Helm Talks Podcast: Recent Episodes
Helm Talks Podcast
Professor of Economic Policy, University of Oxford Fellow in Economics, New College, Oxford Interests include Utilities, infrastructure, regulation and the environment. Concentrating on the energy, water, communications and transport sectors primarily in Britain and Europe
Following on from the latest change of Prime Minister and announcements about his new Cabinet, what is going to change? Andy Burnham has a new ten-year plan, and is promising a fundamental revision of politics, but Britain’s deeper economic problems remain unresolved. The fact is, underneath the headlines, the country is still trying to live beyond its means, with high borrowing, weak growth and rising debt interest putting serious pressure on its public finances.Three key costs are holding the economy back: labour, capital and energy. Higher employment costs, high interest rates and expensive electricity all make it harder for British businesses to compete, and small political fixes will not be enough.If Burnham wants to make the radical turnaround he is promising, a more honest national debate about public finances, competitiveness and economic growth is needed. Without a serious, long-term economic strategy, the underlying problems will continue to build, whatever the political headlines of the day.
As another heatwave grips the UK and much of Europe, we need to look beyond the immediate discomfort of hot weather and ask why existing policies are failing to dent the relentless rise in the carbon concentration in the atmosphere. More wind farms and solar panels are not going to crack the problem.Climate policy must be judged not by good intentions, but by its real-world costs, impacts and global effectiveness. Renewables alone cannot deliver cheap, secure and clean energy. The wider costs of electricity systems, storage, back-up power and networks also need to be taken into account. The UK’s choices need to be seen in the international context and compared with the energy strategies of major economies such as China, the US and those in Europe. No other country thinks relying on wind and solar plus a bit of nuclear is going to power a modern economy.A broader mix of technologies, including nuclear power, and a willingness to confront the costs of pollution created by our own consumption are needed. Climate change is real, action is essential, but policy must be practical, affordable and effective if it is to make a meaningful difference. The UK fails on all counts.
With the renewed political enthusiasm for nationalisation, what, in practical terms, does it mean and what would actually change? How might “Manchesterism” apply in practice? Using buses, rail, water and electricity as examples, in this podcast I argue that public ownership and public control are not the same thing, and that different sectors require different models of organisation, regulation and investment. Appeals to “take back control” are simplistic, and need to be examined with a focus on the long-term funding, planning and delivery needs of core infrastructure. While the nationalisation debate is useful, it needs to move beyond rhetoric towards detailed questions about ownership, regulation, incentives and the proper role of the state.
Politicians have been seeking for decades to put right the infrastructure crisis in this country that is rooted not in a lack of ambition, but in deeper economic and political constraints. Building in Britain is exceptionally costly, with high energy prices, high labour costs and high financing costs making major projects difficult to deliver at scale. At the same time, the country saves too little to fund long-term investment, leaving infrastructure heavily reliant on foreign capital, while government is constrained by debt and rising interest payments, and repeatedly prioritises short-term spending over capital renewal.Taking Thames Water as a case study, regulatory hesitation and political short-termism have both delayed necessary restructuring and entrenched decline. Meaningful renewal will require more than rhetoric: it demands lower input costs, stronger incentives to save and invest, firmer control of public debt, and a clear political willingness to favour long-term capital investment over immediate consumption. Without a whole-economy approach, the goal will remain elusive.
The International Energy Agency describes the current Iran conflict as the “biggest energy crisis in history”. While oil prices have risen sharply, they remain below the real highs of past shocks. However, the impact is being felt very differently around the world, with some countrieseven benefiting from the situation. For example, the US and Russia are relatively well placed as major producers, while China and India have buffers through their domestic coal, stockpiles and alternative supplies. Europe, by contrast – especially the UK and Germany – is very exposed because of its energy choices and growing dependence on imported gas.Markets are already adapting: higher prices encourage new production, alternative routes, and renewed interest in nuclear and other energy sources. Rather than dramatic headlines, this podcast focuses on the more complex reality: an energy problem with very different consequences across the world, not a single historic crisis.
The concept of a zero-sum game was fashionable in the 1970s. The idea was simple: competing interest groups, and especially unions, would fight for ever-bigger shares of the nation’s cake, and their gains would mean losses to others. Fast forward to 2026, and what we have now is a negative-sum game: cake for some reduces the cake for others, and reduces the size of the cake. The result is lower economic growth.This is indeed playing out now: the government’s core motors for economic growth – 1.5 million new houses, net zero – are all coming up against the need to pay for more welfare and other public services. To cover all this, the government has raised taxes, notably on the business costs of labour, and borrowed a lot more. The result: higher labour costs and higher costs of capital. Add to this the highest costs of industrial energy in the developed economies, and the results for economic growth can only be negative. Now add in the new renters’ rights with increased costs to landlords, and thence the supply of rented housing going down, whilst the higher labour costs have increased the costs of building new houses and reduced demand. 1979 is with us again. The negative-sum game is not sustainable, and thus it will not be sustained.
There is no such thing as a free lunch, and there is no such thing as “free” electricity. What is true is that there are going to be days in summer when supply exceeds demands and hence the value of electricity generated will be zero. Surpluses arise because a renewables-based system needs far more total generating capacity to guarantee supply at all times, including when the sun is not shining and the wind is not blowing. Using the UK as an example, meeting a peak demand of around 45GW may require roughly double the capacity compared with the “bad old days” of fossil-fuel-based generation, as well as twice the grid system and lots of batteries and storage. There are bound to be times when lots of that 120GW is generating but demand is low.But excess electricity does not reduce the costs. These don’t magically go away. Investors will build wind, solar and nuclear plants only if they are paid through mechanisms such as fixed-price contracts, and households also need to fund the expanded grid, balancing and storage required to handle the extra capacity. As a result, “free” electricity during certain periods will still be paid for elsewhere – ultimately by consumers and taxpayers. Renewables are a good thing, but they need to be accompanied by an honest public discussion about the real system costs of decarbonisation rather than the promise of free energy.
Another day and another bit of sticky plaster is applied. With the highest industrialenergy prices in the developed world, the government is increasing the number ofcompanies that will get a bit off their bills in 2027. This follows other moves, like the£150 off customer bills. It will not be enough, given the sheer scale of the problems.The industrial crisis will go on; domestic bills are scheduled to go up and stay up forthe next decade; new energy-intensive inward investment (e.g. for data centres) isbeing deterred; and where there are projects, own generation from gas is the routeto firm power.The facts are not changing, and it is getting ever more painful to ignore them.Climate realism means facing up to the relentless increase in the concentration ofcarbon in the atmosphere, the continuing 85% of the world’s energy supplies coming from fossil fuels, and the lack of any transition away from this, with the oil, gas and coal burn going ever up as the world energy demand looks set to double by 2050. Renewables on a system basis are not cheap. It takes 120GW now to meet thesame peak 45GW demand, which 60GW once comfortably met, as well as doublingthe transmission grid and adding all the extra batteries and storage. The renewables are not “home-grown” – the supply chains are foreign. Britain is not on a path to home-grown energy. It is not cheap, and other countriesare not looking to Britain as a “clean-energy superpower”. They look to Britain to find out how not to do it – no one else wants the highest energy prices. It’s not difficult to sort all this out, but more sticky plasters will make the situation worse and harder to fix the longer the government ducks the need for a fundamental re-set of British energy policy.
The news is very much about gas price shocks, but this is to misunderstand the fundamental difference between temporary shocks and long-term trends. Gas prices spike when major geopolitical events occur (e.g. Russia’s invasion of Ukraine or the blocking of the Strait of Hormuz), but then often fall sharply afterwards. Such fluctuations are nothing new and should be expected, but they don’t prove that gas is inherently unstable or that the UK can simply “get out of gas” by relying more on wind, solar, and some nuclear. Despite two decades of expanding renewables, the UK still depends on gas for about 35% of its energy, with heating and industry making full exit impossible anytime soon. At the same time, the UK is not making good use of its own North Sea gas. Current policy effectively discourages domestic production through limited licences and heavy windfall taxes, while simultaneously encouraging imports, even though imported LNG is more polluting and exposes the UK to foreign supply risks. The claim being made that domestic gas always has to follow world prices is misleading – long-term contracts once gave the UK stable, predictable gas supplies, and could do so again, if the government required such contracts as a licensing condition. Moreover, the UK’s energy system is more exposed to global gas prices than other countries because electricity prices feed gas costs straight through, industrial electricity prices are the highest in the developed world, and the UK has very little gas storage. A more balanced, practical approach is essential to manage the gas we will inevitably continue to use, to prioritise domestic production over polluting imports, and to build proper storage and contract structures that improve security, environmental outcomes, and industrial competitiveness.
Britain is facing a deep industrial energy price crisis, with many major industries collapsing or shrinking because UK electricity costs are among the highest in the world. Recent closures—from refineries to steel, fertilizer, and fibreglass plants—show how uncompetitive energy prices have already pushed firms out, long before the latest geopolitical price spikes made things worse. The core issue isn’t temporary shocks but a long‑term cost problem baked into the UK’s electricity system costs.To restore industrial competitiveness, Britain needs permanent, structural reform to electricity pricing—not short-term fixes. This requires three big changes: charge industry based on long‑run marginal system costs rather than loading full network costs onto them; reform the electricity market by moving away from gas‑set wholesale prices towards a capacity‑based “equivalent firm power” system that properly accounts for intermittency; and index carbon prices inversely to oil and gas prices to stabilise overall energy costs. Together with improvements in gas storage and long‑term gas supply contracts from the North Sea, these reforms would deliver predictable, globally competitive energy prices to support both existing industries and the more electricity‑intensive sectors of the future.
nor cheaper. High-cost energy, dependent on foreign supply chains, raises the cost of defence and the exposure to shocks, political or otherwise.
Several key industries have fallen back to production levels last seen in the 1950s. Car production has dropped to its 1952 level at around 700,000 vehicles a year—down by nearly 1 million in a decade—while steel is a shadow of its former output. Even cement is falling back, being increasingly switched to imports. Housebuilding is far below its 1950s’ and 1960s’ levels. The fertiliser industry has closed. Net zero technology is overwhelmingly imported (e.g. the batteries, solar panels, wind turbines, critical minerals and now EVs ), now mostly from China. Why? Deindustrialisation has multiple causes, exacerbated by the highest industrial electricity prices in the developed world. New digital technologies and data centres are highly energy‑intensive and need reliable, non-intermittent, round‑the‑clock electricity. The idea that we can simply become Singapore-on-Thames, relying on finance, law, tech, and hospitality, is at best naive. Traditional service sectors face rising costs from recent tax and wage policies, and global finance is becoming more fragmented and less open. Meanwhile, the UK continues to rely heavily on foreign investors to fund essential infrastructure, from water and energy to roads.The UK needs to focus on three big areas: competitive business taxes; affordable and globally competitive energy prices; and major investment in skills. Raising employers' national insurance, raising the minimum wage, increasing workers’ rights and signing ever-higher contracts for offshore wind leave what is left of UK industry reaching for the exit. Instead, we need a switch from business costs and taxes to consumers. It isn’t sustainable for voters to enjoy 21st‑century living standards with 1950s’ outputs. It will take a brave politician to tell the public some of these basic facts of life.
