Economics was described by Thomas Carlyle as the dismal science. In my opinion it isn’t a science at all, however many formulae are used by economists. The debate as to whether it’s a science, a social science or an arts subject can, however, be left for another day.

Economics has rules or basic tenets, but even they don’t always hold good. In week one of my A Level course, I learned that, ceteris paribus (all things being equal), as economists like to say, if you reduce the demand for a product and/or increase its supply, then its price will fall. Conversely, increase demand for it and/or reduce its supply, then its price will increase. We are seeing that lesson in action right now with regard to oil and gas prices, consequent on the reduced global supplies of those products due to Trump and Netanyahu’s war with Iran.

Yet even this basic law doesn’t always hold good – or rather, the ceteris paribus qualification is essential if it is to hold good. Take renewable energy supplies in the UK, for instance. Increase the supply of renewable energy in the electricity supply network and the price goes up, not down. There are many reasons for this, but most obviously it’s because not all things are equal – renewable energy suppliers receive special treatment, and taxpayer and billpayer largesse, courtesy of government intervention. Also renewable energy is not like a simple product being brought to a simple market. In that classic case, if more of the product is brought to market, without more customers being present, then the price will fall in order to stimulate greater demand. But in the case of renewable energy, there is no real operating market, despite the supposed attempt to put one in place as part of Thatcher’s privatisation of the UK’s energy supply. Instead, renewable energy suppliers are given a guaranteed price, courtesy of Contracts for Difference, which initially lasted for 15 years but are now to last for 20. Furthermore, if the buyer isn’t in a position to take the product, the seller doesn’t walk away with nothing. Instead, he gets paid for not supplying his product. To paraphrase George Orwell in Animal Farm, it seems that while all energy suppliers are equal, some are more equal than others.

John Ridgway’s article, The Limitation of Limits mentioned the economist, William Nordhaus. At the time I was reading Thomas Piketty’s “Capital in the twenty first century”, and I commented thus regarding his section on climate change:

The Stern Report… calculated that the potential damage to the environment by the end of the century could amount, in some scenarios, to dozens of points of global GDP per year. Among economists, the controversy surrounding the report hinged mainly on the question of the rate at which future damage to the environment should be discounted. Nicholas Stern… argued for a relatively low discount rate, approximately the same as the growth rate (1-1.5 percent a year). With that assumption, present generations weigh future damage very heavily in their own calculations. William Nordhaus… argued that one ought to choose a discount rate closer to the average return on capital (4-4.5 percent a year), a choice that makes future disasters seem much less worrisome. In other words, even if everyone agrees about the cost of future disasters (despite the obvious uncertainties), they can reach different conclusions. For Stern, the loss of global wellbeing is so great that it justifies spending at least 5 points of global GDP a year right now to attempt to mitigate climate change in the future. For Nordhaus, such a large expenditure would be entirely unreasonable, because future generations will be richer and more productive than we are. They will find a way to cope, even if it means consuming less, which will in any case be less costly from the standpoint of universal wellbeing than making the kind of effort Stern envisions. So in the end, all of these expert calculations come down to a stark difference of opinion.

Nicely summarised, Professor Piketty. In plain English, adopt different discount rates and you get completely different outcomes. One assumption justifies drastic and expensive action, another justifies the opposite. That’s surely problematic – what to do about it? The answer – if you’re the government – is obvious. You adopt the assumptions that support the policy you’d already decided to implement, and then you claim that your preferred policy is supported by sound economics. This was in my thoughts as I read Jit’s latest article regarding the cost/benefit analysis relating to the ZEV mandate.

As Jit noted, the cost-benfit analysis came up with a net present benefit of £39 billion. Curiously, although it was calculated as being the difference between total estimated costs of £127 billion and total putative benefits of £166 billion, the £39 billion figure just happens to be the same as the estimated benefit to households of a reduced running costs bill for fuel of £39 billion. Search the cost/benefit analysis document as I might, I couldn’t find any basis for the claimed saving of £39 billion in household fuel costs arising from the use of EVs instead of ICE vehicles. Perplexingly, this figure, which seems to have been plucked out of thin air, isn’t the same as the figure contained in the earlier document titled “Zero Emissions Vehicle Mandate and non-ZEV Efficiency Requirements Consultation-stage Cost Benefit Analysis”. On page 5, it claims that the reduced fuel costs would amount to “c.£20bn”. On page 8, that figure is “c.£19bn”. Nowhere can I find an explanation as to why the more recent document has pretty much doubled the estimated benefit to households in respect of fuel cost savings. Nor can I find any explanation as to what happens to that “saving” when the government decides it needs to recoup the tax it’s losing (in the form of fuel duty and VAT on fuel at 20%) as ICE vehicles are replaced by ZEVs. In 2019 the IFS suggested that the UK government raised around £33.7bn from VAT and duty on diesel and petrol bought by motorists (admittedly not all of that will be paid directly by households, but indirectly it probably will be, as a result of businesses passing the cost on via the price they charge for goods and services). Once that tax is added to the cost of motoring for ZEV drivers, the £19bn or £20bn saving claimed in the earlier document has become a net cost. Even the putative £39bn saving claimed in the later document has been badly eroded.

