Paying for climate policy: The case for long-term public borrowing

Ed Miliband's dramatic pledge to freeze energy prices at the Labour party conference this year was a simple, and so far popular, move. But underneath it lies a complex dilemma for the left on climate policy. In the mid-2000s, a wave of public concern about climate change led centre-left politicians across Europe to the view that a deeper green agenda could revive interest in progressive politics. In the UK's Labour party, the clearest proponents of this new approach were David and Ed Miliband, during their respective spells at Defra and the DECC. Climate change was embraced as an issue by progressive parties partly because it fitted well into a wider narrative about cosmopolitanism and internationalism. On the continent, social democratic parties formed a number of 'red-green' coalitions with green parties, putting forward bold targets and policies on energy and transport. However, following the financial crisis and with the long economic depression, there was an increasing realisation that parts of electorates that were crucial to the centre-left vote did not feel that they had benefited from the cosmopolitan agenda. Climate policy has increasingly become ever more difficult for progressives.1

Cost, especially the cost of energy, is at the heart of the challenge. Low-carbon energy, including nuclear power, remains more expensive at present than conventional sources such as coal and gas. This is due to a number of reasons, often beyond the cost of the technology itself such as the difficulties of getting onshore wind farms through the planning system. The unit costs of some renewable energy technologies are falling, but the government still puts the additional costs of building a low-carbon energy system at around £40 billion (in 2012 prices) between now and 2020.2

The conventional approach to financing climate policies is to allow energy companies to pass these costs through to energy consumers, where they appear as an item on bills. This approach is highly regressive. In part, this is because such levies on bills are a form of consumption tax (and indeed is treated as such by the Treasury). But it is also because poorer consumers tend to pay more per unit of energy since they are much more likely to be on higher-tariff prepayment meters, and so effectively pay a disproportionate amount of this tax.3 Successive governments have argued that the costs of greening the energy system would be largely offset by policies to improve energy efficiency, which will protect the vulnerable. However, this account rests on the assumption that energy efficiency programmes will be able to successfully target poorer households. The experience of previous programmes suggests that this is actually quite difficult, and independent analyses contest the assumptions of the current government.4

The wider context is of course a sharp rise in the costs of conventional high-carbon energy. The price of Brent crude oil doubled between 1998 and 2008, and both gas and coal followed suit. At the margin this may help the economics of specific low-carbon projects, but it makes the overall politics much more contentious. Perceptions are important. The renewables industry has pointed out that the costs of technologies like wind contributes relatively little to increased energy costs,5 but the fact that they do exacerbate the burden facing households at all, and that they are likely to rise to more significant levels by 2020, still gives plenty of grist to the critics' mill.

By contrast with energy costs, while climate change is still of concern to most people it has relatively low salience, being largely what Anthony Giddens calls a 'back-of-the-mind worry'.6 The wave of public interest in the issue in the mid-2000s has now passed, whereas energy costs have become increasingly salient over the last decade, not only because of sharply rising prices but also because of the stagnation and then decline of wages for the 'squeezed middle'.7 It is concerns such as these that have, for example, driven Ed Balls to call for a freezing of fuel duty rises, George Osborne to deliver such a freeze and, now, Ed Miliband to commit to an energy price freeze. This is not a uniquely British problem - there are currently major debates in Germany about the costs of renewable energy - but it is exacerbated in Britain by the fact that income and wealth are now so very unequally distributed, and by the large number of households on low incomes.

So overall, it is not at all clear that it is a good strategy for progressive politicians to be promoting policies that at one and the same time have a regressive effect in the short term and are politically unpopular with the constituency that they must appeal to in order to win power.

Are there alternatives? One approach is to try to change fundamental values, and make people 'greener' in outlook, through measures such as banning advertising aimed at children.8 It is not certain whether this is a realistic proposition, but if even if it is, it a generational project, not one for the next few years. A more tactical idea is to try to reframe the issue as one of 'green growth' or 'low-carbon jobs', effectively recasting green energy policy costs as the costs of industrial policy. This may indeed work for certain parts of the country (for example, the North East, where offshore wind is providing a local boom), but has not so far been convincing at a national level.

A more radical alternative is to step outside of the box of assuming that low-carbon energy policies must be financed by passing their costs through to consumers. Why not rethink the way we finance green energy investments? In the wake of Ed Miliband's energy price freeze pledge, the chief executive of the energy giant E.ON has argued for shifting this burden from consumers to taxpayers.9 However, even this idea remains more regressive and has less logic than the proposal I put forward here - using long-term public borrowing to finance investment in reducing greenhouse gas emissions.

