Chris Huhne said at the Renewable UK conference last October:
“We're missing a trick unless we start supporting low-carbon manufacturing here in Britain – and … creating the exports that will keep Britain competitive…. This government has resolved that we will be the largest market in Europe for offshore wind.… We will not heed the … green economy deniers.”
Both ‘green’ policies to promote reduced carbon emissions and growth policies (including to help pay for emissions reduction) are important priorities. But as Policy Exchange has consistently argued, muddling-up these priorities under ‘green growth’ ‘or the ‘green economy’ is damaging to both the goals of emissions reduction and growth.
The approach to securing maximum emissions reduction for minimum economic impact is to develop an effective long-term, technology-neutral carbon pricing framework to guide markets, with further support focused on maximising low carbon innovation.
But a goal of promoting ‘green growth’ instead leads the Government to favour and subsidise selected ‘green’ – usually renewable energy – industrial sectors. The ‘green growth’ argument is not that such subsidies are the best way to reduce emissions, but that they will increase overall levels of growth, exports and employment in the UK.
Energy and Climate Change Secretary, Chris Huhne, makes a clear political pitch for the sort of industrial policy interventions not often heard in the UK since the 1970s. This recalls historic industrial policy interventions, to support, for example, advanced gas-cooled nuclear reactors, British car manufacturing or supersonic civil aviation with generous subsidies in the hope that they would power future UK growth and exports. Following the recent adjustment to renewable subsidies, in which long-term subsidies to offshore wind were increased, Climate Change Minister, Greg Barker, was quite explicit about this being “ambitious green industrial policy in action.”
But renewable generation subsidies are currently an incredibly expensive way to meet 2020 carbon targets, and are a poor way to prioritise resources for low carbon innovation. The cost to the UK economy of the EU 2020 renewable energy target has been estimated by the Government at £66 billion. As part of meeting the target, the Government plans to deploy 13-18GW of mainly deep water offshore wind, at a current cost of around £300 per tonne of carbon dioxide saved. Yet, the subsidies save no more emissions by 2020 than would anyway be saved under the EU Emissions Trading System carbon cap (under which the carbon permit price is currently only around £10).
It is these most wasteful emissions reductions policies that are most vociferously justified by ‘green growth’ industrial policy arguments, in particular by those representing commercial interests in the subsidised renewable energy sector. At the recent Renewable UK conference, Chris Huhne criticised as ‘green economy deniers’ those who questioned the industrial policy approach, even conflating them with climate science deniers.
But there is no reason to believe that subsidising any one industrial sector can increase overall UK growth levels. Overall UK growth and employment levels depend on fundamental economic factors such as skills levels, the functioning of labour markets, competition and overall investment levels. Successful export sectors are based on comparative advantage.
The Government argues that it can create UK comparative advantage in relation to offshore wind, and other marine renewables, based on the UK’s offshore deployment potential and North Sea engineering expertise. It also believes that there will be a large world market in marine renewables that the UK will then be in a good position to export into. The Government is gambling tens of billions on these beliefs – resources which cannot therefore be used for investment and spending elsewhere in the economy.
Yet it is very far from clear that this gamble will pay off. There are huge unknowns about the development of global marine renewables – currently some of the most expensive forms of renewable generation – as well as about the UK’s ability to capture a significant proportion of any global export market in competition with other countries.
Moreover, the track record of governments’ lack of success in taking such industrial policy gambles is a stark warning. History provides little reason to believe that the Government has any special ability – over and above the market – to pick winners. Where there is real comparative advantage, markets are better able to identify and exploit them (helped, in the case of green sectors, if the Government does its job of putting in place effective carbon pricing and innovation policies).
Subsidies to selected renewable sectors are paid for by the rest of the economy, in particular through increased energy prices. So they reduce investment and spending in other sectors. An optimistic outcome is that such subsidies simply shift jobs around the economy, with no overall jobs and growth impact. But it’s more likely that growth is lower than it would otherwise have been, as large resources are diverted away from industrial sectors with greater growth and export potential.
It is the valuable investment and innovation that never happens which is the key cost of the government directing huge economic resources to its preferred sectors. Muddled ‘green growth’ 1970s-style industrial policy objectives mean resources are squandered that could have been used to deliver more growth and greater emissions reduction.