Many people in the Labour Party support bringing utilities like water (in particular, Thames Water) and electricity transmission back into public ownership. Supporters often present nationalisation as a simple fix: no greedy investors, no dividends, and lower bills. But, in reality, nationalisation is far more complicated and involves real trade-offs that are often glossed over.Financial risks of running these industries do not disappear when the state takes over. Under private ownership, investors bear the risk and expect returns through dividends and interest. Under nationalisation, that risk shifts to customers and taxpayers instead. If the government still borrows to fund investment, interest payments remain. If it wants to avoid borrowing, then customers would have to pay higher bills now to fund upgrades and maintenance — a return to the “pay-as-you-go” model used after the Second World War.Nationalisation also wouldn’t automatically improve how these industries are run. The state once had strong expertise in managing utilities, but that capacity largely no longer exists. There is a risk that governments use nationalised industries for political goals, such as freezing prices, which can lead to underinvestment and reduce service quality. Anyone arguing for nationalisation needs to be honest that it likely means higher bills today, real financial risk for the public, and no guarantee of better performance.
As 2026 begins, and people look ahead to what it might bring, this podcast focuses on the likely, more profound, economic and geopolitical shifts expected by 2030 – now less than five years’ away. Immediate questions revolve around UK elections, leadership changes, and ongoing conflicts like Ukraine and Taiwan, but infrastructure, technology and economic planning require a longer-term perspective. By 2030, the world is likely to be more fragmented into economic and political blocs, with China, Russia, and the US reinforcing self-sufficiency, and emerging economies like India and Indonesia gaining prominence. Climate change progress is expected to remain minimal, and technological revolutions in AI and quantum computing may either transform industries or deliver incremental changes.Of the possible shifts in the next five years, a significant global financial correction before 2030 appears the most likely, driven by unsustainable market valuations, private equity vulnerabilities, and mounting government debt. The aftermath could involve serious inflation and currency debasement, as governments resort to aggressive monetary interventions. This scenario would reshape political and economic models, potentially leading to more state intervention and less private sector influence.Looking ahead, three possible trajectories for the UK and similar economies are outlined: continued muddling through with incremental adjustments; a radical re-set akin to a “Thatcher moment” to curb public spending and debt; or a protectionist “fortress Britain” approach emphasising self-sufficiency. Each path carries profound implications for trade, growth, and political stability. But financial markets seem most likely to act as the catalyst for systemic change before 2030.
– in his case, nuclear and renewables. Political instinct favours doing “everything” to please all parts of politicians’ constituencies, but this dilutes investment and prevents large-scale, coordinated programmes. Instead of comprehensive strategies like those seen in China or France, the UK pursues piecemeal, case-by-case projects, resulting in high costs and inefficiencies, such as probably the most expensive nuclear plants in the world (at c. £12 billion per gigawatt). Without focused, long-term infrastructure programmes, growth cannot accelerate.Beyond this, structural issues compound the problem. Western economies, especially the UK, prioritise consumption over production, rely heavily on welfare spending, and maintain incentive systems that discourage work. High taxes and borrowing further stifle growth, while domestic savings – critical for funding investment – are minimal. Unlike post-war economic miracles in Germany, Japan and China, driven by savings and production, the UK depends on foreign capital and supply chains, leaving its economy vulnerable. A fundamental shift towards production, supported by domestic savings and programme-driven investment, is a prerequisite for sustainable growth.
There are five major lessons from COP30. They are not the ones the climate community has highlighted, but they really matter and will shape the post-COP30 climate change negotiations.First up is the realisation that it is no longer a European (and UK) game. The shifts in world political and economic power for the first time sidelined the Europeans. There was no UK “climate change leadership” to be taken seriously. It is India, China, Russia and the US that pulled the strings, whether present or not. Second, no major oil and gas producer or coal-burning nation wants to stop. Brazil set the tone: it announced that it wants to be the world’s fourth-largest oil producer, with drilling to start in the mouth of the Amazon. Third, no one wants to cut their carbon consumption, personally or nationally. The Brazilian carbon footprint includes the flights, the new road through the rainforest, the cruise liners for accommodation, as well as the commitment to its own fossil fuels. Fourth, the real action was on the bottom-up trade issues, notably the carbon border adjustment mechanism (CBAM) and the emerging coalition of the willing with the extension of carbon pricing. The fifth lesson is that the temperature is going to go on rising: 30 COPs so far haven’t made a dent in the carbon concentration in the atmosphere, and another 30 COPs probably won’t.
As the Chancellor gears up to deliver the Autumn Budget next week, let’s look behind the headlines at the reality of what is going on with the UK’s economy and lack of growth. Despite what the current government argues (not very different from the previous incumbents), the UK’s economic stagnation is not so much due to a lack of new infrastructure projects or excessive regulation, but rather the chronic failure to maintain existing assets. Essential networks—such as railways, roads, water systems, and mobile connectivity—are in poor condition, creating inefficiencies and costs that ripple through the economy. Instead of prioritising glamorous projects like HS2, the focus should be on ensuring that current systems actually work. Well-maintained infrastructure provides resilience and reduces the disproportionate costs of failures, making it a cornerstone for productivity and growth. This is not a technical challenge but a matter of political priorities and regulatory focus.Current fiscal rules and political incentives distort spending decisions. The government re-labels maintenance as “investment” to justify borrowing, shifting costs to future generations and encouraging flashy enhancements over essential upkeep. True maintenance should be funded on a pay-as-you-go basis through current bills, ensuring intergenerational fairness and system reliability. Capital maintenance comes first, second, and third, with new projects only after existing infrastructure is robust.
British energy policy, once heralded as a pathway to cheap, secure and decarbonised power, has instead resulted in some of the highest energy costs globally. Despite the optimism of Ed Miliband and before him, Boris Johnson, Britain’s energy system is heavily dependent on foreign supply chains, finance and ownership. The shift to intermittent renewables like wind and solar has doubled infrastructure needs, while long-term contracts lock in elevated prices until at least 2045. Offshore wind, particularly in Scotland, suffers from grid constraints, leading to payments for unused generation. The government’s approach to nuclear, with its “let’s try one and see if it works” perspective, rather than a fully fledged nuclear programme, has followed an inefficient and costly path, further entrenching high costs.This trajectory poses serious risks to the UK economy. Energy-intensive industries are closing, and few new ones are emerging, as high energy prices deter investment. Britain’s apparent success in reducing carbon emissions masks a growing reliance on imported carbon-intensive goods. Without radical policy reform – renegotiating contracts, restructuring pricing, and rethinking energy strategy – Britain faces a future of permanently high energy costs and diminished industrial competitiveness. What is needed now is not our politicians flying off to yet another COP, this time in Brazil (with access by a new road cut through the Amazon rainforest), but honesty and humility in global climate discussions, urging leaders to learn from Britain’s missteps rather than emulate them.
The UK’s infrastructure costs are amongst the highest globally, making ambitious projects—like new nuclear plants, HS2, and airport expansions—extremely expensive. Hinkley and Sizewell nuclear stations together may end up costing more than the original full costs of HS2, and a new Heathrow runway could reach £40 billion. Even basic upgrades, like sewage tanks and reservoirs, are far pricier than elsewhere. While some projects, such as the Elizabeth Line and Thames Tideway, have been delivered efficiently, these are rare exceptions.The main drivers of high costs are higher costs of capital (due to high interest rates and inflation), low labour productivity, and fragmented project delivery. The UK often builds infrastructure as isolated projects rather than as part of coordinated programmes, which prevents investment in supply chains and skills. France’s programme of nuclear power stations building in the 1980s is an example of how things could be done. Unlike countries that use the state’s balance sheet or commit to long-term programmes, the UK’s piecemeal approach keeps costs high, discourages investors, and limits what can actually be delivered. Without smarter regulation and better planning, these high costs will continue to hold back progress.
Few people have much good to say about the water industry, and the blame game is fully engaged. But what to do? There are four possible options: continue with minimal reform; implement the recommendations of the recent Independent Commission on Water, led by Sir Jon Cunliffe; nationalise the industry; or adopt a catchment-based regulatory model. The Cunliffe Commission advocates: abolishing Ofwat, merging its functions with the Environment Agency, and introducing a supervision model akin to banking regulation. The former is not thought through, not least its neglect of the EA. The latter adds even more layers of regulation. It will be costly and there is a serious risk of regulatory capture, all the while not addressing the core issues of public distrust and investor reluctance. The right approach is Catchment Regulation Model, using digital mapping and AI-enhanced data to guide environmental interventions. It encourages participation by all the parties, including through competitive bidding for projects (as opposed to financial engineering). It is the one route that can create a sustainable, transparent, and inclusive framework for the next 35 years. However, as the government reflects on the recommendations in the final Cunliffe Commission report, continued superficial reforms, particularly in the case of Thames Water, sadly look more likely, kicking the problems down the road.
Why when solar and wind are supposed to be nine times cheaper than gas are electricity prices in the UK amongst the highest in the world? Why when the UK is supposed to be a fast track to this promised cheap net zero electricity by 2030 are large industrial users struggling? Why is Grangemouth in trouble? Why is the steel industry in such bad shape that it has be bailed out and nationalised? Why have fertiliser and petrochemical companies and now biofuels all reached for the exit? The UK’s dash for renewables is supposed to be creating a clean-energy superpower, based upon “home-grown” energy, whereas in fact almost all of the supply chain is imported.Renewables are not cheap when their system costs are properly measured. Marginal costs might be near zero, but a renewables-based system already needs almost twice the capacity as the old coal plus gas plus nuclear system, even though demand has fallen. To produce roughly the same amount of firm power, a renewables-based system already requires lots of new transmission lines, which were not needed in the past for the same demand, as well as a host of upgrades. It requires batteries and storage and lots of back-up gas standing mostly idle, as well relying heavily on imported electricity via the interconnectors to keep the lights on. Renewables are not like-for-like and the wholesale price for firm power should not be compared with the contract for differences (CfD) price for intermittent generation. The nine times cheaper claim relies on leaving almost all the relevant costs out of the comparison.It's time for some energy and climate realism and some honesty about the costs and consequences of the net zero 2030 target.
In the mid-2030s, historians may look back and note that, despite numerous COP meetings and agreements like the Paris Agreement, global carbon emissions continued to rise, with significant contributions from countries like India, China, and Indonesia. The world failed to meet the 1.5°C target, making 2°C and even 3°C more likely. In this podcast, Dieter Helm looks at why the COP process has not delivered the desired outcomes, and the immediate imperative to shift strategies to tackle climate change from territorial net zero targets in the UK to more realistic approaches to reducing global emissions. Renewable energy sources like wind and solar, despite their growth, still contribute a small fraction to global energy supplies compared to fossil fuels. The increasing demand for electricity – in particular, from new technologies and data centres – and the intermittent nature of renewables have led to higher system costs, with nuclear power emerging (once again), but this time as a more viable option for stable and continuous energy supply. Looking ahead, more radical measures, including geoengineering, might be necessary to address climate change effectively. Whatever strategy is adopted, the net zero path being pursued in the UK is unlikely to be successful, as our historians in 2035 will no doubt have discovered.
