This House Does Not Trust the Market for Improvements in Energy Standards.

The market has no interest in altering a model in which scarcity increases profitability as is the case with the current market. Within that context there is little likelihood that they will provide, with no stimulus, the front-loaded investment necessary for the development of new technologies. Instead the state has the capacity to offer both the carrot of guaranteeing a future market and the stick of regulating future carbon emissions.

Left unchecked the market has little or no interest to innovate and has the encouragement of the profit motive not to. However, corporations have an interest in the sustainability of their individual businesses so will move to new technologies, even if more expensive, if necessary but that will only be the case if the government creates that market artificially.

The market will, ultimately, respond to cost. As a result, just as has been the case with tar sands and shale fracking and other non-traditional sources of carbon fuels once the cost justifies it or the demand is created then the market will respond by creating or utilizing new innovations.

If the cost of production of fossil fuels rises to a point whereby the investment in new technologies is justified – as it will – then the market will respond.

Creating false markets either through subsidies or regulation is unlikely to create technologies that can survive without those regulations or subsidies. There is, after all, no motivation to do so. Presented with a guaranteed market, there is an active motivation to do the bare minimum – in terms of expense – to meet that need as it removes the competitive advantage of exceeding it. Equally the idea that the global energy giants can’t see on their own that this is a market that they will need to prepare for is clearly undermined by the fact that they are already doing so.

In the process of creating, effectively an entire new industry, there are myriad infrastructural considerations which companies are poorly placed to deliver. Companies rely on government to train graduate and other staff, to plan for and deal with the externalities of industry and, perversely, to regulate them. The energy industry, in particular has not demonstrated a notable capacity to undertake any of these task voluntarily and there is little reason to believe that they would act any differently in the future.

As long as there is a market for oil engineers universities and others have little interest in training a new generation of experts, indeed, given the structure of university departments there is an active disincentive to making one’s own field of research redundant. This means the intervention has to come from the government; departments could change their focus to being on renewable energy but it won’t happen without government backing. Similarly engineers could be retrained to work in the renewable industry by the government.

It is in the interest of the providers of infrastructural services such as education to respond to the changing face of the market. Attempting to predict that in advance is almost always reckless as has been routinely seen in the relationship between universities, planning bodies and others in relation to the IT industry.

Second guessing the next big thing proves far more dangerous than being left free to respond to changing circumstances.

Specifically in relation to universities, research follows the funding and therefore as the energy industry shifts its focus due to changing demands, so the focus of academic departments follows suit. Absolutely none of this requires government intervention; it is worth noting that the history of government long term planning for new sectors of the economy does not have a happy track record as the creation of Soviet heavy industry demonstrated - it simply leaves millions of people unemployable with expertise in an area that does not exist. A priori, the most accurate determinant of who employers are hiring is who they’re hiring.

Governmental and inter-governmental policies can be focused on decades in the future rather than on the next product launch. Energy policy in particular operates on long time scales due to the very long build time for new power plants. Equally, governments have the power to regulate and, where necessary, compel individuals and organizations to comply with those regulations. Moreover government’s interests are very different from the interests of business; government’s interest is in the future welfare of their citizens not their own profit and is as much for the young as the current working generation.

By contrast the market has an interest in avoiding – or in the case of carbon trading, moving - the problem. Energy companies – not to mention heavy industry and manufacturing – have a commercial interest in maximizing energy use as it relates directly to maximizing output. Energy companies want consumers to use more of their product, car manufacturers want consumers to travel more even if this means using more fuel. If a manufacturer expands they increase their energy consumption and if a consumer is to buy a good they are then increasing their own energy consumption, therefore increasing energy use is, ultimately perceived as a positive outcome.

However, every serious report on the subject sees a reduction in the consumption of energy as an important, indeed critical, part of the solution to the challenges posed by climate change and peak oil.

Energy efficiency is an important part of any plan not only for its environmental benefits but also because of its impact on the balance sheet. This reality is being discovered not only by individuals and SMEs but by global corporations who are, increasingly building into their corporate strategy[i]. While it may be true that energy companies want everyone to use more energy for most companies the opposite is true. The market ensures that companies want to cut their costs and so reduce energy consumption. At the same time companies know that consumers too want to reduce their energy consumption so as to cut costs so make their products as energy efficient as possible

It is, in fact, the best example of real change taking place because it has a market benefit. Government activity by contrast has mostly revolved around meaningless and largely unmet targets.

