Touting windmills

Published: January 26 2009 21:45

Renewable energy is on the ropes. A capital-intensive industry, it has been bruised by the credit crisis. When fuel prices are falling, wind farms and tidal barrages can become unprofitable. Policymakers, however, cannot rely on oil price spikes to turn their energy green. They must act.
A proposed large offshore wind plant in England is now under threat. Eon UK, part of the German energy group, said this week that its London Array project in the Thames estuary was endangered by falling energy prices. Even in a recession, we should not forget renewable energy. Far from it: this is the right time for states to invest in diversifying their energy.

President Barack Obama intends to spend money on energy infrastructure as part of his economic recovery plan. A wise choice. Admittedly, energy investment is often not an effective economic stimulus: projects seldom get going in time. But it is still worthwhile. The US needs a great deal of investment in its energy systems, and this is a good time to do it. Steel prices are low and underemployed construction workers are plentiful. But Mr Obama – and other political leaders – must go further.
Renewable energy cannot be allowed to rely on straightforward government subsidy or high oil prices to remain viable. The only solution is a broad carbon tax. This should not happen immediately. A carbon tax is intended to prompt households and businesses to change their behaviour by investing in improving efficiency. But finding money for investment would be difficult in the midst of a global credit crisis. A carbon tax would also need accompanying measures to prevent fiscal tightening and avoid unfairly burdening people.
But indebted governments – not just Mr Obama’s – will eventually need to repair their balance sheets, and all countries need to fight climate change. Committing now to introduce a carbon tax some years ahead would provide credible new sources of revenue when they would be needed, and when they could be afforded. A carbon tax would also provide the certainty required for companies to increase investment in renewables even when the economy is in poor shape.
In the short term, states must make sure that energy companies can borrow to invest, and that planning laws do not stand in their way – a particular problem in the UK. Subsidy regimes for renewables currently under way should pay out in relation to how much carbon they save. But in the long term only a carbon tax will make renewable energy able to pay its own way.
Copyright The Financial Times Limited 2009