The Party is currently running a consultation on our climate change policy, which you can find here. As you would expect, it touches on almost every aspect of our lives, and so I’ve decided to respond and to make that response public. I warn you, this is a pretty long post as there’s a great number of questions to respond to. You may note that I grow increasingly irksome as it progresses.

This is a personal response, and should not be considered to be related to any of the organisations with which I am affiliated.

What should the UK’s greenhouse gas emissions reduction target be for 2050?

120% on 1990 levels. The sequestration of carbon emissions from biomass plants actually reduces the level of carbon dioxide in the atmosphere, offering an opportunity to Britain – with its extensive North Sea sequestration facilities – to take a radical lead in combatting climate change. It gives the lie to claims of opponents of unilateral action on climate change that our contribution can only be miniscule compared to that of, say, China. Aiming for a negative carbon Britain could provide commercial opportunities under an appropriate international framework to sequester CO2 from countries unable to do it for themselves. Such a target – as yet beyond the imagination of any other party – would demonstrate how radical Liberal Democrats can be on climate change.

Should targets be based solely on reductions in emissions or should they take into account the emissions of other countries that produce goods exported to the UK? How could such a target be set, measured and enforced?

Any targets must take into account the carbon costs of imports, to avoid inadvertently offshoring emissions and thus providing a cost to our economy without any commensurate emissions reduction. This can only be enforced through an import tariff based on the life-cycle emissions of goods imported from outside areas with which the UK has agreements on carbon pricing, such as the EU.

Would sectoral targets assist in maintaining momentum for long-term targets and, if so, how should such targets be set?

Sectoral targets are essential to avoid political horse-trading between Government departments. They must be set by a rigorous technical appraisal of the potential for emissions reduction across the economy, with the strongest targets set for those sectors with the greatest potential for reduction – and the greatest potential to reduce emissions in other sectors. For example, the successful decarbonisation of the electricity sector will permit further decarbonisation across other sectors through the use of a zero-carbon energy source.

How can future governments be held to account for the achievement of the targets?

Governments should only be held to account by the public the vote, and in this instance the correct method of holding to account is for a Government to elected on a platform of setting legally binding targets for emissions reductions. Such targets, having received the assent of the electorate, can then be used to assess the policies of future Governments, potentially opening them up to judicial review if they appear likely to fail to meet the targets.

How can we ensure that industry, electricity consumers and the public accept greenhouse gas emissions targets and are prepared to make the behaviour changes needed to achieve them?

This is a fantastically broad question, and tailored solutions for each sector would be too detailed to enter into here. However, in broad terms, the Government should work with civil society to achieve popular consent for behavioural change, and bring forward a package of incentives to help achieve such. We should reject the argument that the Government advocating in favour of its own policies is somehow subverting the democratic process; the incentives provided by the tax system for activities the Government is seeking to minimise (i.e. the carbon price floor and so on) are on a continuum with PR.

Should there be an EU emissions reduction target for 2030, together with 2030 milestones for renewables and energy efficiency, on the model of the 2020 targets?

An EU emissions target is a useful tool to provide a direction of travel for economies throughout Europe. However, a renewables rather than low-carbon energy target is excessively prescriptive in terms of the kinds of energy member states will deliver. In particular, it may place countries with extensive carbon sequestration opportunities like the UK at a disadvantage. Member states should be free to play to the strengths of their particular geography and economy. For the UK, this is wind, wave & tidal, and sequestration.

What mechanisms and structures should be put in place to ensure more effective delivery and coordination of policy across government to work towards a zero-carbon Britain?

DECC should be reconfigured as a kind of Carbon Treasury and given responsibility for managing each department’s carbon budgets, set in line with sectoral trajectories. This would put carbon emissions at the centre of departmental planning, in the same way as finance is now. It would give DECC a much stronger hand when wrangling with Treasury over the costs of decarbonisation too.

Should local authorities be given a statutory duty to develop and implement low carbon plans?

Yes.

How should government empower, support and encourage local authorities to play their part in the transition to a zero-carbon Britain?

