The TaxPayers' Alliance - Economics 101

Jeremy Leggett on Renewable Power

Leggett's article for Comment is Free is so idiotic it is positively painful. I'll fisk it and then quickly conclude with a little examination of his dubious byline:

"When Britain and Germany raced to scale up their aircraft industries for war in the 1930s, the British competed rather well. Recovering from a late start, we rapidly produced machines capable of winning the Battle of Britain.

Today, the two nations are on the same side in a different battle, but Germany alone is mobilising as fast as it did 70 years ago."

If we're on the same side why would we want to race the Germans? Who cares if they win. Their gain is not our loss. Quite the opposite. If they develop the renewable technologies we can use them. Welcome to post-mercantilist economics.

"Our common enemy is global warming, and it is already at our gates. But while our German allies are turning out the renewable energy equivalents of Messerschmitts by the factory-load, Britain is again slow to spring into action."

Okay, they can bring the renewable power technology; we'll bring the City, Canary Wharf and associated financial innovation. We can't produce everything so why should we distort our investment market in an effort to race the Germans for the renewable energy market? Specialisation can make us all better off.

"Worse, as we learned yesterday, officials responsible for UK mobilisation have told the prime minister it is impossible for us to build modern-day Spitfires in any number. We should instead oppose European targets set recently for such mobilisation and join other laggards in order to persuade the Germans to scale back their own efforts."

Perhaps they've realised that big subsidies for renewables may not be a particularly efficient way of reducing emissions.

"On Tuesday one of the main architects of Germany's renewable energy policy, Hans-Josef Fell, was in London to give a press conference on peak oil. In this issue lies another, related imperative for nations like Germany and Britain to be mobilising for renewable energy as if for war. A group of German scientists, the Energy Watch Group, has completed the latest in a crop of studies showing that oil is depleting far faster than previously estimated, and that a global energy crisis is imminent. Renewable energy and energy efficiency are the only technologies that offer any hope of staving this off in time."

Anyone who pretends to have a good idea of the amount of oil left in the ground is trying to fool us or themselves. Besides, shortages of hydrocarbons aren't an externality so the market will create the proper incentives to switch to other sources of power. There is no market failure here for government to address.

If all you're worried about is dwindling reserves then you're worried about them increasing the cost of hydrocarbon-based power. The idea that the best response is raising the cost of hydrocarbon power is pretty bizarre.

"Fell spelt out Germany's success with renewables. In 2000, when he and other parliamentarians pushed through a law to fast-track renewables markets, such sources contributed 6% to the national electricity mix; the target was 12% by 2010. Three years ahead of the target, they are approaching 14% - and have created 200,000 jobs in the process."

Have they created more jobs than would have been created if the free-market had invested the capital instead of it being forced by the state into the hands of renewables companies? Opportunity costs!

"International investment patterns tell the story. Some $1 trillion, globally, will go into energy this year, and more than $100bn of that will be invested in renewables. Renewables make up just 2% of the global mix, excluding large hydropower schemes, and yet about a tenth of global energy investment now flows into them. Renewables companies are lining up to be quoted on stock exchanges, and those already listed have strong share prices. But as things stand, only a tiny proportion of this investment bonanza is heading into Britain."

Almost all of that development is utterly dependent on subsidies. It isn't a competitive industry at all. What that means is that each country pays for the investment either from its exchequer or through a levy on energy production.

"The German renewables market is being fed by funds raised from a levy on energy bills to guarantee premium prices for renewable electricity. Britain's Department of Business, Enterprise and Regulatory Reform says the UK's renewables obligation, a certificate-based scheme for growing renewables markets, works better. Ofgem and the Carbon Trust are among the many who disagree. It is easy to see why. In 2006 the cost to the average German household of the tariff was £12 a year. The average UK household paid £7 a year under the renewables obligation, but that delivered significantly less renewable capacity. German windpower capacity is 10 times that of the UK today, and the energy it produces is 30% cheaper; German solar power capacity is 200 times that of the UK."

An energy production levy is particularly cruel as it means taking money from the very poorest. We demonstrated in the TaxPayers' Alliance report on green taxes (PDF) how regressive any measure increasing the cost of electricity is. Poor families pay more, as a portion of their income, than the average and the rich pay the least. While £7-12 pounds isn't a lot of money it is significant and could be spent in another way or deliver a tax cut that might make a small but meaningful difference to a number of poor families. That is quite a price to pay to distort the market in favour of renewables.

"Consider the stakes here. If we fail to contain global warming, we put the economy at risk. If we continue to ignore peak-oil warnings, we will plunge into the chaos of a third global energy crisis. If we continue to allow investment to flow uncontested into countries with a renewables vision, UK plc loses out on any prospect of a serious share in the next global business revolution."

1) Britain's renewables subsidy won't make a significant difference to global emissions. It makes no important difference to the amount of risk the economy is at from global warming.

2) I've dealt with 'peak-oil' already. "Oh no! An energy crisis is coming and we'll all suffer as energy gets more expensive. Better make it expensive now to end the suspense!"

3) There are plenty of plausible "next global business revolution". I think the market is better at identifying them. Renewables, which are dependent on big subsidies, are a particularly poor candidate.

