A few years ago perennial BS vendor Naomi Klein wrote a book called This Changes Everything. 

Dooming about climate change

She argued in typically economically illiterate fashion, that the threat of climate change requires us embrace a socialist, planned economy.

Climate change. The government hopes it will get hot

On that note, Prof Dieter Helm’s government report into the cost of energy ought to be commended. He argues that intervention in the energy market has made tackling climate change much more expensive than it needs to be. The ‘free market’ solution to carbon emissions:  work out the cost of the external damage caused by pollution and force the polluter to pay it, usually in the form of a Pigouvian tax. Let the market do the rest. No need for lobbyists and politicians to bang on about their favored technology.

Crazy wish list of 17 interventions in the energy market

Ranged from obligations on energy suppliers to source a proportion of their energy from renewables to Contracts for Difference which guarantee low-carbon electricity generators a fixed price above the market rate paid by consumers via a levy on energy suppliers.

Helm argues that there are two main problems with the existing approach. First, they often require the government to make forecasts about energy prices. As Helm points out ‘If the government is going to get deeply involved in being the central contractor, to contract on a technology-by-technology basis, and run multiple policy interventions, it needs to try to second-guess the results the market would otherwise have produced’.

But it just so happens that government is woefully bad at forecasting prices.

Climate change. Difference between government and market forecasts

“While the private sector has to forecast, and its investment decisions reflect companies’ assessment of the net present value of projects, it is important to recognise that this is not necessary for government, except in some specific and difficult cases. In a competitive electricity industry, prices are the outcomes of a competitive process, and they are revealed in the wholesale and capacity markets. They are not assumptions.”

But, government forecasts are not merely inaccurate. As the assumptions that government makes determine subsidy levels, they invite lobbying and policy-driven evidence.

That leads to a second problem: regulatory capture

The sheer complexity of interventions and how they interact with one another means that a straight-forward cost-benefit analysis of a particular programme is beyond even the brightest civil servants. This leads to a classic case of regulatory capture – “the particular interested party would have superior information. Asymmetric information between the government and regulators on the one hand, and the vested interest on the other, is a bigger problem, the more complex the interventions.”

Rather than the market determining the cheapest way to cut carbon emissions, rent seekers lobby to have their preferred energy sources subsidised.

“Every main energy company and every main energy-consuming company has its own regulatory team, and a number of significant and in some cases highly effective trade bodies have emerged.”

The Government should shift to a single, unified carbon price that includes emissions from agriculture, transport and electricity.

This would blunt the tools in the rent-seeker’s arsenal and incentivise the market to discover the cheapest way to cut emissions. Better yet, any revenue from a carbon charge could be used to eliminate the most pernicious effects of the tax system. We could boost investment by letting businesses deduct the full cost of their investments from their tax bills and protect the poorest by raising the NI threshold to $14,500.

It would surely be better than the status quo where instead of the market we rely on the government to pick winners. Government isn’t very good at picking winners, but as Helm says, “losers are good at picking governments”.

The end?