The General Power of Competence brought in by the Localism Bill, coupled with City Deals that have decarbonisation at their heart, can help provide local authorities with the decision-making power and additional funding needed to enable them to play their part in decarbonisation.

How can we develop a UK carbon pricing regime that is effective, coherent and fair?

A carbon price should only be set as part of a basket of policies covering a range of mechanisms for delivering decarbonisation, and should cover those sectors where the Government is not competent to provide appropriately fine-grained incentives. While attractive from a classical liberal point of view, a blunt carbon tax may actually cost more to deliver the same amount of emissions reduction compared to, say, direct subsidies for low-carbon generation. For those sectors with large-scale and transparent markets where the cost of Government intervention can be properly priced (i.e. energy), direct intervention through subsidies and other regulatory instruments is preferable to a carbon price. For other sectors, an increasing carbon tax on the Nordhaus model is preferable to drive long-term carbon reduction.

What further action is needed at EU level to improve the EU ETS, so that it can create a long-term and stable carbon price to facilitate a shift to a low-carbon economy?

Radical action is required to rescue the ETS from its present form, in which it has been subject to political horse-trading and an excess of Emission Unit Allowances on the market. While a carbon price is less preferable than fine-grained intervention, an emissions market is less preferable again owing to its scope for wrangling over permits for sectors. A transition to an EU-wide fixed carbon price is preferable, but probably politically impossible. In its absence, a move to all permits being issued by auction in line with a linear trajectory towards a 2030 decarbonisation target may be the best option.

Should the Liberal Democrats encourage low-carbon investment by ring-fencing receipts from the EU Emissions Trading System or the Carbon Floor Price?

No. Popular consent for green taxes is greatly aided by them being perceived as cost-neutral, and the revenues from such taxes should be used to reduce the levels of income tax paid by the least well off in our society.

As carbon pricing measures are developed, how can we help energy intensive industries to manage the transition to a zero-carbon economy?

By making the measures cost-neutral; an increase in carbon pricing should be matched by a commensurate increase in another levy. It may be worth having a separate corporate tax bracket for energy-intensive users in order to facilitate this.

In light of the CRC review, what carbon pricing measures should apply to non energy intensive companies and organisations?

All companies should be obliged to pay a carbon price directly in line with their emissions. To achieve this, aggregators or exchanges easily accessible to UK businesses should be set up by Government, ideally in co-operation with the private sector. Companies should have the option of paying a flat fee to an aggregator in line with their emissions or play in the EUA market themselves.

Should we seek to reduce total electricity demand; if so, how? Should there be binding targets for reducing electricity demand?

We should certainly seek to increase the energy efficiency of our economy, but a demand target is difficult: a decarbonised electricity sector would permit increased electricity use in other sectors, potentially radically increasing demand while driving decarbonisation. Preferentially, we would have a fuel poverty target, setting out the maximum percentage of income anyone should expect to pay for energy in the UK. This could be achieved through measures like CERT, delivering energy efficiency for the worst off in society.

How can future electricity policies allow for uncertainties around future demand and capacity, technological developments and the international context?

Primarily through flexibility; subsidies should have automatic review points depending on the deployment of technology, there should be a process for the rapid accession of new technologies into a policy regime, and a mechanism for shifting the cost of volatility in the wholesale fossil fuel markets onto energy suppliers should be developed.

How and when should we prepare for the decarbonisation of the electricity system?

By 2030, in line with the CCC’s recommendations. Decarbonisation should be delivered by a mix of technologies, to ensure that it does not come with a risk of reducing system security. These technologies may include wind and other renewables, CCS and nuclear. The ones actually utilised should dependent both on price and on operational characteristics. For example, wind’s role as a fuel saver helps reduce the system cost of electricity generation in a high-fossil-fuel price scenario.

Should there be a new UK target for renewable energy, for beyond 2020?

A decarbonisation target coupled with expected technologies trajectories conditional on cost (i.e. gigawatts of offshore wind deployed should be dependent on cost reduction) would be more helpful, by providing developing technologies with additional certainty.

