Coal and Greening taxes while preserving social protection mechanisms

I wrote a post about green taxation and social protection and was fascinated to see reports that the Coal industry was claiming that campaigns waged against coal were “anti-poor” (see FT 26 September 2014). It is worth quoting in full :

“If we are really serious about helping the impoverished, then we should be supporting activities to provide abundant low-cost energy for the billions in the world who lack it,” said chief executive, Gregory Boyce, adding “climate alarmism” was stalling improved access to energy for millions of people worldwide.

“All investors should be calling for more advanced coal use to alleviate energy poverty and drive major environmental gains,” he said.

Now I worked with Greg when he was at Rio Tinto and I have a lot of time for him. He is posing some interesting questions which demonstrate how difficult the interaction between carbon pricing and social protection.

What I said was :

“From a social policy perspective one needs to consider what is the most efficient policy which meets the social policy aspirations? From an economic perspective, the imperative is to reduce all emissions efficiently, ring-fencing some emissions from reduction for other policy reasons needs to be justified carefully and in particular the method chosen. Price signals are the clearest way to change behaviour but they fall disproportionately on the poorer sections of society raising the question of whether Fuel poverty will be replaced by Fuel/Carbon poverty as an issue as increasing carbon pricing comes into operation?

So what are the mechanisms that can deal with this and address social policy concerns? To change behaviour one needs to maintain a carbon price to reduce emissions, so in this context it appears one needs to provide non tax measures to deal with fuel and carbon poverty. Given that the lowest cost measures to reduce emissions according to McKinsey are energy efficiency measures then energy efficiency programmes and education become crucial. These programmes need to focus on housing stock and housing heating in particular although transport will be another important issue.”

Greg is correct that at present coal is a cheap fuel source and that in relative terms the poor benefit most from this, but the reason for its cheapness is the lack of a carbon price in the current price of coal. The climate policy objective is to reduce emissions by 80% from 2005 levels by 2050, given growth this is only achievable if fossil fuels are virtually phased out over the remaining 36 years (and I will write separately about gas as the alternative). The issue here is not about the continued use of coal (unless decarbonisation technology is available) but about how to move in a very short period of time from a carbon to a low carbon economy while addressing the social consequences of an increase in the price of energy.

“Improved access to energy” is the key challenge it is true but to what form of energy? Can we have access to non fossil fuel energy at a cost which is reasonable for all in the world and if so what is the policy path to do this? The OECD report on Fossil Fuel Subsidies (2012) estimated annual subsidies of $55 – 90 billion with Coal enjoying roughly a sixth of this or $9 – 15 billion per annum. The FT has also reported that the cost of installed power generation in the US is now equal between fossil fuels and renewables.

The social policy issues of moving to a low carbon economy are significant and I am pleased to be involved in a research project on this subject with the University of Lund. But however difficult those issues are, it would be a mistake to believe that continued use of fossil fuels is the optimal way to address the issue – it is not. Instead the path that we should follow is how to make non fossil fuel energy sources more cost effective coupled with the removal of fossil fuel subsidies while addressing the social policy costs of this transition to a low carbon economy.

 

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