Environmental concerns may be seen as a fringe issue by politicians but there is nothing fringe in the issue of reducing costs within the business community. As a result the market is far more incentivized to address this issue than recalcitrant politicians reluctant to admit that people really do have to give up their cars, insulate their houses and reduce their consumption.

It’s a good example of the market beating regulation hands down.

[i] Economist Intelligence Unit. “Unlocking the Benefits of Energy Efficiency: An Executive Dilemma”.

The market has no interest in altering a model in which scarcity increases profitability as is the case with the current market. Within that context there is little likelihood that they will provide, with no stimulus, the front-loaded investment necessary for the development of new technologies. Instead the state has the capacity to offer both the carrot of guaranteeing a future market and the stick of regulating future carbon emissions.

Left unchecked the market has little or no interest to innovate and has the encouragement of the profit motive not to. However, corporations have an interest in the sustainability of their individual businesses so will move to new technologies, even if more expensive, if necessary but that will only be the case if the government creates that market artificially.

The market will, ultimately, respond to cost. As a result, just as has been the case with tar sands and shale fracking and other non-traditional sources of carbon fuels once the cost justifies it or the demand is created then the market will respond by creating or utilizing new innovations.

If the cost of production of fossil fuels rises to a point whereby the investment in new technologies is justified – as it will – then the market will respond.

Creating false markets either through subsidies or regulation is unlikely to create technologies that can survive without those regulations or subsidies. There is, after all, no motivation to do so. Presented with a guaranteed market, there is an active motivation to do the bare minimum – in terms of expense – to meet that need as it removes the competitive advantage of exceeding it. Equally the idea that the global energy giants can’t see on their own that this is a market that they will need to prepare for is clearly undermined by the fact that they are already doing so.

In the process of creating, effectively an entire new industry, there are myriad infrastructural considerations which companies are poorly placed to deliver. Companies rely on government to train graduate and other staff, to plan for and deal with the externalities of industry and, perversely, to regulate them. The energy industry, in particular has not demonstrated a notable capacity to undertake any of these task voluntarily and there is little reason to believe that they would act any differently in the future.

As long as there is a market for oil engineers universities and others have little interest in training a new generation of experts, indeed, given the structure of university departments there is an active disincentive to making one’s own field of research redundant. This means the intervention has to come from the government; departments could change their focus to being on renewable energy but it won’t happen without government backing. Similarly engineers could be retrained to work in the renewable industry by the government.

It is in the interest of the providers of infrastructural services such as education to respond to the changing face of the market. Attempting to predict that in advance is almost always reckless as has been routinely seen in the relationship between universities, planning bodies and others in relation to the IT industry.

Second guessing the next big thing proves far more dangerous than being left free to respond to changing circumstances.

Specifically in relation to universities, research follows the funding and therefore as the energy industry shifts its focus due to changing demands, so the focus of academic departments follows suit. Absolutely none of this requires government intervention; it is worth noting that the history of government long term planning for new sectors of the economy does not have a happy track record as the creation of Soviet heavy industry demonstrated - it simply leaves millions of people unemployable with expertise in an area that does not exist. A priori, the most accurate determinant of who employers are hiring is who they’re hiring.

Governmental and inter-governmental policies can be focused on decades in the future rather than on the next product launch. Energy policy in particular operates on long time scales due to the very long build time for new power plants. Equally, governments have the power to regulate and, where necessary, compel individuals and organizations to comply with those regulations. Moreover government’s interests are very different from the interests of business; government’s interest is in the future welfare of their citizens not their own profit and is as much for the young as the current working generation.

By contrast the market has an interest in avoiding – or in the case of carbon trading, moving - the problem. Energy companies – not to mention heavy industry and manufacturing – have a commercial interest in maximizing energy use as it relates directly to maximizing output. Energy companies want consumers to use more of their product, car manufacturers want consumers to travel more even if this means using more fuel. If a manufacturer expands they increase their energy consumption and if a consumer is to buy a good they are then increasing their own energy consumption, therefore increasing energy use is, ultimately perceived as a positive outcome.

However, every serious report on the subject sees a reduction in the consumption of energy as an important, indeed critical, part of the solution to the challenges posed by climate change and peak oil.

Energy efficiency is an important part of any plan not only for its environmental benefits but also because of its impact on the balance sheet. This reality is being discovered not only by individuals and SMEs but by global corporations who are, increasingly building into their corporate strategy[i]. While it may be true that energy companies want everyone to use more energy for most companies the opposite is true. The market ensures that companies want to cut their costs and so reduce energy consumption. At the same time companies know that consumers too want to reduce their energy consumption so as to cut costs so make their products as energy efficient as possible

It is, in fact, the best example of real change taking place because it has a market benefit. Government activity by contrast has mostly revolved around meaningless and largely unmet targets.