The UK’s national debt now stands at around 100% of GDP, meaning that the country has borrowed the equivalent of an entire year’s economic output. Under current fiscal rules, the government aims to stop borrowing for day-to-day spending by 2030, but borrowing for investment is exempt from these limits. This creates a loophole: by reclassifying current spending as “investment”, the Chancellor can continue borrowing without breaching her fiscal rules. Even routine maintenance of infrastructure – fixing potholes, school buildings or bridges – is being labelled as investment, when in fact it’s simply capital maintenance. This accounting sleight of hand allows for open-ended borrowing while giving the illusion of fiscal discipline.Beyond these reclassifications, a deeper fiscal fiddle is the long-standing trend of moving public spending off the government’s books through privatisation and private finance initiatives (PFIs). Infrastructure once funded and owned by the state—like power stations, water systems, and telecoms—has been shifted to private hands, masking the true scale of national indebtedness. While this may reduce the official debt-to-GDP ratio, the financial burden still falls on the public, now as utility customers rather than taxpayers. With rising interest rates and growing infrastructure needs, the cost of this hidden debt is mounting. What is needed now is honesty, through greater transparency of public finances. Without it, future generations will bear the brunt of the current delusion, and the fact that we are living beyond our means.
The economic outlook for the UK is bleaker than the government would have us believe. The government's ambition to be the fastest-growing economy in the G7 by 2030 faces significant challenges. Starmer and Reeves blame the Conservatives for the current economic mess, citing a £20–£22 billion gap. They argue that, once constraints are addressed, the government will push towards net zero and build 1.5 million new homes, with growth solving public expenditure problems through increased tax revenue. If only…The IMF predicts 1.1% GDP growth, but even this meagre number overstates the prospects, for three reasons. First, it is flattered by increasing population, with GDP per head lower. Second, borrowing is larger than expected, with a debt-to-GDP ratio already at around 100%, making the cost of debt a significant constraint. Third, the Autumn Budget increased the cost of labour and capital, and savings taxes were increased.More fundamentally, the government's balance sheet is damaged by consuming capital rather than investing in infrastructure. Core infrastructure is not fit for purpose, and building houses and achieving net zero are not the panaceas they are claimed to be. Accounting ruses such as more PFI-type schemes and treating capital maintenance as if it is investment to push stuff off the government’s books do not make the problems go away. True national debt should add all this back, painting a very different and even more unsustainable picture.A fundamental rethink is needed to put the economy on a sustainable consumption and sustainable economic growth path, and thereby reduce the burden on future generations.
How have investors managed to turn Thames Water, despite its extraordinary debt, inefficiency and poor performance, into a company that offers rich financial rewards, at least for some? The roots of this began with the privatisation of water in England and Wales in 1989. At the time, the sector was in need of significant repairs to its infrastructure, and privatisation promised renewed assets and improved efficiency. Since then, with weak regulation, practices like gearing up balance sheets and extracting dividends have led some (not all) water companies to undertake financial engineering, without proper regulatory checks on balance sheets and corporate plans. To some, Thames Water appears to have prioritised financial gains, possibly to the expense of capital maintenance and the interests of customers and the environment. It has become the unacceptable face of water privatisation. Regulatory neglect is linked to broader public dissatisfaction and the erosion of the social licence to operate.Distressed debt players have taken control, with a £3billion loan to keep Thames Water afloat and at very high interest and associated “costs”. They are planning to sell out the equity to a sole preferred bidder, KKR, for around £4 billion. This move raises serious questions about the terms and the interests of the A-class bondholders versus the public interest, about transparency and public accountability. It is likely to be profitable all round, given the value of the Thames Water regulatory asset base is around £20 billion. The irony is that it probably will not save Thames Water, and there is the possibility that it could lead eventually to the nationalisation the government has been so determined to try to head off.
The recent fire at an electricity substation shut Heathrow Airport for 24 hours, causing chaos in the skies and across international airports. In doing so, it highlighted the broader critical condition of the UK’s major infrastructure and its lack of resilience. “Just in time” and “just enough” have replaced secure, ready and prepared.The incident at Heathrow prompted calls for inquiries, in the search to find someone to blame – not the more obvious economic regulator of the airport, the CAA, but instead the National Energy System Operator (NESO). The key lesson to be learned from this is that robust systems are needed to support modern requirements, including from all the new data centres that depend on continuous electricity supply, before such failures become normalised.To ensure the future stability of the economy, proactive measures need to be taken to reinforce these essential systems, prioritising investment and innovation that can cope with the evolving demands of our modern society.
Retreats on manifesto promises (electric vehicles and gas boilers), alongside the plans for carbon-intensive housebuilding and airport expansion, as well as renewal of the DRAX subsidy, are putting the UK’s ambition to achieve net zero electricity by 2030 at serious risk. Additionally, the cost of capital for renewable energy projects has increased, making it more challenging to meet the promised targets for offshore wind, solar, and nuclear energy. All of the above mean that the UK will almost certainly miss the 2030 target. That is before the big new challenge to net zero – defence. The sector is highly carbon-intensive. Think of all those missiles, submarines, tanks and all the infrastructure that goes with the sector. Decarbonising the defence industry is impractical; it relies on firm power and high-grade materials such as steel – no good if your tank needs recharging in the middle of the battlefield. The UK's energy infrastructure, including offshore wind farms and interconnectors, is also highly vulnerable to attacks, highlighting the need for a robust energy defence strategy.Achieving a strong defence capability requires reindustrialisation, which will in turn mean more carbon emissions and reverse the UK’s progress towards net zero territorial emissions. Integrating defence costs into the energy sector will significantly increase overall costs, necessitating a reassessment of current energy policies.
The UK government and the Climate Change Committee (CCC), with its 7th Carbon Budget, are keen to portray a "cakeism" narrative, suggesting that economic growth and net zero emissions are easily achievable together, without net costs and us having to change our lifestyles. The CCC even claims that it can reduce electricity bills by £700 by 2050. How would it know the prices in 25 years' time? This misleading narrative downplays the significant costs and consumption changes necessary to really address climate change. The political framing of the net zero targets on territorial emissions rather than consumption-based emissions pretends that when net zero is attained we will no longer be causing climate change. Politicians claim progress while potentially worsening the overall climate impact by shifting polluting industries overseas. Not only is this approach ineffective but it’s also dishonest, as it avoids confronting the public with the real costs and lifestyle adjustments required.Time for an end to this spin surrounding climate change. We need to acknowledge the difficult realities of climate change and increased costs. Cakeism, “win-win” narratives and the avoidance of inconvenient truths will not lead to meaningful reductions in carbon consumption.
The UK has very expensive electricity for both the industrial sectors and consumers, despite the government’s policies that are intended to deliver the exact opposite. It’s damaging not only the dwindling remaining energy-intensive industries in the UK, but also any potential future ones, including all the AI and data centres.A quick look at the existing energy generation assets in the UK, and the high energy costs are perhaps not such a surprise. These assets are relied upon to deliver secure, firm power, but fast-tracking the renewables generation route by 2030 means that all the energy sources become intermittent. While Ed Miliband, Secretary of State for Energy and Climate Change, continues to tell us that renewables costs are nine times cheaper, this is far from the reality of what the true system costs of energy are. If they were, the UK would already be outcompeting the US. It obviously isn’t.In this podcast, Dieter Helm looks at an alternative approach to setting competitive electricity prices, going back to how energy prices were set in the days of the Central Energy Generating Board, before privatisation.
Economic growth is the government’s new mantra, but what exactly does it mean, and how exactly is it achieved? Who is going to pay for it? The government does not appear to have answers – at least, not ones that are credible and likely to create sustainable economic growth.Growth involves a more than simply announcing big projects: three new runways and nine new reservoirs and the largest theme park in Europe – the government’s aspiration is to announce 150 projects by the end of this Parliament. Despite Tony Blair’s description of politics as being “and/and”, the reality is that it’s “either/or” – there are always trade-offs to be made.This podcast explores what really lies being these announcements: the real choices and the trade-offs that need to be made, and what actually causes economic growth.
The government’s number one mission is to grow the economy, by building more houses and sprinting to net zero by 2030. On the energy side, we’re told that investment in renewables will lower our electricity bills – costs come down, investment goes up. But despite the UK’s claim to be world leader in tackling climate change, the reality is that it has amongst the highest energy costs in the developed world and global warming is still rising. This podcast examines the challenges that the government is facing that run counter to its objective to reduce energy costs. These include the massive demands on the system that come from the new data centres that need to run 24/7, the back-up supplies required when the wind doesn’t blow and the sun doesn’t shine, and the materials needed to build the new green infrastructure, much of which needs to be imported and paid for by whatever it costs as a result of the sprint to achieve net zero in just 60 months. These high costs are making the UK a much less attractive place for investors, who are not flocking to its shores for its claimed low-cost electricity.
As the many tens of thousands fly back home from Baku after this year’s COP, where have the 29 attempts among the world’s nations to tackle climate change got us? The concentration of carbon in the atmosphere continues to rise; 80% of the world’s energy still comes from fossil fuels; and the 1.5 ⁰C target is being passed.But why? What’s causing the relentless increases in emissions that are feeding through to the continual, year-on-year 2ppm+ increase in carbon the atmosphere? COPs are based on the failed objective of achieving a legally binding set of emissions targets, measured in carbon production and not carbon consumption. They encourage net zero targeting, which is at best ineffectual. Why would anyone think that another 29 COPs are going to crack the climate problem? It’s time to re-set climate policies, build bottom-up coalitions of the willing, and face up to the full scale of our carbon consumption.
The British economy is going to see more regulators, more regulatory bodies, more intervention in the private sector – all requiring businesses, on the other side of the regulatory rules, to spend more time dealing with regulators and regulation. While all governments promise to “cut red tape” – and the new government is no different – sadly, the opposite appears to be happening. There are plans not only to beef up existing regulatory bodies (Ofcom, HMRC, Ofgem, Ofwat possibly, and the EA), but also to add new regulators, including NESO, the Regulatory Innovation Office, the Fair Work Agency. No doubt there are more to come.Why does regulation grow and grow? Do we need yet more regulatory bodies, on top of the government departments, the various offices of regulation, the plethora of quasi-regulators that surround them, and the regulators that regulate them? Does it lead to better outcomes? Not only does the new government want to do more, so, too, will the regulators themselves, as they tend to seek to expand in order to increase their budgets and make their mark. Hence the growing regulation industry, despite the efficiencies that one might expect new digital technologies to bring. But as regulation in the UK mushrooms, with this additive (not substitution) approach, what does it mean for the UK economy ahead?
The government is planning radical transformation, to health, education, rail travel, and with a view to achieving net zero electricity by 2030. These bold plans raise questions about what is going to be achieved, by when, and how. The politics is key, as is the timing. Such transformation takes years (many more than Starmer is anticipating). Thinking through the politics of what happens between now and when the election takes place in 2028–29, the government needs to face the difficult reality that radical reform will, in essence, mean that things will get worse before they can start to get better. Thatcher’s reforms in the 1980s, for example, took a decade to begin to turn the economy around.So, it’s worth looking at what is going to get worse through the period until 2030 before it gets better (as a result of transitioning to net zero, and turning around the NHS, education, housing and transport). To ensure that this transformation is embedded and to bring the public with it, the government needs to be honest with us and manage our expectations while we experience the pain and disruption of the transition in the interim.
