Cretins

Seriously, dribbling idiots:

In a joint statement on Monday night Mr Kwarteng and Ofgem chief executive Jonathan Brearley said: “Central to any next steps is our clear and agreed position that the energy price cap will remain in place.”

Earlier, Mr Kwarteng told MPs: “The energy price cap, which saves 15 million households up to £100 a year, is staying. It is not going anywhere.”

A government source said on Monday night: “The energy suppliers want to get rid of the cap. It came up multiple times [at the meeting]. But as Kwasi has said, the priority is protecting consumers, and the price cap protects consumers.”

Reality is non-optional. The cure for high prices is, of course, high prices. For they reduce demand and so bring it into line with supply. If you then insist that prices cannot rise to match supply then you guarantee shortages/queues and all that.

If you insist that wholesale prices can move and retail cannot then all the people buying wholesale and selling retail then go bust. That was the mistake California made.

Jesus, Tories are supposed to know about this stuff…..

Sector analysts have warned that, of the 55 energy companies currently existing, fewer than 10 may survive by the end of the year.

24 thoughts on “Cretins”

  1. Sector analysts have warned that, of the 55 energy companies currently existing, fewer than 10 may survive by the end of the year.

    Would those be companies who guarantee that every electron you receive via the national grid is green?

  2. If the Government’s concerned about higher prices to the consumer, well, the Government is the problem, with all their green shite/taxes. Scrap the cap, scrap the regulatory crap, job done?

    Conservative my arse.

  3. Load following, it’s a bitch. Which is why I wouldn’t do it. It was tough enough managing the spark when I knew the volume of electricity I was short and the volume of fuel that I was long.

  4. AIUI it’s the wholesale price of gas that’s at issue

    So why are renewable only companies under threat? It’s almost like their business model is actually reliant on fossil fuelled baseload although they and the zealots have denied this for years

    On the news last night the talking heads were simultaneously complaining about too much CO2 and too little

    I think their heads will explode soon

  5. “the Government is the problem, with all their green shite/taxes”

    And the same problem with the much vaunted here Carbon Tax. The “green” taxes are supposed to deter energy use by artificially high price. But when energy prices rise to that supposed optimum price point, the “green” taxes are kept on. In theory, if a Carbon Tax does what it’s supposed to do, then the tax should reduce as carbon emissions fall in response to the tax. At the optimum point of carbon emissions the Carbon Tax should be zero. Any bets on that happening? What more likely is that as carbon emissions fall the Carbon Tax will will riser to maintain revenue.

  6. It’s a blind spot Tim seems to have about Pigou taxation. “Incentives matter” says the economist & Pigou taxes are an incentive to change behaviour. It ignores that the people doing the taxation have incentives too. Entirely different ones. Pigou taxes will always end up as simply revenue producers & not reflect any supposed “costs”

  7. What more likely is that as carbon emissions fall the Carbon Tax will will riser to maintain revenue.

    I think what’s more likely is that government, having got used to the revenue, will transfer the tax to energy in general. As seen with green incentives in motoring; they’re already talking about a mileage tax to replace the fuel taxes they’re losing.

  8. He does, doesn’t he? What he doesn’t seem to see is that government doesn’t give a toss about the environment, the economy, voter’s wellbeing or anything else. Just getting elected & staying in power. Give an opportunity to raise revenue, it’ll raise revenue to buy votes. The danger of any Pigou taxation is that it can be sold to the gullible with rather less honking resulting from the plucking as “less popular” taxation. So total taxation is higher than it would have been.

  9. There are valid reasons to distrust government implementation of Pigovian taxes, or to argue that certain goods don’t need Pigovian taxes because there is in fact no externality.

    “At the optimum point of carbon emissions the Carbon Tax should be zero” doesn’t make any sense at all, though. At any point, optimum or not, a Pigovian tax should try to reflect the cost of externalities. Just because you’re at a social optimum doesn’t mean there’s no externality.

