Author: Richard Tol

The cost of triple regulation

There has been some consternation about the announced energy levy. See Times, Examiner, and Independent (in decreasing order of accuracy).

The CER has announced an increase of the PSO levy (currently near zero) to a total of €157 mln a year. This is a levy on a connection, €33/yr for households and €99/yr for small businesses. Large companies pay a levy that depends on the capacity of their connection: €14/kVA/yr. The method of payment and the distribution of costs makes perfect sense if the PSO levy would be for security of supply (in the sense of avoiding black-outs), but that is only €14 of the €157 mln.

These are small amounts, but the costs are unnecessary. About €72 mln will be a subsidy for peat, and about €43 mln will be a subsidy for wind. That is, we subsidise carbon dioxide emissions and subsidise the reduction of carbon dioxide emissions at the same time!

Tuohy et al reckon that 0.9 mln tonnes of carbon dioxide can be avoided if we do away with the peat subsidies, and save €70 mln. On average, that is €78/tCO2, but their estimate of the marginal cost is €19,500/tCO2! Today’s spot price for emission permits is €14/tCO2.

I am not aware of a detailed study of the implications of the REFIT scheme on emissions and costs. REFIT is part subsidy and part price guarantee, so back of the envelop calculations are more likely to confuse than to illuminate. Suffice to say that REFIT subsidises carbon dioxide emission reduction.

The prime instrument for emission reduction is, of course, the EU ETS. I would think that that is enough. I do not understand why we would also subsidise emissions and emission reduction — and we would save €115 mln while simplifying regulations.

Some say that we need REFIT to meet the renewables obligation, but the EU will likely scrap that as some of the big Member States cannot meet theirs. Besides, it has yet to be established that REFIT is an effective and cost-effective way to meet the renewables obligation. Both renewables and peat are said to help with security of supply (in the sense of import dependence), but that is just another word for import substitution, and the available analysis has not gone much beyond hand-waving.

So, for now, I would think we would be better off without (most of) the PSO levy.

Oireachtas report on November floods

The Oireachtas Joint Committee on the Environment etc published a report on the November floods while I was on holiday. It is interesting both for what it says and does not say.

The report is clear about responsibilities: There are too many agencies involved, and no one took the lead. The report argues that the Minister of the Environment should take charge.

The committee also laments the role played by the ESB, and underlines that perhaps it should have been involved in Cork’s flood management.

The report has a little gem: “The ESB made the point that they issued two warnings on Thursday, 19th November, which was unique. However, the significance of the two notifications wasn’t appreciated by the general public.” Perhaps that is because the general public did not understand that “higher than 300 m3/s” really meant 535 m3/s. Along the same lines, ESB apparently told the Lee Waterworks at 22:10 that 450 m3/s was being released, while the actual release had reached 546 m3/s by 21:50. The report does not make much of this, but it does call for further investigations.

The report is silent on a number of things. It avoids questions of liability. It calls on the OPW to develop a flood warning system, but omits that crucial data are off-limits to the OPW and that the data exchange between Met Eireann and OPW is not perfect either. The report acknowledges that there too many agencies involved, but it does not name those that should be relieved from their duties.

The list of invitees to the hearings is interesting too: Only insiders were heard. Not at single independent expert was invited.

Budget 2011 (ctd)

My prediction earlier this week is now supported by the Times (and again in more detail) and Independent.

I would agree that the focus should be spending cuts rather than tax increases.

However, I would also argue that taxes need to be reformed too. Particularly, I would use the revenues of property taxes and water charges to reduce income taxes — as that would help to price Ireland back into the export and FDI markets.

I have also called for privatisation of particular state companies and agencies (ESB, CIE, DAA, Bord Bia, RTE, etc). This would only improve the public balance sheet if the market would pay a higher price than the current book value — that is, if a private operator thinks she can improve efficiency. However, privatisation would, in the longer run, improve domestic competition and reduce the costs of energy and transport.

These things will not happen soon as the necessary preparations are slow at best. Some have taken this as me criticising the civil service, particularly the DoF. That would be incorrect. Reform is complex and requires careful consideration — and DoF has its own budget cuts and hiring ban; endless complaints from other departments; the EU and IMF; and NAMA to cope with.

Nevertheless, you should never let a good crisis go to waste — and the public sector should be reformed as well as cut in size.

Budget 2011

In an earlier post, I wrote about postponement of water charges and property taxes — partly because proper preparations started too late and have not progressed fast enough. The same is true for privatisation and, it emerged today, for child benefits. It looks increasingly likely that there will be €3 bln worth of spending cuts in the 2011 budget.

RTE and the new Dutch cabinet

Yesterday morning and again this morning, there was an item on RTE Radio 1 claiming that Geert Wilders’ Freedom Party (PVV) is about to join the Government of the Netherlands. This is not true. As the negotations stand, the new cabinet will be formed by VVD (right or centre), PvdA (left of centre), D66 (left of centre) and Greens. The PVV would be the largest opposition party.