The ETS again


I have written several times about the EU’s Emissions Trading Scheme, which I have described as “A dog’s breakfast“.  They’re now trying yet again to “reform” it, so as to set the prices of CO2 emissions permits at the level they first thought of.  I’ve had a number of communications from concerned citizens asking us to help to achieve the desired price.  As frequently happens in these cases, I have drafted a standard reply which will be used by colleagues to respond to similar requests.  I thought it was of sufficient interest to justify publishing.

Dear (name),

Thank you for writing to us about proposed changes to the EU’s ETS system for emissions control.  We appreciate your interest, but we take a rather different view of the matter.

First of all, there is still a lively debate about whether atmospheric CO2 has a material effect on climate, and estimates of “climate sensitivity” range from less than 1oC per doubling of CO2 to 3o+.  Indeed some atmospheric physicists believe that negative feedbacks in the climate system may outweigh positive feedbacks, so the sensitivity could theoretically be negative.

Secondly, even if atmospheric CO2 is a factor, it is by no means clear that man-made emissions (generally estimated at around 3% of the total carbon cycle) have a major effect.  It is entirely possible that the observed increases in atmospheric CO2 over recent decades could be the result of naturally-occurring cyclical changes in mean global temperatures, with the temperature driving the CO2 (out-gassing from the oceans) rather than vice versa.

Thirdly, in assessing the impact of man-made emissions, no account is generally taken of the benefits of higher CO2 levels.  Atmospheric CO2 drives plant growth, bio-mass formation and crop yields, helping to feed a hungry world.  Atmospheric CO2 is, quite literally, greening the planet.

Fourthly, it is open to question whether, even if we wish to reduce CO2 emissions, the ETS is an appropriate system.  As you point out, its impact so far has been derisory, and repeated interventions designed to “reform” it appear to have failed.  It was promoted as “a market mechanism”.  There have been repeated adjustments – and you are now requesting a further adjustment — with the explicit objective of achieving a pre-conceived price level.  But a “market mechanism” that requires repeated regulatory interventions to achieve some pre-conceived price is not, in fact, a market mechanism at all.  It is simply a complex and cumbersome method of imposing what amounts to a carbon tax.  It would be much better in economic terms, much cheaper and simpler, to cut to the chase and apply a straightforward carbon tax (if you want to disincentivise CO2 emissions, which, as noted above, may not be desirable in the first place).

Fifth point: the observed effect of the ETS (with other instruments designed to disincentivise emissions and increase energy costs) is to have a devastating effect on energy prices (and therefore on industrial competitiveness) in the EU.  Across a range of energy-intensive businesses – steel, aluminium, chemicals, petroleum refining, glass, cement, paper — we are forcing plant closures, and driving jobs and investment out of the EU altogether.  While politicians talk of rebuilding manufacturing industry to 20% of EU GDP, we adopt energy policies that have the reverse effect.  As former Industry Commissioner Antonio Tajani put it, “We are creating an Industrial Massacre in Europe”.  Hundreds of thousands of jobs are being lost across the continent.

Sixth: recognising the problem of energy intensive industries, we have created exemptions for them designed to prevent “carbon leakage” (which is an EU euphemism for driving jobs and production off-shore).  These measures are proving insufficient to prevent off-shoring of energy-intensive production.  But they do have the effect of shifting the burden of the ETS primarily onto small and medium enterprises – SMEs – the very businesses we’re told are essential to growth and employment.  This is a perverse consequence.

Finally, the bitterest irony of all.  These energy-intensive businesses often go to jurisdictions with lower environmental standards, and therefore result in higher emissions of CO2 than would be the case if production had remained in the EU.  Anecdotal evidence from the steel industry suggests that a ton of steel made in Shanghai produces double the CO2 that would be produced for the same ton of steel in Sheffield.  A formal study commissioned from Vivid Economics and published by the British government’s DECC (Department of Energy & Climate Change) stated that imported refined petroleum products imply a 35% higher level of emissions than the same products refined in the EU.

So in conclusion, the EU’s emissions policies, including the ETS, are not only undermining our economies but arguably are actually increasing global emissions.  They are totally counter-productive.  For this reason, UKIP will oppose measures designed to raise energy prices, and given the opportunity will seek the repeal of the ETS system.

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Perverse incentives


George Osborne is reportedly looking for £13 billion of savings from government expenditure.  That’s no small potatoes.  As they used to say in the USA, “A billion here, a billion there, and pretty soon you’re talking real money”.  Especially with large spending departments like Health and Education – and Foreign Aid – ring-fenced, this inevitably means huge pressure on the government’s massive welfare budget.

