Submitted by Bruno Prior
on Mon, 14/12/2020 - 17:48
This is typical of the development process in an interventionist environment.
In a healthy economy, entrepreneurs identify opportunities and risk their capital to invest in commercial research and development to test if their judgment was right and identify ways to reduce costs in implementation. If they made a good judgment, they use their knowledge to replicate and profit from their investment, linking the means to make further investments to the track record of making good judgments. If not, they learn and move on.
In an unhealthy economy, the risk of investing ahead of policy is too great (“regime uncertainty”), and businesses focus on persuading the government to back their favoured solutions before investing in them. The investments are then insulated from competition from alternative solutions because their profitability leans heavily on the subsidy that is available only to the government’s “winners” (“de-risked” to use the popular current euphemism). This reduces the competitive pressure to reduce costs. Indeed, cost reductions can be unwise because governments may see them as a reason to remove support. Best to promise lower costs in the future subject to sufficient support now, for as long as governments believe it. This is unattractive to entrepreneurs, who like to back their own judgment, and hostile to them because (a) government is typically seduced by big promises, and targets solutions that require investment beyond enterpreneurs’ capital resources, and (b) lobbying and influence lean heavily on corporate heft. We may term this the “corporatist”, “crony capitalist”, “anti-entrepreneurial” or “Mazzucato” model.[1]
The way to avoid the corporatist siren is for governments to recognise the knowledge problem, forsake the winner-picking course that reflects interventionists’ delusions of adequacy, and tie themselves to the mast of a policy to “internalise the carbon externality” that is blind to technology, scale or sector, aka: a carbon tax.
This has been the recommended option of most economists over the years. In the form of the Carbon Dividend proposal, it is backed by over 3,500 current economists including 28 Nobel Laureates.[2] But it has never in three decades of privatised energy been a contender in a UK government consultation on low-carbon energy policy.
Each time we have been faced with another proposal for a winner-picking mechanism, we have prefaced our consultation response with a proviso that a carbon tax would be preferable (before addressing the minutiae on which the government is pretending to seek opinions before implementing what it always intended to do), but it is whistling in the wind.
Some people believe that the UK does enjoy a carbon price, in the form of the EU Emissions Trading Scheme (EU-ETS). In reality, this only covers around half of energy, which roughly coincides with the sectors in which the UK government intervenes through other measures as well, and excludes those sectors in which the UK has historically done very little. It has also been serially undermined by gaming by national governments, resulting in very low prices that reflect the design of the scheme rather than the cost of the externality.
Our Chairman travelled to Brussels for an early discussion on the EU-ETS. After they had set out how it would work, he said to the room “But they’ll cheat”, meaning national governments would find ways to exaggerate existing emissions and allocate existing rights generously, particularly to “national champions”, so that modest, easily-achievable savings would be sufficient to ensure compliance, thereby undermining the price signal. This has, of course, proved to be the case, but the comment was treated with a combination of horror and ridicule at the time. How could anyone think that policy would work in any way other than that intended?
That is not a phenomenon exclusively confined to meetings in Brussels. We have been greeted by the same attitude repeatedly in the UK, when we have tried to warn of the likely ways that policy would be gamed, or of the perverse incentives and unintended consequences.
It shouldn’t be a difficult judgment for politicians to make:
If I say, “scrap the winner picking and implement a carbon price across all uses, technologies and scales”, I am saying “I believe I can reduce carbon at a lower cost than my competitors”. You don’t have to believe I am altruistic or more expert; just notice that my self-interest is aligned with the interests of taxpayers.
If my competitor says “my technology may be expensive now, but will be plentiful and cheap in the future, so long as you subsidise me disproportionately for now”, they may believe it, but they don’t have much confidence in it or they would back their long-term cost-effectiveness under a carbon-pricing regime. Governments have no idea if the claims are true, but can apply the judgment of Solomon – if you really believed it, you would be aiming to profit from your special knowledge in a competitive market, not asking for special treatment.
The proposal is effectively to move risk away from corporations and on to taxpayers, but allow corporations to retain the profits should the cost-savings materialise. Politicians should be wise to “privatised profits, socialised risks” by now. But “de-risking” is all the rage again in corporatist circles of whatever political colour.
The lesson for Net Zero of energy policy since privatisation (and of our experience as one of the last renewable-energy entrepreneurs surviving from the days of privatisation) is: DON’T DO IT. It assumes even more omniscience than was assumed in earlier, failed energy policies. We know enough about energy to know that it is too complex to plan and manage in this way. But in over 30 years of involvement in renewable energy, we have never been able to overcome the Dunning-Kruger effect in energy policy-making. Those who need to recognise their ignorance are too ignorant to realise it. They continue to implement or recommend policy as though they know enough to pick winners, ignoring not only the limitations of their position but also the evidence of every preceding failed policy.
