Financial Times Editorial - A real energy market
Financial Times Editorial - A real energy market
Published: April 17 2006 03:00 | Last updated: April 17 2006 03:00. Copyright by The Financial Times
Everyone "obsesses" about energy security these days - whether it is America's concern that its dependence on specifically Arab oil is politically unsafe, or commercial fears of India and China in relying on so much imported energy to fuel their huge growing economies, or the wider worry about the climatic risk of fossil fuels.
In these circumstances, it is very tempting for governments to say energy security is too important to be left to the market. That has been the attitude of India and China in instructing their state oil companies to scramble harder for foreign reserves and of several continental European governments in building up and protecting their energy companies as national champions. Politicians cannot just walk away if there is any real risk of the lights going off. Nor can their approach to energy be purely laisser faire, or bruler, because of atmospheric pollution. But here are three ways in which the market or its mechanisms can increase energy security.
First, use the market tool of price to discourage waste. This lesson should be heeded by the many developing countries that still subsidise oil product prices and by the US, the world's biggest oil consumer that still refuses to tax gasoline properly. Bizarrely for the banner carrier of capitalism, Washington declines to use the price mechanism of tax in favour of an administrative system of fuel efficiency standards that would do credit to Soviet-era Gosplanners, who would at least have imposed such norms more effectively on Detroit than have US bureaucrats.
Second, recognise the market as a source of security and a shock-absorber and remember the bigger the market, the larger the shock it can absorb. But the US and Europe are each still vainly trying to create a big single energy market. Only briefly in the aftermath of last summer's hurricanes did the US suspend the differing regional gasoline specifications that segment its national market. In Europe, Brussels has had to take legal action against no fewer than 17 European Union governments for failing, in various ways, to open their national markets to each other.
Finally, give the market maximum play in supporting new types of energy. This means giving support in the form, not of subsidies (except to research), but of mechanisms that allow market forces rather than bureaucrats to determine the most competitive forms of new energy. Europe already has such a mechanism in its emissions trading scheme, in which the price at which pollution permits are traded effectively becomes a kind of tax on carbon. This system will soon cover other Kyoto  signatories.
Such a carbon tax acts as a broad and neutral incentive for non-carbon fuels: nuclear as much as renewable energy. The beauty of this, for politicians hesitant about publicly backing nuclear power, is that the market can take the decision for them.
Published: April 17 2006 03:00 | Last updated: April 17 2006 03:00. Copyright by The Financial Times
Everyone "obsesses" about energy security these days - whether it is America's concern that its dependence on specifically Arab oil is politically unsafe, or commercial fears of India and China in relying on so much imported energy to fuel their huge growing economies, or the wider worry about the climatic risk of fossil fuels.
In these circumstances, it is very tempting for governments to say energy security is too important to be left to the market. That has been the attitude of India and China in instructing their state oil companies to scramble harder for foreign reserves and of several continental European governments in building up and protecting their energy companies as national champions. Politicians cannot just walk away if there is any real risk of the lights going off. Nor can their approach to energy be purely laisser faire, or bruler, because of atmospheric pollution. But here are three ways in which the market or its mechanisms can increase energy security.
First, use the market tool of price to discourage waste. This lesson should be heeded by the many developing countries that still subsidise oil product prices and by the US, the world's biggest oil consumer that still refuses to tax gasoline properly. Bizarrely for the banner carrier of capitalism, Washington declines to use the price mechanism of tax in favour of an administrative system of fuel efficiency standards that would do credit to Soviet-era Gosplanners, who would at least have imposed such norms more effectively on Detroit than have US bureaucrats.
Second, recognise the market as a source of security and a shock-absorber and remember the bigger the market, the larger the shock it can absorb. But the US and Europe are each still vainly trying to create a big single energy market. Only briefly in the aftermath of last summer's hurricanes did the US suspend the differing regional gasoline specifications that segment its national market. In Europe, Brussels has had to take legal action against no fewer than 17 European Union governments for failing, in various ways, to open their national markets to each other.
Finally, give the market maximum play in supporting new types of energy. This means giving support in the form, not of subsidies (except to research), but of mechanisms that allow market forces rather than bureaucrats to determine the most competitive forms of new energy. Europe already has such a mechanism in its emissions trading scheme, in which the price at which pollution permits are traded effectively becomes a kind of tax on carbon. This system will soon cover other Kyoto  signatories.
Such a carbon tax acts as a broad and neutral incentive for non-carbon fuels: nuclear as much as renewable energy. The beauty of this, for politicians hesitant about publicly backing nuclear power, is that the market can take the decision for them.
posted by Carlos T Mock at 10:20 AM
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