Green plan a recipe for fudge and confusion in economic policy


OPINION: Recent green stimulus proposals from Comhar ignore public finance crisis and promote uncosted objectives, writes COLM McCARTHY

ANY POLICY proposal that offers an employment stimulus, cuts to emissions of greenhouse gases and a lessening of social exclusion, all at no apparent cost to the public finances, deserves attention.

Comhar, the Sustainable Development Council, released a document a week ago proposing a stimulus package to last for two to three years targeted at “green” investments and costing 2 per cent of GDP, more than €3 billion per annum. The declared objectives include:

reviving the Irish economy through building an innovative, low-carbon and resource-efficient society;

protecting ecosystems and biodiversity while reducing fossil fuel dependency;

providing for greater social inclusion through stimulating new green jobs and reducing fuel poverty.

Investments would include expenditures additional to those already under way designed to upgrade energy efficiency in the building stock, expand renewable electricity generation, and extend the national grid to accommodate more renewable capacity. The programme would be financed through the earmarking of revenues from a carbon tax, from the sale of carbon emission allowances currently free, as well as through the sale of “green” bonds and the conversion of Anglo Irish into a “green” bank.

Irish targets for wind penetration are well above EU requirements and exceed levels actually achieved, or even contemplated, in other countries. Wind turbines are costly to construct and currently enjoy direct and indirect State guarantees and subsidies. The dispersed wind resource cannot be reached without additional, and expensive, grid investment.

Energy demand in Ireland has weakened over the last two years and boom-time projections for future requirements of both power generation and grid capacity are no longer plausible. Last June, the Irish Academy of Engineering released a report that cautioned against over-investment in either generation or grid capacity.

More recently, the National Competitiveness Council has drawn attention once again to Ireland’s relatively expensive energy costs, and business groups regularly bemoan their negative impact on Ireland’s ability to compete.

All of these considerations are blithely ignored in the Comhar report, and the academy of engineering document is not even referenced.

The Government is considering the introduction of a carbon tax on fossil fuels not already subject to the emissions trading regime. Carbon taxes are popular with economists, since they have the silver bullet property of identifying the undesirable economic activity (in this case, emitting carbon) and discouraging the activity directly through increasing its price.

Comhar cannot, however, leave well enough alone, and wishes to earmark the carbon tax revenues for a national decarbonisation fund, to be run by the National Treasury Management Agency. This body is already tasked with running Nama, not to mention the marketing of prodigious quantities of Irish Government paper over the next several years. Irish State agencies are often accused of mission creep, but the NTMA seems to have mission creep imposed from all quarters.

The national decarbonisation fund would also enjoy the earmarked revenue from auctioning, rather than gifting, carbon emission permits. This is another idea popular with economists, but not on the basis that the revenues get hijacked into yet another mini-exchequer, augmented through the sale of “green bonds”, in competition with Government bonds from the rest of the spectrum. Anglo Irish, finally, is to find a new role as a “green” bank, owned by the State and offering green mortgages, green savings accounts and green SSIA accounts.

It is important to understand that most of the activities to which this apparent new flow of resources would be devoted already enjoy taxpayer support. There are schemes for energy efficiency in homes, special guaranteed prices for wind energy producers, and indirect subsidies through exempting wind generators from the full costs of grid enhancement that their investments impose.

No estimate of the cost of current policies graces the Comhar report. The case for subsidies of this type is of course reduced, if not eliminated, where fossil fuel users are faced with a proper carbon tax. How often do you need to level the playing field?

The deployment of every available instrument in pursuit of popular objectives is a formula for fudge and confusion in economic policy. The Irish bank rescue illustrates this point perfectly. Nama, should it come to pass, will struggle to execute the tasks assigned to it under the legislation and to avoid ultimate cost to the exchequer and to taxpayers.

But siren voices are already calling for the declaration of a “social dividend” from Nama, in the form of land grants for worthy purposes such as playing fields and social housing. Now Comhar wants Anglo Irish, a nationalised bank with no obvious commercial future, to be recycled as a provider of capital for unspecified investments whose economic rationale has not been established.

The “Green New Deal” package from Comhar is seductive in several dimensions, apart from the catchy moniker. It promises to help the environment and to create jobs, all at no apparent cost.

But there is no long-term advantage in creating tax-subsidised jobs at the inevitable cost of job destruction elsewhere. On the contrary, further impositions on energy costs, through excess investment in favoured technologies, will render the economy less able to compete and recover.

A carbon tax at the right level, ideally by international agreement and on a universal basis, offers not just the best prospect of combating climate change but also the opportunity to dismantle the plethora of inefficient piecemeal interventions that governments have adopted in its absence.

Any “stimulus” package must, given the commitment to a reduction of borrowing from current unsustainable levels, either displace other spending programmes, in which case there may not be a net stimulus, or involve the abandonment of the fiscal consolidation programme.

The Comhar document refers nowhere to the public finance crisis in which Ireland now finds itself, nor does it share the commendable candour of recent stimulus arguments from the Irish Congress of Trade Unions, which at least had the virtue of being upfront about abandoning the fiscal targets.

Yale professor Bill Nordhaus, one of the leading authorities on the economics of climate change, puts it better than I can: “To a first approximation, raising the price of carbon is a necessary and sufficient step for tackling global warming. The rest is largely fluff.”

Colm McCarthy lectures in economics at University College Dublin and chaired the Special Group on Public Service Numbers and Expenditure Programmes, whose report in July recommended a range of cost-saving measures across the public sector

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