August 27, 2010
UK Carbon Budget: Carbon Cuts vs Budget Cuts—Are They Even Compatible?
Yet while Cameron hailed the outcome as a "historic step" will "position the UK [as] a leading player in the global low-carbon economy", and while environmentalist groups like Greenpeace, WWF and the Green Alliance largely echoed this sentiment, praising the government for becoming the first country in the world to enshrine such ambitious and specific cuts into law, there are three major problems that are likely to render the announced targets largely ineffective, if not entirely hollow.
First of all, as Roger Pielke Jr. pointed out in a blog post earlier, Huhne essentially announced "targets without policies." There is nothing wrong with enshrining aspirational targets as an institutional framework within which to embed specific policies aimed at meeting those targets. But fetishizing targets themselves, elevating them to the point where they become the principal policy tools to fight climate change, is a dangerous mistake indeed. Without concerted government policies directed at driving down the cost of renewable technologies, a target alone remains merely a statement. In and of itself, it will do very little to make a clean energy transition a reality.
Secondly, the idea that the formalization of the carbon budget will drive private investment in clean energy is wishful thinking at best. Despite the fact that the UK signed its Climate Change Act into law in 2008, private investment in clean energy plunged dramatically from 2009 to 2010. Just two months ago, the Financial Times reported on a Pew survey in which the UK fell sharply from third place to 13th in a table of clean energy investments secured by G-20 economies. Private investment in the UK's clean energy sectors fell from $11bn in 2009 to a mere $3.3bn in 2010.
Thirdly, even if the Green Investment Bank were to generate significant sums of investment, such private investments are likely to pale in comparison to what will be needed to truly transform the UK's energy economy. As Gwyn Prins of the LSE and Steve Rayner of Oxford University demonstrated in their influential paper, The Wrong Trousers, climate policies that rely on caps, limits and targets, combined with top-down market creation, simply "cannot deliver the escape velocity required to get investment in technological innovation into orbit, in time." Indeed, "that calls for something else."
What is called for, then, is epic public investment in research, development, demonstration and deployment of alternative technologies - with the overarching goal of making clean energy cheaper than fossil fuels. Yet the responsibilities of the public sector are entirely missing from the coalition's carbon budget. Apart from a previously standing pledge to sink £3bn into a Green Investment Bank, no commitments have been made whatsoever on increasing government expenditure on clean energy RDD&D. Indeed, the coalition's radical budget cuts are only likely to lead to a further squeeze in the overall green budget. The bottomline is that the coalition's carbon cuts and its budget cuts are not compatible, as the latter will inevitably drown out the principal policy lever (public investment) by which the former can be accomplished.
Seen in this light, the statement by Connie Hedegaard, the EU's climate chief, that the UK carbon budget was "a recognition that to be very ambitious on public spending [cuts] does not mean you can't be ambitious on climate change targets," sounds rather empty. Indeed, one can always be ambitious on budget cuts and climate targets at the same time; but it's not setting the targets that's the problem - it's meeting them. Indeed, even if we were to subscribe to the magical thinking of "targets without policies," the targets themselves - as the Guardian pointed out in an editorial - are full of "important (and still undefined) exemptions for energy-intensive industries, which could in the end render the targets hollow."
The only real alternative, as I wrote before, is to forget about the budget deficit and invest in the green economy now. In this respect, the UK has an inspirational legacy to aspire to: Churchill's war economy. David Cameron and the Conservative Party may have forgotten that the UK government took a leading role in transforming the country from a crisis-ridden laissez-faire economy in the 1930s to the impressive war machine of the 1940s, virtually transforming factories overnight through massive debt-financed public investment. Such an approach has recently been favored by Gerry Holtham at the Institute for Public Policy Research in Going for Growth.
In this respect, it is also good to remember that, after the War, the national debt stood at 250 percent of GDP, making today's 53.3 percent look like a joke in comparison. Yet the post-war years saw some of the highest growth levels in UK history as the public investments made during the war paid off by transforming the technological base of the UK economy and feeding into vast productivity increases. All of this just goes to show that despite the dominant narrative on both the carbon budget and the public budget, there is still room to move - and there is still an alternative.