    In fact this is Timmy’s point whenever he uses Pigovian taxes as a counterpoint to the calls du jour of “we must ban this Bad Thing” – we may not like the Bad Thing, but if it’s a byproduct of something we do like, then the socially optimal level of the Bad Thing is not zero and we shouldn’t be trying to ban it outright. Instead, we want to live with a level of Bad Thing where the marginal social benefit of producing it matches the marginal cost, and we need that marginal cost to reflect not only the private cost but also the external cost. There is no reason to think that external cost vanishes at the optimal level, nor the other common mistake which is to believe the presence of any externality means the optimal level of production is zero!!

  10. MBE. If carbon emissions are reduced to the point where they are no longer a problem there is no cost to the externality. There is also no cost where the cost is acceptable because the benefits of carbon emissions balance the costs. Either way, Carbon Tax revenue should approach zero where the optimum emissions are reached. What you’ll get with a Carbon Tax is emissions below the optimum.

  11. What you’re ignoring MBE, is all those things people will have done to produce zero emissions energy at less than the price of emitted carbon. As PJF says above, when government loses revenue from “green” revenue on transport fuel it’ll switch to road pricing. What you won’t get is an optimum level of road usage or an optimum amount of usable roads.

  12. It’s the story of the London Congestion Charge. Before the LCC, congestion in London was limited by the cost of the congestion itself. That actually worked rather well because it prioritised road use to those with lower hourly earnings. So kept the services a city needs being delivered. The LCC meant that higher earners could buy road space for their convenience. What we saw when the Western Extension went in. The average value of cars on the road went up. Those service providers could pass on the LCC to their customers did so but we lost some at the margins. Every time they rack up the charges, some services disappear. More company execs & government ministers get chauffeured about.

  13. @bis

    “Either way, Carbon Tax revenue should approach zero where the optimum emissions are reached.”

    The goal of a Pigou tax isn’t that the Bad Thing gets reduced to a level where it does no harm. If you want to do that, and if its harm is proportional to the level of its production, you might as well just ban the Bad Thing. If its harm is zero for the first X units of production and only then starts to rise, feasible if the Bad Thing can be absorbed or broken down naturally or simply tolerated up to a certain level, then a zero-harm policy might be to introduce a quota system (possibly tradable) of X units of Bad Thing.

    But if we are prepared to accept harm, then a Pigou tax is just a way to incorporate that harm into pricing so that actors make their decisions in a way that reflects the social and not just private good.

    To establish a social optimum at that point, marginal (private) benefit needs to match marginal private cost plus marginal external cost.

    To establish an economic equilibrium at that point, marginal (private) benefit needs to match marginal private cost plus Pigou tax.

    So for a socially optimal equilibrium, you need Pigou tax to equal marginal external cost. This doesn’t “tend to zero” except in the special case you mention, where the Bad Thing is harmless underneath a certain tolerable threshold (or another special case where marginal external cost is zero because the harm “tops out” at a maximum level, beyond which any additional production causes no additional harm). Now it may well be that there are thresholds of CO2 emissions both for “so low that any marginal emissions make no detectable difference to atmospheric concentration” and “so high we are doomed to imminent collapse and any additional emissions make no difference” but we are so far away from either of those points that they’re not worth thinking about too hard. In fact if there were any substantial movement from current levels of emissions, you may want to redo the Stern review to see what the marginal external cost of Bad Thing has become at this new output level, which really ought to deal with any issues of non-linearities or threshold effects in the harm function.

    (Yeah yeah yeah, I get that governments may be rubbish at implementing such reviews when needed, or will allow factors other than marginal harms to influence the tax they impose. But that’s not got much to do with the argument that at the optimum Pigovian taxes ought to be zero, unless you think optimal CO2 emissions are tiny perhaps? And over the range they’re likely to vary within the next decade or more, I don’t think a linear model of the relationship between emissions and harms is going to be too far wrong.)

    I’m trying to understand your thinking process and I reckon the point we are diverging on is “There is also no cost where the cost is acceptable because the benefits of carbon emissions balance the costs”. There clearly is an external cost at this point, it’s just balanced (along with the corresponding private cost) by the benefits of that emitting activity. You still need to impose a Pigou tax equal to that marginal harm to hold the economic system in equilibrium there.