The government’s overriding objective is economic growth, and it plans to get there by building lots more houses, and a dash for net zero electricity with the implausible target of 2030. There may be some merit in both, but economic growth is not caused by houses or wind turbines. What inhibits Britain’s economic growth is altogether more profound. The four fundamental problems are: not enough production, too much consumption, too little savings, and too much debt.We import rather than produce, and have almost no supply chain domestically for the net zero target. We live beyond our means, with imports exceeding exports, and calling capital maintenance “investment” supported by debt rather than paying as we go. We have virtually no savings net of capital depreciation, and hence rely on foreign investors not domestic savings. The result is too much debt, exacerbated by failing to realise that the great financial crisis of 2007-08 and the Covid-19 pandemic left us poorer, but without the willingness to accept an adjustment to our consumption.
‘Easy money’ (quantitative easing and low nominal/negative real interest rates) has left a legacy of lots of zombie companies that should not still be in business, because they are not genuinely profitable. Cheap debt washed through the banking system keeps them afloat.For the utilities, easy money has had a devastating impact, encouraging widespread financial engineering. Thames Water is the extreme example, but there are many others among the unlisted, privately owned, UK utilities. The result is a set of companies that are highly vulnerable to economic shocks being kept on life systems.The impact is most obvious in the boardroom, where the focus is on servicing the debt, rather than on customers, future investment and R&D. As these are the elements that drive productivity growth, the long-term economic growth opportunities are seriously impaired.Facing up to the consequences of zombie companies in the utilities sector means Special Administration, pulling the plug on the zombies, restructuring them, and selling them on to new owners. The debt holders will have to take a haircut. But what’s not to like about more productivity, more investment, better customer service, boards focused on their customers and the business? This has to be done now if we’re serious about turning around not only the utilities sector but the wider British economy. Instead of endlessly kicking the Thames Water can down the road, Ofwat should call in the Special Administrator now. The costs of not doing so are serious.
The Labour government is on a mission to grow the economy to pay for all the public expenditure needed. But where will this growth come from? Previous major economic growth (e.g. in Germany, Japan and China) has had two common factors: exports and high levels of domestic savings. Labour’s plans don’t include anything about exports or export growth, and savings net of capital depreciation are less than zero in the UK. How does Labour’s strategy of building new houses and wind turbines, and fitting lots of solar panels, cause economic growth? The need for more houses comes from the sharp growth in the UK population, and with higher population, GDP growth itself doesn’t necessarily raise GPD per head. On the wind turbines and solar panels, we’re replacing one capital stock (gas and coal power stations) with another (off- and onshore wind and solar panels) that provides exactly the same services. As new technology replaces old assets, this is capital maintenance not investment. The stuff to build the houses, turbines and panels comes from overseas supply chains – the opposite of export-led growth. The economic growth calculation is based on the assumption that the costs of renewables will fall. But with the net zero card being pushed elsewhere, the costs are higher for all those competing countries wanting to go faster. The main source of finance is overseas debt markets. This dash for growth is in effect a dash for debt. The cost of capital is key to this, and it’s been rising in real terms. How will the government get to a position of no current deficit and debt falling as a percentage of GDP by the end of the Parliament? Calling anything investment, especially capital maintenance, is no real, long-term solution. If the government’s strategy goes wrong, the dash for debt will leave finances even worse than it inherited. Let’s be realistic about what we are truly facing.
The privatisation casualties are starting to stack up – earlier failures included Railtrack, and more recently there is Thames Water. Royal Mail is struggling to deliver the post; Bulb and over half the energy supply companies failed; and BT is struggling to find a way forward. Is there a trend behind this, and what does it mean for the UK’s core infrastructures? As real interest rates rise, the financial engineering that regulators allowed to happen has started to unravel. Thames Water geared up to 80%, Heathrow even higher, and most of the energy distribution companies are carrying a lot of debt. Their priorities risk becoming the servicing of their debt over and above their capital maintenance and the performance.Some think that it’s simply a question of reversing the privatisation, but it’s hard to see how nationalisation will resolve the issues. Abolishing dividends does not abolish the cost of capital. Finding the money for investment just gets a whole lot harder. The Treasury has other competing priorities in a highly constrained public finance context. Proper regulation is what is needed now to deal with the casualties and to prevent a trickle becoming a flood. Failing companies need to be taken into special administration and restructured, with a proper balance sheet and with new owners brought in to run the company. This needs to happen to Thames Water – if it doesn’t, a terrible precedent will be set. Clear performance and environmental requirements need to be reimposed. A line needs to be drawn, with companies regulated to operate in the interests of their customers; nationalisation simply kicks the can down the road.
The Labour Party, like the Conservatives, has committed to borrow only to invest, to fund current spending only from current income, and to get debt as a percentage of GDP down. As ever when it comes to fiscal rules, the devil is in the detail, and these rules are less than they seem. Labour acknowledges that this may take some time, but its promise is that it will meet its fiscal rules by achieving the highest growth rate in the G7.As with the Conservatives, Labour knows that these fiscal rules leave plenty of wriggle room. The deadline on current spending bites only gradually and that for the debt to be coming down is by the end of its first Parliament. More importantly, current spending on desperately needed capital maintenance could be renamed as “investment” expenditure (as Gordon Brown did with education and health spending), leaving the next generation to pick up the tab for what should come out of current income. For both parties, “growth” is assumed to help fix the problems, with Labour targeting the highest growth rate amongst the G7 by the end of the Parliament. Neither party has any plans to tackle the lack of domestic savings, and hence the almost complete reliance on foreigners to lend them the money. The fiscal rules allow large scope for fudge. If either party really meant to be fiscally credible, it would need to be willing to entertain either serious tax rises or serious reductions in spending (or both). Fiscal rectitude is easier to announce than it is to deliver.
What is to be done about the UK’s failing utilities? The current back-stop is special administration, opening up the possibility of wider restructuring. In all cases it is the structure that needs to change if there is to be a stable investment framework for the next couple of decades.In the case of Thames Water, if the special administer is called in, the assets could be taken over in the short term and passed on to other owners. The trouble is that the current owners are mostly foreign, and the UK is very dependent on foreign investors as it is a net dis-saver. Such dependence creates a big problem: we are beholden to the kindness of strangers to invest in all our utilities, but these investors have many alternative options to place their money. Special administration would nevertheless provide a great opportunity to break Thames up, both geographically and by service. It need not lead to any increase in government spending other than very short-term guarantees on the debt. There could be a London Water and a Greater Thames Water, divided between sewerage and water supplies, all listed. Separating out sewerage could help to deal with the large CAPEX required through a ring-fenced ten-year improvement programme, with bespoke regulation and longer-term funding and finance arrangements. A structural approach might also work for Network Rail, with greater integration, bringing the train operators and rolling stock companies back into the frame. For Royal Mail, there is a fundamental structural issue relating to service provision – put letters back into the Post Office as a public service, separated from the parcels delivery service. Introducing stability and a longer-term approach could at least create a more solid and investable infrastructure, which may then address the challenge of how to make these utilities more attractive to outside investment. Fudging Thames, Network Rail and Royal Mail now will give us another decade of failures and crises, which in turn will turn out worse for foreign investors.
Iron fiscal rules that allow borrowing only for investment might seem like a sensible strategy, but the figures have repeatedly been fiddled to make the UK appear fiscally responsible. Both main political parties have been playing this game for forty years. From Thatcher onwards, Conservatives used privatisation and PFIs (private finance initiatives) to move debt off the public books to the private sector. Gordon Brown opted for the PPP (public–private partnership) model for the London Underground, and perfected the art by re-categorising some public spending (e.g. on health and education) as “investment” in order to meet the requirement to borrow only to invest. The current approach, however, is much more serious. Governments are now borrowing to maintain our assets, calling this “investment”, as are the utilities. Fixing the school roofs and the hospital buildings, and, for the utilities, the sewers, the potholes, the sad state of the railway infrastructures, patching up the electricity networks, and maintaining the natural environment, should be current expenditure, not treated as new investments. We are borrowing from the next generation to pay for the current maintenance. Capital maintenance should be a current expenditure not a capital one. Sustainable public finance would (with a few exceptions) require debt to only ever be for investment that genuinely enhances assets and creates new ones, such that the next generation receives better assets. When it comes to the environment, we need to pass it on in a good state, not to simply say we will continue to borrow and live beyond our means. Government needs to explain honestly and openly how it will balance the books. Pretending that our fiscal rules are held with an iron fist whilst actually including the capital maintenance is bad accounting. The numbers are huge. The next debt crisis will follow as the unsustainable is not sustained.
When it comes to addressing the trilemma of energy policy in the UK (net zero, energy security and customer affordability), there are three overall policy approaches. “Policy option 1” is about setting targets: pick a year by when net zero is to be achieved, and then do whatever is necessary to get there. “Policy option 2” is the other way around, looking at what can be afforded and then at what can be achieved with the available pot of money.There is a third set of more extreme options of stopping oil and gas now, or just assuming that science and technology will eventually solve the problem. Both are dangerous.What is now needed is a rational debate and honesty. Politicians need to engage in an open conversation with citizens and to work out how to maximise the benefits from what can be afforded, by making hard choices between the options.
Network Rail, Royal Mail, and Thames Water are all examples of serious failure, with major economic and social consequences. None has lived up to the ambitions of privatisation, nor are they world-leading examples of efficient management or in good shape to deal with the challenges in their sectors. They demonstrate what has gone wrong with the implementation of privatisation. And they are not the only ones – other companies across the utilities sector have also poorly maintained their assets.These utility failures have come at a huge cost. If productivity is to be improved, we can no longer afford to have continuing failed companies in the core utilities. The sustainable economy needs infrastructure that is well-maintained, properly financed and accessible to all. No more sticking plaster; we need a rebase now.
Our politicians may claim that the UK is on its way to net zero electricity, but the potential closure of the Grangemouth oil refinery provides an illustration of why the seemingly good numbers are not quite what they appear. Closing Grangemouth would bring down UK carbon emissions, but this just means a shift in the numbers from territorial to overseas production. To tackle the UK’s carbon emissions, Labour would also prefer to shut down oil and gas production in the North Sea and import it instead. Closing down large energy-intensive plants and oil and gas production in the UK will not make a big impact on global carbon emissions – it could even make it worse.The further big anomaly in territorial emissions measurement is the Drax power station. Its 12m tonnes of emissions per year are not counted in the UK’s numbers; yet the emissions are in our territory and wood pellet burning is a very questionable approach to tackling climate change.With a focus on carbon consumption – our carbon footprint – the story changes. A carbon tax on all the goods we buy, if applied at the border, would make a substantial difference when it comes to tackling carbon emissions. There are tentative steps at the EU level (and separately in the UK) to introduce such a tax. While this would take us a lot further forward, it would also result in UK consumers having to pay for the true carbon cost of goods and services, and hence live within our environmental means, as spelt out in my new book Legacy: How to build the sustainable economy. ( https://shorturl.at/fTW57 ) In particular, there could be a really big impact on the cost of electric vehicles, due to the emissions caused by their manufacturing, including the mining and refining of all the minerals and rare earths that go into them. Closing Grangemouth (and British Steel) is not a “get out of jail” card. Our responsibility to stop causing climate change needs us to take responsibility for our carbon consumption, not our carbon production.
