Carbon tax breaks for low-particulate fuel

We have learned a few lessons over the years. Monetary policy and market regulation are better done at arm’s length of the government. The generalists in the Dail set the broad goals, but leave the details to quasi-independent technocrats. Macro-prudence is now being added to those broad goals.

Micro is another matter. Policy-makers instinctively reach for the second-best. Sometimes that is the best feasible regulation. Sometimes that creates rents for their clients. And sometimes it is just the force of habit.

The Examiner reports that Minister Hogan suggested that smokeless fuels be given a break on the carbon tax. Really? The carbon tax regulates carbon dioxide emissions. Smokeless fuels and smoky fuels differ in their particulate emissions. A carbon tax break may reduce particulate emissions but would increase carbon dioxide emissions.

A carbon tax break would make climate policy more expensive. Emission reduction is cheapest when there is a uniform price. At the moment, there are three carbon prices: EU ETS, carbon tax, and zero. Hogan proposes there’d be four: EU ETS, carbon tax, reduced carbon tax, and zero. The reduced carbon tax would hold for coal and peat, the fuels that emit most carbon dioxide per unit of energy.

A carbon tax break would also make particulate policy more expensive. At the moment, there is a range of regulations including technical standards (e.g., in transport) and local bans (e.g., on selling smoky fuels in cities). A tax break would add yet another layer of regulation. The impact on costs is predictable: They will rise as any move away from first-best regulation does (Tinbergen 1952).

The impact on emissions is unknown. There are two substitution effects: (1) smoky -> smokeless coal and peat; and (2) oil and gas -> coal and peat. The carbon tax break would apply to all smokeless fuel, not just to smokeless fuel sold in places where smoky fuels are banned. Smokeless fuel use may increase more that smoky fuel use falls.

Recall that smokeless fuels are not particulate-less. There are no visible emissions. Invisible particulates, the ones that do real damage, are emitted nonetheless.

If Minister Hogan wants to reduce particulate emissions, he should impose a particulate tax (and abolish the ineffective sales ban) or extend the sales ban to the entire country.

Financieel Dagblad on Ireland

Yesterday, Het Financieel Dagblad published an interview with Michael O’Leary and me on the future of the Irish economy. I said much else besides, and some colorful language was cut out. For those who cannot read Dutch, here’s what Google Translate made of it:

Ireland has not really learned from the crisis

Reforms in Ireland have not been substantial enough to lift the economy on a higher level and to make more resilient to shocks. Through weak political leadership and an indulgent attitude of the troika of IMF, ECB and European Commission, opportunities have been missed, leaving the country in the long term to continue to perform below par. A repeat of the scenario of a severe economic downturn that Dublin cannot get to the top of on its own, cannot be excluded.

This say two connoisseurs of Irish society, Michael O’Leary, CEO of Ryanair, and Richard Tol, originally a Dutch professor who because of the crisis moved from Dublin to Brighton.

“A crisis is an opportunity for reform, but in Ireland there is only cuts,” says Tol. “Even this very big crisis was no need for structural reforms, where there should have been.” O’Leary agrees with him.

“We had the opportunity to exploit the crisis to reform the labor market and to remove job-growth barriers. “Never waste a good crisis.” But we have missed every opportunity. In Ireland there is not much appetite for real, structural reforms. ”

Rebound effect

Because nothing has changed, Ireland remains a “very inefficient, third-rate economy with a high cost structure,” thinks the CEO of the price fighter in aviation. Professor Tol takes into account an economic acceleration by the rebound effect, but then foresees a new crisis. “If confidence returns, for example in 2015, another period of rapid growth follows.

We might get another ten years growth rates of 5%. But because the structural problems are not addressed, this can produce a similar crisis in 2025 or 2030. Which can be much worse than the current one if the Irish by that time have not sufficiently reduced their debts. ”

Dublin has a long way to go, even if the country is by year-end released from the troika, as is widely expected. Some key figures illustrate this. The government expenditure fell, but are still well above the level of 2005. The debt has grown so much that the IMF warns that it can be unsustainable if there is no a real economic recovery soon. A major problem is the steady increase in the number of homeowners who can no longer bear their mortgage.


