Academic Freedom Carbon Commodities Carbon Pricing Carbon Taxatious Energy Change Energy Revival Green Investment

Academic Freedom #3 : Carbon pricing cannot work #1

From what I have read, I have concluded that economists live in a dream world, divorced from logic and reality.

Most economists appear happy to live with, and base their work upon, huge assumptions, apart from some branches of the discipline such as the behavioural economists.

Standard economists assume that all actors in a trading, free, market always make a rational, selfish decision at each point of sale. One can question whether all purchasing decisions are made solely on a Darwinian-survival, or Dawkins-selfish basis. One can also question if all purchasing decisions are rational.

My main doubt is whether consumers actually have any choice in their purchasing decisions. I would say that the majority of markets have narrow scope – that not all the products that could come to market are permitted to come to market. My experience suggests that markets are rarely free – some product sellers have restricted, limited access to markets, either because others have cornered the market through some artificial competitive advantage, or through having undue power within the market.

There are also the advantages conferred by time in the marketplace – the grandfather winner-takes-all syndrome. And on top of that, there are the markets that start to resemble cartel operations, or even quasi-monopolies.

Let me take for example green energy. If I decide that I want to buy renewable electricity and renewable gas, I cannot actually make that consumer choice. I get what I’m given through the pipe and the wires. Unless I’m hideously rich, live far enough from my neighbours, and can afford to go off-grid with my own solar power and wind power installation and an anaerobic digestion system fed by my toilets and kitchen waste.

Of course, I have already switched, and I buy my electricity and gas from a green energy company, and they use a variety of means to ensure that what I pay for ensures an equivalent amount of green power (and one day, green gas, too) in the networks. But this is not adequate competition in the market, because my consumer choices do not directly affect the proportions of non-fossil fuel gas and non-fossil fuel-generated electricity that are produced.

Why not ? Because decisions were made decades ago about which power and gas infrastructure, production and imports would be required. Power plants burning fossil fuels were granted licences a long time ago and the country decided decades ago that Natural Gas would be the fuel to heat our homes, and so all the pumping stations, generating plant and pipe and wire grid networks were built to meet those policy decisions.

How can green power and green gas enter this market ?

Building any new energy infrastructure – power plants, refineries and distribution networks – requires investment. These assets are enormously expensive (compared to an average consumer bill), and so there is an incredible inertia in deploying green energy. The average consumer does not have a choice about which kind of energy to buy, because the choice of energy resources actually occurs way back at the production end of the market.

One way around this problem is try to implement a policy that sees a new tax, charge or price on dirty energy. This is the strategy preferred by most economists, many environmentalists and even some of the large oil and gas companies. It is based on the theory that if energy with high carbon dioxide emissions costs more than green energy, then people will choose to use green energy, and energy companies will choose to produce green energy.

There are several basic problems with this theory, most of them connected with lack of choice. You can’t just suddenly grow a green energy production network, so the net effect of pricing carbon will be that energy prices will rise on average. And you can’t ask people to suddenly switch to using green energy, when they are used to buying dirty energy. For a start, green energy may cost more, as it is still in development. And of course, there is the not-so-small matter of the fact that there is not much green energy being produced yet, so not everybody can choose to buy it.

Is there any evidence which shows that pricing carbon works to change the decisions of energy production companies, to “go green” in their investment choices ?

One form of pricing has been implemented in the European Emissions Trading Scheme (EU ETS). The idea is that a carbon emissions cap is set, and that all emitters of a particular range and volume have to keep within the overall cap, and trade their emissions rights within the overall quota. This theoretically creates a price for carbon dioxide emissions that should trigger investment and operational decisions by energy production companies to go greener.

Not counting the faults with the scheme, such as the oversized cap and the inevitable fraud, there has also been a very low price of carbon in this market. Some say that this points to the efficiency of the economic instrument – it validates their economic theories of supply, demand and pricing. A low carbon price may be efficient, but it does not stimulate a move to green energy. The step between paying for your carbon quota and low carbon energy investment is too great. Companies will just pay the carbon trade price, pass the costs on to their customers, and carry on regardless with dirty energy.

How tight would a carbon cap need to be, and how expensive the penalties for breaching it, before genuine change took place. It’s hard to say, as there seems no way to know what a functioning incentive would look like. And would such an instrument regulate the market so firmly that it would provoke a free market backlash ?

One way around this problem is to seek to justify subsidies for green energy – after all, all new technology deployment needs a helping hand. Helping new green energy to “get off the ground” would be less a subsidy, more a public investment in the assets of the future.

In the meantime, people continue to advocate higher carbon pricing, as if it’s some kind of miracle cure :-

15th March 2012

@carbonmeme [Climate change and other energy/environment news, Durham, UK]
New Research Suggests Cap and Trade Programs Do Not Provide Sufficient Incentives for Energy Technology Innovation

@joabbess jo abbess
@carbonmeme Somebody tell the economists they’re wrong (again) about carbon pricing. And @guynewey too ?

16th March 2012

@guynewey [Guy Newey, Senior Research Fellow for Environment & Energy at Policy Exchange]
@joabbess Thanks for pointing out paper, Jo. It suggests both a tighter ETS cap and extra support for innovation, both of which I support.

17 March 2012

@JesseJenkins Jesse Jenkins [Director of Energy and Climate Change at the Breakthrough Institute]
Shell’s [Russ] Ford: every project we invest in has to clear hurdle assuming $40/ton of CO2 [carbon dioxide emissions]. #MITEnergyConf [MIT Energy Conference 17 March 2012]

@JesseJenkins Jesse Jenkins
My reply: so w/ [with] Shell still pouring billions into fossil energy, what does tell you about how much impact a CO2 [carbon dioxide emissions] price has? #MITEnergyConf [MIT Energy Conference 17 March 2012]

@billmckibben Bill McKibben [well-known American environmentalist and author, and leader of]
@JesseJenkins that it should be higher?

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