The political consensus about how the UK will achieve net zero by 2035 is remarkable, centred as it on the assumption that consumer bills must not go up and that instead we will need to borrow from the private sector – from foreigners and future generations. This is built on the further premise that it will all be cheap, and that renewables are a lot cheaper than fossil fuels.But just because it is a consensus does not mean that it is right. The fundamental reality is that we are living beyond our sustainable means, and if we continue to do so, then we will reap the consequences. As set out in my new book, Legacy: How to Build the Sustainable Economy ( https://shorturl.at/fTW57 ) we need to understand what the sustainable economy actually looks like. It doesn’t mean no economic growth (information technology and genetics will play a big part in that growth), but it will not be achieved by simply thinking that it will come from building more houses and wind turbines. We need to undertake the capital maintenance and look after our existing assets.The political consensus will not deliver the fundamental transition needed to address climate change. Listen to my podcast to understand the consequences of what will happen if we continue along the current path of selfish living beyond our means…
It’s time for climate realism. The political rhetoric of low costs and ever-falling energy bills has inevitably collided with the reality of the actual costs of the transition. Renewables might be zero marginal cost, but this ignores not only the fixed and sunk costs, but also the intermittency problem and the need for subsidies and the associated back-up for a long time to come. The supply chain supporting the new electricity and transport technologies stretches to mining and refining in China, South East Asia and Russia. Very little is mined, refined or fabricated in the UK, and these supply chains are far from net zero. The consumer will need to pay the costs to fund all these investments; costs that are now higher due to the higher interest rates. The narrative needs to be changed. It’s not going to be an almost free lunch. If it is, then we can stop the subsidies right now. But we can’t and we shouldn’t. Net zero realism requires honesty about the actual costs that need to be paid, and the necessity of reducing our carbon consumption and measuring our emissions properly. To really help reduce global emissions, there are three things we in the UK should focus on: offshore wind; carbon capture and storage (CCS); and scientific research to develop decarbonising technologies. Concentrating on these globally significant investments rather than trying to do everything is the best way to make the UK’s contribution. If we are not going to be honest, the risk is that the rise of AfD in Germany and the farmers’ party in the Netherlands, and the Republican march in the US will sink the whole project, with all the terrible consequences that may follow.For more on this, read my paper: Net Zero Realism - https://dieterhelm.co.uk/natural-capital-environment/net-zero-realism/
The Treasury gets accused of not spending enough on school roofs, on health to cut the waiting lists, on local government and social care, on subsidising battery factories and steel plants, and these are corralled together to blame it for the deep structural problems in the British economy. But are these really the Treasury’s fault?
There may be issues with how the Treasury functions – for example, its focus on cash, and on siloed cost–benefit analysis undertaken government department by department. But these are details that could be sorted out. What really matters is that the Treasury faces the unenviable task of holding the fiscal line when faced with huge demands for more and more spending, on almost everything. It is not only the usual suspects above, but net zero, immigration, and bailing out local government as well. Neither political party is suggesting that taxes are going to go up to pay for all this.
Unless and until we understand that we have to pay, and that we have to start living within our economic and environmental means in the sustainable economy, then we need to stop blaming the Treasury for our cake-ism. Ultimately, it is us and our unsustainable economy that are at fault.
Air traffic control, school buildings, the railways, potholes in the roads, leaking water pipes, local electricity networks failing when the wind blows from the wrong direction. Why does it feel that everything in Britain is broken? The real problem is a lack of capital maintenance. The assets need to be maintained and fixed when they break, paid for from current spending – not from new investment. Avoiding capital maintenance to save money is short-sighted. A functioning society and a functioning economy need the core infrastructures to be kept in a good condition, and the costs of not doing so are asymmetrically high. Part of the blame lies with the regulators for not forcing utility companies to pay for the maintenance. But we don’t want to pay higher taxes or higher customer bills to restore the currently poorly maintained infrastructures. This problem can be solved, if we can learn to live within our means in the sustainable economy. To do this, we need a full audit of the assets we have and to budget for the long-term costs of maintaining them continually and properly.
Labour has been busy setting out its plans for the economy, and its pitch to potential voters, of no new income or wealth taxes. Instead, the essential improvements to public services will all be paid for through economic growth. But are the proposed policies to deliver this growth coherent? This prompts two questions: where will the growth come from, and where will the money come from to underpin the investment to deliver that economic growth?
Labour is betting on a couple of things – housebuilding, including building on the green belt; and “green” investment and net zero for the power sector by 2030! Even the Conservatives’ ambition of 2035 is extremely tight.
These policies will be against a very different economic background to that of the past 30 years of very low interest rates. With the current interest rate at 5%, the costs are much higher, presenting a whole new ballpark. Moreover, it is not at all clear where the money is going to come from for all the investment needed. This podcast looks at the reality behind Labour’s proposals
“Unlocking” or “unleashing” funds is not as straightforward as UK politicians would have us believe. The simple fact is that there are few UK savings to invest. Households don’t save very much; the corporate sector does not retain earnings; and the government borrows increasingly greater sums. As a result, we are relying on money from investors abroad to invest. Worse, foreigners lend us the money to consume beyond our means as imports exceed exports by a wide margin.
As beggars, we can’t be choosy about who lends to us and on what terms. Investment is a voluntary activity. We can continue to beg the foreigners or we can turn ourselves into savers. We’ve witnessed the result of financial engineering by, and poor regulation of, a major utility company, with investors being asked to stump up at least £1 billion to salvage Thames Water. These same investors have lots of potential opportunities to invest elsewhere.
The obvious solution, while hugely unpalatable, is for the UK to stop being beggars: to live within our external balance of payments means, to save for retirement and our investment needs, to retain earnings, and to change the tax incentives on companies. The government would need to change its behaviour too, running surpluses not deficits. This is unpalatable because it will mean lowering the standard of living in the UK and paying higher taxes. We can be choosers only if we choose to save and live within our means.
The net zero electricity targets in the UK are fast-approaching. On current policies, there is little chance that we get there by 2035, let alone Labour’s 2030. UK energy infrastructure is not designed around intermittent wind, intermittent solar, active demand management, around electric car charging, air conditioning and heat pumps and decentralised home generation. A radical system change is required in both the electricity transmission and distribution systems. This is all going to cost a lot more than our leaders would have us believe.
The supply chains for the transition are not UK-based, so we are reliant on the critical imports for net zero – the minerals, refined products, batteries, solar panels, wind turbines and much else. We run a very large trade deficit, so foreigners will also have to lend us the money to pay for these imports. We don’t even have enough skilled people – when it comes to smart meters, for example, we are still at 50% coverage only, even though the aim had been to install meters in all households by 2019/20. It is going to take twice as long and twice the cost for even this part of the net zero infrastructure to be completed.
How will the required changes be financed? Who will pay the dividends, interest and capital, including the capital maintenance? In a high-interest, high-inflation world, the economics changes significantly. It’s hard to see how all the investment needed will be delivered. Something has to give. Either we have to pay higher taxes, higher energy bills and start switching from consumption to saving, or the net zero targets will inevitably slip back. Time for our leaders to spell out what it would really take to get to net zero.
The government would have us believe that not only can we get to net zero in electricity by 2035, but that it won’t cost very much. All the green investment needed will be paid for through borrowing, and the returns on that investment will pay back the initial outlay and the interest. The problem with this approach is that it is not us, the polluters, who pay for the damage we have caused to the environment, but rather that debt will be passed on to the next generation. This is the result of the shift from pay-as-you-go, the approach that existed from 1945 to the end of the 1970s, with each generation effectively paying through their utility bills for the investment and capital maintenance of the systems (an “intergenerational contract”), to pay-when-delivered, the approach adopted during the Thatcher government in the 1980s and the great privatisation boom. The understanding was then that newly privatised utilities would borrow and pay back from the returns they made from the future customers. Forty years later, and this appetite for debt has become addictive.This podcast looks at the risks of this borrowing, with the result that we are living beyond our means, what this means for the next generation, and what we need to do now to mitigate this.
The science on climate change is pretty clear and not new. The latest IPPC report is pretty dire in its predictions, but our understanding of the science is not new – it has been around since the 19th century.Alongside this science and increasing understanding, however, is what is happening on the ground – a different universe altogether. This podcast looks at this reality, and why now is the time to get real about the implications of a world of 1.5ºC+ within our lifetimes, not only in terms of the likely costs, but also what it means in terms changing our behaviour.
What role can the UK seriously can play in tackling climate change? The “delusion of grandeur” we have been led to believe is that we can do it all. This delusion is falling away – when it comes to green technology, the UK is not the envy of the world in the twenty-first century. The US is positioning itself to play a major role in this, through its Inflation Reduction Act, the Chips Act and the Infrastructure Act. The UK can’t match this scale of initiative. The EU, too, is big, and is likely to allow member governments to play a large role similar to that being carved out in the US.In this global context, what is the UK’s role in climate change mitigation? Rather than try to do everything, the UK should focus on the three areas that it is good at: offshore wind; carbon capture and storage (CCS); and research. In this podcast, I explain why, and how concentrating on these three comparative advantages will enable us to make a serious contribution to mitigating climate change globally – the only thing that really matters.
Getting to net zero is necessary but it will not be cheap. Everyone is clamouring for government subsidies: steel, battery factories, offshore wind, farmers, and customers and SMEs hit by high energy prices, as well as new nuclear power, CCS offshore, and hydrogen. The great gas price crisis is already easing, but not the demand for state support. It’s a lobbyists’ dream.Both main political parties in the UK are in this “subsidy game”. The Labour Party also has Great British Energy and its fast-track “mission” to get to zero emissions in electricity by 2030, requiring a lot of fast-tracked extra subsidies. It’s not just the UK. The US has its Inflation Reduction Act, Infrastructure Act and the Chips Act – state interventions not seen since Franklin Roosevelt’s New Deal. Europe is playing catch-up, looking to water down its competition policy limits on state aid. In this subsidy world, what should we do? Listen to this podcast to find out more.
Keir Starmer, Leader of the Opposition, has come up with his five missions to match Rishi Sunak’s five pledges. But taking a look at two specifically – the highest sustained economic growth in the G7 and zero carbon electricity by 2030 (not just net zero) – are these missions both credible and deliverable?While there are some positives – in particular a longer-term horizon and a focus on infrastructure – there are serious flaws in both. On economic growth, the performance of the rest of the G7 is obviously out of Starmer’s control, and it is not clear what “sustained” actually means. There is also the awkward question of where all the money is going to come from for all this investment. Given the poor current savings record in the UK, it relies overwhelmingly on foreigners. On zero-carbon electricity, is it seriously possible to effect such a radical reform of the system within six years if Labour wins, and if the next election is in 2024? Planning law, planning law implementation, the supply chains, the networks and all the rest?The good news is that we now have a serious debate about what needs to be done to achieve an economic revival and tackle climate change. The bad news is that no politician seems to be willing to engage with the fundamental realities: we don’t save and we rely on foreigner investors, preferring to live well beyond our diminished post-BREXIT means.