O’Leary does not understanding that Ireland has not faced up to reality the beginning of the crisis. “The government gets  €35 billion in taxes, but spend €45 billion.

This is the first thing that should be reformed. Why are we still wasting perhaps €2 billion by giving everyone in this country child support. I’m a multi-millionaire, but my wife gets four checks each month to support our four children This is insane. ‘

The entrepreneur, who elevated efficiency in his business to a religion, is annoyed by the combination of high wages and strict labor laws that take the dynamic out of the economy, according to him.

“Why should an Irish doctor earn two or three times as much money as a German doctor? That would not be bad if productivity is proportionally higher. But you cannot be treated between 5 pm and 7 am.”

Shut tight

Tol regrets that important sectors of the economy such as legal services, energy and transport in practice are as closed as before the crisis. Furthermore, the 42-year-old professor knows from personal experience how high wages in Ireland are still.

“My net wages dropped by 30% between 2010 to 2012. When I started working in Brighton my salary was matched. I am now the highest paid professor in Brighton.”

That Dublin fails to get itself together, even if a crisis manifests itself as the ‘excuse, O’Leary as well as Tol explain by a chronic lack of expertise and leadership in Irish politics. The electoral system promotes that the government and parliament consist of populists.

Who please their electorate, shrink from painful measures and generally lack the knowledge and experience necessary to steer the country by a crisis. Tol: “The Dáil is full of people who can talk very well. Many have been lawyers or teachers. Expert backbenchers are not there.

No strong opposition

The professor points out that there is no separation of powers. Ministers retain their seats in the Dáil, and are the spokesmen of their own party. Moreover, there is no strong opposition, because the two major parties, Fianna Fáil and Fine Gael, are like two drops of water. What separates them historically is not idealogy, but their position during the Irish Civil War.

The troika also do not mind anymore. “The problem of the Troika,” O’Leary says, “that when the worst of the crisis had passed and the idea was established that the country was saved, focus on reforms disappeared.” According Tol especially the IMF was full good intentions, but the ECB has taken over the control. “They just want their money returned.”

Where in Donegal?

This document reached me by way of the European Commission. It shows that some people are working hard to convince the Commission that Bogtec is a transnational infrastructure project of European importance (and thus qualifies for subsidies). It also shows that the Spirit of Ireland refuses to die.

There is mention of a glacial valley near Kilcar, Co Donegal. A dam, 1300 meters wide and 120 meters high (in the middle), would create an upper reservoir with a surface of 4 squared kilometers; assuming that the valley is triangular, the reservoir would be 6150 meters long. The sea would be the lower reservoir. Surplus wind power would pump the water from the sea into the reservoir. Releasing the water back into the sea, power would be generated when there’s demand.

I’ve been hiking in Donegal only a few times. Is there a glacial valley near the sea, of the above dimensions, uninhabited, and not full of archaeological treasure?

UPDATE: I’ve had one vote for Glenaddragh River Valley, which is a good way from the sea.

UPDATE2: Another correspondent forwarded this map, discussed by Donegal County Council. The hydro plan was apparently rejected as it failed to meet the requirements of the SEA Directive on procedural grounds.

Swords v DCENR

The case of Pat Swords versus the Department of Energy etc continues. See here and here for its history. The media is strangely quiet. At stake is an injunction to halt the National Renewable Energy Action Plan (NREAP), but this case has ramifications for all relations between the rulers and the ruled, and for Ireland’ sovereignty.

There have been two sessions of the High Court, one on April 12 and one of April 16.

State argued that the case should be thrown out because the Aarhus Convention does not apply as it had not been ratified at the time the NREAP was accepted by the European Commission in 2010. This argument was rejected. Even though Ireland did not ratify the Aarhus Convention until 2012, the European Union had ratified it in 2005. Therefore, Ireland must comply with Aarhus.