    To switch to a less contentious example, let’s say farmers like fertilisers to improve yield but run-off into the local rivers and lake harms the fishing, tourism and drinking water industries. At rates of fertiliser use similar to the current ones, an extra sack of fertiliser causes 20 dollars of harm to those industries, but the farmer doesn’t care as those industries are external to him. If the fertiliser saleswoman is happy to sell a sack for 80 dollars and the farmer is prepared to buy one for 100 dollars due to the private benefits, then we have a situation where marginal private benefit (100 dollars) equals marginal private cost (80 dollars) plus marginal external cost (20 dollars) so we are at a level of fertiliser use which is socially optimal. But there is still an external harm and so the optimal Pigovian tax is not zero.

    Under zero taxation, the farmer’s current equation is that he is able to purchase a 100 dollar benefit for his farm production at a private cost of 80 dollars. This isn’t an equilibrium, and he’ll happily purchase more fertiliser. She may need a higher price to do so, but the fertiliser saleswoman will be happy to oblige. At a higher level of fertiliser use, the marginal benefit of each sack declines. Eventually the farmer hits a new equilibrium whereby he pays 85 dollars a sack for his fertiliser, and the marginal private benefit of a sack is 85 dollars more crops. The problem here is that the social benefit of each sack is 85 dollars (farmer’s crops) and the social cost is 105 dollars (farmer’s fertiliser cost plus water-users’ run-off costs) so we are not at a social optimum but rather overproducing fertiliser.

    It’s clear that to have held the market in equilibrium at the socially optimal level, a Pigovian tax of 20 dollars per bag of fertiliser does the trick. The farmer’s calculation then is that an additional sack of fertiliser reaps 100 dollars of benefit (more crops) at a cost of 100 dollars (fertiliser saleswoman is happy with 80 dollars at this output level, plus 20 dollars tax) so he’s at equilibrium. Then we still get 100 dollars marginal benefit per sack (more crops, farmer’s private benefit) versus 100 dollars marginal cost (80 dollars private cost to the farmer in producing the fertiliser and 20 dollars external harm to water-users) so we have a social optimum. The optimum does not happen when there is no harm or when there is no tax!

    Underproduction can happen if the government hates run-off so much (or sees a good chance to raise revenue) that they overdo the tax level, let’s say 50 dollars per sack. The farmer is then content to leave a lot of the gains of fertiliser use on the table, purchasing a lower quantity of fertiliser and accepting that the marginal, unpurchased sack would have had a big improvement on his crops. The fertiliser saleswoman will take a lower price given the reduced demand. So they may settle in an equilibrium where the farmer has a marginal benefit of 120 dollars extra crops per sack of fertiliser and pays 120 dollars for it. The fertiliser saleswoman gets 70 dollars and 50 goes to the government. This equilibrium is not a social optimum because marginal benefits of 120 dollars per sack (more crops for the farmer) face marginal costs of 90 dollars (70 dollars to produce and ship the fertiliser, 20 dollars external harm to water-users) so society would be better off, to the tune of 30 dollars per sack, if fertiliser use is stepped up and we accept more harm to the waterways as a result. In this situation we have “too little harm” and the tax is acting like a wedge that jams the market participants too far apart to form an equilibrium at the socially optimal output level. But this doesn’t mean zero taxes produce the correct output level either – the trick is to push the market participants as far apart as is necessary to incorporate the cost to other people that has not formed part of their personal cost-benefit calculations.

    An alternative would be for the water-users to just pay the farmers not to excessively pollute, which is another way to get farmers to take the cost to others into account and reach the previous optimal equilibrium. But when those who pollute and those who suffer harm from polluting are very diffuse groups, bargaining may not be feasible as an alternative to Pigou.

  14. Your fertiliser is different because it’s just about the externalities of one thing. With a Carbon Tax you’re trying to change behaviour not reduce it. If it’s successful, then alternatives to carbon producing energy become cheaper than carbon emitters. And as those prices reduce further the cost of carbon emitters should follow them down. The carbon tax reduce. It should go to zero at the point where the advantages of carbon emitters outweighs the HIGHER, non tax adjusted price of them compared with non-carbon. There’s always going to be cases. It seems likely that really is no alternative to jet fuel for air transport. The physics of energy density don’t allow it. So if renewables have replaced all other energy sources by price competition & atmospheric CO2 is no longer a problem, why would you want to keep taxing it? Have less air transportation than optimum?
    But when you have governments hooked on energy tax revenues that’s what you’ll get.
    I have doubts about the entirety of energy taxes. They’re like taxing buggy whips in 1900. Technology in energy production had reached railroading time. It was going to happen that alternatives to oil/coal were going to supplant them on price. All that energy taxes have achieved is that we’ve got the alternatives a decade or two earlier but in much less efficient initial forms. Hence we’re now looking at brownouts/blackouts. Instead of a phasing out of one in favour of the other based on real price.