In turn, pundits expect the axe to fall on Gordon Brown’s pet project – tax credits.  Wages too low?  Never mind.  Uncle Gordon will give you a top-up.  This was a very clever policy in two ways.  First, it makes many millions of people effectively clients of the state, and therefore (in the Brown view) more likely to vote Labour.  Second, it is very difficult for the next government to reverse, without being seen (at least by the left) as brutal and heartless and committed to child poverty.

It is also another example of the left’s failure to think a policy through, to analyse the knock-on effects, the perverse incentives, the unintended consequences, the moral hazard.

What Gordon was effectively saying to employers was “Look guys, you can pay really low wages.  Don’t lose any sleep worrying whether your workers can afford a decent breakfast.  There’s no need for you to pay a living wage – the government will top it up”.  In a very real sense, the tax credit is not a benefit to low-paid workers.  It’s a subsidy directed to bad employers.

(An aside – you can see the same effect with the Common Agricultural Policy.  Those clever Tesco buyers know exactly what it costs to grow a ton of wheat, or produce a pint of milk.  And they also know just how much Single Farm Payment each farmer is getting.  They negotiate accordingly.  So what we intended as a subsidy for farmers, which I’m quite comfortable about, becomes a subsidy to Tesco).

But there’s a deeper question on low wages.  How is it that low wages are endemic in the UK?  There’s a basic principle of economics that when there is an excess supply of any product or service, prices fall.  If you get a good harvest, the price of wheat tumbles.  If the world is awash with oil, the price of oil dives.  And if there’s a surplus of unskilled and semi-skilled labour, wages fall – or are compressed and fail to rise.  That’s what we’re seeing now.

And the reason for the glut of labour?  EU Free Movement policies.  With wages in the UK many times higher than those in Bulgaria, or Croatia, or Romania, we’re getting exceptional levels of immigration, which are causing wage compression.  Gordon’s tax credits are, indirectly, subsidising the EU’s free movement policy – another hidden cost of EU membership.

Then there’s productivity.  Economists constantly wring their hands about the UK’s poor productivity record.  But one major factor affecting automation and investment – and therefore productivity – is the availability of cheap labour.  There’s a clear trade-off between labour costs and investment in automation.  Put simply, if labour is cheap, and looks likely to stay cheap, there’s less incentive to invest. I believe that this must be at least a  significant factor behind the UK’s productivity problems.

When we eurosceptics debate against the other side, they often say, dismissively “Oh, you eurosceptics simply blame everything on the EU”.  True.  We often do.  And often, as in this case, we’re right to do so.

We need to leave the EU, to control our borders, control immigration, allow wages to rise to a realistic level, and against that back-drop, start phasing out Gordon’s superficially attractive, but ultimately destructive, tax credits.

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The EU offers no benefits – reform or no reform


                                There really is nothing in the Brussels cupboard

I recently wrote a piece for my newsletter (not yet published) noting that most people involved in the EU debate, including our Prime Minister, seem to make the implicit assumption that if only we could reform the EU, if only we could renegotiate our terms, there is some remaining bed-rock of benefit, some crumb of comfort, some kernel of competitiveness, that will make our EU membership worthwhile, and justify an “IN” vote.  I have argued to the contrary that I see no benefit at all beyond what could be achieved by a free trade deal, and that therefore we should be Better Off Out.

So I was struck by a remarkable essay by Roger Bootle in The Telegraph of Monday June 29th (the 160th anniversary edition, as it happens), in which he argues the case that far from offering benefits, the EU has exercised a damaging and malign influence on the economies of member-states.  Admittedly, he too uses the phrase “without reform, the EU will go on being a poor economic performer”.  But it is clear from his analysis that little or nothing would be left of the EU if the problems he points to were corrected.  It’s a superb piece, and I strongly recommend it – especially to anyone who will be campaigning on the “OUT” side in the referendum.  Indeed, I also commend it to those who plan to support the “IN” side – it may well change their minds.

He points out that “after an initial burst of success, the EU has done relatively badly economically”.  Not only against emerging markets, but also compared with mature economies like the USA, Canada and Australia, and with non-EU European countries like Norway and Switzerland.

He adduces three reasons for this.  First, a “general European malaise” – cultural senility, perhaps – not necessarily attributable to the EU as such.  Second, EU decisions which tend to inhibit economic performance.  And third, the €uro.

Rightly, he leaves the first issue as not directly caused by Brussels.  But the second and third certainly are.

