Thursday, 18 October 2012

The Coalition's Carbon Crunch

Michael Jacobs

David Cameron’s announcement that the Government would legislate to force energy companies to put customers on their lowest tariffs sounded good for a couple of hours. But it quickly unravelled, with even consumer groups arguing that it was unworkable and would destroy what little competition there is in the energy market, forcing prices up not down. It neatly symbolised the current disarray in the Government’s energy policy, which is fast approaching crisis point. As it prepares to publish its long-awaited Energy Bill, the choice at stake could not be more critical: whether Britain moves towards a low carbon energy system which contributes to tackling climate change, or a continuing fossil-fuel-based one which locks in high greenhouse gas emissions for the next forty years.

The Bill will set out a new system for regulation of Britain’s energy market. The task is to incentivise the private energy sector to install the £100bn-plus of investment needed to keep the lights on, replacing ageing power stations and upgrading transmission grids, while keeping energy prices competitive.

Given the different needs of different technologies – principally renewables, nuclear and gas – this was never going to be easy. But in the last few months a huge fissure has opened up in the Coalition which has left the Bill drafting process in complete confusion. In a leaked letter in July, George Osborne told the Energy Secretary Ed Davey that support for renewables should be capped, and Britain should meet its energy needs instead through a major expansion of gas-fired power.

Davey might have resisted. Instead, he acceded to the Chancellor’s demand and last month announced a new ‘dash for gas’, with twenty new gas-fired power stations to be built over the next twenty years. Since ministers cannot decide how many gas power stations get built (the energy companies do that), the announcement could only have been a signal that indeed the incentives for renewables would be cut.

The result has been uproar. With the UK’s low carbon energy goals apparently to be cast aside, the energy companies, their investors, and the green technology businesses which supply them have been left facing huge uncertainty about their own futures. Last week it was revealed that seven of the largest firms had written to the Government threatening to abandon their multi-billion pound investment plans in the UK – with thousands of jobs at stake – if policy certainty was not quickly restored. At the same time over fifty of Britain’s largest companies publicly urged the Government to commit itself to a low carbon energy policy. The Government’s own Committee on Climate Change took the unusual step of warning the Government publicly that a new dash for gas risked breaching the UK’s legally-binding carbon targets.

The choice between gas and renewables is not absolute. Gas is a flexible fuel which can supply the back-up needed when wind and solar are not flowing. With carbon capture and storage (CCS), it can even become low carbon. If coal-fired plants were phased out more quickly – the best way of cutting emissions – there is certainly room for more gas. But Osborne and his supporters on the right of the Conservative Party, backed by the Daily Mail and Telegraph, explicitly reject both back-up capacity and CCS, and oppose regulation of coal emissions. Citing the huge increase in shale gas which has transformed the American energy market in recent years, they want gas to become the centrepiece of Britain’s energy future. They have been supported by a major lobbying effort among the fossil fuel companies, led by Shell.

But the argument made is false. In the US it is true that shale gas has slashed energy prices, forcing the closure of many coal-fired power stations and thereby reducing US emissions. But as Chatham House and others have pointed out, the UK and Europe do not have accessible shale gas in anything like the same volume, it will be some years before it can be commercially exploited (even if environmental objections to the ‘fracking’ process are overcome), and it is unlikely to be cheap. On the contrary, as two separate analyses published this week have shown (1), there is a major risk that future gas prices will be much higher than they are now. It was striking that the CBI’s John Cridland immediately repudiated Davey’s announcement, warning that excessive reliance on gas would leave the UK exposed to dangerous global price and supply fluctuations.

The Conservative right complain of the cost to consumers of green policies. But the Climate Change Committee has shown that such policies have contributed only a sixth of the price rises consumers have experienced over the last decade. Almost all the rest has come from the rising cost of gas. It is precisely this which has caused the energy giants to increase their prices again this week.