  15. @bis

    I’m trying to understand where you’re coming from, but there’s something about your argument I’m not clocking when you keep returning to this point: “If it’s successful, then alternatives to carbon producing energy become cheaper than carbon emitters. And as those prices reduce further the cost of carbon emitters should follow them down. The carbon tax reduce. It should go to zero at the point where the advantages of carbon emitters outweighs the HIGHER, non tax adjusted price of them compared with non-carbon.”

    I just cannot fathom the bit in bold at all, particularly why you think the cheaper cost of green energy sources means that the carbon tax should fall to zero. Timmy’s (Stern’s) carbon tax is a Pigou tax. A Pigou tax needs to be set at a level reflecting the marginal harm caused by the negative externality. Provided the negative externality is still present, the tax still needs to be there. If the harm done by the Bad Thing is pretty much directly proportion to the level of the Bad Thing produced, then the marginal harm is pretty much constant so the optimal rate of the tax stays unchanged too. It’s got nothing to do with whether alternatives to the Bad Thing are available or have become cheaper, it’s just basic maths, differential calculus. Optimum net social benefit happens at the top of the curve, when the slope – the marginal net social benefit – is zero. That means marginal private benefit plus marginal external benefit must equal marginal private cost plus marginal external cost.

    In a world with no taxes or barganing about the externalities, economic equilibrium is reached when marginal private benefit equals marginal private cost. So if there’s a negative externality we are overproducing the Bad Thing, if there’s a positive externality we are underproducing the Good Thing. If the people affected by the externality of the Bad/Good Thing can bargain with the other actors to ensure Less Bad Thing/More Good Thing is produced, so that the cost/benefit of the Bad/Good Thing is reflected in their marginal decision-making, we reach an equilibrium which is also socially optimal. Alternatively, government can tax/subsidise the Bad/Good Thing so that producers’ decision-making also incorporates the external cost/benefit. But if the tax does not match the social cost of the externality, then you still get over- or underproduction, which was the point of my fertiliser example. You have to focus on the externality, it’s the whole point of the Pigovian regime.

    I can’t tell if you’re writing about the externality but not explicitly recognising it as such. Maybe you’re trying to say something like “the purported harms of CO2-equivalent emissions don’t rise linearly with their emission levels, so their marginal external cost varies. If less emitting sources of energy start taking over, I reckon the marginal external cost of 1 tonne of CO2e in our remaining fossil-fuel infrastructure will be very low, and the carbon tax would need to change to reflect this.” But the answer to this is simply re-run the Stern review every ten years or so, to see what the marginal external cost is of any additions to then-current atmospheric levels. If the marginal tonne of CO2e is no longer so problematic (not the total!!) then we cut the tax. (Oh that’ll never happen? Yeah, but a carbon tax of Timmy’s ilk isn’t gonna happen either. We’re just discussing here whether the fantasy could even work in theory.)

