A lesson for Britain: America is saving the world by making energy cheaper

Paul Ormerod
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CRIMINALS are reportedly refusing to leave Portugal’s prisons. According to the International Herald Tribune, prisoners are rejecting parole and requesting to serve the full length of their sentences. Despite record over-crowding, some motoring offenders have failed to pay fines, and have opted instead to serve three or even six month sentences.

This is a remarkable illustration of the effect of economic incentives. Portugal’s economy is now in its fifth successive year of crisis. In prison, people are at least guaranteed accommodation, clothes, hot water and three full meals a day. Outside, many would be struggling to pay for even the bare essentials.

Back in Britain, the coalition is banking on the fact that people will respond to incentives in an even more straightforward way when it comes to energy. Its plans will gradually increase the charges levied on consumers to help support electricity generation from low-carbon sources. And higher prices should mean that people will consume less.

This controversial policy is entirely in keeping with the trend in energy policy across Europe. If we want to reduce emissions, we make energy expensive. But is it the best approach? Unlike in physics, it is hard for social scientists to conduct real-life experiments. In the case of emissions, however, a massive experiment is playing out before our very eyes.

Europe wants to solve the emissions problem by making energy more expensive. In contrast, the US is making energy more affordable. And it is the American way which is delivering the better results. Since 2006, US emissions have declined by 8 per cent – the largest drop in any country in the world. And this is unconnected with the economic crisis. Energy consumption is, of course, linked to total economic activity. But GDP in the EU is now only 2 per cent higher than in 2006, while US GDP has increased by 6 per cent.

America has achieved this through technological innovation, by making things more efficient and, above all, by developing cheaper energy sources. Michael Shellenberger at the Breakthrough Institute in California points out that significant investment by government and the private sector has made solar and wind energy much more efficient. Even more dramatically, the development of shale gas in the US has led natural gas prices to fall by 80 per cent. So clean gas, rather than dirty coal, is used to make electricity.

Innovation is the driving force behind the stupendous increase in living standards across the world over the past 200 years. Economics, with its emphasis on equilibrium, finds it hard to cope with the concept, because innovation means change. But it is innovation rather than incentives that will solve our emissions problems. To save the planet, invest in making energy cheap.

Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis, and author of Positive Linking: How Networks Can Revolutionise the World (Faber & Faber).