What does the Helm Review teach us about climate policy?

Professor Dieter Helm’s much awaited Review on the Cost of Energy was published on 25 October. Predictably, it was greeted in parts of the press with headlines like “excessive green taxes force up energy bills”.

Fortunately, Professor Helm himself is more nuanced.  His report is packed with interesting ideas. They range from spot-on to somewhat off the mark, but all aligned with the need for the UK to reduce greenhouse gas emissions.

Four ideas in particular stand out from the point of view of climate policy: Professor Helm’s proposals on carbon pricing, on border tax adjustments, on the creation of a legacy bank and on the replacement of renewable energy auctions with a new system of unified equivalent firm power (EFP) capacity auctions.

Professor Helm is spot on in calling for a more streamlined approach to carbon pricing. The UK landscape on carbon pricing is unbelievably complicated, particularly for businesses. Not even experts know how many firms are subject to which permutation of policies. The result is an incoherent price signal that differs across firms and fuels and creates disincentives, for example, to switch from gas to electricity, which the projections of the Committee on Climate Change tell us households and firms must do if the UK is to meet its emissions reduction targets.

A more coherent carbon price is long-overdue. It was advocated in a joint report by the Institute for Fiscal Studies, the ESRC Centre for Climate Change Economics and Policy, and the Grantham Research Institute on Climate Change and the Environment as far back as November 2013. Whether this will result in a significantly lower cost, as Professor Helm conjectures, remains to be seen.

The Helm Review proposes a border carbon tax to protect firms against the economic impact of a higher carbon price. This is something he has advocated for some time. However, from where we are today it feels like a throwback to another time. Professor Helm’s pitch for high-carbon protectionism grates with the much more open narrative of low-carbon prosperity, which the government espoused in its Clean Growth Strategy. The UK has immense growth opportunities in low-carbon trade. The global demand for low-carbon goods and services could rise by a factor ten between now and 2030. Exploiting these opportunities would be much more rewarding than starting a trade war over our remaining high-carbon industries, important though they are.

Moreover, the threat from carbon policies to UK competitiveness is abating. Helm is wrong in saying that the UK’s carbon targets are unilateral. It is true that they are anchored in UK law and therefore not affected by Brexit. But we are not acting alone. There are well over 1,300 climate change laws and related policies worldwide and, putting aside recent changes in policy in the United States, pretty much every country has signed up to the Paris Agreement. The stronger the carbon policies in these countries, the lower will be the competitiveness impacts of our own targets.

Competitiveness concerns are further alleviated by the fact that low-carbon electricity is becoming cheaper. Professor Helm is wrong in suggesting we could have reached the level of competitiveness seen in the last auction of Contracts for Difference without the prior support provided to technologies like offshore wind. The early contracts are not costly mistakes, as he thinks, but successful investments in low-carbon technology that are now paying back.

Even so, Professor Helm’s proposal to concentrate earlier (and thus costlier) low-carbon power contracts in a dedicated legacy bank is interesting. It serves transparency to ring fence the early investments and identify their costs explicitly in electricity bills.

But why stop there? A case can be made to move the legacy costs completely off electricity bills and cover them through general taxation – perhaps financed through the proceeds of the proposed “universal carbon price”.  Investing in technological innovation is an appropriate use of taxpayers’ money, given the societal benefits associated with clean innovation.

The idea of EFP capacity auctions had also been trailed earlier. There is a particular logic in asking intermittent power producers to solve the problems associated with intermittency. Yet, this may not be the cheapest way. Intermittency is by definition a system problem and as such most effectively solved at systems level. Such a coordinated approach is likely to be cheaper than expecting individual suppliers to solve the problem on their own. EFPs also favour the large incumbent producers who are more likely to find a private solution than market entrants or small-scale producers. In the long-term this could affect the dynamic efficiency of the market.

Professor Helm warns us at the outset that the time was too short to discover new facts. What he offers us instead is his interpretation of the existing evidence. He has probably not solved the problem of high energy costs, but hopefully his report will stimulate an important discussion.

 

Professor Sam Fankhauser is Director of the Grantham Research Institute on Climate Change and the Environment, and Deputy Director of the ESRC Centre for Climate Change Economics and Policy, both at the London School of Economics and Political Science. He was a member of the Committee on Climate Change from 2008 to 2016.