Clare McNeil, senior research fellow at the Institute for Public Policy Research (IPPR), looks at the energy policy and environmental impact of the budget.
Last week’s budget was a fossil fuel friendly one. Aside from a positive mention for renewable energy and some small gestures on energy efficiency, George Osborne’s statement was pro-gas and pro-oil.
The fact that this was done in the name of ‘fiscal sustainability’ is evidence of the increasingly short-term horizons that are driving energy policy.
High energy bills were the key driver behind recent rises in inflation and they continue to squeeze household disposable income.
As we know, the increases have been driven by a huge climb in the wholesale costs of energy, primarily due to increases to the gas price as independent government advisers the Committee on Climate Change have shown.
Yet the chancellor’s most significant budget intervention was to back gas as “the largest single source of our electricity in the coming years”, building on his announcement last week with Ed Davey.
While most scenarios would see gas continue to play a role in the UK’s energy mix up to 2050, this move increases our dependence on a volatile and polluting energy source.
Last weekend’s announcement included no requirement for carbon capture and storage, which could prevent the release of carbon emissions from gas. It also shifts efforts away from reducing the costs of renewable energy, which could provide a more secure and stable source of energy for the UK.
A similar contradiction lies behind the £3 billion boon in the budget for the UK’s oil industry. While the rising cost of petrol is holding back consumer spending as the price of petrol hits a new high of 140p, a new field allowance was awarded for oil fields to open up West of Shetland.
Evidence that increasing the supply of oil will bring down costs at the pump is highly disputed as recent statistical analysis in the US shows, and the long term trend for these prices is only to rise further, no matter what quick handouts are given to the industry.
So far from providing a cheap source of energy, high fossil fuel prices are keeping the heads of drowning economies under water. Last week’s budget simply perpetuates that situation. But in the absence of a clearly defined industrial policy for low carbon growth this should come as no surprise.
A recent Harvard-led research study showed economies are likely to tilt towards innovation in existing technologies under laissez faire conditions. So-called ‘path dependence’ leads industry to continue to innovate in technologies that have historically dominated and government intervention is needed to tip the balance.
In the case of clean technology, the same research suggests this would mean introducing a new combination of carbon taxes and research and development subsidies in low carbon technology.
The chancellor is right when he says environmental sustainability has to be fiscally sustainable – but at the moment his strategy is neither. If this is to change, the UK needs to re-direct government investment towards production in clean technologies and away from ‘dirty’ innovation.