The American economist Duncan Foley has put forward a theoretical argument for this approach.10 His starting point is that climate change is a negative externality, so correcting it must improve social welfare relative to the situation in which we take no action. As long as the costs of policy do not exceed the damage that happens if we do nothing (which is the core argument of the Stern Review) then acting on climate change should provide a net benefit to humanity as a whole over time, not a net cost. Foley points out that future generations will be better off if we mitigate climate change now, and that with the right compensating measures, the current generation can also do this without lower consumption. The costs of mitigation lie mainly in the form of having to invest in more expensive green infrastructure. Under current policy approaches, that cost falls on today's consumers, whereas most of the benefits will accrue to future generations. Foley's argument is that future generations should be willing to pay for avoiding global warming up to the point that the benefits for them outweigh the costs. In practical terms this means borrowing from future generations to pay all or part of the additional costs of green policies now, rather than reducing consumption.

A more intuitive way of seeing this is via the argument, often made by right-wing commentators, that accruing public debt is morally wrong because it burdens future generations who will have to repay that debt. It is true that incurring more debt now means an additional burden of repayment for some later on. But if we refuse to borrow now in order to green our infrastructure, future generations will have to bear the burden of an unliveable climate, unless we make the unrealistic assumption that they will be able to easily use their wealth to put things right at that later date. If we instead make the more reasonable assumption that people will in future be willing, up to a point, to have a higher financial debt legacy in return for a less damaging environmental one, then we should certainly borrow more now to deliver a sustainable world. Another analogy might be drawn with paying for the costs of the second world war: political leaders then implicitly assumed that future generations would be happy to pick up the bill in order to live free from tyranny. This left a legacy of a government debt stock of around 250 per cent of GDP, but this was dealt with by postwar growth (and inflation in the 1970s), and no one subsequently questioned whether this was money well spent.11

Shifting the burden of mitigation costs onto future generations still involves distributional issues. Nevertheless, the effects are still likely to be less regressive than the current policy of paying for mitigation via energy bills, since the tax system overall is much more progressive than this kind of consumption tax.

This approach should not be a substitute for carbon pricing, since it is still important to send the right relative price signals, but it would be appropriate for R&D and support costs for new low carbon technologies such as offshore wind or electric vehicles - not only because of their environmental effects, but also because scaling-up these technologies now should bring down their costs and provide additional benefits to future generations.12

Borrowing from future generations to pay for the mitigation of climate change means long-term public borrowing. Private sector debt typically needs to be repaid completely in 10 years or less - a relatively short period from a climate change point of view - and will also cost more than public sector debt. It is also important to be clear that the proposal put forward here is distinct from the argument that infrastructure should be financed by the government with debt repaid from infrastructure user charges.13 Here the point is precisely that the burden of repayment should be shifted onto taxpayers in the more distant future, not infrastructure users over the next 10 to 15 years.

The most difficult challenge for the approach proposed here is that while, in principle, future generations may be willing to pay something for action on mitigation today, we actually have no way of knowing how much they would be willing to pay (and therefore how much it is valid to borrow now) in practice.14 In theory, this sum would be determined by the point at which the marginal value, aggregated in some way, placed on a better climate by future generations was equal to the marginal value placed on avoiding having the additional national debt. While the methodological problems of aggregation are severe, they are also irrelevant, because we have no way of knowing how people in future will think about these issues.

However, such objections may not be so important in practical policy terms, simply because the additions to the UK's debt are likely to be marginal. Take the example of the additional costs of a low-carbon energy system, noted above. This is likely to be one of the largest components of the costs of decarbonising the economy. The Treasury has set a financial envelope for the total costs of investment in low carbon energy, known as the Levy Control Framework (LCF).15 Rising from £2.35 billion in 2012, this will be £7.6 billion in 2020 (in 2012 prices), and over the whole period to the end of the decade will be of the order of £40 billion, or around £5 billion a year on average. Under current policy, all of this cost will be spread across consumer bills. Assume that it is instead covered by public borrowing. With public sector debt standing at approximately £1,350 billion at the end of 2012, an additional £5 billion a year would mean adding some 0.4 per cent to the stock of debt per year. The government can currently borrow for a 30-year period at a rate of around 3 per cent, implying a debt service of some £150 million a year. This is equivalent to 0.34 per cent of current public debt servicing cost, or 0.1 per cent of the deficit. These calculations are rough, as they do not take into account movements in debt totals and the exact scale-up of the LCF, but they give a clear indication of the order of magnitude.