Should a target for decarbonisation of the electricity sector be enshrined in legislation; if so, what should the target be?

The CCC recommends a target of 50g/KWh by 2030. This should be in the Energy Bill, or at a minimum set in secondary legislation via an independent body.

How can the electricity market be reformed so as to provide robust incentive mechanisms to reduce total energy demand?

This can be achieved through the Capacity Mechanism as proposed in the Electricity Market Reform white paper, by allowing demand-side measures to take priority over new plant. In addition, an Energy Efficiency Feed-in Tariff would provide businesses and consumers with a direct and understandable incentive to reduce their energy use, overcoming concerns about the cost of capital for efficiency measures for an uncertain return.

How should the above reforms be designed to ensure they do not interfere or undermine the existing EU framework the UK is part of, such as the EU Emissions Trading Scheme?

We must ensure that any electricity that enters the UK market has paid for the emissions caused by its generation in some way. This requires ensuring that the UK’s market is fully coupled to those of our neighbours we trade with via interconnection; currently, a coal plant in the Netherlands can sell electricity via interconnector to us without necessarily requiring an EUA to do so.

What further measures might be needed to allow new market entrants and community energy projects to invest in the UK’s low carbon future?

On the supplier side, the obligations placed on suppliers above a certain number of customers effectively provide a cap on their ambition. Supplier obligations should be better scaled in line with customer numbers, and not all be imposed at once when a company hits a single threshold. Different obligations should have different thresholds, allowing for a company to expand more smoothly. On the generator side, a feed-in tariff for small-scale projects (<10MW) which replaces the RO, rather than requiring them to enter into the more complex world of Contracts for Difference, would be helpful. However, a broader challenge to medium-scale development is offtake risk, and the Government should look at including a buyer of last resort in its current policy proposals.

What policies are needed to deliver a higher level of renewables penetration?

  • Appropriate strike prices under Contracts for Difference set on a technology-specific basis using a transparent and evidence-based process
  • A single counterparty for CfDs that is ultimately indemnified by the Government. This can be through the willingness of the Government to take on the administration – and hence the obligations of the CfD – in the event that a participating suppliers comes into difficulty.
  • Forward visibility of the Government’s ambition for each technology through technology trajectories, set up to 2030.

Should the UK meet its 2020 renewables target solely from electricity generated in the UK?

This is a complex issue, as countries with a high renewable resource who manage to exploit it early should clearly be awarded by attracting a premium for their product on foreign markets. Given the level of appetite for offshore wind development, this may yet be the UK, and we should not rule out the possibility of us doing this by denying it to others.

Should the UK support overseas renewable electricity projects and interconnectors as a cheaper way of meeting renewable targets; if so, how?

Yes. Interconnectors should be allowed to participate in the proposed Capacity Mechanism, at a level derated for their likely load factor from a given market. The UK should not, however, allow overseas projects to participate in our incentive schemes.

To what extent do we want to see the UK develop biomass electricity, which, for larger plants, requires imports of wood chips or pellets? Is this a sustainable way in which to generate electricity?

In combination with sequestration, this may be a powerful way of extracting carbon dioxide from the atmosphere. However, there must be strong sustainability regulations around any biomass used for electricity generation; clear-felling forests to generate electricity is clearly counterproductive. A fixed lifecycle emissions target for any biomass plant must be put in place, and enforced through an incentive mechanism. Biomass, as reactive plant, has a crucial role to play in ensuring system security.

What role should nuclear power have in the UK’s electricity generation mix between now and 2050?

A role entirely depending on cost. If nuclear power can deliver low-carbon baseload electricity at a cost cheaper than another type of plant or amalgam of plant (i.e. wind combined with gas CCS), then the UK should permit its development.

Where safe to do so, should the life of existing nuclear power stations be extended?

Yes; they have amortised their capital costs to a great extent and are a cheap form of low-carbon electricity.

How should ‘public subsidies’ for new nuclear plant be defined?