Read that again: Ireland is subject to an international treaty it did not ratify.

The session is adjourned till June. State now has to engage substantively with the ruling of the Aarhus Compliance Committee, which has that Ireland failed to properly inform its citizens about NREAP and its impact and did not allow them sufficient time to engage with policy making.

Ireland v Pat Swords

It has been several years since I first came across Pat Swords. Pat demanded access to wind energy modeling work that he thought the ESRI had done but not published. There were many layers to our reply. The ESRI is not covered by Freedom of Information legislation. At the time, Ireland had not yet ratified the Aarhus Convention on Access to Environmental Information, so that did not apply either (but see below). Although it would have been appropriate for the ESRI to do a detailed study of the pros and cons of subsidizing wind energy, we had not. And no, we were not aware of someone else having done such a study either. There is no ex ante evaluation of wind energy subsidies in Ireland, and no ex post evaluation either. (And lest people protest, I am aware of a number of partial studies, and a number of not-independent ones.)

Pat lost interest in the ESRI, but not in wind policy. He asked every institution in Ireland he could think of “why do we subsidize wind?” Some replied in the vein of “because we do, now go away”. Others did not respond. So Pat asked the European Commission, with the same result. Although we do generously subsidize wind power, no official was able to satisfactorily answer why.

So Pat went to the United Nations. It first ruled that, because the European Union has ratified the Aarhus Convention and because wind policy is dictated by Brussels, Ireland’s wind policy is bound by the Aarhus Convention – a treaty Ireland had not ratified at the time.

The Aarhus Convention is not at all about wind. It is about public policy. The Aarhus Compliance Committee ruled that Ireland had failed to give its residents a proper say in the National Renewable Energy Action Plan (NREAP). Two failures were identified. First, there was insufficient information to inform a reasoned decision. Second, there was insufficient time given to deliberate and, if need be, protest.

The Committee did not say whether wind power is good or bad. It did say that decisions on wind power are dodgy.

This is a remarkable result in and of itself. The Irish government cannot justify policy decisions with a few half-baked arguments and ram it through the Dail. It often does, but there is now a precedent to call an end to such practice.

The story does not end here. Pat took the UN ruling to the High Court and asked for a judicial review of the NREAP. The judge agreed that there is prima facie evidence that things are not kosher and called a hearing, which is due to reconvene on March 13.

The government’s defense is that Pat’s protest comes far too late, ignoring that all his earlier protests were put aside and ignoring the UN ruling that insufficient time was granted in the first place. The government also argues that the EU has accepted the NREAP, ignoring that the UN ruled that the European Commission was just as much in the wrong as the Irish government.

Inexcusably, the government asked the court to be granted legal costs if they win. If he loses, Pat may have to pay the government’s lawyers.

Such bullying tactics may soon come to an end through another lawsuit, but they have not yet. It is immoral, though, that the mighty government seeks to throttle a judicial review by threatening to bankrupt a citizen who exercises his democratic right.

The government’s behaviour suggests that it knows it cannot defend its case for subsidies for wind power. Carbon dioxide emissions from power generation are indeed already adequately regulated by the EU Emissions Trading System. There is no reason to put subsidies on top. Many Irish households and companies would probably welcome cheaper electricity.

Pat comments on this case here.

Bogtec (continued)

The recently signed Memorandum of Understanding between Ireland and the UK on wind power has led to excited talk of tens of thousands of new jobs and billions in tax revenue and expert earnings. How realistic is that?

The Memorandum itself is silent on the implications of the deal. Pat Rabbitte and Ed Davey agreed to negotiate a treaty under the Renewables Directive. There are targets for renewables for all Member States of the European Union. Some countries will easily meet these targets, but most won’t. Under the Renewables Directive, Member States with a renewables surplus can sell this to the highest bidder or to an exclusive buyer.