Finally, what about the politics? It is true that, while the politics of piling decarbonisation costs onto energy bills may be hard, the politics of adding to public debt has also been hard since 2009, and especially so for Labour. When I put this idea forward in a workshop with Ed Miliband in 2009 it was dismissed out of hand. But three years of austerity under the coalition government (and across Europe) with poor results have started to undermine that consensus. The range of those arguing for publicly funded investment as stimulus has expanded to include even the International Monetary Fund.

Beyond the short-term context there are, of course, several serious structural dilemmas facing the management of public finances, including ageing populations and ever-increasing demands on the health service, and it might be argued that one should be cautious about further adding to these pressures. However, at a very basic level, the underlying political case for a new approach to funding climate policy is surely strong and simple. Borrowing to invest now in order to provide a liveable world for our children and grandchildren is surely responsible borrowing, much more so than borrowing for almost any other purpose. If public borrowing is not for addressing the biggest intra-generational public goods problem that we face, then what is it for?

Notes:

1 Kr?nig J (2010) Regrets, they've had a few: where now for climate politics? London: Policy Network, http://www.policy-network.net/publications_detail.aspx?ID=3680; Dhian Ho M and Cuperus R (2011) Social democratic internationalism beyond the comfort zone, London: Policy Network, http://www.policy-network.net/articles/4087/Social-democratic-internationalism-beyond-the-comfort-zone.^back

2 https://www.gov.uk/government/news/government-agreement-on-energy-policy-sends-clear-durable-signal-to-investors.^back

3 Preston I, White V and Guertler P (2010) Distributional Impacts of UK Climate Policies, Bristol: Centre for Sustainable Energy. http://www.cse.org.uk/downloads/file/distributional_impacts_of_UK_climate_change_policies_june_2010.pdf.^back

4 Department of Energy and Climate Change (2010a) Estimated impacts of energy and climate change policies on energy prices and bills, London: DECC; Preston et al (2010). ^back

5 'Fair wind for renewables as new figures show cost of wind is just over 3p a day per household', press release, 22 March 2013, RenewableUK. http://www.renewableuk.com/en/news/press-releases.cfm/2013-03-22-fair-wind-for-renewables-as-new-figures-show-cost-of-wind-is-just-over-3p-a-day-per-household.^back

6 Giddens A (2008) The Politics of Climate Change, Cambridge: Polity Press. For an analysis of the salience of climate change see: Lockwood M (2013) 'The political sustainability of the 2008 Climate Change Act', IGov working paper 13-02, Exeter: University of Exeter; and Carter N (2008) 'Combatting climate change in the UK: challenges and obstacles, Political Quarterly 79.2: 94-105. ^back

7 Whittaker M (2013) Squeezed Britain 2013, London: Resolution Foundation. http://www.resolutionfoundation.org/media/media/downloads/Resolution-Foundation-Squeezed-Britain-2013_1.pdf. Not surprisingly, perhaps, more people now prefer to say that they do not believe that global warming is actually occurring, up from only 7 per cent in 2008 to 28 per cent in 2013 (http://ukpollingreport.co.uk/blog/archives/7222). ^back

8 Crompton T (2010) Common Cause: The Case for Working with our Cultural Values, Godalming: World Wide Fund for Nature. http://assets.wwf.org.uk/downloads/common_cause_report.pdf.^back

9 http://www.telegraph.co.uk/finance/newsbysector/energy/10334496/E.ON-blames-governments-for-high-energy-bills.html.^back

10 Foley D (2007) 'The economic fundamentals of global warming', working paper 2007-12-044, Santa Fe Institute, http://www.santafe.edu/media/workingpapers/07-12-044.pdf. See also the arguments made by Matthew Rendall in 'Climate change and the threat of disaster: the moral case for taking out insurance at our grandchildren's expense', Political Studies 59(4): 884-99. ^back

11 I am grateful to Julian Morgan for suggesting this analogy. ^back

12 There is considerable debate about the best form of policy to bring down those costs, for example supporting R&D versus supporting deployment to realise learning-by-doing and scale effects. While important, that debate is not relevant here, since the question is how to fund low-carbon technology development in whatever form it might take. ^back

13 Holtham G (2011) 'Essential investment requires state enterprise' in W Straw (ed) Going for Growth, London: Left Foot Forward/IPPR/Friedrich Ebert Stiftung. http://www.ippr.org/images/media/files/publication/2011/07/going-for-growth_Feb2011_1826.pdf.^back

14 I am grateful to Dmitri Zenghelis for pointing this out. ^back

15 HM Treasury (2011) Control framework for DECC levy-funded spending, London: HM Treasury. http://hm-treasury.gov.uk/d/control_framework_decc250311.pdf.^back