Thursday 18 January 2024

The tree burning racket

I've written a briefing for the IEA about the perverse incentives that have led to the UK importing millions of tonnes of wood pellets to burn to make electricity. 

The negative externalities of greenhouse gas emissions leave more scope for political decisions and scientific judgements in the energy market than in many other markets, but this does not mean that governments should ‘pick winners’, nor does it mean that market forces are redundant. On the contrary, governments should set what Milton Friedman called ‘the rules of the game’ and allow the best solutions to prevail through ‘open and free competition without deception or fraud’. We need an institutional framework that is technology-neutral and open to all, leaving it to innovators to produce environmentally sound energy at the lowest cost.

Current carbon accounting practices create perverse incentives and allow governments to boast about reductions in carbon dioxide emissions that only exist on paper. It is difficult to imagine the British government permitting, let alone subsidising, the incineration of imported wood chips to generate electricity if the emissions were counted on its own balance sheet. Far from internalising the externalities, the current system allows governments to completely ignore the externalities of this form of electricity generation, thereby blunting the price mechanism and distorting the market. Without this distortion, it is unlikely that woody biomass would be part of the UK’s energy mix at all.

It's a short briefing so if you want an easy explainer of the arguments for and against the supposedly carbon neutral biomass industry, click here.

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