UK Parliament’s Environmental Audit Committee has concluded that the European Emissions Trading Scheme (ETS) is not working as it should. Thanks to a total emissions cap that is too low in a time of recession, the carbon price has fallen. The result is that there is no longer sufficient of an incentive for firms to invest in green technology. As the Financial Times article (below) reports:
The committee has urged the government to consider other measures, such as a floor price for carbon dioxide emissions, which would provide industries with greater certainty over the price of carbon and help to ensure the system of pricing was effective.
The MPs said a price of €100 per tonne of CO2 could be necessary to encourage investment, compared with current prices of about €13.
So is the committee correct? Or is a low price of carbon merely temporary, with firms realising that the price will rise as the European economy recovers? The following articles examine the issues.
Carbon markets failing, say British MPs Financial Times, Fiona Harvey (8/2/10)
Carbon prices are going the wrong way Independent, David Prosser (8/2/10)
U.K. Lawmakers Call for Intervention in Carbon Market BusinessWeek, Catherine Airlie and Ewa Krukowska (8/2/10)
UK should press EU for tighter carbon caps Reuters, Nina Chestney (8/2/10)
MPs propose carbon tax to boost green investment Guardian, Terry Macalister (8/2/10)
As UK Cap and Trade Falters, Government May Prop Up Carbon Prices Environmental Leader (9/2/10)
EU ETS intervention call howled down CarbonPositive (9/2/10)
The report
The role of carbon markets in preventing dangerous climage change Environmental Audit Committee
Questions
- Explain how the ETS works.
- What determines the price of carbon in the ETS? Why has it fallen in recent months?
- Compare the alternative policy approaches for encouraging green investment.
- What are the advantages and disadvantages of setting a floor price for carbon permits? What would be the effect on the balance of demand for and supply of premits?
- Discuss whether the total number of permits allocated should be reduced (i.e. the cap tightened).
- Compare the relative merits of giving the allocation of permits away with auctioning them.
- Compare the relative merits of a cap-and-trade system with green taxes.
The government has been under a lot of pressure to tackle the culture of binge drinking. Figures for 2006/7 show that the cost to the NHS of binge drinking was £2.7 billion per year. In response, MPs are calling for a change in government policy towards the alcohol industry, arguing that at present the drinks industry has more control over policy than health experts. So what can be done?
In a report published in early January 2010, the House of Commons Health Select Committee proposed a minimum price per unit of alcohol, tighter controls on advertising and mandatory labelling. A minimum price, the Committee argued, would reduce demand by heavy drinkers who are looking for cheap alcohol. At present, many supermarkets have promotions that involve selling cider and beer at below cost, allowing people to ‘pre-load’ cheaply at home before going out drinking. The report suggested that a minimum price of alcohol of 50p per unit would save more than 3000 lives per year and a minimum price of 40p per unit would save 1100 lives.
Dr. Richard Taylor, an independent MP and member of the Commons Health Select Committee, said:
“The evidence we took showed that minimum pricing was the most effective way forward and at the moment you can sometimes buy beer cheaper than water. Our message is that the price would be put up but only by a little for moderate drinkers. Surely that is a sacrifice to pay for the good health of young people.”
However, those opposed to setting a minimum price per unit of alcohol argue that it would be unfair on moderate drinkers, that it wouldn’t work and that it could even be illegal. Instead, they argue that that government intervention needs to be smarter. It should not target everyone, but solely those groups consuming the most alcohol. The British Beer and Pub Association suggests that 10% of the population consumes 44% of all alcohol.
It appears that the government won’t be following Scotland’s minimum price on alcohol, but will instead impose bans on all-you-can-drink deals and introduce compulsory identity checks. However, supermarket deals don’t appear to have been targeted. Successive governments have failed to tackle this problem sufficiently, but with an election approaching, will this be a proposal that is promoted?
Raise alcohol price to save lives, MPs argue Telegraph, Rebecca Smith (8/1/10)
Commons committee backs minimum alcohol pricing BBC News (8/1/10)
Campagain to tackle cut price alchol The Arran Banner (8/1/10)
Wyre Forest MP calls for alcohol minimum pricing The Shuttle (8/1/10)
Should 50p be minimum price for a unit of alcohol? Have your say BBC News (8/1/10)
BBPA: minimum price would be ineffective Morning Advertiser, Ewan Turney (8/1/10)
Cost of binge drinking doubles for the NHS rises to £2.7 billion Mirror, James Lyons (2/1/10)
Bring in 50p minimum price for alcohol, MPs urge Guardian, Toby Helm (3/1/10)
All-you-can-drink pub offers facing ban BBC News (19/1/10)
Too much of the hard stuff: what alcohol costs the NHS THE NHS Confederation, Issue 193 January 2010
Minimum pricing for alcohol essential, says Health Committee Marketing Week, David Burrows (8/1/10)
Minimum alcohol pricing ‘will affect the poor’ BBC News, Kevin Barron and Gavin Partington debate (8/1/10)
Questions
- How is the equilibrium price of alcohol determined?