    It’s wrong to think the point of a Pigovian regime in terms of “you’re trying to change behaviour not reduce it”. You’re trying to reach the socially optimal level by pricing in the externality, and leaving it to the market to work out what do about it. If innovation and substitution happen, that’s great, we reach the social optimum. Turns out there’s no way to substitute? We reach the social optimum just by reducing production alone. Either way we reach social optimum so we’re good. As it happens, we expect the energy market to do a lot of innovation and substitution since there are alternatives to fossil fuels available. Timmy likes the carbon tax because it allows those alternatives to compete on a more level playing field than letting government try to pick winners. The fertiliser example works fine. Someone comes along with a sack of slow-release fertiliser, which reduces the marginal run-off of an additional sack, so the Pigou tax on this alternative fertiliser is only $5 to reflect that lower harm. Even if it’s more expensive to produce than conventional fertiliser, the lower tax rate makes it more competitive, so perhaps it takes over the market and both farmers and fishermen are happy. But if it’s too expensive to produce, much more than reflects its ability to reduce external harms inflicted on the water-users, then the socially optimal course is to stick to the conventional fertiliser, but use less of it. If the innovative product is cheaper than the conventional, or has marginal benefit to the crops that more than makes up for its higher price, then the problem largely solves itself (though you still need to price in the external cost of run-off from the new product, even if it’s much reduced compared to before). The point is that the market arrives at the best outcome, whereas if the government ham-fistedly jumps in and says “all farmers must only use low run-off fertiliser” then picking winners can lead to the less-than-optimal outcome.

    The multi-sectoral argument you raise actually makes the case for a carbon tax stronger not weaker. In the fertiliser example, farmers are a concentrated group which makes them relatively easier to bargain with. As an alternative example, urban coal use has the negative externality of smog and particulate emissions, harming everyone who lives there and not doing any favours to the tourism trade. Users include a factory with steam engine, the ironworks, domestic fireplaces. A much more diffuse group and harder to bargain with. Price up the externality and slap on a Pigou tax, and in the end they all reach their equilibrium. You might get some substitution, some reduction. Perhaps the factory switches to a diesel generator, maybe the houses switch to town gas, maybe the ironworks moves out of town or maybe it sticks about as the only major coal user. Whatever. The point is that it self-organises without governments needing to write a massively detailed plan for it all. You just need to price up the externality and ensure that those contribute towards it have to face the cost.

    Clearly some sectors will continue to use fossil fuels longer than others. Air’s a good example, though synthetic fuels may be a “green”-ish alternative for them. If there’s a significant air transport industry buzzing about, I don’t think CO2e emissions are going to be so low that the marginal tonne is harmless, so there’d still be a Pigou tax in Timmy’s ideal world. Maybe that tax is enough to bridge the gap to aircraft running on a 50% fossil, 50% synthetic mix, rather than on pure fossil fuels like they would if the tax were zero. Maybe not, we’d have to see if the costs were worth the reduced emissions. But so long as fossil fuels are cheaper for aircraft and there is any negative externality to additional emissions, you wouldn’t reach the socially optimal level of flights by abolishing the Pigou tax. You’d get “too many” flights using “too much” fossil fuel, relative to the social optimum. If the marginal cost of the emissions to society really has dropped to zero, then fine, at the next tax review, the tax level can be set to zero and the planes can keep fly as per the social optimum. But the marginal cost of emissions really needs to be zero at this time for that to be the correct and desirable solution.

  16. This is just an economist’s wankfest. There is no real way of measuring negative or positive externalities in terms of social cost/benefit. Except perhaps to remember what life was like before widespread developed fossil fuel use. There is also no way of applying your stupid bloody tax to every country, some of whom have different priorities.

  17. @MBE
    Because when renewables produce energy cheaper than carbon emitters the problem is solved. Finito. Gone away. Why would you want taxation on something no longer a problem?

    My point is that’s not how any government is going to think. It’ll be habituated to the Pigou Tax & won’t want the revenue gap. This isn’t an economic problem solvable with economic arguments. I’d take Rhoda’s line. Government will set any Pigou tax as high as they can get away with & continue it for as long as they can get away with. At which point they’ll switch to taxing something else.

  18. BNiC, would you like to be on the other side of the hedge at the moment? This could be another Lehmann moment unless the people holding the hedges are running a properly balanced book. Given the way this problem has erupted, it seems unlikely to me

  19. ‘More company execs & government ministers get chauffeured about.’

    Thanks BiS. I should have realised that was its purpose.

    ‘This is just an economist’s wankfest.’

    Thanks Rhoda. You put that very nicely.

  20. Just to add to the general scepicism on Pigou taxation and the like. Note the huge tax on motor fuel, which is supposed to encourage switching to alternatives such as electric vehicles, but we’re already hearing that as that happend the revenue will have to be found elsewhere, with suggestions of road pricing. So once a tax gets established, the nation is addicted to it.

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