The global average temperature for July 2023 was the highest ever recorded and July 3rd was the world’s hottest day on record. We’ve seen scenes of wildfires raging across much of southern Europe, people suffering searing temperatures in south-west USA, southern India and western China, flash floods in South Korea, Japan and eastern USA. These are all directly related to global warming, which is causing weather systems to become more extreme. And as the planet continues to warm, so these problems will intensify.
The Secretary General of the United Nations, Antonio Guterres, in a press conference on 27 July warned that:
Climate change is here. It is terrifying. And it is just the beginning. The era of global warming has ended; the era of global boiling has arrived. The air is unbreathable. The heat is unbearable. And the level of fossil-fuel profits and climate inaction is unacceptable. Leaders must lead. No more hesitancy. No more excuses. No more waiting for others to move first. There is simply no more time for that.
The environmental, human, social and economic impact of global warming is huge, but concentrated on just part of the world’s population. For many, a more variable climate is at worst an inconvenience – at least in the short term. But it is the short term that politicians are most concerned about when seeking to win the next election.
Tackling climate change requires action to reduce carbon emissions now, even though the effects take many years. But one person’s emissions make only a minuscule contribution to global warming. So why not be selfish and carry on driving, flying off on holiday, using a gas boiler and eating large amounts of red meat? This is what many people want to do and governments know it. Many people do not like green policies as they involve sacrifice. Examples include higher fuel prices and restrictions on what you can do. So, despite the visions of fires, floods and destruction, governments are wary about raising fuel taxes, airport duties and charges to use old high-emission cars in cities; wary about raising taxes generally to provide subsidies for sustainable power generation; wary about banning new oil and gas fields that would reduce reliance on imported fuel.
Because the external costs of carbon emissions are so high and global, government action is required to change behaviour. Education can help and scenes of devastation from around the world may change the hearts and minds or some people. Also, the prospect of profits from cleaner and more fuel-efficient technology can help to spur innovation and investment. But to meet net zero targets still requires policies that are unpopular with many people who might be inconvenienced or have to pay higher petrol, energy and food prices, especially at a time when budgets are being squeezed by inflation.
Part of the problem is a distributional one. The people most affected by the cost-of-living crisis and higher interest rates are those on lower incomes and with higher debts. Politicians know that it will be hard to win the votes of such people if they are faced with higher green taxes. As elections approach, politicians are likely to backtrack on many environmental commitments to appeal to such people.
This is beginning to happen in the UK, with the government declaring that it is on the side of the motorist. Indeed, Rishi Sunak has just announced that the government will authorise more than 100 new licenses for new oil and gas wells in the North Sea. This is despite the United Nations, various other international bodies, climate scientists and charities calling for a halt to all licensing and funding of new oil and gas development from new and existing fields. The government argues that increased North Sea production would reduce the reliance on imported oil.
Video
Articles
- July 2023 the Hottest Ever Month on Record, Likely Warmest in ‘Tens of Thousands of Years’
The Wire, Aathira Perinchery (28/7/23)
- Climate threat ‘existential’ says Biden, as world faces hottest July
BBC News, Heather Sharp and Emma Owen (27/7/23)
- UN chief says Earth in ‘era of global boiling’, calls for radical action
Aljazeera (27/7/23)
- Why it’s time to prepare for the worst on climate change
Financial Times, Robert Pindyck (6/7/23)
- The planet heats, the world economy cools – the real global recession is ecological
The Guardian, Larry Elliott (9/7/23)
- Climate change will reshape global supply chains — it can reduce welfare on Earth by 20%: Ivan Rudick
The Economic Times (India), Srijana Mitra Das (30/6/23)
- Rishi Sunak defends granting new North Sea oil and gas licences
BBC News (31/7/23)
- The oil industry has succumbed to a dangerous new climate denialism
The Conversation, Adi Imsirovic (31/7/23)
- Dismay as Rishi Sunak vows to ‘max out’ UK fossil fuel reserves
The Guardian, Severin Carrell, Peter Walker and Helena Horton (31/7/23)
- What are the Conservatives’ green policies – and what could be scrapped
Sky News, Jennifer Scott (31/7/23)
- Rishi Sunak signals he is ready to soften UK green policies
Financial Times, George Parker and Lucy Fisher (24/7/23)
- Green campaigners fear UK policy backlash after ULEZ keeps Uxbridge Tory
Politico, Charlie Cooper and Bethany Dawson (23/7/23)
- Climate policy and economic inequality
VoxEU, Diego Känzig (25/6/23)
- The untapped potential of education in the battle against climate change
VoxEU, Noam Angrist, Kevin Winseck, Harry Anthony Patrinos and Joshua Graff Zivin (14/7/23)
Questions
- In what sense is the environment a ‘public good’? How is the concept of externalities relevant in analysing the private decisions made about the use of a public good?