"· Jeremy Leggett is author of Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis"

The Guardian's byline tells us only that he has written a book about energy policy. This suggests that he is an 'expert' in the field and little more. How has such an expert produced such a poor article?

It appears the reason is that the article is more corporate PR flyer than intellectual search for truth. If you look at his profile on Comment is Free it turns out that instead of being an independent expert he is actually "chief executive of solarcentury the UK’s largest independent solar electric solutions company". If that isn't enough "he is, in addition to his solarcentury role, a director of the world’s first private equity fund for renewable energy, Bank Sarasin’s New Energies Invest AG". This is a man with a massive personal stake in subsidies for renewable power that guarantee its future. For the Guardian to put him up as merely a concerned author writing on his subject instead of mentioning front and centre that he is a part of the renewables business he wishes to see subsidised is an abject failure of journalistic standards.

I'm all for business leaders speaking for their industry. I don't mind newspapers printing what they have to say. However, that depends upon two key conditions being met:

1. They must have something interesting and coherent to say. Instead, this article just ignored basic economics and spouted phony analogies about Spitfires.
2. It must be clearly acknowledged - in a prominent position on the same page as the article - that they have an interest in the matter.

Neither condition was satisfied with this article. Deeply shoddy.

Conservative plans to cut £14 billion off red tape burden

John Redwood's competitiveness policy group will present its final report on Friday. The report has been widely trailed in the media. A central recommendation is reported to be a £14 billion reduction in red tape on business. This is reported to include:

Repealing working time regulations;
Scrapping data protection laws;
Reviewing the 1974 Health and Safety Work Act;
Relaxing redundancy laws to make it easier to fire staff;
Reducing financial services regulation;
A simpler regime for administering tax;
Scrapping Home Information Packs;
Reducing the number of Whitehall targets imposed on local authorities.

These proposals sound very sensible. They should make it easier to do business in Britain for both large and small companies and will improve Britain's economic competitiveness. It also looks as though the report will be welcomed by the Conservative leadership, although with no specific promises at this stage.

Regulation imposes a heavy burden on businesses, and so the report is right to focus on specific ways to reduce it. But we don't yet know what the report will say on the burden of tax hitting small and large businesses. We hope it will propose reductions in both the main rate and the small companies rate of corporation tax; relief on business rates, which have done so much damage to small shops and other businesses; and further alignment of income tax and NI, which can be an administrative nightmare for firms. We await the report's publication on Friday with interest.

Of course, much of the tax relief discussed above has already been proposed by the Tax Reform Commission, and so it may be that John Redwood's report need add nothing new in that area. But it would be rather strange if a report designed to provide answers to the problems of Britain's economic competitiveness ignored the burden of taxation completely.

To that extent, it is slightly worrying to read in the Financial Times that the report "will endorse Mr Osborne's mantra that economic stability must come before tax reductions". For that mantra is to admit defeat. An immediate reduction in the overall burden of tax (not a small one at the end of an economic cycle that could last ten years) is a necessary if not sufficient condition of a serious improvement in economic competitiveness. To get that overall tax reduction, spending decisions will have to be made. If the Conservatives are unwilling to make those spending decisions, they will only half-succeed in creating a much more competitive economy.

Other countries in Europe realise that they cannot ignore tax. The Netherlands, Germany and France have all reduced taxes recently, to say nothing of Ireland and the eastern European countries. It's time for Britain to do the same.

Liberal Democrat Tax Proposals

Download Reducing the Burden:  Policies for tax reform (PDF)

There are some good ideas in the Liberal Democrat tax proposals:

1. Simplification of the tax code and postcard-style returns could ease the administrative burden faced by individuals and companies.  Britain has the most complex tax system in the world, having recently overtaken India; there has to be room for simplification.
2. A cut in the basic rate would give millions of Britons some of their money back.  Very welcome.
3. Replacing the council tax would address the problem of a tax which hits the vulnerable the hardest and reduces pensioners to penury.

However, there are also some bad ones:

1. An extension of green taxes would be an inefficient way to raise revenue, would likely prove regressive and could do serious harm to British industry.  In particular, plans to increase the variation in vehicle excise duty on the basis of emissions would probably still not take lifetime emissions into account: some estimates that do include costs of construction and design suggest that a Toyota Prius Hybrid puts out more emissions than even a huge Hummer H3.
2. Taxing the rich more may appeal to social democratic notions of fairness but could do the British economy serious harm.  Estimates by the Liberal Democrats suggest that the tax bill of a City banker earning £250,000 would be increased by 11,800 pounds.  If the bank that employs that banker moved to another country to avoid the additional bill or international investment was diverted elsewhere we would all lose out.
3. There are risks to introducing a 'General Anti-Avoidance Rule'.  As the Conservative Tax Reform Commission pointed out:  "It is not easy to define exactly what such a rule should say, and experience in other jurisdictions shows that it may take some time before sufficient issues have been brought before the courts to enable to scope of the GAAR to be clarified."  Until clarity is achieved there is a lot of uncertainty in the law which exposes business leaders to unfair legal risk.

In short, a mixed bag.  Certainly an improvement over past Liberal Democrats plans to introduce a new 50 per cent tax band.  This platform would make important positive changes to the tax system by simplifying it.  If only the Liberal Democrats could get over the need to keep these changes revenue neutral they could avoid compensating measures that might undermine our economic competitiveness.