4.3 The Economics of Climate Change Should Be a Key Policy Driver
It seems clear that electricity sector will be the lead sector in the medium
term response to CO2 emissions in the UK, closely followed by improvements in the use of heat. In 2006, combustion of fuel for heat constituted 31% of CO2 emissions, just behind power station emissions which were 33% of the total. Focusing on fuel sources, in 2005 coal combustion accounted for 27% of CO2 emissions, while natural gas combustion was 36% of CO2 emissions.23 An economic regulator
for energy, committed to economically efficient achievement of policy goals, potentially has a key role to play in this. Climate change policy should be all about ensuring the efficient internalization of the externality created by CO2 (and other greenhouse gases) emissions. Clearly an economic regulator like Ofgem should consistently price CO2 across all of its regulatory interventions and do this consistently with other government policies. This has the potential to be a powerful institutional
component of sensible policy trade-offs in government. A key problem will
be the unwillingness, at least initially, for governments across Europe to simply let
the price of CO2 rise to the level required to fully decentralize CO2 reductions. This
makes sense at the level of the fact that the CO2 price in such a market would reflect
all of the institutional barriers to low carbon investment – e.g. blockages in the
planning process and uncertainties in the financial markets. Using a combination
of prices and other policies would therefore seem sensible. However this suggests
that large government inspired initiatives will be forthcoming e.g. trialing of smart
metering and heat networks and subsidized investments in CCS and tidal barrages.
Such initiatives are likely to be inconvenient in terms of necessitating adjustment
of the rest of the electricity system to accommodate them. However Ofgem’s role
should be to ensure that the competitions to enact government initiatives should
be competitive and the costs of accommodating them should be minimized, i.e.
the independent regulator should ensure that politically motivated investments in
demonstration projects occur at least cost to the energy system.
It seems clear that electricity sector will be the lead sector in the mediumterm response to CO2 emissions in the UK, closely followed by improvements in the use of heat. In 2006, combustion of fuel for heat constituted 31% of CO2 emissions, just behind power station emissions which were 33% of the total. Focusing on fuel sources, in 2005 coal combustion accounted for 27% of CO2 emissions, while natural gas combustion was 36% of CO2 emissions.23 An economic regulator
for energy, committed to economically efficient achievement of policy goals, potentially has a key role to play in this. Climate change policy should be all about ensuring the efficient internalization of the externality created by CO2 (and other greenhouse gases) emissions. Clearly an economic regulator like Ofgem should consistently price CO2 across all of its regulatory interventions and do this consistently with other government policies. This has the potential to be a powerful institutional
component of sensible policy trade-offs in government. A key problem will
be the unwillingness, at least initially, for governments across Europe to simply let
the price of CO2 rise to the level required to fully decentralize CO2 reductions. This
makes sense at the level of the fact that the CO2 price in such a market would reflect
all of the institutional barriers to low carbon investment – e.g. blockages in the
planning process and uncertainties in the financial markets. Using a combination
of prices and other policies would therefore seem sensible. However this suggests
that large government inspired initiatives will be forthcoming e.g. trialing of smart
metering and heat networks and subsidized investments in CCS and tidal barrages.
Such initiatives are likely to be inconvenient in terms of necessitating adjustment
of the rest of the electricity system to accommodate them. However Ofgem’s role
should be to ensure that the competitions to enact government initiatives should
be competitive and the costs of accommodating them should be minimized, i.e.
the independent regulator should ensure that politically motivated investments in
demonstration projects occur at least cost to the energy system.
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