Has green heat paid for Osborne's latest U-turn?

In the car-crash telly that was Paxman's interview of Chloe Smith (junior minister in the Treasury) in tonight's Newsnight, one of her few feeble defences was that the cost of deferring the rise in fuel duty had fallen in a matter of days from £1.5bn to £0.5bn due to "departmental underspend", although she was unable to say from which departments.

The timeline and rationale make one suspect that most of this "underspend" is fictional justification for an entirely political decision. But there is at least one area where we already know that they are probably going to spend less than they expected: the RHI. And although it's a 4-year budget, they were careful to make sure that the money can't be redistributed from one year to another, so under-spend goes straight into the Treasury's pocket.

The history of the RHI, like most other government policies (of all flavours) has been a series of bad decisions that compromised the effectiveness of the policy.

This now appears to be reinforced by a masterly bureaucratic campaign by Ofgem to make sure that every I is dotted and T is crossed, and every potential obstacle carefully explored. Applicants who have sent all the details (including the manuals) for their pellet boilers, are still being asked to prove that the boilers are for pellets! In one case, an applicant who received funding to build affordable housing has been told by Ofgem that they must repay part of the funding in order to be eligible for RHI, without any investigation into whether the money was "in respect of" the pellet heating system (which is the test according to the legislation). Meanwhile, the sector that constitutes the largest demand for heat and which has delivered the greatest displacement of fossil fuels in other countries (domestic heat) is kicked further into the long grass for fear of encouraging something that might actually work. It looks like the Greater Bureaucracy is doing a splendid job of making sure that green heat policy is as ineffective and cheap as possible.

Cockup or conspiracy? Knaves or fools? You decide. But whichever it is, what we need above all is a simplified energy and environment policy, where the ability of politicians and civil servants to pick losers and penalise winners is dramatically diminished. Something, for example, like the following, wonderfully-simple, description of Swedish policy from a recent report for ENplus on the Swedish pellet market:

4.1.3 Carbon dioxide tax – a great example of a general and successful incentive 

Sweden introduced carbon tax in 1990. Since then Sweden has experienced rapid economic growth and decreased carbon emissions. Sweden has the highest Carbon tax, about 15 U.S. cents per kg of carbon dioxide. The purpose of carbon taxation is not to punish people for their life style or technical equipment today, but to help them make the right choices and investments for the future.

The level of the Carbon tax is not the main issue at the start. More important is to get a general acceptance for the carbon taxation. Once the tax is introduced it can be raised gradually to make it possible for companies and individuals to take action to reduce their use of fossil fuels.

According to Polluter Pays Principle (PPP) emitters of CO2 should pay a Carbon tax for their emissions and in this way pay for current and future costs caused by the emission. That way the environmental costs (external costs) are internalized and made a part of the total cost of the polluting activity. The purpose of the tax is not to increase taxation, but to steer the economy in a sustainable direction. Other taxes can be lowered to compensate for the raised Carbon tax, in a “green tax shift”.

A Carbon tax is always the same – or higher in the future, if this has been decided on. The tax therefore creates a higher degree of certainty for investors. A quota system or a feed-in tariff system is good for the investors and energy producers who qualify for the system, but it doesn’t affect the whole society the same way as a Carbon tax. Furthermore, the politicians have to decide what technologies to stimulate, e.g. whether to further energy efficiency or renewable energy production, as well as what kind of renewable technology. With a Carbon tax these decisions are left to the market (the companies, the consumers).

 

The EU has just released the figures for renewable energy in 2010. Yet again, the Swedes come top (with nearly half of all of their energy being supplied by renewables). The other leading countries were either carbon-tax countries or at least did not rely on FiTs (except Spain, which has already hit the buffers on FiT costs):

Highest share of renewables in Sweden, Latvia, Finland, Austria and Portugal

The highest share of renewable energy in total consumption in 2010 was found in Sweden (47.9% of renewable energy sources in total consumption), Latvia (32.6%), Finland (32.2%), Austria (30.1%) and Portugal (24.6%), and the lowest in Malta (0.4%), Luxembourg (2.8%), the United Kingdom (3.2%) and the Netherlands (3.8%).

Between 2006 and 2010, all Member States increased their share of renewable energy in total consumption. The largest increases were recorded in Estonia (from 16.1% in 2006 to 24.3% in 2010), Romania (from 17.1% to 23.4%), Denmark (from 16.5% to 22.2%), Sweden (from 42.7% to 47.9%) and Spain (from 9.0% to 13.8%).


Nevertheless, we look to Germany and its unaffordable FiT regime for our model for renewables policy, supported by propagandists who perpetuate the lie that German energy policy is somehow the most successful in Europe (they are actually below average on total renewable energy). We need a different way - one that allies good economics with the interests of taxpayers and investors, rather than using bad economics to continuously add complexity to unaffordable policy that destroys capital and delivers little.