Annabel Denham

    Boris Johnson should trust the market to solve climate change

    Boris Johnson should trust the market to solve climate change
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    In a 368-page document published this week, the government announced its strategy to cut emissions to net zero by 2050 and confirmed its target for all electricity to come from low carbon sources by 2035. 

    It’s difficult to imagine worse timing for the release. An energy crisis is exposing the failures of decades of massive state meddling in the market. Insulate Britain have been picnicking on the M4 and M25. And on Wednesday a leak of documents showed Saudi Arabia, Japan and Australia are asking the UN to play down the need to move rapidly away from fossil fuels.

    None of this has weakened the Prime Minister’s resolve, though that’s hardly surprising. For some time, the net zero debate has essentially boiled down to how quickly the cultural elite can enforce total eco-austerity, rather than a nuanced discussion about trade-offs. Parliament declared a climate emergency in May 2019, and hasn’t looked back since.

    Proponents of net zero justify the policy with a range of pathways that supposedly show that it is both achievable and affordable. But a vast number of uncertain assumptions undermine their claims. No one, not entrepreneurs nor Whitehall officials, can predict the state of the energy sector in 30 years’ time. The plethora of panicked interventions imposed on the market in the past couple of decades – and the crisis which has ensued – proves this point.

    Consider, for instance, Boris Johnson’s belief that the 2035 target can be reached through a combination of new nuclear, wind power and decarbonised gas. Unless we build more reactors or import more nuclear power, then it will continue to provide just 16 per cent of our electricity – meaning it cannot decarbonise the grid alone. The UK would need to at least double its 2030 offshore wind target and roll out new grid-connected batteries at an unprecedented pace for it to play its part. Nuclear cannot act as a backup to renewables – used to plug intermittency gaps when the wind isn't blowing, for example – because it cannot be turned on and off with the flick of a switch. The process takes time, and waste has to be dealt with. Gas power with carbon capture and storage sounds appealing, but reduces the efficiency of a plant by 15-40 per cent.

    In an article for the Sun, the Prime Minister this week claimed his illustrious targets can be reached in a ‘fair’ manner. But his definition of ‘fairness’ seems to involve subsidising those who would pay to upgrade to cleaner heat pumps anyway, while putting up gas bills for everyone else. Given the £5,000 falls far short of the cost involved in purchasing an installing a heat pump, this policy will benefit the wealthy, at the expense of the poor.

    We still don’t have a clear estimate from the government on the cost of reaching net zero by 2050, though the Office for Budget Responsibility put the total cost at £1.4 trillion in July. The Treasury this week warned UK households and businesses face the prospect of new taxes in the coming years to help meet the target. But discussions over the cost are almost irrelevant because centralising all these decisions will shut down the market discovery process, meaning we’ll never know if cheaper, better routes were available.

    Boris Johnson may talk a good talk on the unique power of capitalism to bring down the costs of going green, but if this were true he’d be taking a more agnostic approach to decarbonisation. Rather than gazing into a crystal ball, his officials would abandon their obsession with specific choices or sectors. The Prime Minister would dismiss the notion of net zero providing a net-benefit to overall employment as a modern-day example of Bastiat’s Parable of the Broken Window, which shows how opportunity costs affect economic activity in unseen ways. Money spent on pumps today is money that cannot be spent on hydrogen boilers tomorrow, which may be a better solution. Jobs filled in green sectors are jobs unfilled elsewhere.

    Perhaps Johnson should come down on the side of a border-adjusted carbon tax. It arguably offers the most cost-effective lever to reduce carbon emissions at the speed and scale necessary. It doesn’t require anyone to know or predict which particular technology will work best. It wouldn’t cause a collapse in investment in gas generation, a likely consequence of the government’s Heat and Buildings Strategy. But there’s no indication so far that anything this reasonable will replace current decision-making.

    The idea that, if we are to halt climate change then we need to start doing things differently, is no longer a fringe view. You don’t need to live in a hemp-smelling bivouac to worry that if we continue as usual, the world will continue to heat up, and future generations will suffer the consequences. This is a positive development – but a fragile one, too. Support may soon give way to hostility if government remains stubbornly committed to its current approach.