As the Government’s own analysis shows, there are no cheap energy futures, whatever technologies are chosen. The huge advantage of renewables is that, once built, the fuel is free, and home-grown. The answer to rising prices is therefore not to abandon the low carbon agenda, but to reinforce it through higher energy efficiency. Yet just when this is needed, the Government’s other flagship energy policy is also in a mess. The ‘Green Deal’ programme will allow householders to pay for efficiency measures out of future bill savings. But by insisting on an entirely private-sector-driven scheme, without backing from its own Green Investment Bank, the Government has ensured that the interest rate faced by consumers will be prohibitive, and on current design take-up is expected to be feeble.

So will the Energy Bill confirm that George Osborne and the Tory Right have won and Britain is now dashing for gas? The whisper in Whitehall is that a compromise may be reached, in which Davey gets a ‘decarbonisation’ target for 2030, while Osborne imposes a cap on renewable subsidies. But this would not be a compromise at all. For investors, an aspirational target almost two decades hence is worth little – you can’t bank money on it. What matters is the regime in place for investment now, and if the subsidies are capped, that will inevitably mean (with nuclear protected) that renewables are displaced by gas.

This is a real test both for the Liberal Democrats and for David Cameron, whose famous promise that the Coalition would be ‘the greenest government ever’ is starkly on the line. Interestingly, the Opposition can play the crucial role. Even if Osborne gets his way when the Bill is published, the natural coalition here is between Labour and the Lib Dems, in support of low carbon. So Labour should announce that it is ready to work with the Government to improve the Bill. Cross-party consensus is vital on an issue where investors need to know that the policy regime will not change if the Government does. They should then co-operate with the Lib Dems and the remaining green Tories in Parliament to ensure the Bill is amended to support renewables and energy efficiency and constrain the dash for gas. In the battle for Britain’s low carbon future, events are about to get interesting.

(1) Pelin Zorlu et al, Risk-managing power sector decarbonisation in the UK, E3G, October 2012 (; Michael Grubb, Renewable energy and decarbonisation, paper given at Chatham House, 15 October 2012

A shorter version of this article appeared in the Guardian (

Thursday, 11 October 2012

Economic Prospects

Michael Jacobs

The party conference season has ended with no-one any the wiser as to how the British economy will get out of its current dire condition. At the beginning of this week - not good timing for the Chancellor - the IMF downgraded its growth forecast for the UK again. Three months ago it believed the British economy would grow by just 0.2% in 2012; now it predicts it will shrink by 0.4%. It cut its growth forecast for next year from 1.4% to 1.1% - over the two years, the largest IMF downgrade of all developed countries. Never wishing to offend the governments which fund it, the IMF stopped short of arguing for a change to the Coalition’s austerity policies; but in doing so conveniently overlooked its own view of just one year ago. Then it had predicted growth of 1.6% in 2012 – and said that if growth were lower than this a ‘Plan B’ would be needed.

As expected, George Osborne made clear in his speech to the Tory Conference that there would be no such thing. Lashing himself to the mast of the good ship Plan A, he declared that only austerity had kept interest rates low, and any stimulus would cause them to rise. With bondholders now effectively paying the Government (in real terms) to allow them to hold UK debt there is frankly very little basis for such a claim. But the Chancellor’s macho stance, begging the conference to hear the echo from Mrs Thatcher’s ‘the lady’s not for turning’, has so painted him into a corner that politically he had little alternative. With consumers fearful and investors holding onto their cash for lack of demand, the British economy remains at the mercy of the Eurozone crisis and the faltering economies of the US and China. It is very hard to see where growth will come from any time soon.

Yet perhaps the most devastating announcement from the IMF this week was that it had revised its calculation of the ‘fiscal multiplier’, the amount by which GDP falls for every pound that public spending is cut. Where before it had estimated that every cut of £1 took 50p from GDP, now it believes that the figure is actually between 90p and £1.70. As the TUC immediately pointed out, taking a figure from the middle of this range would suggest an extra £76 billion has been sucked out of the UK economy by the Coalition’s austerity package. It is not hard to see why the UK went back into recession this year.

