Blow Away the Accountants

“If we are concerned about the cost, then renewables have no part in reducing greenhouse gas emissions by 80% by 2050.”

So writes Clare Spottiswoode, chair of the nuclear energy company Magnox, according to yesterday’s Sunday Times. The words are purported to be contained in the foreword to a report to be published today which shows that it would be cheaper to invest in gas-fired power stations and nuclear than to offer subsidies to wind turbines. This would seem to be a deeply flawed report but I hope it is widely read so people understand that economics can be misused and remind everyone that economics has to be kept in its place as a tool of policy to be used intelligently with full knowledge of the underlying assumptions.

The accountants have done the sums and the numbers ‘prove’ that it would be cheaper to build gas-fired and nuclear power stations for the UK to meet its CO2 reduction targets by 2020 and 2050. The economic advice is to stop investing in wind turbines, a message that opponents of wind like to hear.

Concurrently with this breaking story, I was participating in a seminar on environmental economics and a number of the economists were adamant that every decision could be boiled down to a cost/benefit analysis. The attraction seems to be that the answer is clear cut and expressed in numbers, with the least-cost option the preferred option. The economists would like us to accept the result and act upon it; but policy makers need to reflect about what is really going on.

The number crunching of a cost/benefit analysis may be impressive but the process is simply computation. The answer is entirely dependent on the input assumptions. Intelligent policy makers use the tool of cost/benefit analysis but focus the intellectual effort on the real issues and key factors. In this case, key factors include security of energy supply, long-term liabilities and the risks of climate change. Diligently working out the numbers for investment options to hit a certain target date can hide these issues and obscure the real picture.

Policy makers in the Department for Energy and Climate Change (DECC) will not give this report much credence. Putting up wind turbines may not be liked by some people but once the site is established it will generate energy into perpetuity with maintenance and equipment renewals as required. This is clean energy to underpin a secure energy future without the long-term liabilities that come with nuclear power – for which accountants have a tendency to discount the calculation to shove the problem outside the reference frame of the calculation.

The authors of this report may yet see sense and pull it, but I would like to see it widely read, countered and then filed where it deserves to be filed ...

Wasted Government Subsidy

Drax is Western Europe’s biggest coal-fired power station. It receives government subsidy through the allocation of Renewable Obligation Credits (ROC). This seems ridiculous – and is ridiculous – but there is a logic which those who focus on counting CO2 emissions find persuasive; it goes like this.

In 2011, Drax emitted 21.5 million tons of CO2. However 6% of this came from co-firing 3,500 tonnes per day of biomass (wood chips, straw and other material). It is claimed that this is enough to power 350,000 homes. Net CO2 emissions are reduced compared with what they would have been because the biomass component is renewable. There are plans to increase the co-firing of biomass to 50% saving yet more net CO2 emissions. Adding up carbon emissions, this seems like a good idea, until you do a careful the strategic appraisal.
Drax Power Station: Photo courtesy of freefoto.com

Drax management is struggling to set the strategic direction for the future because carbon now has a price, and where it was given a free allocation of carbon permits, that is now coming to an end. The price of carbon is around £8 per tonne of CO2 which would amount to an annual bill for £170m. Power generation is a competitive business; this is a significant extra cost but carbon is currently very cheap and likely to get much more expensive. No wonder the owners of Drax are trying to squeeze the system for subsidies to reduce their costs. There are plans to raise the proportion of biomass to 50%, requiring a shuttle of ships to import the huge quantities of biomass required. If the government agrees to pay ROCs, it could make Drax one of the most profitable power stations in the UK and allow it to continue operating at a profit for many years.

Drax is a monument to the old system of fossil fuel and big power stations. The economies of scale are financial; it is not efficient in an engineering sense. Smaller power stations, much closer to communities, are the future. These combined heat and power (CHP) stations squeeze maximum calorific value from the fuel and, if using locally-grown biomass, reduce the transportation overhead. Further significant improvements to the insulation of the housing stock and the 3,500 tonnes per day of biomass currently burnt by Drax could power perhaps 1 million homes.

Government subsidy should flow to support investment in small CHP and better insulation of homes. The government should make it clear that the future of Drax will be left to market forces and not propped up by government subsidy. Drax investors will understand that it is obsolescent and make the appropriate choices for its future.

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Greening America

‘Environmental policies must be carefully structured and predictable if they are to enhance rather than undermine competitiveness.’

