Good morning from New Economy Brief.
In the words of Joss Garman (Director of the European Climate Foundation), decarbonisation has become “the dominant question in British politics” and this week, the Prime Minister is keen to tell us which side he’s on. The PM kicked off the Government’s ‘Energy Week’ on Monday by giving the green light to hundreds of new oil and gas licences. This followed a weekend in which he branded himself as on the “side” of motorists.
What is the logic here? Time and time again, polls show that the British public is growing increasingly concerned about the climate crisis. But there’s a caveat - polls also show that voters only back Net Zero policies when it doesn’t cost them too much. The government’s answer is to talk the language of cleaner energy, while simultaneously trying to draw a dividing line with Labour on energy security. How do they square that circle? Carbon capture and storage. By capturing the carbon dioxide that is released in the process of using fossil fuels, then storing it back in the ground, the Government argues that you can have your Net Zero cake and eat it. But is it all too good to be true?
This week, we take a look at the political debate around decarbonisation and whether carbon capture is the silver bullet the Government claims it to be.
What actually is carbon capture? Carbon capture and storage (CCS) is often promoted as a useful tool to mitigate the use of fossil fuels during the transition to more renewable energy sources and is seen by some as a vital part of Net Zero strategy. It encompasses a range of technologies which take two basic forms. One type of CCS relies on human-made processes to capture carbon and store it deep underground. This may involve giant air filters to capture CO2 directly from the atmosphere or pre-combustion methods which separate CO2 from hydrogen before fuel is burnt. Once the carbon is captured, it must then be stored. This may involve the use of saline aquifers: underground formations of sedimentary rock filled with salt water that are injected with CO2 to be stored permanently. The other main type of CCS involves taking advantage of nature’s capacity to absorb CO2, using ‘carbon sinks’ such as forests and wetlands to remove CO2 from the atmosphere. Sometimes, the use of natural materials is taken one step further, using a technology called bioenergy with CCS (BECCS). More on this later…
Can we transition without CCS? Obviously, less reliance on CCS means more reliance on other technologies or major shifts in behaviour. As part of the Paris Agreement, Integrated Assessment Model scenarios “with low or no CCS deployment require considerable increases in energy efficiency and near-term rapid fall in energy demand”. Reducing energy demand or increasing efficiency obviously require huge investment and behavioural change to have as effective an impact as possible. According to the think tank Ember, reaching “clean power” by 2030 means adding 90GW of wind and solar in the next 8 years. Currently, wind and solar have a combined total installed capacity of 42GW. Bridging that gap requires a lot of investment. However, many argue that investment in renewable energy is more cost effective and more efficient than investment in carbon capture which, as we’ve explored, has had limited proven success so far. According to research by Nature Energy, even moderately efficient renewable locations (e.g. for wind and solar power) “provide a better energy return than the majority of carbon capture technologies”.
So what does this all mean? The announcement of this week should be seen as primarily driven by politics, and the attempt by the government to create a dividing line on climate that positions themselves on the side of energy security and lower bills. Whether it will work or not remains to be seen, but whatever the political situation after the next election the debate about which technologies to pursue in the green transition is unlikely to go away. If victorious next year, the Labour Party will inherit the same “dominant question” of our times - decarbonisation - and will have to decide how it answers it. As the PM positions himself firmly on one side of the debate, Sir Keir Starmer will have to decide whether to join him or to take a different approach.
ECB implements a form of ‘tiered reserves’. The European Central Bank is scrapping the interest rates it pays out on money held by commercial banks in a move towards a ‘tiered reserve’ system, saving the ECB from paying out $6bn to commercial banks. The New Economics Foundation outlines the case for a tiered reserve monetary policy framework in the UK and have warned that HM Treasury will have to pay for over £150bn to service higher interest on debts owed to commercial banks.
Insulating households from higher borrowing costs. Only 11% of US household debt is affected by the rise in their central bank’s interest rate, leaving most debtors insulated from higher borrowing costs. Investor and writer Charlie Bilello explains that most Americans mortgages, student loans and other forms of credit are on existing fixed rate schemes.
Energy firms pricing power. Energy companies have continued to post record profits over the summer. For instance, Common Wealth calculated that BP distributed $3.3 billion to their shareholders through share buybacks and dividends in Q3 2023, 17 times more than they invested in “low-carbon” in Q2 ($190m). The Institute for Public Policy Research’s George Dibb and the New Economics Foundation’s Jeevun Sandher spoke to the Independent’s Tara Cobham to explain how profiteering still occurs in the energy sector due to “a combination of lack of regulatory oversight, little competition within the sector, and an energy price cap that companies are reluctant to go under”.
The Fiona Scott Morton Affair. A prominent US economist, previously head of anti-trust policy under the Obama administration, has been the subject of political controversy after the European Commission had announced she would become their next Chief Competition Economist. Critics argued that her background in consulting for “a variety of large corporations” and Big-Tech firms would lead to conflicts of interest in the role.
Regulatory capture in EU competition policy. The Time’s Mehreen Khan argues “The Scott Morton furore should not have been a victory for the EU’s parochial anti-Americanism, but a chance for authorities to safeguard the merger process from big businesses that use economists as hired guns.” The Balanced Economy Project has a deep dive into the debate it has opened up about competition policy and the growing problem of ‘revolving doors’ in lobbying and economic consultancy. (Read our previous explainer on New Competition Policy emerging in the US and EU.)
Welfare reform. The Institute for Public Policy Research has released a new report calling for an overhaul of the social security system, co-produced with The University of York, Abdrn Financial Fairness Trust and 100+ parents and carers with lived experience of Universal Credit. They found 7.6% of those expected to carry out full-time job search are having financial support withdrawn and call for removing the threat of sanctions.
The political case for tax and spend. Oxford economist Simon Wren-Lewis outlines the political and fiscal case for Labour to increase spending and taxes in their first Budget: “It will take time for the benefits of higher public spending to be seen in lower waiting times and better staff retention, so the sooner Labour starts the better.” He outlines “obvious tax increases that can be made that will impact mainly on the well off”, as well as a “strong political argument for going beyond these, and to raise taxes that are paid by much larger numbers of people.”
Lost revenue to tax havens. Tax Justice Network have calculated that governments across the world are set to lose nearly $5tn in tax revenue over the next 10 years due to multinational corporations and wealthy individuals using tax havens to underpay tax. They are urging countries to support moving leadership on global tax from the OECD to the UN, “where global membership, public transparency and the UN’s human rights legal frameworks and technical expertise can provide a more viable forum for securing effective tax solutions.”