It seemed to me that, leading up to the worldwide economic recession, climate change was building up to a critical mass of public exposure and concern. A large and increasing quantity of airtime and newspaper coverage was helping propel this topic into the mainstream of public attention. Perhaps, when the good times were rolling, we had the luxury of caring about things above and beyond the basic human needs of providing food and shelter for our families. It has been proven empirically that as a Nations Gross Domestic Product increases past a certain point, so too does a desire to live in a clean and unpolluted environment (see Environmental Kuznets Curve).
Since 2008, with the recession in full swing, the debate regarding Climate Change took a back seat to “more important”(read more short term) fundamental issues. Public concern about the environment fell off dramatically leading to lower levels of media and political attention. Politicians in developed nations were all for installing ambitious targets and legislation to reduce greenhouse gas emissions when the times were good and capital was plentiful. Now that Sovereign Debt is a major issue in most Western economies, politicians are being asked to quickly reduce their nation’s budget deficits leading to some tough decisions that are needed. In the UK, some departments are facing 40% funding decreases and are being asked to do more with less. Added to this, the developed economies have not nearly recovered as fast as those in emerging markets leading to a very weak and fragile recovery. Asking companies to invest more money into cleaner technologies and reduce their carbon footprints may have seemed like a good idea before the recession but now are being perceived as potential recovery busters. The last thing the UK Government will want to do is damage the economy’s chances of a speedy recovery so some of these potential climate change orientated measures are coming under greater scrutiny.
With less money available to reach the same carbon budgets that were written into legislation before the recession, the UK Government has to ensure its getting the most return for capital invested as possible. In carbon terms, the terminology of choice here is Marginal Abatement Costs (MAC). What these costs equate to is the value of the investment needed to reduce a tonne of CO2 from being emitted as a result of an activity. Now the bad news for Electric and Plug in Hybrid Vehicles is that their associated MACs are much higher than those associated with power generation and a host of other potential industries (see illustration). A big piece of research recently conducted concerning the Economics of Climate Change was conducted by Lord Stern (see the Stern Review) specifically recommended that the UK Government should attempt to combat climate change using the cheapest methods possible in order to limit the impact onto the economy. With this in mind, it seems that the UK Government should be looking to power generation as the best possible industry to reduce carbon emissions from.
Now there are some problems with thinking of things simply in terms of MACs. Firstly it encourages politicians and decision makers to think of things in only one dimension without considering other important angles. Cost is only one element of project appraisal. Secondly it tempts politicians and decision markers to place all their eggs in one basket attempting to maximise their return. As any prudent financier will tell you, diversification in any portfolio is key to reduce the level of risk you’re being exposed to. Thirdly MACs are dynamic and so politicians and decision markets should be made aware that projects that may seem expensive now could turn profitable in the future. In some situations, initial investment at a lost will be needed to develop the market and the technologies.
In the case of LEVs, the UK Government is going to subsidize, at least for one year, a £5000 incentive grant for BEV/PHEV buyers alongside preferential loan agreements with some automotive manufactures to help them build these cars. The UK Government is also investing money into research, development and demonstration projects across the country alongside installing charging infrastructure in urban areas. These projects could be in danger of having their funding cut or outright removed in the coming age of fiscal austerity. I am by no means advocating the UK Government to wholeheartedly endorse LEVs and the associated public funding, but that they should consider all dimensions when making a decision on this topic. So long as the appraisal process is inclusive and transparent then I will support whatever decision comes at the end of it. Perhaps it will be the case that LEVs are less actively backed by the government in favour of projects with more immediate carbon returns but I wouldn’t be surprised if, once the Government looks into it in detail, they think putting the money into developing a low carbon transport future now will pay high returns in the future.
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