I wrote last month’s column in advance of the UN Climate Change Conference in Copenhagen. I was politely optimistic about it but, in reality, I feared it would be a failure, and it proved to be worse than even I expected.
More than 20,000 delegates and others attended the jamboree. Leaders of more than 20 countries attended, including President Obama and our own Gordon Brown, in hope of agreeing on a package of climate-change measures for the forthcoming decade. They were all disappointed, with the possible exception of the Chinese.
The Copenhagen summit was concerned with a global agreement to reduce CO emissions, but there are real lessons for Scotland. In particular, there is little point in having specific policies in Scotland if the rest of the world – or some of it, notably China and the US – is going in a different direction.
I have long and consistently argued that the Scottish Government’s climate-change and associated renewable-energy policies are unrealistically ambitious and that the stated targets cannot be achieved, at least within the time scales given. The failure of the Copenhagen summit has strengthened my opinions.
There were two main objectives in Copenhagen: firstly, commitments to curb greenhouse-gas emissions, and secondly, proposed finance from rich to poor countries to help them do likewise. Little was achieved on both fronts, mainly because of opposition from China and other developing countries who strongly rejected the proposals of rich countries such as the UK and US.
In any case, I remain very sceptical of the effectiveness of the current CO reduction policies in the UK and EU generally. The underlying principle is cap-and-trade. Most energy economists, including me, believe that the EU policies have fundamental flaws and cannot be effective.
Carbon taxes would be much more effective. The polluters, such as power plants, would be taxed for the pollution they created and the tax levels could be steadily increased over time. Eventually, most would change their behaviour, unlike with the present cap-and-trade policies.
There has been some backlash from cap-and-trade supporters since the Copenhagen summit, but the underlying economic logic is clearly against them. The policies might work theoretically but, in practice, there are so many loopholes in the UK and rest of the EU.
In particular, the caps, or limits, in the EU have been set at far too high levels and some big polluting countries have clearly cheated. The failure of the system is evident from the very low price of traded carbon at the present time.
The current policies create serious economic distortions, notably in the electricity-generation industry. There can be no doubt that coal-fired power stations are the biggest polluters, both here in Scotland and elsewhere, and that we should be phasing them out. However, some of the cap-and-trade policies are actually encouraging the construction of new coal-fired power stations in the UK rather than nuclear or gas-fired, never mind more renewable energy.
I believe that there is now far too much emphasis on short-term decision-making, which works against long-term investments in our energy infrastructure. New nuclear power stations are the obvious example.
The costs of investments can be quantified with some certainty, but the likely benefits are much more uncertain. Carbon capture and storage projects are a good example of that. Consequently, the private sector in most countries, including Scotland, is very reluctant to invest in the projects which governments wish to encourage.
There is little evidence of global warming in the north of Scotland as I write this column. December and January seem to have been the coldest in years.
The skiers may be pleased, but not us diehard football supporters.
What sense is there in having distinct policies in Scotland when there are lukewarm attitudes from much more important countries such as the US and China? Can we lead by example? Is there merit in our being virtuous?
Well, maybe, but as an economist, I would prefer us to have climate-change policies that are actually implementable and effective. International agreement is obviously very difficult, as demonstrated by both Kyoto and Copenhagen, but must be sought. If not, the virtuous countries will lose out.
An obvious example is the location of industries with high CO emissions. Worldwide, they would inevitably gravitate to countries such as China and India, as steel is already doing. Within Europe, the trend would be towards eastern European countries such as Poland and Romania.
Scotland cannot be immune from such trends, so a radically different approach is required. We need to be much more realistic about renewable energy and climate-change investments.
Tony Mackay is MD of economists Mackay Consultants
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