Any form of Government intervention in the market which reduces costs (e.g. capital costs) or increases revenue is a subsidy. CfDs are a subsidy, and claiming otherwise makes us look ridiculous. An EU emissions target, rather than a renewables target, would allow us to claim that subsidies for nuclear power are intended to help comply with legislation and hence potentially circumvent EU state aid rules.

What other measures, if any, are needed to encourage the development and commercialisation of CCS technology?

The Government should provide capital support for demonstration projects and revenue support for projects nearing commercial viability. Beyond this, there is a strong role for the Government to provide the Transmission System Operator with the responsibility to deliver a national network of CO2 pipelines to facilitate the sequestration of carbon. Many of the UK’s existing power plants are inland, away from likely sequestration hubs, and as a result would find it prohibitively expensive to participate. Infrastructure of this kind is something that Government is good at.

Should any support for CCS be spread across fuel types or focussed on coal, gas or biomass?

The Government should not pick winners in this field; the commercial sector should be provided with support for those investments in which it sees the greatest commercial opportunity.

Should CCS for industrial processes be supported; if so, how?

By the provision of a network for the export of emissions, and through a carbon price where appropriate.

What role should gas-fired generation play in the GB electricity system (i) before 2030 and (ii) between 2030 and 2050?

No unabated or non-peaking gas should be present on the UK’s electricity system post 2030. All gas plants built in the UK during this decade must be CCS-ready, and any gas plants built post-2020 should be required to bear a significant portion of the cost of the CO2 pipelines they will require.

How can we balance any role for peaking gas plants in providing energy security with the need to ensure that the GB electricity system is on a path to decarbonisation by 2050?

By introducing a market for capacity, as outlined under the EMR proposals. This will allow increasing incentives for gas plant used in a peaking role as time goes on and unabated gas as baseload becomes obsolete. Coupled with a strong EPS for new plant that decreases over time – pushing gas into a peaking role – this should remove unabated plant from the system while maintaining system security.

How can we ensure that the electricity transmission and distribution networks can adapt to a low carbon future?

Adaptation by the System Operator and the various TOs and DNOs will depend on their ability to integrate smart grid operation into existing arrangements. NGET have this in hand already; the best role Government can play is to specify through regulation standards for smart grid interoperability. The Government can help by requiring Ofgem to allow demand-side response, potentially via aggregators, to play a role in any balancing markets that are produced as a result of its current cash-out review.

What policies are needed to ensure that the components of a smart electricity system are in place when they are needed?

The MCS for electric heating devices does not specify smart grid compliance, and there is no requirement for electric cars to do so at present. Any additional large demands must be time-shiftable, and regulations must specify this. Government should work with NGET and businesses to develop these standards.

What new regulatory and fiscal incentives are needed to encourage take-up of energy efficiency in buildings?

An energy efficiency feed-in tariff will help overcome obstacles to building retrofit. Thought must be given to the levels that will be required to deliver deep retrofit where appropriate, and how planning laws could potentially interfere in this.

Should the UK set a separate target for building renovation to 2050? How should this target be expressed?

Such a target would be extremely difficult to enforce, and could represent a severe cost to the householder. Far better to provide incentives and strengthen new-build regulation, as well as require housing being sold on the open market to be given an energy efficiency rating.

How can planning authorities (a) enhance the environmental performance of new and existing buildings while respecting local views and (b) be encouraged to set higher energy efficiency standards, even compared to building regulations (until zero-carbon building regulations apply? What legislative changes, if any, are needed?

This is a question that local authorities should be responsible for answering; a carbon reduction requirement and empowerment to deliver it will allow a variety of answers to this difficult question to be tested.

What other policies (for example the use of regulations) are needed to promote changes in consumers’ energy consumption behaviours?

Low carbon energy will cost more in the short term, albeit less than relying on increasingly expensive fossil fuels. This will lead to a reduction in energy demand by itself without any other intervention by the Government. The Government can provide information on ways of reducing energy consumption while maintaining comfort, as well as providing support for energy efficiency measures to mitigate fuel poverty, as outlined above.

What specific actions to promote energy efficiency in various sectors such as industry and buildings should the Liberal Democrats push for at EU level? Should they include setting energy efficiency targets for post-2020?

