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    UK govt in denial over costs of energy transition, top economist warns


The high carbon price will also need to be backed up by a levy on carbon-intensive imports, as the EC also recognises, according to Oxford economic researcher Dieter Helm.

by: William Powell

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UK govt in denial over costs of energy transition, top economist warns

The UK government is failing to present the electorate with a true picture of the cost of the energy transition, according to Oxford economic researcher Dieter Helm July 20. He also said the government had no coherent plan for reaching a net zero carbon economy by 2050, merely a collection of strategies and announcements – some of which have been postponed as being too difficult for now.

He was the latest in a series of interviewees explaining to the House of Lords Committee for Regulation and Industry how the regulatory landscape would best help achieve the government's net zero carbon goal.

Helm, who published his Cost of Energy report in 2017 advocating a carbon price and a levy on the carbon content of imports, praised the European Commission, which has put a carbon price at the centre of its "Fit for 55" climate package  – although that too has yet to be modified by the legislative process and is expected to meet opposition from some member states (see below). 

Helm said he would not change a word of his report, although it had met with stiff opposition from vested interests. The killer argument against it had always been that 'now is not the time for change.'

But now that time might have come as the committee digs into the log-jams between government, regulators and industry that has produced a lot of consultations but not much climate-related action – even the relatively easy smart metering programme has failed in its unambitious target in the teeth of household inertia.

Helm had advocated replacing the energy regulator Ofgem with an overall regulator for industries and leaving the key tasks of reaching net zero and meeting security of supply to be met by existing institutions. It might well produce very well researched documents on the cost of charging points for electric vehicles, he said, but is that its proper function?

His argument was not that Ofgem was doing a bad job, merely that the world of energy has moved on since the 1990s: "It is not now about sweating assets," he said. Then, there was an abundance of centralised coal and gas fired generation which needed managing for the benefit of consumers.

Now, energy is diffuse and local and new means of meeting demand should be met through greater competition, overseen by a system operator taken out of National Grid. This need not be just about new plant but also about better ways of making the money go further to achieve the net zero goal, for which an open-access, transparent auction system was needed.

Press reports say that the government is planning to separate National Grid’s role as the operator of the national electricity system in favour of a new independent body equipped to tackle decarbonisation at the lowest cost and with no conflict of interests, which could hinder competition. A consultation on the ‘Future System Operator” could be launched in the coming week, according to a report in The Times July 19. An independent system operator would enable better co-ordination between government, regulator and industry.

He also lamented the "mistake" of leaving the EU. As part of the trading block, the UK could influence the rules to ensure it was not discriminated against in the market place. Accordingly it could consider the electricity interconnectors, "which have made the English Channel narrower," as 'firm' power stations. But now he said they should be derated proportional to the risk of not supplying power to the UK on the same terms as if it were a member state. 

But he also compared the UK favourably in terms of its net zero carbon objectives with Germany, which, he said, has built 13 GW of coal-fired plant since 20oo and is exiting [low carbon] nuclear generation. The UK, under earlier prime ministers, has been doing the opposite.  

He also said that politicians faced a lot of conflicting pressures but this is almost universally true: despite the UN COP meetings in Copenhagen and Paris, the atmospheric concentration of CO2 has been steadily rising at 2 ppm/yr this century.

And he referred to the prime minister's capacity for "cakeism", whereby it is possible to enjoy a net zero carbon future, and enjoy not having to pay out for it. Boris Johnson in other contexts has expressed his support for cakeism – benefiting from two things that are mutually exclusive. Eventually the truth has to come out: everything has a cost.

He said politicians were understandably nervous about spelling out for the electorate the costs of implementing the biggest single change on the economy in the shortest period. The finance ministry's estimate of 1% of gross domestic product was "nonsense", he said. The government has delayed its plans to reveal its central heating systems in homes and offices – which combined make up a third of emissions – until after the summer break. This was part of its ten-point plan.

EC makes carbon the centrepiece

On the other hand, the EC has been more open about it and made the carbon price the means for achieving the fair transition, as a portion of the revenues from the  trading scheme will be siphoned off to benefit the poorer elements of society. “Inclusion will be at the core,” said the president, Ursula von der Leyen July 20, addressing a webinar hosted by the Florence School of Regulation. ”Vulnerable households must feel the benefit,” she said, adding that some 35mn inhabitants were in ‘fuel poverty’.

This is why the second phase of the EU emissions trading scheme, which will embrace road transport and heating but be kept distinct from industry and energy in the first phase, will only begin in 2026 – a year after a social climate fund has been launched. Some of the revenues will go as direct income support and some will be spent on innovation. The EC estimates it will raise €144bn ($169bn) for the fund over its first seven years. The two schemes will however be kept separate, meaning different prices for each.

The second phase will have an inbuilt surplus which will be wound back progressively each year, and the EC hopes to prevent speculation by reserving the right to alter the number of certificates in circulation.

The all-important carbon border adjustment mechanism (CBAM) has been allotted three years of diplomatic bargaining: it cannot be a tax on imports as that would break World Trade Organisation rules. But some way needs to be found to ensure that exporters to the EU do not benefit from the lower production cost of their high-carbon goods.

Neither the US or China, major emitters, have similar carbon trading schemes in place but the EC is hoping that they will realise that it is better to keep the money at home by reducing carbon there, than to pay it at the EU border.

The EU’s Fit for 55 package also has opponents within the energy sector, most notably in transport. Electric vehicles  (EVs) produce no emissions but the CO2 emissions inherent in the whole supply and manufacturing chain, leading up to the point where the vehicle moves, are considerable and worth tens of thousands of kilometres on the clock.

The EC’s policy director at the research and innovation directorate, Kurt Vandenberghe, told the webinar that technology neutrality did not rule out internal combustion engines (ICE). But he did refer to the zero emissions at the tail-pipe as the yardstick. Concerning ICEs biogas vehicles fail to reach that stringent target, while natural gas vehicles are cleaner than EVs if measured in other ways.

Owing to well-known problems with recharging lithium batteries, ICEs have earned the nick-name ‘spontaneous combustion engines’ among their opponents.