Sliding down the wrong end of the Kuznets curve

“How Electricity Became a Luxury Good” was a headline on the US’ ABC News website in 2013.

Its story was about Germany’s electricity prices after the push for renewable energy – the Energiewende I told you about last week.

From the highest prices in Europe to a 20% increase. Oops.

So the Energiewende was a shemozzle on the consumers’ side as much as the political side.

Inspired by this failure, and not to be outdone by the Germans, former Prime Minister Theresa May passed legally binding legislation to make Britain emissions neutral by 2050. Before making a run for the blamelessness of the backbench.

The former chancellor estimated the cost of May’s pledge at a trillion pounds. Before making his own no-deal exit from the Treasury without having to pay up. No wonder the new chancellor gave up on austerity…

I wonder what political promises would look like if they had the same term limits as their makers? 

“Emissions neutral by 2050” becomes “a piddling cut to emissions in two years”. “Reducing the deficit to 0 by 2092” becomes “a piddling cut to spending this year”. “Billions in new infrastructure spending over the next 15 years” becomes “200 feet of a tunnel under Abbey Wood by next year”.

Back to the price of unaffordable power. What bothers me about the drive to cut emissions is whether it’s going to tip us off the wrong end of the Kuznets curve.

There are several versions of the Kuznets curve. The original is about inequality. The idea is that, as an economy develops, it increases and then decreases inequality. You get an upper class before you get a middle class.

The environmental Kuznets curve is the idea that, as an economy develops, it goes from increasing pollution to decreasing. “Only wealthy societies can afford renewable energy,” and that sort of thing.

Source: Economics Help

A cheeky Dane might say that only a country which sells a lot of oil can afford to build a lot of hydropower capacity. The reply from Norway would involve bicycles and topography.

Now Britain is wealthy. And “The UK has already reduced emissions by 42% while growing the economy by 72%,” says our government’s website. That’s the UK government, not the EU.

So it looks like we’re already slipping down the right side of the Kuznets curve. Less pollution, more GDP. More economy, in both senses of the word.

Now, presuming the government can count both GDP and emissions is very amusing to me. I’ve helped with both in Australia as part of a university group. I learned a lot about how it doesn’t work…

But that’s the power of the Kuznets curve. It’s nice and theoretical, like the Laffer curve. Incorrect data need not get in the way.

The risk I want to point out is that an attempt to reduce emissions by making Britain less wealthy could send us sliding down the wrong side of the Kuznets curve. We’ll grow poorer and might even pollute more at first. Before becoming so poor we eventually do pollute less…

The government mandating zero emissions by a certain date is an example of going about this the wrong way. Because it risks having to take the wrong side of the Kuznets curve.

And it wouldn’t necessarily be deliberate. You can call me a cynic all you like, but if I hear that the government wants to reduce emissions, I predict an increase in emissions as a result of its policy.

Doubters should google “The Cobra Effect” and the UK government’s diesel subsidies.

So how would this apply to the Kuznets curve?

When people can’t afford electricity because government policy makes it more expensive, they turn to other polluting fuels. Or the government is forced to fire up the old coal power in the end to reduce a winter crisis.

Under the Kuznets curve theory, a country sliding down the wrong end of the Kutnets curve would use less power, making the country less wealthy, leading to less pollution, but more other problems.

So sliding down the wrong end of the Kuznets curve comes at a cost. And because we’re talking electricity prices for much of this debate, that cost is obvious.

Deindustrialisation as power intensive manufacturing leaves, a bigger healthcare burden from those who struggle with the cold and can’t afford to heat their house, and a financially squeezed electorate that is not impressed with centre political parties.

But don’t worry about me. My power company still hasn’t figured out which meter is connected to my flat. So I’m not paying nuthin.

At this point, you might think I’d turn to Japan – my go-to for solving Britain’s economic and social problems. The Japanese are rather good at recycling, for example. Even the wildlife in Japan knows how to bow. And the locals supposedly taught Irish rugby fans how to pick up their own rubbish. After beating them.

But having seen the amount of plastic packaging the Japanese use leaves me feeling queasy. They have to fold it flat because there’s so much of it. If only they used it as insulation, which doesn’t seem to exist over there. My wife assumed our London floor heating only heats the floor and not the rest of the room…

As far as I know, no country is pursuing emissions neutrality by trying to grow so wealthy it can afford to do so. Despite the fact that we solved the problem of excessive horse poo in cities, deforestation for heating, and many other problems in this way. Even the Tube was privately built and funded, until nationalisation.

Perhaps that’s what Brexit Britain should be trying to do. In much the same way Germany once did. Pursuing deregulation as a solution to the very problems the regulation aims to solve.

If we don’t, and things take a turn for the worse on the Kuznets curve, you’ll soon be hearing a variation of the Sun’s old line: “Will the last person to enter Britain please turn out the lights.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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