An energy efficiency target – especially for products – is welcome. As outlined above, a properly tailored EE FiT would provide an incentive for deep retrofit where appropriate.

 

 Are new measures needed to reduce car and van emissions?

Unless oil prices decrease rapidly from the $80-100 barrel level, the current incentives should drive increased uptake of low-carbon vehicles and reduced vehicle use.

To what extent would lowering speed limits and encouraging greater eco-driving behaviour assist in cutting greenhouse gas emissions?

This is unclear, but the Government’s efforts are better spent on encouraging the uptake of low-carbon solutions, rather than behavioural change better driven by price signals.

How can we address barriers to the uptake of electric cars and vans?

The Government has a clear role in providing the infrastructure electric vehicles require to become successful, but identifying the correct type of infrastructure to supply is fraught with difficulty. Consumers may prefer to use their domestic supply to recharge vehicles if this turns out to be cheaper and battery life can be sufficiently extended. This would require both additional distribution network upgrades and time-shiftable demand. Conversely, short-range vehicles would require a network of charging points to be viable. New technologies, such as charging from strips in the road or via contactless electromagnets may be disruptive. The Government may be better off extending the current voucher scheme to encourage uptake, and let the market decide.

In addition to electrification and HS2, what further investment in rail is likely to make the greatest contribution to reducing emissions from the transport sector?

Quite frankly, the Government should either get out of rail provision entirely or fully nationalise the service, but this is besides the point. The role of rail should be reduce short-haul flights, so the continued extension of High-Speed rail between major cities and Government subsidised tickets on the service would be helpful.

What efforts should be made to improve operational and energy efficiency of the existing rail network?

Sell the whole thing and allow people to build new tracks to aid competition, as well as own both tracks and trains. No Government over the past few decades has managed the railways properly, and it is difficult to imagine one ever doing so. Higher prices for carbon emissions should make them a viable commercial prospect once more.

What longer term steps should be taken to reduce carbon emissions from road freight traffic?

Road freight is highly unlikely to be electrified. The Government may wish to look at the provision of Compressed Natural Gas (CNG) in the short term, and hydrogen in the medium term.

What steps should be taken to manage the anticipated growth in emissions from domestic and international air travel?

Ensure that airlines globally are included within the EUETS, and provide incentives for the use of biofuels to replace fossil fuel consumption. Decarbonising air travel is hard, and direct fuel replacement may be preferable.

What further steps should the Government take at the UK and EU levels to promote less carbon intensive shipping?

Again, inclusion within the EU ETS for global shipping is helpful.

What new mechanisms are needed to ensure that such fuels are sustainably sourced?

Regulation – specify what exactly will count as a ‘biofuel’ against EUETS liabilities and what will not.

To what extent will bio-fuels make a meaningful contribution to meeting the 2050 emissions reductions targets?

Without a hydrogen air fleet, if we want to keep flying we’ll need to use biofuels. Ideally there should be a target to have the entire fleet running on low-carbon fuels by 2040.

Should we encourage the use of biomass by industry; if so, how?

Biomass may have a role in high-temperature processes, and it should be largely up to industry whether they’d prefer to use biomass or fossil fuels plus CCS to decarbonise those processes.

What new policies, if any, are needed to incentivise the use of CCS in industry?

As mentioned above, a carbon price coupled with an accessible CO2 network.

The production of energy crops diverts agricultural resources away from food production. How much arable land should be dedicated to energy crops?

This is impossible to say. This really is something better left to the market, and any consequent food affordability issues dealt with via social policy.

What can we do to increase forestry significantly?

Allow people to amortise their carbon emissions by planting trees.

In which sectors are specific strategies needed for reducing the amount of waste sent to landfill?

Quite frankly, all sectors. The target should be a ban on landfill for everything but the most stubborn forms of waste.

 

How can we ensure that the GIB can access greater investment resources?

Allow it to borrow on the wholesale money markets, with limits on leverage. It should also provide specific products for pension funds, helping to break into these sources of finance.