What was privatisation really all about? Its advocates thought private sector meant efficiency, versus the failing, inefficient, public sector entities. But now looking at our neighbours in Europe - for example, in water - the evidence does not suggest that we have achieved the promised nirvana. UK utilities are not the envy of the world. Two more profound features of the past 30 years of privatisation have since emerged. First, the move from pay-as-you-go to pay-when-delivered. Under pay-as-you-go, current customers paid for the investment and the next generation benefited from the new infrastructure. They in turn would pay for the investment for the next generation, and so on. Under pay-when-delivered, future customers would pay for the new investments, and the balance sheets would be the way of raising the finance. But that is not what happened: the balance sheets have instead been used for financial engineering, mortgaging the assets and paying out dividends to shareholders. There is now no more money in the balance sheets to pay for new assets. We are being forced back to pay-as-you-go but with the added millstone of all the debt on the balance sheets as well. The second, related feature, is that the investment has had to come not from the UK savers, but from foreign investors who now own most of our core utilities and infrastructure networks. We sell them the ‘family silver’ to live beyond our means. But will we be able to afford to pay them back on their investment? Given the current cost of living crisis and state of the UK economy, the returns on investment are looking less secure.
While each of the current challenges in our core services (NHS, Royal Mail, water, rail, etc) may have has its own explanations, causes and proposed fixes, together they ultimately add up to a systemic problem. Sticking plasters are not going to deliver the decent services a civilised society should expect to have. It’s not that we don’t know how to fix these problems, but rather we are not prepared to do what is necessary to put them right. As a society, we need to pay for these services and save to pay for the investment required and the ongoing maintenance. We prefer consumption now, selfishly expecting future generations to pay. What would living within our means really look like? What are the essential components of a sustainable economy? In this podcast, I outline the important ones: the polluter-pays principle; public money for public goods; investment in infrastructure through funding and finance; and proper saving for the future. The reality is proving inescapable, and we need to stop living beyond our means.
With a lot of investment required for UK infrastructure – in water, in broadband/fibre, in the wind farms, the electricity grid, in heating conversions, and in electric transport - a massive amount of money is needed, but where is it going to come from? Savings are necessary to pay for the investment, but we are no longer a nation of savers, and we therefore have to rely on the savings of foreigners. Foreign savings finance our UK investment programmes, assuming that the next generation will pay the interest, provide the profits and pay back the debt.We import 8% of GDP more than we export. Foreigners lend us the money to cover this excess consumption, balancing our balance of payments. In exchange we sell them the family silver. That’s why so much of UK infrastructure and utilities have overseas owners. This all runs counter to the desire of the current government to shed the UK of its dependence on non-domestic investors. It is foreign investors or no investment, as long as we refuse to save and choose to live beyond our means. This situation is not sustainable.
As the International Energy Agency forecasts another gas crisis in 2024, let’s look at the facts. There are three reasons why the IEA’s fears may not materialise. First, on the Russia–Ukraine position, it was Russia that decided to turn off the taps, and it can choose to turn them on again. There are good reasons why it may do so, not least because its economy is suffering seriously. Second, LNG (from the US, Qatar and Australia) has created a serious alternative option, and it is in plentiful supply. Third, there is the efficiency factor. The result of high gas prices has been a remarkable reduction in demand and the possibility of a global recession will reduce overall gas demand. Efficiency gains from price shocks tend to be irreversible. These three factors all lead to the real possibility that the IEA's predicted gas price shock is over-stated.While short-term planning for emergencies is important, the wider, more medium-term, requirement is to plan for energy policy reform.
Greta was right. COP27 has not made serious progress on mitigating climate change. Instead of concentrating on addressing the failures at Glasgow to set nationally determined contributions (NDCs) matching the 1.5˚C target, COP27 has been all about the past, about reparations for loss and damage. More pious words, 36,000 attendees and a new fund are not going to make much impact, and in the meantime the world carries on relying on fossil fuels for 80% of its energy, the rest being largely hydro and nuclear.
It is hard to imagine that voters in the developed democratic economies are going to vote for even 1% GDP to fund the transfers to the developed world, given that so far the Climate Fund has offered less than the annual dividend of Saudi Aramco, and even this has not been delivered. The COPs have not halted the relentless increases of about 2 parts per million in the carbon concentration in the atmosphere, the only measure that counts. Rather than one more heave, what is needed is to rebase on the polluter-pays principle, and therefore on carbon consumption. That would mean paying for carbon emissions and natural capital destruction, and would put us on a sustainable consumption path. COP27 has not even edged us forward and another 27 COPs probably won’t. Time to change the model – urgently.
26 COPs to date have not delivered, so why will COP27 (or even the next 27 COPs) be any different?
It won't and here is why. It's all about the money, and the money is all about who pays for the pollution – the stock put up in the atmosphere since the Industrial Revolution, and the continuing emissions being added now.
The $100 billion per annum promised at past COPs (but never actually fully delivered) is chicken feed compared to what the polluter-pays principle dictates. It is less than the annual dividend of Saudi Aramco. Worse, because the nationally determined contributions (NDCs) measure only carbon territorial production, they don't even properly measure the current pollution. It is carbon consumption – including all those carbon-intensive goods imported from developing countries – that needs to be added back in to determine the true carbon responsibilities. The polluter-pays principle would put a price on carbon emissions and the NDCs would need to shift to a carbon consumption basis, not carbon production, including the carbon embedded in imports. There needs to be both a carbon price on all carbon, imported or otherwise (dealing with current emissions), and compensation for past pollution and the damage it is causing.
To walk the walk, and not just talk the talk, polluters really do need to pay. The real reason why this is not going to happen at COP27, or at the COPs that follow, is that politicians don't get elected to make polluters pay, because the ultimate polluters are us the consumers of all those carbon-based goods and services. If we want to stop causing climate change, the pollution has to be paid for.
Whenever there is a fossil-fuel price shock, there’s a great temptation to think that the higher prices are here to stay, that this is the ‘new normal’. It happened after the great OPEC shocks of the 1970s, and in the run-up to the oil price peak in 2014. All the usual suspects who benefit from higher prices are at it again now: “prices are going to stay high” and “we’re in for a decade of high prices”.
It's possible, but we should also consider that there could be a reversal in gas prices. There’s plenty of fossil fuels in the world to fry the planet many times over. And markets do usually tend to work. The recent energy forecasts coming out of the Office for Budget Responsibility do not model a low-price scenario. But what we have actually seen this autumn has been remarkable resilience and adaptation in Europe to the high prices, and to Russians turning off the gas tap. The market has responded in both supply and demand terms, and gas prices have come down considerably.
What does this mean going forward? What happens to the economy if the anticipated continuing high gas prices do not materialise? What happens to the price caps, the massive interventions, to inflation and interest rates if and when gas prices fall further?
The sound of Russian gunfire and the alarm has gone off on energy security. The retreat from the net zero strategies is all too apparent: keeping coal-fired power stations running, increasing the coal burn, drilling for more oil and gas and even considering opening a new coal mine, cutting fuel duties and subsidising household energy, and supporting large energy users. The simple illusion that building lots of renewables can be pursued without taking seriously the security of supply consequences has left the UK exposed to the biggest impacts of the gas price shocks, even though it imports only around 4% of its gas from Russia. Decarbonisation with intermittent, low-density, disaggregated wind requires a lot of back-up, which will mostly be gas in the next decade or so.
Asleep at the wheel, having neglected security of supply, ministers now face the consequences of no gas storage and short-term spot wholesale markets. Ignoring the facts that 80% of global energy comes from fossil fuels, that the destruction of the natural environment to soak up carbon has left the Amazon as a net emitter, and that the stock of carbon in the atmosphere has continued to go up year on year by 2 parts per million since 1990, including last year with the lockdowns, means that the claim that net zero on a territorial basis will unilaterally stop the UK causing climate change is sadly misguided. The current energy crisis – what I call the "first net zero energy price crisis" – should sound a very loud alarm bell. It is time to face up to what unilateralism means: paying the costs of our carbon consumption, and applying that pollution carbon price to imports as well as agriculture, heating, power, transport and industry at home.
Faced with sharply rising household energy bills, there is great political consensus that this is a good time to bash the companies with a windfall tax. Prices have gone up, companies are benefiting from the troubles in Ukraine, and governments are in the business of redistribution. There are two questions: first, what exactly is a windfall; and second, why have windfalls emerged? Windfalls arise all the time in competitive markets; they happen when prices, but not costs, go up. The converse happens too: prices fall, whilst costs go up. It's swings and roundabouts, and investors take their chances.
In the North Sea, prices can only be excessive if the offshore taxation regime is flawed – and the answer is to put that tax regime right. Onshore in the electricity market, prices are excessive if the wholesale market does not reflect the costs. It doesn’t: the wholesale price of electricity is roughly equal to the spot price of gas, whereas the costs of more than half the electricity generated have nothing to do with the gas price. The lessons from this sorry episode are: fix North Sea taxation, and reform the electricity market to meet the challenges and cost structures of the net zero targets and security of supply.
How do we pay not just for the immediate costs of energy, but for the full transition to net zero? Right now the UK economy is around 80% dependent on fossil fuels, just as it was back in 1970 - and much the same as the rest of the world. We have 28 years to get this down to a residual, all of which needs to be sequestrated. We have the 2050 net zero target and the 2035 target for net zero for electricity - just 13 years away. This is a transition on a scale last seen in converting a peacetime economy into a wartime economy ready for the Second World War.
We are all in this together as citizens and we have to find a way to pay for this that enables all citizens to participate fully in society and the economy. This means that we need a social tariff, to provide the basic social primary good of energy. It breaks the link between price and costs, and brings the better-off customers and the Treasury into this picture. None of the current short-term fixes is going to address the costly long haul to net zero. Sticky plasters like loans and Council Tax rebates assume that our current energy price crisis is temporary. It is not. Lots and lots of intermittent wind will increase costs, which we should pay – as citizens and not just consumers.
From April, the average household will be paying around £2,000 a year for their energy. By October it may be closer to £3,000. Many will struggle to pay. This price does not reflect the true energy costs, which are lower. Consumers are paying too much. Whilst the price of gas has gone up, this is only one part of energy costs. Energy costs from nuclear and from renewables have not increased. The costs of the network distributors are too high. The costs of supply failures are being added to the bills. Then there are all the costs from past renewables subsidies and a host of policy costs. Five years ago I carried out the Cost of Energy Review, setting out why we are all paying too much and what should be done about it. Five years later, failing to implement its main recommendations has made the situation much worse. It does not have to be like this, but it will take a rethink of energy policy and some rapid changes.
What would sustainable agriculture look like? It would be zero carbon consumption or better, deliver food sustainably whilst preserving and enhancing natural capital (including the soils and the peat), offset carbon emissions elsewhere, and pass the assets on to the next generation in good shape. What we have now is no carbon price, no carbon border adjustments, and no overall plan for land use, including carbon sequestration.
Agriculture is the largest carbon emitter relative to size in the economy. We have a bottom-up, case-by-case approach, with ELMs (Environmental Land Management schemes) in England and a voluntary carbon offsetting market that looks like the Wild West. There is a chasm between what is going on and net zero. The scope for improvement is correspondingly vast and the time is short – just 28 years to net zero. Creating a green and prosperous agriculture requires a step change, with credible offsetting, credible public goods funding, and polluters being made to pay. All are perfectly achievable and economically efficient, but not if we continue with the current timid approaches.
The reasons why energy prices have shot up are well known: the Russians and extra demand in the Far East when it comes to gas, exacerbated in the UK by the lack of storage, the scale of the intermittent renewables, and the fast-track exit from coal. The UK government assumes that this is all very temporary, that gas prices will fall back by the autumn, and that the temporary storm can be weathered by, in particular, a £200 loan to customers, which will be easier to repay as the energy bills fall back again.