Ireland may have more wind power than it needs. Ministers Rabbitte and Davey intend to enter into an exclusive agreement. This is obviously attractive to the UK. It is not obvious why Ireland would want this, rather than let the Brits compete against the French and the Poles. The first contours of the plan emerged shortly after the UK offered soft loans to bail-out Ireland’s public debt.

The UK cannot meet its renewables obligations. It cannot ignore these targets because the coalition is fragile enough and relations with Brussels already tense. Great Britain has plenty of wind, but people have effectively used the planning system to stop the erection of new wind turbines. So, the plan is to build turbines across the Irish Sea and transmit the power via a dedicated grid to England and Wales.

The Midlands are the leading candidate to build these new turbines. The plan is therefore known as Bogtec, after a similar plan involved the Sahara called Desertec. New wind capacity may amount to 5,000 MW. The current installed capacity is 1,700 MW.

Long distance power transmission is expensive. The East-West Interconnector cost 600 million euro. It has a capacity of 500 MW. Similar interconnectors elsewhere cost 200-300 million euro. Assuming that the Brits will not pay for gold-plating, the bill for the undersea cables alone would be 2-3 billion euro.

The delayed new North-South Interconnector will have a capacity of 400 MW. People are already up in arms against the planned pylons. Transmission from the Midlands to the sea will need 12 times as many pylons.

The potential benefits of Bogtec for Ireland are unclear. The more optimistic estimates aim to impress voters and politicians. Wind power does not generate a lot of employment. Estimates often ignore the jobs lost in thermal power generation, and the jobs destroyed by dearer electricity and higher taxes. There certainly are jobs in “sandwiches and concrete” as Pat Rabbitte put it. The more attractive jobs, however, are in manufacturing and in designing new turbines. There is overcapacity in wind turbine manufacturing, so companies would hesitate to build a new plant in Dublin Port – even if Ireland would suddenly discover its talent for mechanical engineering.

Export earnings depend on the selling price. The REFIT tariff in England and Wales is 25 c/KWh for small suppliers. The retail price of electricity is only 18 c/KWh, the wholesale price 6 c/KWh. If Irish wind farmers are paid the wholesale price minus the cost of transmission (2 c/KWh), revenue will be around €0.5 billion per year. Higher revenues will be at the mercy of the generosity of British subsidies.

If manufacturing jobs are in Denmark and revenues low, the government will not see much tax revenue. No royalties are paid on wind. Bogtec does not appear to be a great deal for Ireland.

Wind farms have real costs. They can spoil the landscape, affect wildlife, and disturb people living nearby. Do the benefits outweigh the costs?

There is not much information on Bogtec. The government has yet to publish an impact assessment, but it protests only meekly against the fantastical claims put forward by companies hoping for subsidies. Evidence is not the strongest point in Ireland’s energy policy. Paul Hunt has shown that energy policy in Ireland is run for the benefit of the state-owned energy companies and their workers, Minister Rabbitte disagreed. Mr Hunt’s analysis is based on data. Mr Rabbitte promised data, but has yet to deliver.

People that could be affected by the new turbines fear that planning regulations will not protect them. Indeed, Bogtec exploits the difference in planning between England and Ireland. The UN has ruled that Ireland’s National Renewable Energy Action Plan violates international planning standards. The High Court has agreed to hear this case in March.

Bogtec is a good deal for Britain.* Is it a good deal for Ireland too? We need to know before we proceed. Why is an exclusive deal with the UK better than selling to the highest bidder?  Is Bogtec related to the bail-out? Will the Irish government or state-owned companies invest money in Bogtec? What is the expected rate of return? What if UK subsidies are less generous? Will planning properly protect households? In the past, the Irish government repeated sleepwalked into a bad deal. It is time to kick that habit.

* Well, it is a good deal for Britain given the corner it has painted itself into. Without political constraints, the best solution would be to ditch the Large Combustion Directive and replace coal with gas over a 15 year period or so.