- How may game theory be used to help understand the difficulties in reaching international agreement about climate change policies?
- What is meant by ‘net zero’? Is carbon capture and storage an acceptable alternative to cutting carbon emissions?
- In what ways could policies to tackle climate change be designed to reduce income inequality rather than increase it?
- What are the arguments for and against banning (a) petrol and diesel cars; (b) gas boilers; (c) fossil-fuel power stations? How much notice should be given if such bans are to be introduced?
- What is meant by ‘nudge theory’? In what ways could people be nudged into making greener decisions?
- What are the arguments for and against granting new licences for North Sea oil and gas drilling? Explain where you feel the balance of the arguments lies.
The Consumer Prices index (CPI) measures the rate of inflation and in October, this rate fell to 2.2%, bringing inflation to its lowest level since September 2012. For many, this drop in inflation came as a surprise, but it brings the rate much closer to the Bank of England’s target and thus reduces the pressure on changing interest rates.
The CPI is calculated by calculating the weighted average price of a basket of goods and comparing how this price level changes from one month to the next. Between September and October prices across a range of markets fell, thus bringing inflation to its lowest level in many months. Transport prices fell by their largest amount since mid-2009, in part driven by fuel price cuts at the big supermarkets and this was also accompanied by falls in education costs and food. The Mail Online article linked below gives a breakdown of the sectors where the largest price falls have taken place. One thing that has not yet been included in the data is the impact of the price rises by the energy companies. The impact of his will obviously be to raise energy costs and hence we can expect to see an impact on the CPI in the coming months, once the price rises take effect.
With inflation coming back on target, pressures on the Bank of England to raise interest rates have been reduced. When inflation was above the target rate, there were concerns that the Bank of England would need to raise interest rates to cut aggregate demand and thus bring inflation down.
However, the adverse effect of this would be a potential decline in growth. With inflation falling to 2.2%, this pressure has been removed and hence interest rates can continue to remain at the record low, with the objective of stimulating the economy. Chris Williamson from Markit said:
The easing in the rate of inflation and underlying price pressures will provide greater scope for monetary policy to be kept looser for longer and thereby helping ensure a sustainable upturn in the economy … Lower inflation reduces the risk of the Bank of England having to hike rates earlier than it may otherwise prefer to, allowing policy to focus on stimulating growth rather than warding off rising inflationary pressures.
The lower rate of inflation also has good news for consumers and businesses. Wages remain flat and thus the reduction in the CPI is crucial for consumers, as it improves their purchasing power. As for businesses, a low inflation environment creates more certainty, as inflation tends to be more stable. Businesses are more able to invest with confidence, again benefiting the economy. Any further falls in the CPI would bring inflation back to its target level of 2% and then undoubtedly concerns will turn back to the spectre of deflation, though with the recent announcements in energy price rises, perhaps we’re getting a little ahead of ourselves! Though we only need to look to countries such as Spain and Sweden where prices are falling to realise that it is certainly a possibility. The following articles consider the data and the impact.
UK inflation falls in October: what the economists say The Guardian, Katie Allen (12/11/13)
British inflation hits 13-month low, easing pressure on central bank Reuters, David Milliken and William Schomberg (12/11/13)
UK inflation falls to 2.2% in October BBC News (1211/13)
UK inflation falls to 13-month low: reaction The Telegraph (12/11/13)
Fall in inflation to 2.2% welcome by government The Guardian, Katie Allen (12/11/13)
Inflation falls to lowest level for a year as supermarket petrol price war helps ease the squeeze on family finances Mail Online, Matt Chorley (12/11/13)
Inflation falls to its lowest level for more than a year as consumers benefit from petrol pump price war Independent, John-Paul Ford Rojas (12/11/13)
UK inflation slows to 2.2%, lowest level in a year Bloomberg, Scott Hamilton and Jennifer Ryan (12/11/13)
Are we facing deflation? Let’s not get carried away The Telegraph, Jeremy Warner (12/11/13)
Questions
- How is the CPI calculated?
- Use an AD/AS diagram to illustrate how prices have been brought back down. Is the reduction in inflation due to demand-side or supply-side factors?
- What are the benefits of low inflation?
- The Telegraph article mentions the possibility of deflation. What is deflation and why does it cause such concern?
- Explain why a fall in the rate of inflation eases pressure on the Bank of England.
- How does the rate of inflation affect the cost of living?
- Is a target rate of inflation a good idea?
From early January to late February 2013, the average pump price of petrol in the UK rose by over 6p per litre – a rise of 4.7% in just seven weeks. There have also been substantial rises in the price of diesel.
