British Energy Policy and International Political Economy in Climate Change

1
British Energy Policy and International
Political Economy in Climate Change

• Stephen Stretton
• 19th April 2006
• Judge Institute of Management,
• Cambridge University

2
Contents

• Part I) The Problem Global Warming and
  international political economy
• Part II) Positive Feedback in Climate and
  Society. Increasing Returns to scale.
• Part III) British Energy Policy. A Plan Zero
  Carbon through Nuclear Energy.

3
Part I The Problem

• Climate Change
• Impacts
• The Long View
• Should We Worried
• Why We Must Aim to Overreact.
• Institutions
• Welfare Economics Perspective
• Management Perspective

4
Impacts of Climate Change

• Extent of anthropogenic Climate Change
• 0.6C warming already.
• 2-5C over next century
• Impact increases rapidly as temperature rise
  exceeds 2C
• Collapse of Global heat Circulation system
• Collapse of Ecosystems (e.g. Amazon Rainforest)
• Acidification of Oceans
• Irreversible melting of Greenland (final 7m final
  sea level rise) and West Antarctic (also7m) ice
  sheets
• Massive changes in precipitation and temperature
  leading to increased water and food stress
  refugees, war.

5
Impacts of Climate Change

• Widespread Desertification for a 5C increase in
  average global temperatures

6
Global Warming The long view

• Hottest time in Earths History
  Paleocene-Oeocene Thermal Maximum
• 55m years ago.
• Cause Perhaps a massive volcanic eruption
  releasing greenhouse gases?.
• Release of frozen Methane?
• Increase in atmospheric CO2 concentrations to
  3000-4000ppm
• Temperatures rose to 20C in Arctic Regions
• Acidification of oceans
• Widespread extinctions including large mammals
• Takes Earth 100,000 years to recover

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Should We be worried?

• GW is major threat.
• Rational ranking of risks GW ranks above nuclear
  power risks.
• Still uncertainty over final emissions, final
  warmth, final outcomes
• Russian roulette with our children?
• Collective action problem
• Mancur Olson (1982) ... If we finally get the
  information that the ecosystem cant take any
  more, then it is important that we have the
  open-mindedness needed to change our views and
  policies the moment decisive information arrives.
  Those who shout wolf too often, and those who are
  sure there are no wolves around, could be our
  undoing
• (Olson, M. Environmental Indivisibilities and
  Information Costs Fanaticism, Agnosticism and
  Intellectual Progress The American Economic
  Review Vol 72, No 2. Papers and Proceedings of
  the Ninety Fourth Annual Meeting of the American
  Economuc Association (May 1982) 262-266)

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Aim to Over-react

• Threats to earth are severe
• To solve the problem requires a large change in
  behaviour across earth
• Everyone needs to change (unfortunately each has
  particular circumstances)
• Current trends going in opposite direction fast
• Need to show self-interested actors can convert
  their economies.
• Only by aiming to overreact do we have a chance
  of making a sufficient difference.

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Institutions

• Utilitarian or cost-benefit analysis assumes
  perfect institutions.
• This is far from the case. There is no global
  government.
• Need to look where we already have institutions
• National self-determination, and national
  ownership of future is key, except where there
  are intrinsically global issues, like global
  warming.

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Welfare Economics Perspective

• Have a Environmental Externality
• Need a Binding International Agreement so that
  private costs social costs e.g.
• Global Carbon Tax or
• Global Emissions Trading
• BUT
• No global government no taxation
• International agreement difficult
• Agreements are in any case not enough
• Incentives for countries to defect

11
Management Perspective

• Have a Problem
• Need to find Solution
• Keep it simple!
• Importance of leadership.

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Part II Positive Feedback

• Climate
• Society War
• Society Hysteria
• Environment, Society Collapse
• Local and Global Environmental Problems
• Can we substitute?
• Technology
• Increasing Returns to Scale
• Tipping Points

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Positive Feedbacks in Climate

• Negative Feedbacks
• CO2 increases rate of growth of plants
• Positive
• Increased temperature causes collapse of
  ecosystems, so sinks become sources
• Reduction in albedo (so Earth absorbs more heat
  directly from Sun)
• Release of frozen Methane (greenhouse gas)
• Reduction in oceanic mixing due to changes in
  thermohaline circulation

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Positive Feedbacks in Society War

• Benevolence of Nation-state for last 50 years in
  the West is the exception rather than the rule.
  In the Congo, mineral wealth fuels a Hobbesian
  war.
• Escalation in international conflict

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Positive Feedbacks in Society Hysteria

• Rational elements within society are fragile.
  Existing order can be overthrown.
• Perceived inability of governments to protect
  people could lead to mass panic.
• Panic further stretches government resources.

