Tim Guinness takes on The Economist

In the blog this week Tim Guinness, energy investment specialist at Guinness Asset Management, responds to The Economist’s Lexington column “How not to manage a boom” on the politics of energy policy in the United States.

The Economist article is perceptive and well balanced. Less is good is its core thrust – less environmental regulation; less tax; less complex subsidies (cap & trade) – and this is hard to argue with. On the other hand, whilst applauding growing domestic US oil and gas production and lessening greenhouse gas emissions it slightly glosses over the obvious point that encouraging more efficient use of energy by well crafted policy is nonetheless sensible. Fossil fuels are finite and the biggest challenge bar none that the world faces over the next two centuries is how to replace fossil fuel energy – probably the main driver of the flowering of our civilisation which we have seen since 1800 – as we use up the hydrocarbon reserves laid down over 150 million years in the blink of an eyelid in geological time. The world vehicle fleet is on track to double over the next 20 years from 1 billion to 2 billion and air passenger kilometres have been doubling every 15 years since 1983 (1.3 trillion to 2.6 trillion to 5.2 trillion today). It is going to be increasingly difficult to provide the energy needed for this from fossil fuels.

I would make the following detailed comments: cap and trade and carbon capture and storage deserve to fail on grounds of complexity, expense, proneness to inefficiency and corruption but a simple carbon tax and stable, simple subsidies (eg. feed in tariffs) over long time periods can help the speedier development of renewable energy. A sensible carbon tax along with fit for purpose regulation would also give nuclear power the encouragement it much needs. To this should be added incentives for the use of more efficient transport technology and energy saving in the home. These could include tax reliefs for energy efficient vehicles or tax deductibility for expenditure on energy efficiency in the home.

The best policy mix would seek to support a scenario which recognises that the 1920–1970 50 years of cheap energy is never returning and that we need to try and manage a non-disruptive transition to a post fossil fuel world.  Perhaps one where  fossil fuel costs grow slowly over time – possibly a doubling in real terms every twenty or so years would do this well, as has in fact  been happening since 1970 at least for oil and which the world has so far  been able to cope with without too much difficulty.

Summary of article & thoughts

US output of oil and gas are up, and greenhouse gas emissions are down – that’s all true – but the US still needs to import 50% of its oil and 15% of its gas, and emits more per capita than anyone else. However, we need to be careful about the claim that gas is cheap. Gas is not that cheap – it has benefitted from existing pipeline infrastructure. The concept of Obama and Cass Sunstein, the regulation Czar, doing little to prevent fracking is encouraging but Obama’s “cap and trade” policy and the attempt to promote cellulosic ethanol is not succeeding. Cap and trade never was a good idea. A carbon tax is infinitely better.

Furthermore clean coal has failed to progress and indeed is an annoyingly stupid approach – very expensive and we end up using 33% more coal. In contrast, gas has boomed, principally because of a good competitive market, reasonable tax/royalty regime and low bureaucracy.

Mitt Romney’s call for less regulation, lower environmental standards and lower subsidies are all fine in theory but the absence of any continuity of subsidy policy is wasteful. Romney says he wants to repeal power to regulate greenhouse gasses – that’s fine, but first he needs to answer this question: what’s the point of repeal?

To sign up for Mindful Money’s daily newsletter click here.

This entry was posted in Energy. Bookmark the permalink.
Subscribe Find an Adviser
  • Anonymous

    I disagree with feed in tariffs because they subsidize failing technology. Markets are a powerful tool to identify which technologies are useful and profitable. The feed in tariffs destroy these market signals and reward inefficient products. The feed in tariffs hide the horrible truths that the present solar panels are unworkable and they also keep electricity prices below a true market. If we removed the feed in tariff and charged consumers more for power – it sends a market signal to purchase energy efficient appliances.

    Use a simple carbon tax to price electricity accurately and let entrepreneurs find the cheapest answer to the CO2 reduction problem.