More on 'Let them eat carbon'

  • 25 Aug 2011, 16:42
  • Robin Webster

Last week we wrote two blogs concerning claims about energy bills made in the Daily Mail. Both of the figures quoted in the Daily Mail were sourced to a new book by the Taxpayers Alliance, entitled 'Let them eat carbon'. The two claims made were:

1.  That ' green taxes' are costing families £500 a year (see the blog we posted on this point)

2.   That ' EU emissions directives alone' are costing households up to £115 a year (and again, a blog in response). 

Matthew Sinclair, the author of the TPA book, responded to both pieces, here and here, repeating the first point, and defending the second, and suggesting that we've got our analysis wrong.

Arguments about these sorts of numbers get complex quickly, so I'll try to keep it as jargon-free as possible.

£500 a year?

The first claim to deal with is that families are being charged an "extra" £500 a year as a result of green taxes. To calculate this figure the TPA compared a measure called the 'Social Cost of Carbon' with an estimate of the total figure for domestic green taxes in the UK. (For a more detailed explanation see our previous blog).  

The Social Cost of Carbon is an estimate of the economic impacts of climate change, which the government has in the past used to inform policymaking. Not surprisingly, such a figure is difficult to calculate, and there are varying estimates of what it should be. For example, how do you quantify in cost terms the risks of a collapse in food supplies, or of 30-40% of the world's species being at risk of extinction, or of unpredictable extreme weather events around the world?

There are differing economic approaches, but the difficulty of doing so with confidence is such that DECC and Defra, following advice from a variety of experts ( not just economist Paul Ekins as Sinclair suggests) stopped using it, adopting a different approach in 2009, which instead tries to identify the most cost-efficient policies for meeting pre-existing emissions targets.

In defending the use of the social cost of carbon in his analysis, Sinclair writes that this current methodology used by Government is equivalent to "writ[ing] a blank cheque" and that 

"...the problem with it is that there are lots of unlikely, unquantifiable and potentially catastrophic risks.  It would be wrong and utterly impractical to base major economic policies on them..given that the overwhelming majority of the harms expected from climate change - particularly in high estimates of the cost of climate change like the Stern Review - affect people living some time in the future and much more prosperous than we are today, it is hard to make that an argument for implementing radical and expensive climate change policy now."

Sinclair believes that setting an economic value on the potential impacts of climate change is necessary in order to prevent society writing a "blank cheque" for measures to tackle it. It's a superficially compelling argument. But Sinclair's argument gives the impression that major negative impacts on our society caused by climate change are unlikely and unquantifiable (though possible). But that isn't what the scientific evidence suggests. As we have detailed before, the latest figures show that on current trends we are on track for a four degrees temperature rise by the end of the century, about which one recent paper concluded:

"…the limits for human adaptation are likely to be exceeded in many parts of the world, while the limits for adaptation for natural systems would largely be exceeded throughout the world. Hence, the ecosystem services upon which human livelihoods depend would not be preserved."

The difficulties in putting an economic value or cost on this outcome are obvious. (For more detail, see here.)

It's because of issues like this that Social Cost of Carbon has been abandoned by policymakers.

But let's go with the methodology for the purposes of examining the £500 figure. Because he's comparing the social cost of carbon with the green tax burden, the higher the social cost of carbon used in the calculation, the weaker Sinclair's argument.

He argues that the figure he uses for the Social Cost of Carbon is relatively high, as you might expect. But the Stern Review into the social cost of carbon - for example - used a much higher figure. Sinclair responds: "surely we shouldn't just be looking at one study? We should take the IPCC approach and look across the academic literature."

In fact, the Stern Review was exactly such a survey of the available literature in 2006 - including work produced by economist Richard Tol, whom Sinclair bases his argument on. As the Stern Review states (p.322): 

"The academic literature provides a wide range of estimates of the social cost of carbon, spanning three orders of magnitude, from less than £0/tC to over £1000/tC".

The figure used by Stern based on a review of the academic literature, is $85 per tonne of CO2 equivalent. This, Stern argued, "makes some allowances for catastrophe risk and non-market costs" - (economist speak for things like the value of human lives and ecosystems) - but was "well below the upper end of the range (by a factor of about four or five)."

The TPA's lower figure is an old number, known as the Shadow Price of Carbon, which Defra used in the past for policy appraisal. But, like DECC, Defra abandoned the methodology because of inherent uncertainties. The TPA analysis relies on a lower, and narrower assessment of the social cost of carbon to get the £500 figure.

Costing households £115 a year

Onto the second claim. Last Wednesday the Daily Mail claimed that "' EU emissions directives alone'" are costing households up to £115 a year. We pointed out that these figures are approximately three times those calculated by DECC and Ofgem for the impact of the ETS and the RO on domestic electricity bill, which seems worth mentioning.

 In response however, Sinclair wrote that:

"The Daily Mail quoted the cost to consumers, not the contribution to domestic electricity bills.  Residential, industrial and commercial consumers of energy are all affected by these regulations. "  

The essence of his point is that, whilst households account for only 36 percent of electricity bills, consumers also pay the costs of the ETS for industry, because these costs are passed down the chain. So if a consumer buys a car, the costs of the ETS will be passed from the owners of the power plant to the steel producer to the car manufacturer, and ultimately to the consumer.

This is a reasonable point - although to know what the actual impact on consumers was you need to answer questions about what proportion of the ETS costs to industry are passed on. Whether the TPA's numbers on the ETS and the RO actually stack up is an interesting (but involved) question that we will return to next week. 

However, it seems equally reasonable to conclude from the Mail piece that they mangled this argument, suggesting that the ETS costs were came through household electricity bills, claiming:

"Households paid up to £115 each last year to fund EU green policies, according to research. Taxpayers meet the £3billion bill through 'stealth taxes'on household electricity bills passed on by energy companies, a book claims.

Matthew Sinclair, author of Let Them Eat Carbon, said 'Regulations meant to cut greenhouse gas emissions are adding to energy bills, making it harder to for people to make ends meet. It's vital that we scrap them'."  [our italics]

The impression given here is that 'stealth taxes' are adding £3 billion (or £115 per household) to domestic electricity bills. This of course fits in with the Mail's campaign against 'green taxes' in energy bills, but, as Sinclair has subsequently pointed out, it doesn't fit with the TPA's research.

One final point - in his response to us, Sinclair expresses the hope that we will "continue the debate about green taxes". There is undoubtedly a valid debate to be had about the impact of Government measures aimed at encouraging a switch to a low-carbon economy. Are we are using the most efficient policy mechanisms? Will they drive the change the government wants, and will this be a sufficient response to the changing climate? How will different sectors of the economy respond, and what should the Government be doing with the revenues from 'green' taxes?

These are important questions. Answering them intelligently can only happen in the context of an accurate understanding of the relevant figures (and where those figures come from), and of the potential impacts of climate change.

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