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Clearing the energy slums


Themes: Energy and environment

Clearing the energy slumsPolicy makers cannot walk and chew gum. Crises are handled one by one with the most immediate driving all the rest off the agenda. However, Nick Butler, Chairman of the Centre for Energy Studies at Cambridge Judge Business School, argues that by using public policy, such as tax reliefs, to induce private investment in the development of clean, low carbon technology, Government could simultaneously address need and opportunity and in so doing, help avert recession.

Not surprisingly the problems in the financial sector have driven the issue of global warming out of the headlines. Despite the prospect of a new US president more attuned to the realities of climate change, the odds against any meaningful agreement at the formal UN negotiating session to be held in Copenhagen next December are lengthening. Even in Europe, the financial crisis has given a number of countries the opportunity to reopen the climate debate and the agreement on a 20 per cent target reduction in emissions by 2020 now looks fragile.

The radical proposal for an 80 per cent reduction in emissions by 2050 contained in the first report of the UK’s official Climate Committee was accepted with so little scrutiny or challenge as to suggest that it has either gone unnoticed or is not taken seriously.

Climate change will not, however, respectfully wait its turn for attention. We may be entering a recession but emissions continue to rise.

Reduced growth in the developed world will cut energy demand but will also make it more difficult for Governments to introduce carbon taxes or other measures which would alter the fuel mix. In the developing world growth may slow but the pressure of numbers as the global population grows by around 220,000 a day will keep energy consumption rising. Coal will remain the pre-eminent source of power. Slow growth offers little encouragement to innovation or to the large scale, long term investments required in major infrastructure projects. The commitment by the G8 group of industrial countries and the European Union to research work on industrial scale carbon capture and storage facilities remains rhetorical. If the prospect of slow growth continues to reduce energy prices the chances are that the energy mix will change very little and that emissions will continue to grow by between two and three per cent a year.

But the view that only one crisis can be dealt with at a time deserves to be questioned.

In the special corner of heaven reserved for dead economists Keynes must be basking in the attention he is receiving after so many years of neglect. He would perhaps approve increased borrowing and reductions in interest rates, but he might also remind us that Government can direct resources to achieve desirable ends. In 1933 he wrote “I can imagine nothing more useful or better conceived than the campaign for slum clearance… It will at the same time remedy a great social evil, find employment for thousands of men who are wasting their lives in uselessness, increase incomes by setting in motion the revolving ball of expenditure and measurably improve the budgetary position of the Chancellor by reducing the cost of the dole and improving the yield of taxation.”

For slum clearance read the development of clean, low carbon energy.

There is no shortage of technology which could support such a transition. The International Energy Agency recently produced a 600 page book1 summarising the potential across every sector of the economy. The possibilities range from the known and familiar – wind power and solar thermal facilities – to the development of infrastructure such as high speed rail links and smart grids, to the frontier possibilities of super capacitors and planes made of carbon fibre reinforced plastic.

In each case the report shows what could be done over the next few decades on relatively conservative assumptions and the potential which each technology offers for a progressive reduction in emissions at a very limited net cost to the global economy.

The pace of change though is painfully slow. Renewables supply around one per cent of global energy demand today and on current policies that might reach two or just possibly three per cent by 2030. That is why we need a game changing move which will overcome the caution of potential investors faced by both technical and policy risks.

As well as using public funds Keynes believed in using public policy to shape private behaviour. In this case we need to reach for the lever which will induce private investment. Why could we not encourage investment by providing ten years of relief from taxes on all profits made from the application zero or low carbon technology including activities directed to energy efficiency?

To encourage larger firms to invest and to begin the very necessary process of restructuring a sector which is fragmented and therefore suboptimal in meeting global challenge, why not also provide reliefs on current investment. Capital gains tax relief could be steered to encouraging reinvestment and growth in successful ventures. By stimulating private activity Government would avoid having to choose between dozens of different alternatives.

The combination of need and opportunity should make the inducement of investment in renewables part of the strategy to avert recession. Even in dark times the clouds may have linings which are green if not silver.

1 International Energy Agency (2008) Energy technology perspectives 2008. Paris: IEA.