| A low carbon economy: A vision for the future? |
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Fabian Next Capitalism Series Tuesday 23rd March, 2010 Is a low carbon economy an achievable aim and if so, could innovation and green technology be linked to an economic recovery? The latest seminar in the Fabian Next Capitalism series attempted to discover how a low carbon future fits in with the renewal of capitalism and what government’s role should be. Lord Hunt, the Minister of State for Energy and Climate Change, led the discussion and was joined by Professor Jim Skea, Research Director of the UK Energy Research Centre, and Martin Orill, Head of Energy Technology and Innovation at British Gas. The seminar at the Work Foundation was chaired by Tim Horton, Research Director at the Fabian Society. Climate change is the most critical issue we face, said Lord Hunt, and requires planned and decisive action over the next few years. It was essential that government took a strong lead, not just by releasing policy statements but by using the levers of power to have an impact on emissions. The Government has already set ambitious targets for emission reductions and government departments were leading the way. Each department of state has been given a carbon budget which will be gradually reduced over time, forcing government departments to pursue policies aimed at reducing emissions. Energy policy has to fundamentally change, Hunt explained, if we are to reduce emissions; we have already witnessed a revolution in thinking on transport policy over the past year, including proposals for high-speed rail. Other government departments such as DEFRA would also have to make significant changes, as agriculture was responsible for a large amount of emissions. There is huge potential for growth and development within a low carbon economy, Lord Hunt continued. The low carbon sector already employed 800,000 people and this would rise to 1.3 million over the next five years. The potential benefits of being a technological leader in the low carbon economy were huge. However government intervention in energy markets would almost inevitably push up energy bills and it was therefore essential to win public and political support. The cost of inaction would be greater in the long term and sticking with hydro-carbons was simply not an option, he said. There were already great opportunities in place for innovation within the energy sector, including nuclear power, off-shore wind, and - given that coal would continue to be a major resource - carbon capture and storage. Hunt argued that a low carbon world was inevitable and fundamentally, the opportunities for UK businesses were huge and must be taken full advantage of. Lord Hunt said he remained optimistic about the future despite the disappointments of Copenhagen. The government’s overall energy policy was moving towards a low carbon strategy but we needed a diverse energy policy, a “trinity” of energy efficiency, clean coal and renewables. Government should set up the overall parameters, making best use of our natural assets – including the best wave and tidal resource in Europe – and then allow the markets to pick winners, although the government should give every encouragement to prospective winners. Skea said there was a tendency to view the free market as a “featureless landscape” when in reality there was no such thing as a completely ‘free’ market. The market requires a minimum set of rules and there was no reason why these rules and frameworks should not have a green dimension. The role of government is to act as a facilitator rather than an economic actor in its own right. However, because of the urgency of the climate change problem Skea advocated a more interventionist model. It was, however, critical to maintain the competition between companies that helped drive technological innovation. Government may not be able to pick winners, but it had an interesting role to play and could start by picking losers and taking them off the option sheet. Government could also play a more active role in taking the risk out of investing in a low carbon economy through loans and grants. The price of risk had soared in recent years and this was particularly bad for low carbon technologies, as was uncertainty over government policy and the regulatory framework. Martin Orrill said British Gas had already made the decision to pursue a low carbon business model as anything else would not be profitable in the long-term. As an energy provider, British Gas was actually taking steps towards reducing demand for its service by improving energy efficiency, unheard of in any other profit-making industry. However he echoed Skea’s view that without long term certainty about government policy, this strategy could unravel fairly quickly. In terms of new technology, Orill said we should “back them all and see what worked best.” We need to have a “balanced portfolio” of new technologies that takes into account our starting position which includes one of the best gas grids in the world. Renewable energy made from organic matter could be one option. Within this new low carbon agenda though, Orill reminded delegates that private companies still needed to make a profit, and achieving this balance was tricky. Lord Hunt responded to a question about the role of government by saying that its main role would be influencing and facilitating but at times it would have a strong role to play in investing in the sector. “The world we’re moving towards is not one of unfettered competition. Government has to make interventions if the market is not working,” he said. The panellists agreed it was crucial to get customer support for the new energy agenda. Skea said companies would have a role to play as would local authorities and the third sector. Orrill said people were more willing to pay for going green and attitudes had changed. One delegate asked the panel what role they thought the EU should play in efforts to create a low carbon economy. Lord Hunt said the EU could play a big part in helping meet emission reduction targets and in influencing member states to go further and establish more ambitious targets. There were also positive signs from Brussels that the EU was prepared to review its Common Agricultural Policy (CAP), he said. In the USA, he noted, the energy debate was often framed in terms of energy independence. The UK was moving in two directions on this. On the one hand Europe recognised the need to work together on energy in order to avoid a repeat of the recent Russian-Ukrainian dispute over gas supply. On the other hand, the more we could develop home-grown energy the better and we needed to maintain a diverse energy supply. The panel were also asked whether they thought the UK was being bold enough in moving towards a low carbon economy given that Korea was investing 5 per cent of its GDP in a green stimulus package compared to around 0.1 per cent in this country. Skea said he doubted whether the economy had the capacity right now to respond to extra investment but agreed that we needed to expand our activities in this area. He said the Conservatives’ cost estimate of £6,500 per household to improve energy efficiency was actually quite low and £20,000 per household would be needed for radical change. Skea also called for more investment in research and development (R&D) given that oil and gas companies currently invested just 1 per cent of their revenue in R&D and utilities merely 0.1 per cent, while health and pharmaceutical companies invested closer to 15 per cent. However a lot depended on raising the price of carbon from 30 Euros a ton into three figures by 2030. With carbon at 400 Euros a ton, alternative energies like wind would become competitive, he said.     |
