Cameron Hepburn

26 September 2009

Financial Times – Trust me – we have a serious carbon credibility problem

Cameron Hepburn

The British government has set a binding carbon emissions target for 2050. It is safe to speculate that the present cabinet will be out of office by then. Meanwhile, the government levies a reduced rate of tax on domestic heating and neither new nuclear power stations nor renewable energy look well placed to meet the UK’s short-term energy needs.

The EU has an emissions trading scheme, and a good idea it is, too. But its reputation took a knock when the price of emissions permits collapsed in 2007 because member states had flooded the market with them. Current allocations are tighter, but the farce could well be repeated in five or 10 years.

One possible solution, mentioned last year in this column, is to create the climate change equivalent of a central bank. An “energy policy committee” could, like the monetary policy committee, use a narrow range of policy tools to meet targets set by parliament. Or like the UK Statistics Authority, it could act as an independent watchdog.

But ad hoc solutions are also possible. The government could auction off long-term carbon price contracts, in effect selling insurance (to the highest bidder) against the prospect that the carbon price collapses. Dieter Helm and Cameron Hepburn, two economists at Oxford University, have proposed an idea along these lines.