The great green roadblock in the path of recovery

Richard Wellings
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DAVID Cameron wants the coalition to be the “greenest government ever”. But it is doubtful this aim is compatible with strong growth and economic recovery.

New Labour’s climate change targets were very ambitious but the coalition has now gone even further. The government has committed to targets that imply in just twenty years’ time nearly all the UK’s electricity will have to be generated by renewables or nuclear power. There will also be a radical change in transport – a major reduction in mobility and perhaps a shift to electric vehicles. The housing sector will be transformed, with new homes required to be ultra energy efficient and extensive subsidies deployed to insulate existing homes. Nearly every economic sector will be subject to even more stringent environmental regulations, and more activities will be covered by the EU’s Emissions Trading Scheme – effectively an extra tax on business.

The costs involved are staggering. Over the next decade alone, the government estimates that £200bn of capital investment will be required to replace fossil-fuel power stations with renewable and nuclear plants. And this figure assumes the mammoth cost overruns that have plagued previous big infrastructure projects will somehow be avoided. Upgrading the national grid to recharge millions of electric-car batteries could cost a further £100bn.

Energy markets are being manipulated to fund green investment. According to government estimates, electricity prices will be inflated by 26 per cent in 2015 as a result of these policies with gas up by 10 per cent. Consumers will be paying an estimated £11bn a year extra.

Energy-intensive manufacturing industries will suffer most. More production will migrate to China and India – one reason the government’s policies are unlikely to have a significant impact on climate change.

A range of anti-growth transport policies form another key element of the government’s green agenda. The government is favouring rail over air and road, despite the former requiring taxpayer subsidies of £5bn a year. If the coalition decides to support the High Speed 2 rail scheme, supposedly a green alternative to air and road travel, it will end up costing taxpayers an estimated £34bn on top.

Most worrying of all is the likely effect on private investment. Spending hundreds of billions on “green” infrastructure will crowd out investment in wealth-creating enterprises. Resources that would otherwise be used by businesses to improve productivity and satisfy consumer demand will be diverted to schemes that actually reduce economic efficiency and require ongoing subsidies.

British business is facing a green roadblock. Economic growth will be significantly lower as a result, and it will be far harder to reduce government borrowing. More moderate approaches to climate change are possible, given recent improvements in technology. By adopting a radical green agenda, the coalition risks suffocating growth at a time when a strong recovery is desperately needed.

Dr Richard Wellings is deputy editorial director at the Institute of Economic Affairs.