In terms of bad economic decisions, he points first to the CAP, which is hugely wasteful and pushes up the costs of the family shopping basket, as well as (historically) generating huge surpluses, butter mountains and wine lakes.  And he cites over-regulation, which has had a dramatic and malign impact on labour markets, and a host of other areas.  I would add the disaster of the Common Fisheries Policy, and the EU’s energy policies which are (as former Commissioner Antonio Tajani has put it) “creating an industrial massacre in Europe”.

“The €uro is a deliberate exercise in economic self-harm”.

Then of course, his third point is the €uro.  With Greece in meltdown, I need hardly say more – except for one point.  We are inclined in the UK to congratulate ourselves (or to congratulate Gordon Brown) for staying out of the €uro.  Nothing to do with us, Guv.  But of course it affects us enormously.  It simply isn’t true (as the Europhiles love to tell us) that 50% of UK exports go to the EU, less still to the Eurozone.  But it is still (for the moment) our biggest single export market, and the single currency, this deliberate policy of economic self-harm, has certainly had a depressing effect on our economy too.

So the message is clear: it simply isn’t the case that the EU would be a good thing if only we could achieve a few reforms.  It simply isn’t true (as the government used to say) that “The benefits of EU membership are self-evident”.  It is a bad thing all the way through.  There’d be no residue of benefit when we reformed it – even if that were possible.  It is becoming clearer by the day – we shall be Better Off Out.

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The Writing on the Wall


Recently I was dining in London with a group that included a very prominent and well-known political and economic pundit – I shall not mention his name (he may also wish to write about the exchange we had). But let’s call him Fred.

Fred suddenly offered a striking aperçu. “I don’t know why you guys (UKIP) work so hard to leave the EU. You just have to wait, and it will break up by itself”. “All very well, Fred” I replied, “But I’d like to see us out in five years, not fifty years”. (I could have added that I hope to be a free citizen of an independent country in my lifetime). Then after a brief pause, a question struck me. “So what’s your view, Fred? How long before the collapse comes?”.

Fred’s reply was fascinating. He pointed out that we’d just been through a very severe recession, and were now enjoying a modest recovery. But (he added) economies are cyclical. Give it three or four years, and in the normal course of events there’ll be a cyclical downturn. Countries like Greece, Portugal, Spain and Italy will go into that recession with historically high unemployment, and burdened by massive debt. The €uro crisis will become a catastrophe.

Fred reminded us that anti-austerity, anti-€uro parties are proliferating.. It’s not just Syriza in Greece. There’s Podemos in Spain, the NF in France. I could add UKIP in the UK, although our solution to austerity is growth and prosperity, unlike the aforementioned parties who want to rely on borrowing, spending and debt. And UKIP is certainly anti-€uro.

So in Fred’s view, it’s nearer five years than fifty. Mind you I don’t for a moment suggest that we should sit back and wait for the EU’s dissolution. I am becoming much more hopeful regarding the outcome of the UK referendum. A few weeks back, I thought the odds were we should lose. But since then, there have been encouraging developments.

Cameron’s poverty of ambition has been exposed. The concessions he’s seeking from his renegotiation would not be sufficient to stay in, even if he achieved all of them – and that’s unlikely. Various groups, notably Business for Britain and Conservatives for Britain, have set out negotiating demands that would absolutely require Treaty change, and will clearly not be met. I foresee Cameron coming back with derisory concessions, which will turn the tide of public opinion against membership.

I’m encouraged that business groups are emerging on the OUT side. I’m encouraged at the apparent willingness of most on the OUT side to work together, without sniping at each other over precedence. The signs are good.

A majority of the public today say that they’d vote “to stay in a reformed EU”, even though we know that material reform is off the table. But this view contains an implicit assumption that somewhere under the EU’s absurd bureaucracy and regulation and interference, there’s a bed-rock of benefit. So, what benefit?

If the EU were simply a Free Trade Area, I’d be all for it. But it’s not even a free trade area. It’s an old-fashioned Customs Union, overlaid with massive, excessive and vastly expensive regulation. There’s no bed-rock of benefit to save. Outside the EU, we’d still be free to trade with Europe. We’d still be a hugely attractive destination for inward investment – indeed more attractive, with lower energy prices, more realistic regulation and, eventually, lower taxes. We would still be free to negotiate and cooperate with our friends in Europe – but from a position of independence and strength, no longer subject to the dictates of anti-democratic, unrepresentative and technocratic institutions.

There’s all to play for. For my part, this has been the primary objective of my political career. Let’s go for it.