The higher prices reflect a rise in the dollar wholesale price of oil and a depreciation in the pound. From 2 January to 21 February the pound fell from $1.63 to $1.53 – a depreciation of 6.1% (see). Crude oil prices (in dollars) rose by just under 7% over this period. With oil imports priced in dollars, a weaker pound pushes up the price of oil in the UK. The price has then been pushed up even higher by speculation, fuelled by the belief that prices have further to rise.
The higher price of road fuel, plus the general squeeze on living standards from the recession, with prices rising faster than wages, has caused a reduction in the consumption of road fuel. Petrol sales have fallen to their lowest level for 23 years. Sales in January 2013 were 99m litres down on the previous month’s sales of 1564m litres (a fall of 6.3%).
Not surprisingly motorists’ groups have called for a reduction in fuel taxes to ease the burden on motorists. They also argue that this will help to drive recovery in the economy by leaving people with more money in their pockets.
Equally not surprisingly, those concerned about the environment have welcomed the reduction in traffic, as have some motorists who like the quieter roads, allowing journey times to be cut, with resulting reductions in fuel consumption per mile.
The following videos and articles discuss the causes of the most recent fuel price rises and also examine the responsiveness of demand to these higher prices and to the reductions in real incomes.
Webcasts
Rising petrol prices are ‘forcing drivers off the road’ BBC News, Richard Westcott (22/2/13)
Fuel prices ‘forcing drivers off road’ – AA BBC News (22/2/13)
Fuel Prices Head For Highest Level Ever Sky News (22/2/13)
Commodities Next Week: Fuel Prices Hit Fresh 2013 Highs CNBC (22/2/13)
Ministers to blame for high fuel prices, says competition watchdog The Telegraph, Peter Dominiczak (30/1/13)
Articles
Petrol price surge adds 6.24p to a litre in a month The Guardian (22/2/13)
Petrol prices set for record highs as speculators and weak pound drive up pump costs again This is Money (22/2/13)
How are motorists saving fuel? NNC Magazine, Tom Geoghegan (9/3/11)
AA Report
Fuel Price Report (February 2013)
Data
Weekly road fuel prices Department of Energy and Climate Change
Energy consumption in the UK Department of Energy and Climate Change
Oil and oil products: section 3, Energy Trends Department of Energy and Climate Change
Europe Brent Spot Price FOB (Dollars per Barrel) US Energy Information Administration
Crude Oil (petroleum), Price index Monthly Price – Index Number Index Mundi
Questions
- Is it possible to calculate the price elasticity of demand for petrol from the data given? Try making the calculation.
- How important is the ceteris paribus (other things being equal) assumption when calculating the price elasticity of demand for petrol?
- Why is the long-run price elasticity of demand for road fuel likely to different from the short-run price elasticity?
- If wholesale oil prices go up by x%, will prices at the pumps go up by approximately x% or by more or less then x%? Similarly, if the pound depreciates by y% would you expect prices at the pumps go up by approximately y% or by more or less then y%? Explain.
- How has speculation affected fuel prices? Is this effect likely to persist? Explain.
- Under what circumstances would a reduction in road fuel taxes help to drive the recovery? Are such circumstances likely?
- Which groups in society suffer most from higher fuel prices? Is this reflected in their price elasticity of demand and if so why?
- Is a rise in fuel prices above inflation likely to increase or decrease inequality in living standards? Explain.
- Should externalities from fuel consumption and production be taken into account when setting the duty on petrol and diesel and, if so, what would be the implication for prices?
When crude oil prices go up, the prices of petrol and diesel go up pretty well straight away and by the full amount, or more, of the crude price rise. When crude prices go down, however, road fuel prices are often slow to fall; and when they do, the fall is less than the full fall in crude prices.
Click on charts below for a larger version. Click here for a PowerPoint of the left-hand chart.
In response to complaints of motorists and haulage companies, the Office of Fair Trading has announced that it will investigate the link between crude prices and prices at the pump. It will report in January 2013.
The review will consider questions of competition and market power. In particular, it will look at the power of the oil companies in determining the wholesale price of road fuel.
It will also examine the retail fuel sector and whether supermarkets are driving out independent retailers. The claim of many independent petrol stations is that supermarkets are selling below cost as a lost leader to encourage people to shop in their stores. They also claim that supermarkets use their buying power to obtain fuel more cheaply.
What is more, most of the petrol stations that are not part of supermarkets are owned by the oil companies. Again, independents claim that oil companies supply fuel more cheaply to their own stations than to independents.