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Positive Feedbacks of Society AND Environment

• World is potentially already overpopulated for a
  5C world. (Land, Water Energy shortages).
• Massive time delay (50 years) between decisions
  and their effects.
• At each stage, future environmental constraints
  do not bind existing behaviour.
• Existing needs, however, will become more
  pressing at each future time.
• Democratic governments will be more pressed to
  service needs of existing generations in the
  future.
• Air-conditioning and desalination require more
  energy in a hotter climate rather than less.

17
Local and Global Environmental Problems

• Local environmental problems require local
  knowledge and local institutions
• Impossibility of central planner having
  sufficient knowledge to solve them
• Hence we rely on local institutions, including
  but not limited to property rights
• Global environmental problems require global
  knowledge and global institutions CO2 is a
  commodity.
• Ecological Macroeconomics?

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Can we substitute?

• Can we substitute physical capital for natural
  capital?
• Perhaps not
• There are critical commodities with limited
  substitution possibilities e.g.
• Water
• Land
• Energy
• Property rights require peace which may be
  lacking if critical commodities become short.

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What is technology?

• A set of patterns used to solve problems.
• Technological improvement produces economic
  growth
• Technologies can be copied

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Positive Feedback in Technology

• Learning by Doing effects Increasing Returns
  to Scale
• Adoption of technology reduces uncertainty for
  future investors
• Network externalities advantage of having a
  unique standard

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Constraints on CO2 emission

• Conventional oil gas production constrained by
  monopolistic behaviour and by finite reserves
• (Non-clean) coal produces local environmental
  problems (SO2 NOx)
• Governments require a secure source of energy.

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A Tipping point?

• Increasing price of oil will encourage investment
  in
• Extracting unconventional oil and gas
• Non-carbon technologies
• Government needs to do enough to ensure that
  option (2) is dominant

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Part III British Energy Policy 2006

• Background DTI Energy Review
• Main Goals
• CO2 Reduction Target
• Security of Supply
• Economic Efficiency
• Future Energy Mix
• Fossil Fuels
• Renewables
• Nuclear

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CO2 Reduction Target

• UK Target CO2 emissions 60 reduction on 1990
  levels by 2050
• Sweden recently adopted same target
• Significant progress (30 reduction) by 2030
• Aim is that such cuts, if adopted worldwide,
  would avoid Dangerous Climate Change
• Follows recommendations of Royal Society
• More recent evidence suggests even deeper cuts
  may be required
• Some countries may not cooperate, so perhaps UK
  cuts need to be even deeper to compensate/lead?
• Is a near-zero carbon economy economically
  feasible?

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Security of Supply

• North Sea oil and gas are running down.
• Natural Gas provides a large and increasing
  proportion of our supplies
• Britain now net importer of gas
• Possible Fuels
• Natural Gas from Algeria, Russia...
• Oil from Middle East
• Coal reserves are local (but most mines have
  closed environmentally very damaging).
• Uranium from Australia and Canada.

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Economic Efficiency

• A solution that maintains material prosperity
• People wish to maintain a comfortable standard of
  living
• British policy will be more influential if we are
  seen to be prosperous
• Balance of payments
• Sustainability and demographic transition
  requires genuine saving (capital investment).

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UK is uniquely placed to lead

• Strong Scientific Community
• Member of EU so called Transatlantic
  Alliance,
• Historical Cultural links with China India
• International Outlook
• Amenable Philosophical tradition
• Large Economy
• London as a global city
• Needs an Energy Policy for national
  self-interest, independently

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A Plan to Save the World? Go fully nuclear!

• 100 GW of new nuclear capacity in UK
• Cost 10bn pa over 10 years
• Electricity market design to encourage private
  investors in nuclear.
• Some direct public investment?

29
British Energy

• British Energy currently de facto nationalised
• Since social benefits of new build greater than
  private benefits, public ownership and control is
  no bad thing.
• National industries capable of greater
  investment.
• Problem Cost Control in Nationalised industries
• Solution Duopoly in public provision e.g. also
  consider Advanced CANDU

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Conclusion Positive Effects of this Plan

1. Economies of scale ensure investment would be
   repaid
2. Britain would have secure sufficient low cost
   energy for 40-50 years
3. Learning by doing would reduce price of nuclear
   worldwide. In particular, nuclear would become
   more attractive to market investors in US.
4. Britain would give a moral example on CO2
   emissions to the rest of Europe and world.
   (Sweden has adopted same CO2 target already).
5. Market Design innovations would aid US policy
   makers