 

How can we provide individuals with more opportunities to invest in low carbon infrastructure?

This is already being provided by the market through the provision of Green Bonds for some infrastructure projects. A clear way the Government can support this is by aiding community projects when attempting to clear a particular financial structure through the FSA.

How should the government encourage greater innovation in the development and adoption of low carbon technologies and services?

Government is bad at fostering innovation. Providing start-up funding for individuals and groups coming out of low-carbon research centres might be helpful, but costly.

What further action can government take to ensure it leads by example in the procurement of low carbon goods and services?

Departmental targets for emissions should be set. All departments should aim to be zero-carbon for their own operations by 2025.

Should the costs of environmental and climate change policies be recovered on a consumption, or ‘per unit’ basis, rather than a flat rate per gas and electricity consumer, with support provided to low income households through the Warm Home Discount and ECO?

Yes, although this broadly happens already.

What new policies should be introduced to deliver the requirements of the Warm Homes & Energy Conservation Act 2000?

CERT was extremely successful, and ECO will do well to match it. However, it is clear that utilities delivering CERT found accessing particular social groups very difficult. The Government could consider fostering partnerships between utilities and relevant local stakeholders to help overcome these obstacles.

What further action should be taken to empower consumers through collective purchasing and switching?

Allowing more suppliers onto the market by reducing the impact of supplier obligations on new entrants, as outlined above, would increase choice.

What additional action is needed to ensure that there are adequate skills to support a green economy?

Additional funding for employees transferring into low-carbon roles.

What are the correct roles of government and business in this matter?

Government should provide funding for training needs identified by business. It should not be the Government’s role to predict training needs for the private sector.

Should the UK aim to take an international lead in climate policy? Would it be more sensible, given the weakness of the economy, to aim not to cut emissions faster than Britain’s main economic competitors?

The UK should certainly aim to take a lead, if only because our comparative advantage in certain low-carbon sectors will lead to our economic competitors looking to buy our products. Rebuilding the economy on low-carbon lines will require investment, innovation and new products. It will require green growth.

What other steps should the UK/EU take alongside the climate negotiations to maximise the chance of them succeeding, and to promote cuts in emissions?

Carbon tariffs, for all countries without robust systems in place to monitor and properly price the emissions of their products. The unilateral dropping of all other tariffs to countries which do undertake to reduce their carbon emissions provides an incentive.

Should we begin to draw up options for an alternative approach should the international negotiations for a new climate treaty fail?

No; conceding the failure of internationalism runs counter to one of our party’s principles.

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A Paradox of Gluttony

September 7, 2012

Even the cursorily familiar with economics will have heard of the Paradox of Thrift; when people, worried about the future of the economy, save rather than spend, and in doing so ensure that the economy takes a downturn.

The current shale gas boom in the US is an example of a different kind of paradox: a paradox of gluttony, of excessive greed leading to failure. Shale gas has been held up as the saviour of our economy; a new resource we can exploit in order to deliver cheaper energy and hence growth. However, unlike normal booms, no-one whose core business is extracting shale gas is actually making any money.

The reasons for this are pretty clear:

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

Following the economic crisis, gas prices collapsed due to falling demand. The advent of shale gas has served to keep prices low, to the point where profitability of the sector is collapsing.

Why is this the case? Markets should respond to a price signal like this by decreasing production. Instead, gas production in the US has actually risen over the period.

The reason behind is an astonishing case of induced greed; an example of talking one’s book on an epic scale. The initial flood of investment into shale gas came from several ‘pioneer’ companies such as Chesapeake massively overleveraging themselves in order to snap up shale plays cheaply before the rest of the market caught on to the potential of fracking. Of course, once they’d done so, they had to ensure that the market, in fact, caught on. And so, they engaged in an enormous publicity campaign about the potential of fracking, placing articles in the media, engaging the investment community and generally putting themselves around quite a bit*.