Environmental concerns may be seen as a fringe issue by politicians but there is nothing fringe in the issue of reducing costs within the business community. As a result the market is far more incentivized to address this issue than recalcitrant politicians reluctant to admit that people really do have to give up their cars, insulate their houses and reduce their consumption.

It’s a good example of the market beating regulation hands down.

[i] Economist Intelligence Unit. “Unlocking the Benefits of Energy Efficiency: An Executive Dilemma”.

Government has done a good deal to put back the cause of the environmental movement by constantly associating it in people’s minds with higher costs and taxes as well as poorly thought out regulation. By contrast the market has an inbuilt motivation to preserve resources for future or more profitable use, to reduce the resource consumption – notably energy – in the provision of any good or service. This means that company can make more and sell more of their product and so make a bigger profit. Also business has an incentive to promote the benefits of sustainability when they provide a market advantage in the minds of consumers keen to help with environmental issues where they can, being ‘green’ can either distinguish a company from the competition or else can become a competition between companies to be greener than their rivals. Government seeks to compel people to do what is good for them, which tends to meet with resistance, whereas market driven solutions present individuals with opportunities to feel good about themselves, still get the products they want and save the planet at the same time.

This is simply not the reality. This approach has so far created the absurdity of “clean Coal”[i] and the notion that there is any such thing as an environmentally friendly car that ignore the polluting implications of their production.

Generally speaking ‘Green’ has been seen as a great advertising strategy but the reality that moving towards a zero carbon economy requires a significant reduction in total global consumption and therefore in the use of the resources that underpin the modern economy – notably energy – has mostly passed manufacturers and others by.

Nobody enjoys compulsion but most accept that it is necessary in many circumstances, ranging from taxation to legislation. It is interesting that exactly the people who tend to be reluctant for the government to have those roles seem to be having difficulty with this one as well. There are plenty of people in the world who are not consumers either because they are part of the majority of the world who can’t afford the products of Western business or because they haven’t been born yet. For all that business ignores their interests, it’s their world too.

[i] Richard Conniff, “The Myth of Clean Coal”. Environment 360. Yale University. 3 June 2008.

There is no doubt that, of course, government has a role in engaging with the market to encourage research and stimulate new areas of growth and development. Indeed one of the primary roles of government is finding a way to encourage the creation of new jobs and have an eye on the future direction of the economy. However it is hard to identify a time or place where increasing regulation and costs or attempting to plan the whole thing centrally with the threat of punitive sanctions for non-compliance has been anything other than a disaster. Ultimately the burden still lies on the market although that has always included a role for government. This does not alter the fact that it’s the market that is taking the lead.

The market has been reluctant – some would say obsessively so – to take the lead on any project. In the US it fought everything from desegregation to the creation of the EPA. Worldwide it has always – with a few honorable exceptions – tended to follow the path of least resistance and greatest profit on everything from child labour to minimum wages to pollution controls to job security to any range of others.

Historically only regulation or legislation has been able to overcome these hurdles. Opposition might as well be saying, “Well, of course there is a market for Cotton from the free states but government must realize that it will only ever be a minority share of the market…”

History tells us that the market requires more than a nudge on these matters.

The market is a process in and of itself, not just a collection of government policies or corporate interests. As a result any sensible approach to energy concerns should deal with that reality. Energy standards will improve when there is a profit motive for it to happen and when it creates jobs.

Unlike government policy which is likely to change when a new government enters power the profit motive will remain the same. Even if there is a swing in oil prices from being very high (so encouraging energy saving) to being very low companies will keep investing in saving energy because they have seen the volatility of the energy market and do not want to be caught out in the future. Both the private and public sector have a role to play that they need to so within the framework of the free market.

Of course legislation needs to reflect economic reality and the idea that people are going to support options that hike prices or destroy jobs is simply not the debate. However the market is not a force in its own right. Ultimately the issue of diminishing energy reserves and the impact of pollution is one that will require concerted government action on an international scale. Taking the chance that the profit motive will eventually become compelling once the last pint of oil becomes really valuable as an antique is simply not a viable option. The market, left unfettered, benefits from increasing energy costs to the detriment of the majority of the world’s population and the wider environment.