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Wind Power Hits Grid Parity! …or maybe not…

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For many years, the Holy Grail of renewables has been to hit “Grid Parity” – in other words, to generate energy so cheaply that it’s directly competitive with conventional generation, and so would require no subsidy.  It would stand on its own feet.  And let me be clear – UKIP’s rooted objection to renewables is based not on ideology, but on economics.  We’d be happy to support genuinely competitive renewables.  Indeed we do, in the case of hydro.  But of course with the caveat that the renewable technology should not do unacceptable damage to the environment in terms of landscape, visual intrusion, and the decimation of birds and bats.

We believe that solar will indeed achieve grid parity in the next few years – it’s probably there already if you put your panels in the Sahara Desert – but we’d rather they were not put on good agricultural land in our dull Northern climes, where sunlight is rarer.  But now – believe it or not – the wind industry is claiming grid parity (see photo above).  Do their claims stand up to scrutiny?  Sadly, no.

Of course these claims all depend on the definition and calculation of ‘grid parity’. If your definition is incomplete, and your calculation dodgy, then the conclusions are likely to be misleading. What people want to know is whether this or that renewable energy is as cheap to consumers as energy from our sources. Unsurprisingly, it turns out that many claims to ‘grid parity’ are so defined or calculated that they don’t in fact show that the energy is fundamentally economic. One definition may exclude electricity grid operation costs, which are very high for most renewables, another may load the costs of fossil fuels with rather arbitrary assumptions about climate change costs. The devil is in the detail.

The source for the Global Wind Energy Council (GWEC) advert poster is this statement:   The report to which it refers is in fact published by the International Renewable Energy Agency (IRENA).

Unfortunately, the wind industry is very secretive about the capital costs of its equipment, while the installation costs vary from country to country depending on labour costs, and the system management costs are a complex area and too little studied. Furthermore, performance varies a great deal from location to location and declines over time.  So the cost of wind power, and renewables generally, is both opaque, and variable from place to place.

Several points need to be made about the IRENA report.

The IRENA study uses the Levellised Cost of Electricity (LCOE) method that is notoriously inappropriate for uncontrollable generators such as wind power (and solar). The cost of delivering the electricity to consumers is so high that the appearance of competitiveness with fossil fuels evaporates if the extra costs are taken in to account. In fact, in the UK it would seem that even if the LCOE cost were zero, the additional system costs would still make wind energy more expensive than energy from conventional sources.

These studies often go on to add “the costs of climate change” to the price of fossil fuel electricity. This is largely arbitrary, since estimates of the social cost of carbon are almost as contentious as climate change itself.  Indeed (separate point) the presumed “social cost” of CO2, sometimes described as “an externality”, is at the heart of specious claims that “subsidies for fossil fuels exceed subsidies for renewables”.  The estimates of “externalities” are real finger-in-the-air stuff.  Indeed it is arguable that the externalities of atmospheric CO2 are positive.  It drives plant growth, bio-mass formation and crop yields.  It helps feed a hungry world.  It is, quite literally and visibly, greening the planet.

One critical aspect which the wind industry studiously ignores in its claims for grid parity are the costs of conventional back-up and the inefficiency exported by intermittent renewables to the back-up (typically gas).  Because wind is variable, the back-up must run intermittently and variably to complement the wind.  (Note that you have double the capital costs – you pay for wind capacity and back-up capacity).  But a gas plant run intermittently is inefficient.  It burns more gas and emits more CO2 per unit of output than it would if it were run properly.

If you want proof of this proposition, it lies in the “Capacity Payments” to operators of back-up plants.  They would simply not be viable run intermittently, so they need yet another subsidy (in addition to the existing multi-layered subsidies for landowners and wind operators).

So maybe these claims of grid parity need to be taken with a pinch of salt.  And we’ll ask the Killer Question: If they’ve achieved Grid Parity, why is the industry making such a song and dance about the proposed withdrawal of on-shore wind subsidies proposed by the present UK government?

In fact, the GWEC poster is cynical spin, and has little foundation, which raises the further question: Why, after decades of subsidies, are these technologies still not fundamentally competitive?  Perhaps it’s time to stop the subsidies.  Real world market pressure would concentrate minds, and make them focus on reducing costs, rather spraying consumer funds all over the streets of Brussels in the form of expensive advertising campaigns that don’t stand up to scrutiny.

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Letter to the Commissioner


Elzbieta Bienkowska

Dear Commissioner,

I have just read your letter to ITRE Chairman Jerzy Buzek MEP on the subject of the EU’s industrial competitiveness, and I am sorry to say that it left me profoundly depressed – though not quite so depressed as I daresay the Chief Executives of companies across my East Midlands region would feel, had they been obliged to read your pages of bureaucratic verbiage with little substantive content.