Don't bank on it: the energy bills are not just the consequence of rising gas prices, and higher gas prices may not be all that temporary. But, even if they are, there are other reasons why energy bills may keep going up. There are the legacy costs of past renewables subsidies, there are more subsidies to come, there are the system costs of integrating a huge further increase in offshore wind, and then there are nuclear and other low-carbon technologies to come. Dealing with climate change is a must, and it is not going to be cheap. Better to tell the truth, so that we all know what is in store in this radical transition, than delude people that the £200 is going to be easy to pay back. Get ready for permanently higher costs to come.
Energy price crises are usually triggered by external events. But the UK has been hit particularly hard by the global gas price increases, and for mainly home-grown reasons. This is the first net zero energy prices crisis and, unless action is taken, there will be many more to come. There are two main reasons: the energy system is not designed to handle the intermittency of the renewables; and the legacy costs from past subsidies on renewables confront consumers with rising prices when costs are falling. They both need to be urgently addressed, because the 2035 target to completely decarbonise the electricity system is a mere 13 years away.
The key steps were set out in the Cost of Energy Review in 2017: socialise the legacy costs, split out the system operators so that they can oversee the pathway to the net zero targets, move away from wholesale markets to Equivalent Firm Power so that those who cause intermittency have to pay for it, and make the polluters (ultimately you and me who buy the power) pay the costs through proper carbon energy pricing. Short-term sticky plasters, such as abolishing VAT, will make matters worse, and abolishing the price cap (or even shortening the period) will encourage a return to some of the appalling behaviour in the supply market before the cap was introduced and avoid the obvious necessity to regulate the market properly. Better to get on with the fundamental reform as set out in the Cost of Energy Review and tell the public the truth: that net zero is going to cost, and, without reform, it is going to cost a lot. And if politicians are not prepared to say this, then admit that all the hype at Glasgow from the UK side was just that - hype.
30 years after privatisation, the electricity model looks to be in deep trouble. In addition to the collapse of 25 suppliers, and the knock-on increases in bills that customers will have to pay for what has, in some cases, been very poor management, and, in regulation, serious failures to scrutinise the businesses, several thousand people have been cut off from the distribution networks for over a week. That a storm could find the local distributors with so little resilience raises all sorts of questions about their behaviour since they agreed at the last price review that they had sufficient funding to meet their licence obligations (they did not appeal). This begs all sorts of questions about what they have and have not spent, and more generally about the highly geared financial structures that private equity has put in place.
None of this bodes well for the complete decarbonising of the electricity industry by 2035 - in just over 13 years from now. It's time to get serious about the reforms in the 2017 Cost of Energy Review.
Is COP26 the “real deal”, marking the point when we “turned the corner” on climate change, or is it what Greta Thunberg calls “blah, blah, blah”? To succeed, COP26 would need to slow down and stop the increase in carbon in the atmosphere – something all the previous COPs have failed to do. For the last 30 wasted years, that concentration has gone up by roughly 2 parts per million per year, including last year, despite the great coronavirus lockdowns.
COP26 is all about territorial carbon production emissions; it does nothing about carbon consumption, the real carbon footprints. That’s why deindustrialising, service-based economies like the UK look good, and yet still cause climate change by importing emissions and then not counting them. The world cannot wait for China (representing nearly 30% of global emissions) to peak in a decade’s time and then take another 30 years to reach “carbon neutrality”. To avoid 3˚C warming, and unilaterally stop causing climate change, the targets should be on carbon consumption, include imports, cover agriculture as well as heating and transport. We would also need to have a much bigger fiscal transfer to the developing countries. Simply setting net zero territorial targets, and mostly for 2050, is not enough, and risks the world moving on after December to other things, as it did after Copenhagen, Durban and Paris.
The gas crisis is very predictable and has caught the government and the regulators asleep at the wheel. Virtually no storage, suppliers without proper contractual cover, and a flawed model of competition have left the UK exposed to the intermittency of wind without proper back-up and with customers picking up the bill. Russia, low wind output, old-fashioned twentieth century wholesale market pricing, and inadequate scrutiny of the suppliers are the immediate causes. But the fundamental problem is the short-termism of the market. Just like Northern Rock, the shift from a longer-term contractual basis to a real-time spot market means volatility, not stability. The price cap is a longer-term contract (or at least six months) and should have forced a consequential response by the companies to go long too.
Just like Northern Rock, limited liability allows the companies to escape, leaving customers to pick up the tab. The Cost of Energy Review in 2017 proposed a reshaping of energy markets to firm capacity, and the Equivalent Firm Power (EFP) auctions. As with the other recommendations in that review, the government ignored this, and it is now reaping the consequences. The ostrich approach will not save the government: the market is flawed, not simply going through a bit of turbulence.
Why are electricity prices going up? Why is the price cap being reported raised by Ofgem? Do prices really have to go up, or should they be coming down?
The answer given by Ofgem and the industry is that the price of gas is going up. That’s true. But gas is only one part of the generation of our electricity. In fact, our electricity is increasingly coming from renewables, with some contribution from nuclear. And the renewables costs are going down. We should all be benefiting from these lower costs. But because it is the marginal cost of the gas at the peaks that drives the wholesale price, and hence our bills, we don't see the benefits of the falling costs of other forms of generation. Since we will need some gas for a couple more decades at least, we face the prospect of it setting the peak price for a long time to come.
The right way to sort this out is to move to a capacity-based approach, and pay for the costs of the different technologies – their costs plus a reasonable return. We should have a strategic gas reserve, pay for that insurance, and for the gas – the actual gas used – when it is used. Put this together and we should see prices coming down, and sharply over the next decade. Decarbonising electricity, and ever-lower-cost renewables, should mean lower bills. It is urgent: even if many people might be willing to pay these ever-higher bills, many won’t be able to pay. Time to address the cost of energy properly, and implement the reforms set out in my 2017 "Cost of Energy Review".
It's about time the government and the regulators took a good hard look at so-called green and renewables-only electricity contracts. Consumers – you and I – might want to do the right thing, and buy only low-carbon electricity so we reduce our carbon footprint. But none of us – unless we really are off grid and use no diesel or gas back-ups – actually consumes only renewable energy. Why? Because what comes through the wires is a mix of gas-, nuclear- and coal-generated electricity and wind- and solar-generated electricity. There are no specific separate green-only transmission and distribution wires.
"Green" contracts are, at best, from suppliers who buy their electricity to put into the system only from renewable electricity generators. At worst, they are just a bundle of financial contracts. So you are paying a premium to renewables generators – an extra subsidy. Nevertheless, you might think you're making a difference by doing this. But does even more subsidy make a difference to how much renewable electricity is on the system. Not really, because the government decides how much renewables there will be and how much all of us will pay for it. If you really want to pay more to help get to net zero, there are much better, and greener, things you could spend your money on.
The new EU climate change package sets the pace for others to try to match in the run-up to COP26. It has a central architecture, built around carbon pricing. The two key components are the widening of the scope of the EUETS to bring in other sectors, and the carbon border adjustment mechanism (CBAM). After a shaky start to carbon pricing, the EU has now made it the central game in town, gradually bringing in transport, including aviation and shipping, and signalling to other sectors that they, too, will feel the forces of its carbon price in due course.
The CBAM is a radical step forward to make this internal carbon price common to both domestic production and imports. In the process, it deals with the competitiveness issues, gives carbon consumption the central role, and creates the scope for a globalisation of carbon pricing through a coalition of the willing. Importers can either pay the CBAM price to the European Commission, or they can introduce a comparable price in their own countries and pay their own governments.
There is one more reason for optimism: the revenues from the CBAM are hypothecated to the recovery budget, and will be key own-revenues to the Commission. As always in environmental policy, it is wise to follow the money.
With just 29 years to go to the 2050 target date, the International Energy Agency (IEA) has done a great service in making a stab at the scale of the changes needed to tackle climate change. Assuming an 8% fall in global energy demand, and 2 billion more people, it projects a fall in the use of fossil fuels, from 80% of world energy to just 20%, including the almost complete eradication of coal, a reduction of around 75% for oil, and 55% for gas.
Putting aside the fantasy that we can accommodate 2 billion more people, and all the economic growth that our leaders assume, and actually reduce energy consumption, the facts are that oil demand is going up, gas demand is going up, and coal is continuing to provide a great deal of the energy mix in South East Asia and elsewhere, with China building more new coal power stations than the US and the EU are closing. Whilst campaigners get their teeth stuck into the independent Western oil and gas companies, the big numbers are all about Russia, Saudi Arabia and China. None of these is doing anything remotely required for global net zero in the next 29 years.
It is these facts on the ground that COP26 needs to get real about, rather than simply trot out the usual stuff about the great targets world leaders are signing up to, and all the cake-ism beloved of the British PM.
We are not short of ambitious carbon targets. We have a 78% reduction target for 2035 – just 14 years away – and 100% by 2050. So far, the focus has been on low-carbon electricity generation and electric cars. Heating has been the missing and much harder part – huge amounts of energy, very seasonal and mostly gas.
There are options: heat pumps, some hydrogen, municipal heating schemes and so on. What is missing is any serious plan as to how to make the massive transfer from gas (and oil) to something else, a plan for dealing with the winter peak demands, a plan for energy efficiency, and a plan for urban energy and heating systems. In fact, even new-build houses are not net zero and gas boilers are still the technology of choice in new homes.
It’s time for politicians not only to talk the talk, but to start walking the walk. It’s time to stop the waffle, stop telling people this is not going to cost much, and to drop the cake-ism. Heating is the really tough bit – expensive, hard to implement, and requiring a whole new infrastructure to back it up on those bleak winter, low-wind and low-solar days when the system will already be under enormous stress.
Post BREXIT, the first trade deal has been deliberately designed to put grit in the wheels of trade with the EU. Now comes India and Australia and the US looms, all part of the new Global Britain. As with almost all trade deals, agriculture tends to be a big issue despite its relatively small part of the economy – just 0.6% of UK GDP. Much of it is simply uncompetitive.
Sheep farming in the hills cannot match the costs of Australian ranches. It is claimed that the welfare and environmental standards are lower, though this may be less than it seems. Then there is the important bit of carbon, and the need for a carbon border adjustment. Fair trade needs a level playing field. In such a new world, the scope to redirect subsidies to make better use of the land should trump protectionism for farmers.
It is simply not good enough to reduce terrestrial carbon production emissions to net zero by 2050 on a unilateralist basis, and to expect that this means we stop causing climate change. It doesn’t. It could even make matters worse – the quickest way to get carbon territorial emissions down in the UK would be to complete the closure of the steel industry, the remaining oil refineries, the car industry and import all these instead.
The UK is already made up of 80% services, importing all the main carbon-intensive goods from countries like China. Climate change is global and what matters is our global carbon footprint. Imports and domestic production both cause climate change, and both do so because they are part of our carbon consumption. When it comes to such consumption, the UK does not look so good. Not to tax carbon at the border whilst having a carbon price at home is precisely wrong. This bit is unanswerable, but then those with a vested interest in the imports argue that such a carbon border adjustment is impractical. No carbon price is perfect, at home or abroad, but it can be roughly right. Imposing a carbon tax at the border on imports from any country without an equivalent carbon tax at home is a great way to spread carbon pricing globally, and a great step in the right direction.