However, those quibbles are minor in the scheme of things. As Jit identified, the claim that replacing ICE vehicles with EVs will lead to a net benefit, is entirely dependent on the claimed “carbon” saving. This, in turn, is dependent on the price attributed to “carbon”. Jit noted that at paragraph 2.18 of the more recent cost/benefit analysis document, we are told that this sits at £245 per tonne of “carbon” equivalent (in 2020 prices) “reflecting a rough scale of the external cost of greenhouse gases borne by society due to CO2e emitted by today’s cars and vans” [my emphasis]. This appears to represent an admission that the figure isn’t accurate, it’s rough and ready. Accurate or not, how is it calculated? At this stage we are referred back to a policy paper published on 2^nd September 2021 by the Johnson government, and titled “Valuation of greenhouse gas emissions: for policy appraisal and evaluation”. This document tells us:

Greenhouse gas emissions values (“carbon values”) are used across government for valuing impacts on GHG emissions resulting from policy interventions. They represent a monetary value that society places on one tonne of carbon dioxide equivalent (£/tCO2e). They differ from carbon prices, which represent the observed price of carbon in a relevant market (such as the UK Emissions Trading Scheme).

The government uses these values to estimate a monetary value of the greenhouse gas impact of policy proposals during policy design, and also after delivery. [My emphasis].

Am I being unfair to emphasise that these numbers are an estimate? I don’t believe I am, since that’s what they are and are all they ever can be.

By the way, if you feel the need to get lost ever further down the rabbit hole, please feel free to refer to the “Supplementary guidance to Treasury’s Green Book providing government analysts with rules for valuing energy usage and greenhouse gas emissions”, which can be found here.

The key point to note is that the basis on which the “value” of “carbon” is assessed keeps changing. Originally, it appears, the UK adopted a “social cost of carbon” (SCC) approach, but we moved away from this in 2009 to a “target-consistent‟ or “abatement cost” approach. What I find startling about the 2021 document is that it makes it clear that the new values attributed to CO2 costs must be consistent with the UK’s national and international climate commitments:

The new carbon values are based on a Marginal Abatement Cost (MAC) or “target-consistent” valuation approach. This involves setting the value of carbon at the level that is consistent with the level of marginal abatement costs required to reach the targets that the UK has adopted at a UK and international level. This is illustrated, in simplified form, below in Figure 1 which illustrates how a “target-consistent” carbon value would be set. From our understanding of emissions projections and abatement options, we can determine the effort level, A*, that is required in order to meet the UK’s targets. Reading across from the abatement curve produces the corresponding carbon value level.

In other words, the cost attributed to “carbon” is driven entirely by our self-imposed, self-flagellating net zero targets. This is made explicit:

The UK has both domestic and international climate targets. The updated carbon values presented in this publication are intended to be consistent with both targets.

The 2021 document also makes it clear that there is no “correct” number and much disagreement in this field. Referring to Global carbon prices from IPCC Modelling, it notes that as regards the target of avoiding 2C of warming, “there is no consensus on the carbon price signals needed to trigger such transformations, with the exception of prices increasing throughout the end of the century”. Furthermore:

The differences in carbon price trajectories are often driven by either structural differences in modelling approaches (that is, optimisation models v. dynamic recursive models) or by differences in underlying scenario assumptions on the future evolution of socioeconomic factors (that is, population or GDP forecasts). This means that there is no true or unique carbon price trajectory that is perfectly aligned with a given global temperature target. The trajectory will depend on the future uncertain evolution of socioeconomic factors and implementation of mitigation actions.

Finally (for current purposes):

There is a significant range of uncertainty in the carbon values derived from any modelling. The differences in carbon price trajectories are often driven by either structural differences in modelling approaches or by differences in underlying scenario assumptions on future evolution of socioeconomic factors (for example, population or GDP forecasts).

Conclusion

Of course the low-hanging fruit has already been plucked in terms of reducing the UK’s territorial GHG emissions, and the task ahead of us becomes steadily more difficult. Consequently, in 2020 prices, the cost per tonne of CO2 rises steadily (central series estimate) from £241 in 2020, to £264 this year, £302 in 2035, and £378 by 2050. Adopt those made-up numbers (for they are made-up, however scientific the calculation is made to appear) and pretty much all net zero policies instantly become financially justifiable, however ludicrous and expensive they may be.

On the other hand,if the UK were to leave the UN Climate Treaties and repeal the Climate Change Act, then the “cost” of “carbon” would disappear in a puff of smoke. At that point, also disappearing in a puff of smoke would be most of the postulated “savings” achieved by the ZEV mandate. And once those imaginary savings are removed from the equation, we’re basically left with a whopping great bill.

In short, the sub-heading to Jit’s article pretty neatly sums up Government policy in this area: “Think of a number. Any number, as long as it makes the policy look worthwhile”.