David Cameron in his speech looked more long term. In a strikingly pessimistic passage about increased competition in the new global economy, he argued that Britain was at “an hour of reckoning.” We faced a stark choice, he said: “Sink or swim. Do or decline.” The Prime Minister should be given credit for acknowledging that Britain’s economic problems are not just short term, and not just about sovereign debt. They concern the very structure of the British economy, with its too-small manufacturing sector, dysfunctional banking system, low rates of R&D and long tail of inadequate skill in the labour force. But neither Cameron’s nor Osborne’s speeches contained any significant ideas for how such weaknesses can be addressed: it is fairly clear that neither more reform to the planning system, nor Osborne’s imaginatively right-wing plan to buy out employees’ rights at work in return for shares in their companies - more or less the only two policies proposed - are adequate responses.

With even the CBI and engineering employers the EEF now calling for a more active industrial policy to help British businesses face the global challenge, Labour should be in a position to capitalise. Yet its own conference produced little more than slogans in this area. Both Ed Balls and shadow business minister Chuka Umunna argued for industrial policy, committed Labour to a British Investment Bank, and stressed the need for better skills training, but there was little detail on any of them. Serious work is no doubt going on behind the scenes, but it remains a real challenge for the Opposition to spell out exactly how a more activist approach to economic policy would transform the UK’s medium-term growth prospects.

Interestingly, there is one area on which both Conservatives and Labour agree. This is the potential for infrastructure investment to get the economy moving. Ed Balls proposed a Keynesian strategy of public investment in housing, paid for from the sale of 4G mobile phone licences, and announced a review of infrastructure needs to be led by the Chair of the Olympic Delivery Authority Sir John Armitt. Surprisingly, George Osborne failed to respond by pointing to the Treasury’s recent announcement of sovereign guarantees for infrastructure investment. Yet this is in practice the most radical economic policy currently on offer from anyone: using the Government’s balance sheet and triple-A rating to underpin private sector investment in infrastructure projects. Perhaps it is because the policy doesn’t accord with the Conservatives’ economic ideology – it is a naked intervention in the finance market which increases the Government’s contingent liabilities (another form of public debt) to ‘crowd in’ private investment. But anyway, if it can be made to work, we should be thankful for it. Now all it needs is for the Green Investment Bank to be allowed to borrow now to invest in low carbon energy and energy efficiency, rather than wait for 2015 as currently required, and the Government might even be said to have a proper stimulus strategy with which the Opposition could agree. How paradoxical that this would appear to run so counter to its austerity message that the government seems to want to pursue it by stealth.

Thursday, 4 October 2012

Ed Miliband's bravura performance...

Michael Jacobs

Ed Miliband's bravura performance at the Labour Party's Conference - a prodigious feat of memory, to deliver more than an hour's oratory without notes or autocue - was the first manifestation of post-Olympics politics. Danny Boyle's extraordinary Opening Ceremony of London 2012 has made patriotism newly acceptable to the Left, and here was the Labour leader wrapping his social democratic vision in the British flag - not in the Union Jack, but in Stella McCartney's subtly softened design for the Team GB kit at the Games, which provided the conference hall with its backdrop and appears to have become Labour's new emblem. (Did they obtain copyright permission?)

But no-one should be confused by Miliband's 'One Nation' theme. Despite the audacious lauding of Disraeli, this was no lurch to the right. It was a bold claim that true British patriotism is social democratic: informed by the compassionate and co-operative values of the NHS, hostile to profiteering big business, egalitarian, and committed to the strengthening of 'our common life'. Claiming that all of these are manifestations of the 'spirit of the British people', Miliband was making an unashamed appeal to Conservative voters. But it was an appeal not to come to Labour because the party has moved to the right - Blair's pitch - but to come to Labour because its values are actually yours too. At just the moment when David Cameron has allowed his original 'detoxified' brand of moderate-sounding conservatism to be drowned out by the shrill free marketeering of his party's extreme wing, it is a compelling call.