So begins an article in the current edition of Harvard Business Review, ‘Green Rules to Drive Innovation’ by Daniel Esty and Steve Charnovitz. To paraphrase the article, they write about energy and climate policy from a viewpoint that this has to be done so let’s do it right. Looking across the pond from Europe, companies in Europe should be concerned. Europe is well advanced in putting a cost against carbon dioxide emissions, considerable investment is flowing into the low-carbon economy and there is growing confidence that making the early moves in green technology will pay off handsomely. But what if America, the slumbering giant so far resisting calls for action on climate change, wakes up to the opportunities? The ability of America to reinvent itself and steal a march on Europe is a very real threat to European companies.

In the article it is argued that without a coherent framework for pricing greenhouse gas emissions, American companies have been unable to make rational decisions about investments. Spending on factories, equipment, and product design where there are significant energy implications becomes fraught with difficulty. ‘This uncertainty has cast a pall over the entire U.S. economy... dampened innovation and put U.S. companies at a serious disadvantage.’ The authors argue that U.S. business is put at a disadvantage compared with businesses in countries where clear policies have sharpened the corporate focus on waste and inefficiency and spurred innovation.

If America enters the international competition for green and renewable technologies, it would be a game changer. The nation that put a man on the moon could turbo-charge green innovation. For example in aviation, U.S. companies have the technology to launch the next Golden Age of aviation, but there is little sign that the U.S. government will allow it. The necessary action includes putting a price on carbon and tax on aviation fuel, but such proposals are greeted with deep suspicion in America. With a presidential election looming, politicians will not be campaigning for increasing the cost of carbon dioxide emissions.

At the time of writing, the HBR article on green innovation does not appear to have grabbed the attention of U.S. business leaders, not appearing on the list of the most popular articles on HBR.com. Perhaps European business can rest easy that competition from the United States will not be mobilized anytime soon. That would be wrong; the United States has the capability to catch up, over take and forge ahead.

For the sake of the planet I would like to see a race for who can lead in green technology. However it is not a two-horse race; both the United States and Europe should be concerned that China could take the lead. For those who think green innovation is a waste of money; think again, the new economy will depend on it.

Cities fit for cycling

Cities for People: Removing Cars from Urban Life.

This is the title of a paper I presented at the London School of Economics in 2007. My paper received considerable support and also opposition which I will explain but first, I will mention the Times campaign to improve safety for cyclists in London. Cities fit for cycling came about after Times journalist Mary Bowers was badly injured on her way to work. To succeed this campaign has to be more than pro-cycling it has to also be anti-car. My words will immediately incense car drivers seeking to defend their ‘rights’. Such reaction is understandable from city residents who know only the city of today but it is very short sighted. Policy that deliberately and specifically gives the city back to its people (on foot, by bicycle and on public transport) leads to better cities for everyone across society.

When I spoke at the LSE five years ago it was part of a conference about the future of cities in the developing world. I expected push back from delegates from the developing world objecting to my call to deny them the ‘benefits’ of car infrastructure and ownership. In fact these delegates were mostly in support; opposition was lead by World Bank officials asserting that investment in roads had the best return on investment. The real problem seemed to be that people living in advanced Western economies find it hard to envisage life with much fewer cars.

In London, at least it is acknowledged that there is a need for much better provision for cyclists but this is only a beginning; there is still huge opposition to reducing the reliance on cars, even though this is the sensible policy if only we think deeply and plan carefully.

On a personal note, I know first-hand the problem that has set off the Times campaign. Some years ago I was hit by a car, was badly injured and went through two years of rehabilitation. The driver was prosecuted, found guilty and fined but I do not blame him. The policy makers who design the infrastructure are to blame. The priority is simple and obvious; people should have more priority than cars.