The hype around COP26 is getting out of hand. The excitement is palpable - the US and China, and then the other world’s leaders are all, if one believes the spin, going to come up with targets that add up to 2˚C maximum global warming. It will be a triumph for Boris Johnson. We have been here before, at Kyoto, Copenhagen, Durban and Paris. What happened? The concentration of carbon in the atmosphere – the only number that counts – has just kept going up at around 2 parts per million every single year from 1990 onwards. Not a blip following the world financial crisis in 2007/08, nor even a blip for 2020.
The COP process has not worked so far. Why? Because the climate change problem is very much about China, India, Africa and Brazil. China is building coal power stations so fast as to more than compensate for all the coal closures in the US and the EU. It has 1,000 or so power stations, burns more than half the world’s coal and is 28% of total CO2 emissions. The developing countries all want the developed countries to pay. COP26 needs to come up with credible targets that are actually going to be met and massive financial transfers for this top-down framework to deliver the goods. The alternative is bottom-up, building a coalition of the unilateral willing, to include the EU, the UK and the US. But this means unilaterally committing to carbon consumption targets, to pay for the carbon footprint and to include imports. The polluters should really pay for their carbon consumption. It turns out that carbon border taxes incentivise exporters to tax carbon at home rather than pay the carbon duties to the likes of the UK and US governments - and that proliferates the carbon prices globally.
Is economic growth possible? Is it even desirable? Lots of environmentalists think we have to get off the growth conveyor belt, seeing it as a road to environmental ruin. They see limited natural resources coming up against unbridled consumption, and think it will all end badly.
They have a point: consumption is unsustainably high, and we are living beyond our environmental means. But two different questions are getting conflated here: whether more consumption is a good idea; and whether progressive growth is possible. Because of the costs of environmental damage, including biodiversity loss and carbon emissions, consumption is unsustainably high. We have to get back onto a sustainable consumption path. But once we are on that path, there is and will be progress in ideas and technology, and this is if anything speeding up.
Think of the generic technologies that made sequencing the coronavirus and then developing the vaccine possible. Think of the new materials that renewable energy needs. Think of the power of AI, ICT and big data to manage energy demand and supplies. Sustainable economic growth is possible, but only once the true environmental costs of our spending have been taken fully into account. We are living beyond our means but, once we have rebased, are capable of gradually becoming better off.
Carbon offsets are all the rage. As companies declare their net zero targets, they are reaching for offsets to make the numbers add up. Landowners see carbon farming as a new revenue driver. The missing bit is any serious attempt to do the valuations properly, and to avoid greenwashing and all the reputational damage it could cause.
The key steps to valuation are: establishing a natural capital baseline; specifying the counterfactuals as new policies on carbon and public goods unfold; projecting carbon prices; creating discount rate scenarios; calculating end-of-life scrappage values; and estimating the value of all the other natural capital impacts and other potential revenues from the offset investments. Done properly, carbon offsetting has the potential to bring the sequestration side of the carbon equation properly into play, which is every bit as important as the emissions when determining the carbon concentrations in the atmosphere. Done badly, it could be a silo-type policy disaster with lots of collateral damage, as the single-minded pursuit of timber production was to forestry over the last century.
The government has been kite-flying proposals for beef and dairy carbon taxes - to signal to environmentalists that it is “on their side” and to see how big the lobbyists’ backlash will be. The Climate Change Committee says we should eat less meat, and hence what better way to do this than put a carbon tax on it? The National Farmers' Union (NFU) counters that any such tax must first be internationally recognised and not put its members at a competitive disadvantage against imports. Unilateral carbon production targets, and unilateral carbon prices can make climate change worse. Think of Brazilian beef raised on cleared Amazonian rainforest displacing UK upland pasture-fed beef. But it is also a council of despair: for it will be a long wait for an internationally recognised and applied beef and dairy tax.
The positive answer is that bespoke taxes such as these need bespoke border adjustments. Beef and dairy taxes at home need to be applied at the same rates at the border too. This could be part of the serious business of decarbonising agriculture here. Agriculture is a mere 0.6% of GDP, but produces over 10% of the UK's emissions (especially if the carbon losses from soil and peat are properly measured). Agriculture is relatively the biggest carbon polluter and applying the polluter-pays principle through carbon taxes to the border and at home is a good place to start.
Once upon a time, developers applied for planning permission and they either got it or not. Now they have to deliver Net Biodiversity Gain, a very limited application of the polluter-pays principle. They should have to show Net Carbon Gain, compensating for the carbon emissions caused by building works and by the buildings. That way, there is some chance that building 300,000 houses a year could be compatible with net zero; right now they are not.
Consistent with the spirit of the Climate Change Act, all developments should first have to measure their full carbon consequences, and provide carbon compensation for three impacts: i) the losses incurred through the building projects themselves; ii) the ongoing loss of the soils and vegetation, which limits future sequestration; and iii) the ongoing carbon emissions from the new buildings. It is not just the bricks and the bulldozers, and not just the fact that, once built, few if any are really net zero homes, but also the damage done to the soils, which are not only carbon storers but also biodiversity reservoirs. Next time you pass a greenfield development called “The Meadows” you will know the lasting consequences, and this especially applies to housing on the Green Belt.
This podcast accompanies Dieter Helm's paper, Net Carbon Gain, which sets out the issues in more detail. http://www.dieterhelm.co.uk/natural-capital/environment/net-carbon-gain/
Boris Johnson, like David Cameron, has started out talking the green talk. Standards here in the UK, post the BREXIT transition, are going to be higher. Net zero is embraced wholeheartedly. But one month into the brave new world, how is it going? There are some straws in the wind: the decision to allow the use of neonics, and ensure that no flowers blossom for a considerable period afterwards; not following the EU in banning waste exports; opting for the very inferior UK Emissions Trading Scheme over a carbon tax. None of these speaks to higher standards.
The intentions are no doubt genuine, as they were for David Cameron, and laced with good politics, trying to corral the green vote to the benefit of the Conservative Party. But walking the walk runs into a brick wall for the government: the PM is not prepared to make us consumers – and hence voters – pay for the necessary changes. Bills can’t be allowed to go up, and farmers must be protected from the consequences of their pollution. Walking the walk is proving a lot tougher - there are choices and costs of moving from living beyond our environmental means to living within them, and it is not right to borrow, spend and then dump on the next generation the costs of both the debt and the pollution.
At the end of 2020 the government and the Climate Change Committee produced a blitz of documents. We had the Ten Point Plan, the National Infrastructure Strategy, the Energy White Paper and the Treasury’s interim report on its Net Zero Review. Thousands of pages. But what do they tell us? Are they good answers to the challenge of our unilateral net zero target? Is the strategy coherent and cost-effective, and is the money being provided to support it?
The Energy White Paper, the precursor to a new Energy Bill, starts off with levelling-up and jobs. All the documents have at their core the claim that this huge transformation of the economy (and especially the main emissions in heating, transport and agriculture) is going to be achieved at little or no cost. Bills are not going to go up. Is it really true that we can no longer cause further increases in the carbon concentration in the atmosphere – unilaterally – without any pain? Can we go from living beyond our environmental and carbon means without a net cost, or not more than 1% of GDP at worst? Or do we need a rethink, a focus on carbon consumption and a new realism about what we need to do?
The Climate Change Committee, in its 6th Carbon Budget, tells us that the answer is not very much, if anything, once fuel savings are taken into account. Is this really true? Could the conversion of our entire economy – energy, transport, heating and agriculture – be switched from a carbon-intensive one to zero within just 30 years at little or no cost? If it is true then we can look forward to the phase-out of subsidies to renewables, a withering of the need for state intervention except for infrastructure and R&D, a falling tax burden and lower consumer bills. Miracles might happen, but it sounds too good to be true and it is. More likely is the opposite: more and more public expenditure and the need for tax rises, and higher energy, transport, food and heating bills. It is a price worth paying if we are to switch from our carbon-intensive lifestyles and stop living beyond our environmental and climate means. Pretending otherwise – convincing voters and consumers that they can have their cake and eat it – is a dangerous game.
In the UK and the EU, grand Ten Point and Green Recovery Plans are all the rage. In the UK, everything adds up to 10; in the EU it was 20, with its "20/20/20 Climate and Energy Package". They tend to be popular, especially if every technology and lobby gets a prize. There are some advances: this time in the UK, “nature” makes an entry at no. 9 in the latest equivalent of the pop charts. The interesting bits are about what is left out.
In the Ten Point Plan, networks are ignored and carbon taxes are notable by their absence. It's all about production, and the aim is to present “good news”. The politically inconvenient facts that, by not paying for the pollution we are causing, we're all living beyond our environmental means, and that it is ultimately us, as consumers, for whom all this carbon is produced, are ignored. The Plan is all about what happens here. The global problem of the global increase in carbon concentration in the atmosphere – which keeps going up even during the pandemic –and the import of all that stuff made, for example, in China does not figure in the great Plan.
Cracking climate change is all about the much more painful politics of making polluters pay; funding and financing the core infrastructures; and pushing hard on R&D.
In November 2021, world leaders will gather in Glasgow to try once again to crack climate change. It is a formidable task: none of the previous agreements, including Paris in 2016, has made any difference to the march upwards of the carbon concentration in the atmosphere - 2 parts per million every year since 1990. After the 30 wasted years I describe in my book, Net Zero, why would anyone expect a breakthrough?
At the heart of the COP26 negotiations lies the geopolitics between the US and China. Add in the EU and most emissions are captured. There is lots of excitement about Biden replacing Trump, and Xi Jingping’s commitment to becoming “carbon neutral” by 2060. Yet the fundamentals of the US–Chinese relationship have not changed: it is about trade and military power. It is about Taiwan, the Uighurs, and the South China Sea.
COP26 offers another opportunity to focus world leaders’ attention on climate change, but the real action needs to be bottom-up and depends on the unilateral measures nations take. Where the global and the national join up is about trade: about carbon trade and carbon imports. If climate and trade do get joined up at Glasgow, that would really make a difference.
The big focus in the net zero debates so far has been on emissions – in particular emissions from coal- and gas-fired power stations, and from vehicles, aviation and shipping. That really matters, but it is only half the story: the carbon in the atmosphere is the balance of emissions and the sequestration of carbon by nature – by trees, grasses, vegetation, salt marches, and the oceans. By burning down the rainforests and stripping the carbon out from the soils, we’ve been messing up the ability of nature to do its job.
This second in my series of podcasts sets out the scale of the damage we’ve been doing to nature’s toolkit, and describes what we need to do to move on from destroying nature’s capacity to help solve climate change, to getting it back on track, with the multiple other natural capital benefits that will come too. It is about carbon offsets, carbon markets, and baseline carbon assessments. It is about an environmental policy fit for the net zero agenda, which is now taking centre stage.
To meet the net zero target by 2050 a carbon price is a necessary (but not sufficient) part of the decarbonising policy architecture. Its time is coming: after the transition ends with the EU, from 1st January 2021, the UK will have its own carbon pricing mechanisms.
This podcast explains why a carbon tax is better than shadowing the EU ETS or inventing a new UK ETS. It tackles the carbon border adjustment issues, and knocks down each of the objections raised by the various interests. It explains how a single carbon price across energy, transport and agriculture would maximise the role of markets and bring carbon offsetting into the mix. Starting by amalgamating all the various carbon prices that already litter the policy landscape, the podcast goes on to set out how a carbon tax can be pragmatically implemented.