Economic efficiency

A claim that seems to be made, quite often, by climate skeptics is that green policies are driving up energy prices. In particular, they claim, this is hitting the poor who are now having to pay much more for their energy than they would if we simply focused on the most efficient energy source – fossil fuels. Left Foot Forward has a recent article that suggests that there isn’t a correlation between green policies and energy bills. The article discusses an Ofgem report that appears to have two very interesting conclusions:

1. The main reason energy bills have been rising is because of the increasing cost of natural gas, not because of the cost of green policies.

2. Creating an almost entirely carbon-free power sector over the next decade or so will lead to annual fuel bills being £600 lower than the ‘high gas’ option favoured by the chancellor.

Wow, so the rising cost is not the fault of green policies and accelerating the green agenda may actually save us money, rather than costing us more.

To be fair, I haven’t looked at the numbers myself and I haven’t read the report in detail, so I can’t claim that I’ve analysed this and can make an objective assessment. There has, however, been something related that has always made me wonder why, the UK in particular, doesn’t invest more heavily in renewables. Up until the mid-2000s, the UK could provide almost of it’s own energy needs. We imported a small amount of nuclear and a small amount of coal. From the mid-2000s we have been importing an increasing fraction of our energy needs and, today, we import half of what we need. This is illustrated in the figure below (the figure comes from here). This is projected to continue and, in 2020, we are projected to be importing 80% of our energy needs.

UK energy imports from 1998 till 2020 (projected).

UK energy imports from 1998 till 2020 (projected).

This has to cost money. I found the following figure on a site called the Oildrum. It only goes to 2009 but it shows that in the mid-2000s we had an energy surplus while by the late-2000s we were spending £10billion – £15billion importing oil, gas, coal and electricity. According to the same site, energy products now make up more than 15% of our trade deficit.

UK trade balance in energy goods.

UK trade balance in energy goods.

Now, I appreciate that we should aim to do things as efficiently as possible, but there are some caveats. Firstly, it’s not obvious that fossil fuels are the only reliable and efficient source of energy (as the report linked to at the beginning of this post indicates). Fossil fuels are likely to become more expensive while renewables are likely to become cheaper. Additionally, an economy isn’t just about making profits for investors and making products cheaper for consumers. It also plays a role in creating jobs. Providing energy probably makes up quite a significant fraction of our economy and if we have a choice between spending many billions of pounds importing energy into the UK or spending a similar amount of money employing people in the UK to develop, build and maintain renewable energy sources, I think the latter would be better for our economy. That’s not to suggest that we shouldn’t be playing a role in the global economy, but we do have to consider the implications of the decisions we make about how to provide resources for the UK.

If I consider the two figures above, the top suggests that imports of gas, oil and coal will be at least 3 times higher in 2020 than it was in 2009. If we were spending £10 – 15 billion importing these products in the late-2000s, we will be spending at least £30 billion by 2020 (ignoring inflation and rising costs of natural gas). That’s a lot of money leaving the UK economy every year. Money that, in my opinion, would be better spent employing people here. Of course, I think we should be investing in renewables for more than just economic reasons, but – even ignoring climate change – the economic argument alone seems pretty strong.

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2 Responses to Economic efficiency

  1. cvdanes says:

    If you factor in health and environmental costs, the price of gas, oil, and coal are much higher. So, even if people paid more for green energy, the overall cost would be less.

  2. Absolutely. I was trying to avoid the environmental aspects of the costs that skeptics would normally dismiss as being unproven.

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