UK Aviation Policy

The UK government has a difficult and important task to craft policy for aviation. It is difficult because of widely divergent viewpoints and multiple stakeholders. It is important because aviation policy has long-term consequences with decisions taken now influencing the type of aircraft and the associated ground infrastructure that will be operating in the middle of this century. The key stakeholders, in approximate order of the political power they wield, are:

Business – concerned that in a globalised world it is important to have an efficient transport infrastructure.
Passengers – a large proportion of the electorate enjoy, and would like to retain, cheap flights.
Airlines – working to tight margins with fuel a high proportion of operating costs.
Airport Operators – concerned that they will run out of capacity, particularly in the South East around London.
Environmentalists – providing the inconvenient grit in the negotiations, concerned at the growth of emissions from aviation as a cause of climate change

Politicians tend to make decisions with input from focus groups, which in this case would be drawn from the stakeholder groups listed above. However if politicians were to take a principled approach, they would be assessing the priorities asking the question what is the key issue that has long-term consequences. Despite the protestations of other stakeholders, that issue is the rapid growth in emissions. On a principled long-term basis, the environmentalists have logic on their side. In reality that counts for little; the electoral cycle sets the timeframe and the first four categories of stakeholder have louder voices. What is very strange about this particular policy stalemate is that putting long-term environmental concerns as the foundation of aviation policy will lead to a golden age of aviation. The price is severe disruption in the short-term but the outcome is better for all stakeholders.


Fly and Be Damned: What now for aviation and climate change?

Politicians should read my book, and take a principled approach launching the next golden age of aviation.

The Great Transformation

The 42nd World Economic Forum in Davos has closed and the rich, powerful and famous have returned home. The theme of this year’s annual meeting was ‘The Great Transformation: Shaping New Models.’ The opening day set the scene with accusations from Sharan Burrow, General Secretary of the International Trade Union Confederation (ITUC) that widening income inequality and high unemployment, especially among young people, are an indication that the capitalist system has failed society. David Rubenstein, Co-Founder and Managing Director of the Carlyle Group, a private-equity firm offered a defence of capitalism using the old adage “Capitalism may be the worst economic system except for any of the others.” The problem, he explained is not capitalism but a lack of investment in education and failure to promote innovation and creativity. We have heard all this before but where does it leave us in the search for a new model of capitalism?

Has the Davos Economic Forum made progress with setting off a great transformation? I fear not; despite the good words and recycled arguments there was little sign of breakthrough ideas or even a willingness to acknowledge deep rooted problems with the global economy and world society. It seems to have become fashionable to talk about each of the challenges the world faces, complete the conversation and move on to the next issue. An example which illustrates the point is ‘climate change’. Already there is danger I will lose the reader at this point – “Oh no, not climate change again, we did that a few weeks ago, let’s move on”. Climate Change may not be the most severe problem we face but it is high up on the list of important and intractable problems. Following the Durban climate talks, there is now an agreement to start discussing an agreement to be finalised by 2015 to come into force by 2020. The conversation is regarded as closed and discussion moves onto more immediate urgent issues such as the financial crisis in the euro zone. There is confusion between what is ‘urgent’ and what is ‘important’.

It is time that world leaders stopped continually hopping between the issues responding to the apparent urgency of immediate crisis and use forums like Davos to focus on the really important issues and the tough choices that have to be made. The world badly needs real-world solutions and a new model for the economy and society. I argue that the new model is ‘proximization’; it is my model so it is not for me to decide if it is the best model but it is better than the alternatives. In a world of many problems and few solutions, ‘proximization’ of human society and the economy truly does offer the prospect of a great transformation.

More UK Airport Capacity

Extrapolation of growth trends in aviation leads to the conclusion that the South East of England will run out of airport capacity sometime before 2020. But predictions of continued growth of conventional aviation are based on the assumption that aviation will remain largely exempt from policy to reduce carbon emissions (noting that the inclusion of aviation in the EU ETS will have little real impact).

The arguments put forward in defence of business-as-usual, range from ‘aviation is vital to the economy’ to ‘emissions are only 2-3% of global emissions’ so policy makers should look for reductions elsewhere. These are attractive arguments, allowing policy makers to ignore the challenge of drafting sustainable aviation policy. As the UK government shapes its new aviation policy through 2012, I hope it does not take this easy detour but tackles the issue head on and grasp the opportunity to move aviation into a new era.

Until policy makers carry out the research and deep analysis and that should underpin sustainable aviation policy, the current debate about building new airport capacity is at best premature, at worst just froth and posturing by vested interests. Green campaigners are no better, refusing to acknowledge that engineers could transform aviation to dramatically reduce the environmental impact allowing us to fly with a clear conscience – if politicians give the engineers an appropriate policy framework. Greens should be arguing to change policy, not arguing against flying per se.

The environmental impact of aviation can and should be reduced. This must be the foundation of sustainable aviation policy. Accepting this, would be a big step forward to a real debate.