ROC bands – just keep it simple

In my experience, a uniting feature of governments of all political complexions is their capacity to base policy on fundamentally flawed assumptions, miss the overarching issues, and eschew sound science and rational economic models. DECC’s proposals on Renewable Obligation Certificate (ROC) Banding were a case in point, and the consultation, the results of which are due out this Spring, frustratingly allowed no scope to question the intellectual strength of the total package.

I am not sanguine about the ROC scheme’s founding assumptions being modified given the sizeable vested commercial and political interests in play. But I feel duty bound to point out the folly of the complex course we seem set on, and hope that someone at DECC will absorb the questions I have raised, whether through this article or my consultation response.

Confidence and complexity

As an economist I would argue that a subsidy (which the ROC scheme amounts to) will be a less effective inducer of behaviour shift than a tax or traded pollution permit regime. Investors will hesitate to respond when history suggests subsidies may be rapidly withdrawn if the modelling framework proves to be flawed (e.g. solar PV) or economic conditions compel swingeing cut backs. Worse, the proposed subsidy framework is not founded on sound scientific CO₂ measurement and transparent data mapping of material flows. Instead it relies on capital and operating cost assumptions – provided by its future beneficiaries.

It is also inordinately complicated, with a matrix of almost 30 permutations based on input estimates for various technologies and/or the scale of operation (with arbitrary cut-off points). If DECC ran a zoo, no doubt visits would be priced according to the specific animals seen and how many other visitors there were at the time. Such complexity will increase investors’ perception of risk – would you go to a zoo if you had no idea whether the ticket would cost £5 or £50?

This complex framework has to survive in a diverse energy market where many external factors vary independently. Oil prices respond to political uncertainty and growth rate changes; food demand affects biomass availability. UK inflation, volatile exchange rates and many other variables may warp the carefully created construct, increase investment risk and distort the allocation of scarce capital.

Subsidies funded by domestic levies also carry the risk of increasing fuel poverty. ROCs dangerously separate authority (to invest in sustainable energy) from responsibility (to price competitively in the market) by increasing the proportion of a generator’s income fixed and underwritten by OFGEM. The result is a much reduced incentive to price attractively.

What worked for waste

And yet the world of waste offers a clear, established alternative approach. In the mid nineties the Government introduced landfill tax to drive a switch to more sustainable options. I repeatedly argued that the annual tax increase was too low, but the principle was right and the tax has succeeded. First it drew out heavy materials from our refuse; now it is high enough to drive innovation in the diversion of low-weight and difficult streams. Landfill tonnages have dropped from 92 million in 1995 to 23 million today.

Imagine if the ROCs model had been adopted for waste; if different support fees had been offered for each material, based on the cost of collecting or diverting it. I wonder how it would have stood up to variations in material prices, and rapid developments in separation and reprocessing technology? Not well, I fear.

So, what should DECC do instead? They should concentrate on keeping it simple and market based, by introducing two taxes:

• An energy tax, based on the gigajoule rating/BTU value of the fuel used to generate it, whether fossil of short cycle carbon.

• An emissions tax per tonne of CO₂ on all technologies using fuels, whether they are converted into electricity, heat, gas, bioethanol, fertiliser, hydrogen or anything else. Any CO₂ sequestered as carbonate rock, industrial gas or equivalent would be netted off.

This approach readily lends itself to measurement and transparent modelling for policy development.

I suspect that Government is shunning simple, effective solutions through aversion to disruptive rather than incremental change – but I fear the latter cannot now deliver what is required. I am also sceptical that DECC has the capacity to move to a ground-shifting, simple approach, wedded as it is to its complex, inflexible model. I’m just glad they don’t run waste policy – or a zoo.