The only issue with the ETS is that we get certainty and send signals to investors that incorporates the fact that they will be responsible for paying for future emissions. In electricity, the Green Paper argues that we should give coal-fired plants free permits to compensate them for being in the wrong place in the wrong century. It is not at all clear that this will send an appropriate signal nor actually change anything in terms of emissions from that sector. Let’s face it what we need is for investment in capacity to take place that is above coal in the merit-order — the 5 minutely order of which plant gets to run or not. The higher you are in that order, the more likely you are to run.
We will get coal lower in the order but either increasing the marginal cost of coal (which requires them to feel emissions costs) or getting investments that have lower costs — most likely wind and solar but there could be others. The problem is that free non-tradable permits will keep coal where it is and that is bad.
Here is a better way forward. Let’s raise the regulated price cap to final consumers by 20 percent over the next few years. In return for that, retailers will have to put in smart meters into households. The twin effect of that will get some behavioural changes at the user end. But the short-run effect will be to see more money available in the electricity sector and so a big incentive to move quickly on new investment. And what new investment will that be: ones that economise on emissions in the long-term.
It shouldn’t be hard to get effective environmental policy but these exceptions and compensation mechanisms can stand in our way. We need to get rid of them.