It seems to me that there are two major issues.  You mention both, at various points, but you present no significant ideas for serious change.

The first is energy.  As former Industry Commissioner Antonio Tajani put it, “We are creating an Industrial Massacre in Europe (with energy prices)”.  Plants are closing, jobs are lost, investment is being forced out of Europe in a range of energy-intensive businesses, including steel, aluminium, glass, cement, chemicals and petroleum refining.  The extent of plant closures and job losses is alarming, and the effect on imports and balance of payments is dire.

This is happening because of our obsessive commitment to unreliable and intermittent renewable technologies, and our failure to rely on proven low-cost technologies like gas.  I see nothing in your letter that addresses this issue.

Then there is the issue of deregulation.  Our economy and our industries are grossly overregulated.  There are various estimates of the costs of excessive regulation but one estimate, not untypical, from a former Industry Commissioner put the figure at around 5.5% of GDP.  This is unacceptable.  Pious aspirations for “better regulation” will not do the job.  We need a major campaign of de-regulation – removing unnecessary and failing regulation, analysing costs and benefits, retiring regulations that are failing to deliver and reducing the scope of those which impact too widely.

Thirdly, we need a sense of urgency.  This, again, was something that I felt was missing from the boiler-plate text of your letter, which appeared to have been cut-and-pasted from a thousand similar documents.

Commissioner, in this early stage of your appointment, you have a real opportunity to transform the competitiveness of European industry – not by new or “better” regulation, but by cutting both energy prices and the regulatory burden.  As a prominent American commentator put it, “We don’t need to teach the grass to grow – we just have to get the rocks off the lawn”.

Yours faithfully,


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And another big lie!

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I heard it again on the Radio today (June 22nd, as I write).  The Today Programme, in fact.  A journalist was interviewing a Spokesman for Business for Britain, and he said: “But businessmen are constantly telling me that if we leave the EU, we’ll still have to obey EU rules”.

This is nonsense, and I suspect that many of those who say it – especially the politicians – know full well that it’s nonsense.  In a piece of very deceitful sleight-of-hand, they’re conflating two quite separate things – on the one hand, country-specific product specs, and on the other, broad-based EU regulations.

I spent thirty years in international businesses, so I know a bit about international trade.  If you want to sell a tractor to India, or a car to Singapore, or an air-conditioner to the USA, then of course you must ensure that your product meets the local country specs.  If we want to sell any product to an EU member state, after Brexit, we’ll have to make sure that it meets EU specs (just as we do now).  That’s just a commonplace of international trade, and it applies to all export destinations.

What will not apply, after Brexit, is the vast mountain of excessive and expensive EU regulation which covers not just EU exports but most aspects of most businesses.  Let’s look at some examples:

Employment law: Much of the EU’s employment laws are well-intended, and designed to protect workers.  But their effect is to damage the economy, suppress growth, and cost jobs.  Yes, we want worker protection, but we don’t need to go over the top as the EU does.  We want our opt-out from the Social Chapter back (and a great deal more).

Product registration: The REACH directive alone has applied vast and unnecessary costs to industry, especially the chemical industry.  We can ensure safety of chemicals without the EU’s over-kill.

Taxation: We shall be free of the threat of the EU’s creeping tax harmonisation.  They’re already asking for a common corporate tax base.  Common corporate tax rates will be next – never mind the damaging proposals for bank regulation and a financial transfer tax.

Immigration: We shall be able to control our borders, and admit (for example) highly qualified Commonwealth immigrants, rather than unskilled Eastern Europeans.

Energy: EU energy policy is forcing up prices and driving plants, jobs and investment out of Britain and out of Europe.  After Brexit, we will still have a battle to persuade our own parliament to be more realistic – but at least we have the opportunity to decide for ourselves.

Agriculture: We shall have a farm support régime designed in Britain for British farmers, not one designed in Brussels for French farmers.  More support, less red tape.

Fisheries: We’ll reclaim our territorial waters under international law, and re-establish our fishing industry.

Suddenly, these vast swathes of policy and regulation will be decided by our elected representatives, not by unelected, unaccountable and unresponsive technocratic institution in Brussels.

Consider: The biggest suppliers of goods to the EU are China, Russia and the USA.  Do they observe EU specs on exports to the EU.  Yes.  Do they apply EU rules to every aspect of their economies?  The hell they do.

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