Undercover Economist

The real cost of keeping warm

If we are to deal with climate change, the price of carbon-intensive energy is going to have to rise

With the price of domestic gas and electricity soaring, the cost of keeping warm, never off the politicians’ radar screens for long, is firmly back on the agenda. The latest wheezes to emerge from the coalition are some mild utility-bashing from the prime minister, and a “green deal” from the energy secretary, Chris Huhne, which is intended to make it easier to borrow money for energy-saving home improvements.

I may have missed it, but I am not aware of either man stating the unpalatable truth: if we are to deal both with climate change and with the security of our energy supply, the price of carbon-intensive energy – and at the moment that means energy in general – is going to have to rise.

No sign yet of any push towards that goal: domestic fuel is taxed at just one quarter of the standard VAT rate. According to a review by the Institute for Fiscal Studies, the percentage of tax revenue attributable to “green” taxes peaked at the end of the 1990s – it was less than 10 per cent then – before it began an inexorable slide. The story behind that slide is simple: the only significant “green” taxes are paid by motorists. Emissions from industrial sources, aviation and – yes – our homes have got away lightly so far. But that situation can’t last forever.

It’s clear enough why politicians don’t care to dwell on such inconvenient truths, and favour instead the kind of regulatory engineering put forward by Huhne. At least his idea addresses a genuine problem: people fear that if they move house after buying an energy-efficient boiler or double-glazed patio windows, the new occupants will reap the benefits without paying more for the house. The “green deal” leaves the home-improvement debt behind, to be repaid through utility bills.

Yet regulatory pushes are limited at best and produce bizarre consequences at worst. In the US, Corporate Average Fuel Economy standards, designed to encourage more efficient cars, have had some benefits but also two dramatic failures. They boosted the rise of the giant SUV, which was exempt from the standards that applied to regular cars. More prosaically, once the standards had been met there was no incentive to do more, and much engineering effort was devoted to making cars bigger and faster rather than more efficient.

In the UK, the “Merton Rule” – it originated in the Borough of Merton and has been widely emulated – demands that substantial new developments include the capacity to generate 10 per cent of the building’s energy needs through renewable sources, on site.

Alas, such a rule is hopelessly slack for an out-of-town supermarket – an environmental disaster because of all the driving it encourages, yet with plenty of real estate for solar panels. Meanwhile it is too challenging for a city-centre skyscraper, which is naturally a low-energy building because of its compactness and proximity to public transport.

All this explains why a carbon price has to be the centrepiece of any policy on climate change. A price on carbon acts in more subtle ways than any regulator will be able to, encouraging a switch away from coal and towards nuclear energy and renewables, encouraging energy efficiency in every choice we make, and in the last resort, encouraging us to do without products, services and activities where the energy cost is just too high.

We live in a world of seven billion people, many billions of distinct products, and countless decisions every day that have the effect of releasing carbon dioxide into the atmosphere. Without a carbon price to guide all those decisions, the cost of responding to climate change is far higher than it has to be.

Also published at ft.com.