The speech has achieved the conference's primary purpose - Miliband by common consent (including that of the Tory commentators) now looks credible as an alternative Prime Minister. While not trying to deny his own wonkishness (he didn't quite say 'I grew up in a household of refugees from Nazi Germany having debates about "predistribution"', but to his aides' dismay he couldn't resist telling Andrew Marr that he rather liked the word) but the accusation of weirdness has been put to bed, and his general bearing of relaxed confidence has been widely remarked upon.

But the speech merely gives him the media's permission to address voters as a serious alternative to David Cameron - it didn't in itself tell them much about what he would do with power. Indeed Labour's Conference as a whole merely highlighted the fact that the party now confronts two almost completely different tasks.

The first, clearly, is to win. Labour will go into the next election needing to gain 75 seats for a majority, recapturing voters who deserted it for both the Lib Dems and the Tories in 2010. As every constituency delegate MP kept repeating in Manchester, reflecting their experiences on the doorstep, this remains an uphill task. Labour still has to overcome a huge amount of distrust - not just of itself, but of politics and politicians in general: what Jim Murphy, at an IPPR / Political Quarterly fringe meeting, described as the 'militant apathy' of the electorate. It has to convince people that it is credible on the economy again, overcoming people's belief (right or wrong) that Labour failed last time. Most of all it has to speak in a language that resonates with the daily struggle of the 'squeezed middle' - to make ends meet, to find a job and to buy a home.

Labour's second task is to develop solutions to the profound crises of capitalism and society which it will face if it gets into Government in 2015. It has become clear for some time that the financial system is no longer serving the real economy, and needs major reform. But the weaknesses of the British economy as global economic power shifts away from Europe and the US is much deeper than that. As the report published by the Resolution Foundation last month shows, the UK economy as currently structured is no longer capable of raising the living standards of the majority of British people. Based on analysis by the Institute of Fiscal Studies and the Institute for Employment Research, the report shows that even if the UK economy returns to growth (in itself a very big if), the rewards will go entirely to the top half of the income distribution, with living standards for the bottom half continuing to fall. At the same time the ageing of the British population is generating a huge strain on our systems of social protection - in the pension system, the NHS, and in social care for the elderly. The marketisation of public service by this Government is hollowing out the very institutions and values which will be needed to meet such social challenges. And meanwhile the global crisis of the environment - of rapidly accelerating climate change, of resource price volatility and food and water insecurity - threatens to undermine the entire model of economic growth on which global markets depend. This is a formidable set of challenges for a government to address - a much, much more difficult set than those faced by Blair and Brown in 1997.

At first sight these two tasks - to win, and to develop answers for these profound challenges of modern society - look as if they are almost entirely separate from one another. Labour could successfully appeal to its target voters without developing complex policy solutions in areas such as industrial and innovation policy, tax and public service delivery reforms, and global environmental co-operation. And having any number of the latter is not going to give them victory.

Yet in fact bringing these two tasks together is Labour's most vital challenge. Not because it cannot win without deep policy thinking; but because it won't be a successful government without it. Unless Labour goes into the next election clear about the kind of radical reforms it will need, it won't be committed in government to implementing them. We know that from 1997 - a limited vision before an election constrains ambition after it.

That means rejecting those who will seek to make Labour a 'small target' in 2015, committed only to a small number of electorally safe headline policies. It means finding ways to explain to voters just how profound are the difficulties faced by the British economy and society, and the kinds of policy reforms which will be needed. And it means trusting that the British public, however immediate their daily concerns, at some deeper level do understand this.

This is not going to be easy. The solutions required will take Labour into previously uncharted territory. Yet what was encouraging about Labour's conference was the extent to which these issues were being debated on the fringe. The fact that some of those making the arguments were Ed Miliband's closest colleagues and advisers must be regarded as an added bonus.