It had an impact. Money flooded into shale exploitation, in the main by buying plays at extortionate rates from ‘pioneer’ companies, who proceeded to make a great deal of money. These plays have now been written down in large part. Nonetheless, the gas continues to flow, as the once greedy  and now worried investors lose money on their assets and demand production continues to extract any possible value, assuming that at some point other people will blink and the price will rise. Of course, if everyone does this, then the price will continue to stay too low for anyone to make any money. This is a paradox of gluttony.

It is difficult to say how long this particular ‘boom’ will last, estimates ranging from six months to several years. Nonetheless, it will eventually end in a squabble of recrimination, litigation and spiking gas prices. The environmentalists will blame the greed of the frackers, the libertarians will blame a quirk of SEC regulations that allowed the likes of Chesapeake to claim that a play is profitable without factoring in the actual cost of drilling, and the Austrians will blame the cheap credit that allowed the initial land grabs in the first place. In the interim before we decide who we’re going to blame, it’d probably be best if people stopped assuming shale gas will be a silver bullet.

*It is interesting to note that Cuadrilla, the company looking to exploit the UK’s Bowland Shale, has recruited Nick Grearly to go round the country extolling the potential of shale gas.

Recapturing Rationality

September 4, 2012

A rational man is one who aims at goals and takes action to achieve them. This is a definition of rationality currently in vogue in some schools of thought. However, it is a fundamentally uninteresting definition: ‘goals’ are construed as whatever a person was aiming to achieve with an action, and so any action is rational. If every action is rational – because every conscious action must aim at a goal – then there is no such thing as an irrational action, and the very word becomes meaningless. By inference, I can describe the aimless swimming of a goldfish as ‘rational’; I know naught of fishy goals, and it is not for me to say when they are rational and when they are not.

While this is not an incoherent position, we should be wary of any stance which says that a commonly used word is being used incorrectly by the rest of mankind; humility is a useful intellectual virtue. Is there another definition of ‘rationality’ which captures the useful insight that rational action is the preserve of the individual while still retaining the distinction between rational and irrational in a coherent fashion?

Luckily, there is. Regular readers will know of my affection for the work of Fleischacker on liberty, and it provides a useful steer here. The first question we should ask is what we mean when we say ‘action’. The definition above considers ‘action’ to be basic, without considering what it is we do when we act. However, this involves a rather basic conceit: that in the split second of decision-making about whether to, say, kill the fat man, we somehow weigh all the pros and cons of each potential act. Of course we do not; our brains are not hyper light speed quantum counting engines. Rather, we act in accordance with the principles we have accepted and considered in advance, before we were thrust into such a situation. What we do when acting is not to assess every possible outcome, but rather to make a judgement: this context falls under this principle, so this action should be performed.

The creation of these principles is something we do when reflecting, or opting to adhere to a particular moral code. It is in the practice of these principles that they are reinforced, and we become more likely to act in such a way in future. This leads us onto a useful definition of rationality: acting in accordance with our principles.

Our principles are self-determined, even if we are signing up to someone else’s – that remains our decision. As a result, only we can determine whether we have been acting irrationally or not. I can state quite categorically that I am more likely to act irrationally while drunk, for example, which captures the common intuition about the meaning of rationality quite happily.

Moreover, this definition of irrationality – failure to determine the correct principle to apply to a particular context – is something which is only known to the self, and so cannot be a tool for another to step in and remove one’s autonomy, unless one wishes it. This may prove useful to members of that particular school I linked above, who do seem to worry so about such things.

Supply-Side Shock and Awe

September 3, 2012

There are at least three levels of rhetoric which one can use to justify a policy: the historical, the ideological, and the pragmatic. When it comes to markets versus central planning, the first is eminently preferable: as Timmy is fond of telling us, the 20th century can be viewed as a great experiment about the relative merits of both systems in terms of delivering growth, with markets defeating central planning under the Nazis and the Soviets in turn. It is clear that, if one wishes to deliver growth, markets are on average the tool for the job.

However, from an ideological perspective, this argument doesn’t wash. If I am a great believer in economic freedoms, then whether those freedoms deliver growth is a moot point: I want them regardless, and making them contingent upon delivering growth is to devalue them. Freedom has value in and of itself, and while the historical context may have value when trying to sway non-believers, it should not form the justification for that belief.

