Failure to take advantage of the gas under our feet is leaving us poorer and colder

Andy Mayer

January 18, 2022

Last week, Jack Richardson of the Conservative Environment Network set out a defence of the Government’s Net Zero delusion that the only problems underpinning soaring energy bills are our failure not to decarbonise faster. He gets some things right, including the causes of the current price spike and how proposed changes to the tax regime are “sticking plasters”. But he gets a lot wrong.

Like the previous government, he assumes gas prices will stay high and keep rising. In practice, gas prices for power generation were low and stable at £30-50MWh for the whole of the last decade. Global markets will adapt, and prices will fall again.

Richardson argues that as part of a larger European market we might not be able to dent prices within it, so we shouldn’t bother trying. No one knows if this is true, and it’s odd to argue that competition doesn’t lower prices, when doing nothing ensures we are price takers while sitting on large reserves.

Not using these reserves just means more imports, a triple hit in lost tax revenue, offshoring domestic supply chains, and lost opportunities for innovation in more efficient and environmentally sensitive developments. This is self-harm, and a servile genuflection to Russian-state market power, not environmentalism.

He argues that gas use for heating is being subsidised, and a transition to electric heat pumps discouraged, because green and social levies on domestic bills are lower for heating (2.5 per cent) than power (25.5 per cent not 23 per cent). This is muddled thinking; currently, gas for any purpose is highly taxed at source. There is a special tax regime for the North Sea that pushes up wholesale prices. Businesses pay the climate change levy on fossil fuels, and some participate in carbon trading through the UK Emissions Trading Scheme propped up by a carbon price floor. Domestic gas charges are lighter but are not zero and a new Green Gas Support Scheme may change that.

For equitable treatment and non-discrimination between these choices we need a single economy-wide carbon tax. We don’t need more special taxes on gas use to match special support schemes on power generation. These schemes are so expensive and badly designed that the 2017 Helm review suggested putting them in a bad bank.

A carbon tax could further be made far less damaging to UK industry and citizens by linking it to global carbon prices (or their estimated equivalents) rather than the lobbying ambitions of rent-seeking low carbon corporations. If CEN want market mechanisms to solve global problems, then it would help to understand that the UK cannot solve them unilaterally and can do itself enormous harm by trying.

On that note, Richardson’s comments that Net Zero is an industrial strategy are self-delusion. You don’t create world-beating industries through subsidies; instead, you create a shopping mall for imports, while undermining domestic industry through high costs, not least on energy. This is the green growth paradox, only politicians don’t see it, focused as they are on headline grabbing factory openings, while ignoring the more extensive closures that paid for it.

In the long term, it is true that that gas will be replaced. But Richardson is quite glib about how hard this will be. Energy technology takes years to develop and deploy. Nuclear power is always slower, less reliable, and more expensive than it claims to be. It can’t be turned on and off easily and can’t cope with providing more than a third of our needs. Most renewables are weather dependent and require back-up. The only affordable back-up option now is gas, and we are decades away from solving that challenge. It is further likely to solved elsewhere, carbon capture and storage for example has no better market for prototyping than China.

While we are so dependent, ignoring the advantage of our domestic supplies is a deliberate campaign to make us poorer and colder for reasons of ‘leave it in the ground’ virtue signalling. With their current agenda, CEN might more accurately rename themselves the Socialist Campaign for Fuel Poverty. Or think again, ditch past errors, and take these challenges seriously.

Author

  • Andy Mayer is Chief Operating Officer and environment, energy and infrastructure analyst at the Institute of Economic Affairs.

Written by Andy Mayer

Andy Mayer is Chief Operating Officer and environment, energy and infrastructure analyst at the Institute of Economic Affairs.

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