As a result of what many independents see as unfair competition, many are driven out of business. Today there some 9000 petrol stations in the UK; 20 years ago there were twice as many.
The following articles look at the remit of the OFT investigation and at the competition issues in the road fuel market.
Articles
Formal inquiry tries to ease motorist pain at the pumps ITV News, Laura Kuenssberg (5/9/12)
OFT to scrutinise retail petrol market Financial Times, Caroline Binham (5/9/12)
OFT launches probe into pump prices Channel 4 News (5/9/12)
Petrol and diesel prices: Office of Fair Trading launches competition inquiry Guardian, Terry Macalister (5/9/12)
Petrol and diesel price review is launched by OFT BBC News (5/9/12)
Are supermarkets to blame for the devastation of independent petrol retailers by deliberately selling at a loss? This is Money, Tom Mcghie and Neil Craven (8/9/12)
OFT petrol pricing probe welcomed The Grocer, Beth Phillips (7/9/12)
Private businesses welcome OFT’s fuel price investigation Talking Retail (6/9/12)
10 charges that make consumers scratch their heads BBC News Magazine, Lucy Townsend (6/9/12)
Data
Crude Oil Price Index Index Mundi
Daily Brent Crude Spot Price, 1987 to present day US Energy Information Administration
Current UK Petrol Pump Prices What Pric£?
Fuel Prices WhatGas.com
Questions
- Describe the structure of the road fuel market, from oil production through to the retailing of petrol and diesel.
- What is meant by the terms ‘monosony’ and ‘oligopsony’? Which companies in the road fuel market have significant monopsony/oligopsony power?
- What determines the price elasticity of demand for road fuel in (a) the short run; (b) the long run? What implications does this have for the value of the short-run and long-run price elasticities?
- Where is the abuse of market power likely to occour in the road fuel market?
- To what extent is it in the consumers’ interests for supermarkets to sell road fuel below average cost?
- Examine the data for pump prices and crude oil prices and establish whether there is any truth in the claim that pump prices adjust rapidly to a rise in crude prices and slowly to a fall in crude prices.
With droughts and poor harvests in both North America and in Russia and the Ukraine, there are worries that food prices are likely to see sharp rises in the coming months. This is clearly bad news for consumers, especially the poor for whom food accounts for a large proportion of expenditure.
But it’s also bad news more generally, as higher food prices are likely to have a dampening effect on the global economy, struggling to recover from five years of low or negative growth. And it’s not just food prices. Oil prices are rising again. Since mid June, they have risen by nearly 25%. This too is likely to have a dampening effect.
Another contributing factor to rising food prices is a response, in part, to rising oil prices. This is the diversion of land from growing food to growing crops for biofuels.
G20 countries held a conference call on 28 August to discuss food prices. Although representatives decided against an emergency meeting, they agreed to reassess the situation in a few weeks when the size of the US harvest would be clearer. If the situation proved as bad as feared, then the G20 would call an emergency meeting of the Rapid Response Forum, to consider what could be done.
But is the sole cause of rising food prices a lack of production? Are there other problems on the supply side, such as poor distribution systems and waste? And what about the role of demand? How is this contributing to long-term increases in food prices? The articles consider these various factors and what can be done to dampen food prices.
Articles
G20 points to ‘worrying’ food prices Financial Times, Javier Blas (28/8/12)
US food prices to surge on drought Gulf News(30/8/12)
Best to get used to high food and energy prices – they’re here to stay The Telegraph, Jeremy Warner (29/8/12)
Feeling a drought The Economist (14/8/12)
Q&A: World food and fuel prices BBC News (14/8/12)
G20 considers global meeting as food prices rise BBC News (28/8/12)
Biofuels and Food Prices (direct link) BBC ‘In the Balance’ programme (25/8/12)
U.N. body urges G20 action on food prices, waste Reuters, Patrick Lannin (27/8/12)
Ethanol industry hits back over food price claims EurActiv (28/8/12)
The era of cheap food may be over Guardian, Larry Elliott (2/9/12)
Data
Food Price Index Index Mundi
Questions
- Why have food prices been rising in recent weeks?
- Use a demand and supply diagram to demonstrate what has been happening to food prices.
- What determines the price elasticity of demand for wheat? What might this elasticity vary over time?
- What is the role of speculation in determining food prices?
- Illustrate on an aggregate demand and supply diagram the effect of a commodity price shock. What is likely to be the policy response from central banks?
- What determines the price elasticity of supply of food in (a) the short term and (b) the long term?
- What determines the cross price elasticity of supply of food to the price of oil? Is the cross price elasticity of supply positive or negative?
- What can governments do to reduce food prices, or at least reduce food price inflation?
- What benefits may come from higher food and fuel prices over the longer term?