On pragmatic grounds, neither of the arguments above work. Economics is fundamentally about trade-offs: a particular form of freedom may impose costs upon others, and the adjudication of which costs are heavier may come in the form of market forces or of public policy. Let us say that we forbade employers from requiring a notice period from their employees, while still requiring that an employer provided a notice period before letting someone go. Employees are free to change jobs at will, assuming someone else will take them on, while employers still find it difficult to get rid of a difficult employee quickly. This increases the economic freedom of employees in our present context, in which almost all desirable jobs require a notice period before departure, while decreasing that of employers.  While we can argue about the particulars, simply demanding increased economic freedom on ideological or historical grounds does not necessarily lead to a particular set of policies. Pragmatically speaking, we have to weigh up which and whose freedoms are more important.

I bring up the above because of a regrettable tendency among the Right to reach for supply-side reforms as an answer to our current economic problems seemingly as a result of an ideological position, and only then going into pragmatic reasons why such reforms are appropriate. Handily, today David Davis has provided an example par excellence of this kind of thinking, which I shall analyse.

His speech meshes the historical, the ideological and the pragmatic into a melange of recommendations. Consider the following selected passages:

“Let us take Switzerland as an example. Its economic dependence on banking was a third greater than ours, and its exports are predominantly to its Euro zone neighbours. Yet, while our economy struggles, Switzerland’s is back up and running. So Britain’s problem cannot simply be attributed to bad banks at home and collapsing export markets abroad.”

“[We] must liberate individuals and companies from the impediments that are undermining their confidence and limiting their freedom of action.”

“The virtue of small businesses is they create jobs and wealth. […] Jump starting the economy will above all else involve liberating this sector to do what it does best, create jobs and wealth.”

“Our Business Secretary congratulates himself that we have one of the most lightly regulated labour markets in the developed world. Perhaps, from the point of view of a large company we do, but not according to the real job creators – small and medium sized businesses.”

“When the German government launched its growth strategy in 2003, the labour market
was the centre of the reform program. Special exemptions from employment law for small companies, easing of laws governing dismissals and redundancies, protection of companies from vexatious employee lawsuits, were combined with reform of the welfare system to improve incentives to work. And it worked.”

On historical grounds, because Switzerland shows our current economic difficulties are not related to our banking sector or exports, we should liberalise our employment market. On ideological grounds, because small business have virtues that must be freed to flourish, we should liberalise our employment market. On pragmatic grounds, because it worked for Germany and Switzerland, we should liberalise our employment market. This would seem to be a coherent argument.

Unfortunately, if you mash differing lines of thought together to create an argument, you leave it open to being picked apart. For example, our employment protections were amongst the lowest in the OECD (below Germany and Switzerland) going into the economic crisis, and I’m fairly sure they haven’t suddenly gone up since then. Germany’s reforms to their labour market were put in place because they were in relative decline compared to their competitor nations with more liberalised employment policies (e.g. the UK); right now, the UK is actually doing worse than countries with more rigorous employment protection (e.g. France). One is left with the ideological argument, which does have merit, but is devalued by all the other arguments around it being incorrect.

There are genuine pragmatic arguments for supply-side reform, and indeed Mr Davis makes one – it should be easier to set up banks, and banks should be more exposed to competition. It’s fairly clear that our banking sector suffered during the economic crisis, and a good dose of marketisation should help it return to health. Unfortunately, the fact that Mr Davis makes it after claiming that woes with our banks aren’t the cause of our current woes again devalues it – but Mr Davis needs to make that claim to justify all his other supply-side recommendations.

If you start from a position of ideology and then reach for arguments of pragmatism and historicity, you devalue your own position. If you’re in favour of freedom, then argue for freedom. If you’re in favour of growth regardless of how it’s achieved, then argue for that. But mashing the two together results in ridiculous situations like Mr Davis objecting to support for green energy, when it’s one of the few examples of the UK actually generating wealth in the current climate, if you’ll pardon the pun.