The cost of climate change policies: over £300 billion (in UK)

The cost of renewable subsidies has been deliberately understated

By Matt Ridley.

"We now know from three different sources that Britain’s climate and energy policy is not just too expensive but has also been dishonestly presented. Peter Lilley MP, an unusually numerate former cabinet minister, has written a devastating new report for the Global Warming Policy Foundation, published today, on the costs of Britain’s Climate Change Act 2008. It reveals “at best economic illiteracy and at worst deliberate deception” by government.

It comes as the National Audit Office has rapped the government’s knuckles for “a lack of transparency [that] has undermined accountability to parliament and consumers” in its energy policy. And a non-executive director of the former Department for Energy and Climate Change (DECC), Tom Kelly, found a systemic underestimation of the costs of the policy as well as “weaknesses in the original governance arrangements that were not rectified over time, a lack of transparency and a tendency to groupthink.” No wonder DECC sat on the Kelly report for a year before releasing it.

Mr Lilley calculates, and this is a conservative estimate, that the Climate Change Act will have cost over £300 billion by 2030. That is a gigantic sum subtracted from the earnings of Britons. Worse, this spending has to be forced by law, which implies that there are other productive investments to which it could be put. Indeed, this spending will be largely wasted even in its own terms: Mr Lilley points out that the dash for gas, as well as the recession, cut emissions, while the rush to renewables has merely driven some abroad.

Worse, Mr Lilley finds that government sources have concealed and downplayed the cost of climate policies. For example, official figures understate the “system” costs of intermittent renewables, such as the need to subsidise fossil fuels in a grid where they are only needed as backup. The government also assumed — wrongly — that fossil fuel prices could only rise, making green subsidies look less costly. Instead they have fallen sharply.

And even the £300 billion estimate omits the cost of biofuels in transport; ignores Britain’s share of the European Union budget, at least 20 per cent of which is spent on “climate-related projects and policies”; includes nothing for international development (though Dfid will spend at least £25 billion by 2030); and excludes the cost of having made British industry less competitive.

When Ed Davey, then energy secretary, wrote about “the impact of all the government’s energy and climate change policies [on] household bills” it turns out he was referring only to the direct costs on individuals’ energy bills and had omitted the two thirds of the cost that falls on businesses’ bills, which pass them on to consumers in higher costs for goods and services. If a supermarket pays more for the electricity to run its refrigerators, it charges more for milk. Challenged on this by Mr Lilley, Mr Davey argued, bizarrely, that many businesses are owned by foreigners, as if that made a difference.

More breathtaking still, Mr Lilley shows that the government has been trying to pass off a cost as a benefit. Both Mr Davey and Chris Huhne, his predecessor, argued that the cost of climate policy could be set against notional energy savings from more efficient appliances and better insulation, which people would buy because of higher energy bills, thus supposedly generating a net saving.

However, improvement in energy efficiency would be desirable even if there were no concern about emissions, or indeed no emissions; and besides, a gain in energy efficiency usually increases the use of energy — a phenomenon known as the Jevons paradox. If they have more fuel-efficient engines, people make more journeys.

So, we have an energy policy that has imposed huge costs on the economy, failed to reduce emissions significantly and was either dishonestly or incompetently presented. That Liberal Democrats were in charge of energy policy for five years and that it was all in a noble cause — ostensibly saving the planet — may partly explain but not excuse this. Yet this does not explain the reluctance of Conservative ministers to revise these policies radically after the end of the coalition.

And where were the watchdogs that are supposed to keep an eye on this policy and check it for effectiveness? The committee on climate change (CCC) was set up by the 2008 act to ensure “a balanced response to the risks of dangerous climate change” (says its website). Yet it has wholly failed to insist on a climate policy whose costs are significantly below the best estimates of the harms of climate change, known technically as the social cost of carbon.

In a lecture in 2013 soon after he became chairman of the CCC, Lord Deben, the former Conservative minister John Gummer, said of climate change that, “the likelihood is almost certain, the scale would certainly be enormous, the effect would be devastating, and the insurance is remarkably cheap.” But we know this is nonsense: the costs, as Mr Lilley’s study shows, are enormous in themselves, and are actually greater than even the higher-end estimates of damage from climate change. Nobody pays insurance premiums greater than the largest likely loss.

Mr Lilley was pilloried for being one of three Conservative MPs who voted against the Climate Change Act in 2008, so perhaps he has an axe to grind. So do I, as somebody with a commercial interest in coal mining and who thinks that the risks of climate change, though real, have been exaggerated. I have never objected to a cost-effective climate protection policy and would be delighted to see all the subsidies and imposts replaced by a simple carbon tax well below the social cost of carbon so as to encourage low-carbon innovation, not punish people for doing what at present they can’t avoid, namely using carbon-based energy sources.

But even on true believers’ own terms — indeed, especially on those terms — the Climate Change Act has been disastrous. In devising its climate-dominated energy policy, government has proceeded as if cost was no object. That is economically irrational, morally wrong and politically foolish. It has needlessly put climate policy on a collision course with public opinion. It is no accident that Donald Trump went from advocating strong climate action to embracing scepticism when he decided to run for president. For rust-belt Americans, just-about-managing Britons, not to mention similar constituencies in Germany, Japan and elsewhere, this is an obvious example of an elite policy that is unfair, costly and futile."