- Illustrate and explain the effects of the imposition of a minimum price.
- To what extent is a minimum price likely to be effective? How is elasticity likely to play a role in the effectiveness of such a policy?
- Why could the introduction of a minimum price on alcohol be illegal and contravene European competition law?
- What are the arguments for and against a minimum price on alcohol? Explain how and why some people will gain and others will lose.
- How would a minimum price on alcohol affect government spending? Would more investment in prevention lead to a lower cost to the NHS? Explain your answer.
- Why might bans on all-you-can-drink deals be ineffective?
You can hardly have failed to miss the snow! From children sledging to cars skidding and from being snowed in from work to being snowed in at work. In the UK, it only happens once in a while and when it does, life practically comes to a standstill. Why is this not the case in countries such as Norway? Well, one way of looking at it as that they’re used to it and have tried and tested methods of dealing with it and the investment to match. As we suffer from these severe conditions only once in a while, any significant investment in improving our ability to deal with it could be considered a waste of money.
However, many businesses affected by the snowy conditions will certainly not see it this way. Transport links have been disrupted: roads closed; trains stopped; airports closed; tunnels blocked and sports fields unplayable. The worst affected city centres have been deserted and retailers have subsequently suffered. Even if shoppers had made it to the shops, they may have found many of them closed, as staff struggled to make it in to work across the country. Office workers were being advised to work from home where possible and off-duty medical staff that could make it in to work were covering for those that couldn’t. Even emergency services were said to be going out only to life threatening situations.
Small businesses are suffering from declining sales, as deliveries cannot be made. Farmers too are facing major problems. Thousands of livestock are being frozen to death and many animals are without food, as farmers simply can’t get to them, suffering from snow drifts that have been up to 4 feet deep across Scotland. These are the worst conditions that some areas in Scotland have experienced in 50 years and they’re expected to continue for some time. Cattle farmers in the UK are also facing wasting thousands of litres of milk, as lorries find they cannot access the farms. This could simply mean pouring all this milk down the drain.
Estimates suggest that this cold winter could cost the UK economy £14.5bn in total from lost business. Daily costs will be about £690 million – certainly something that we don’t need in the current climate – financial that is! The following articles look at some of the problems faced across the UK. Read them and then think about the questions below.
Hundreds stranded as Eurostar train breaks down in channel tunnel again Mail Online, Peter Allen (7/1/10)
UK snow freezes transport links and thousands of schools (including video) Guardian, Peter Walker and Steven Morris (6/1/10)
Snowed in, out of pocket. Store staff face a wage freeze Guardian, Caroline Davis and John Stevens (6/1/10)
Livestock being frozen to death in their thousands Scotsman, Frank Urquhart, Alastair Dalton and Mark Smith (7/1/10)
Heavy snow damages business for hospitality industry Big Hospitality, Becky Paskin (6/1/10)
UK’s snowy winter could cost the economy £14.5bn Metro Reporter (7/1/10)
Business leaders criticise school closures BBC News (7/1/10)
Snow puts business continuity plans to the test Computer Weekly, Warwick Ashford (7/1/10)
Freezing weather will cost Welsh economy £25m a day Western Mail, David James (7/1/10)
Snow brings chaos – and beautiful scenes Cotswold Journal (7/1/10)
Local firms count the cost as the big chill continues Belfast Telegraph (7/1/10)
Is snow actually good for the economy? BBC Magazine, Anthony Reuben (15/1/10)
Businesses affected by bad weather BBC News (8/1/10)
Questions
- How have businesses been affected by the snow? Is opportunity cost relevant here?
- How is a cost of £14.5bn calculated? (See the article from Metro Reporter.)
- What are the arguments (a) for and (b) against more investment in techniques and equipment to combat these type of conditions?
- Why are pay freezes a possibility for some staff? Illustrate and explain the likely effects of this policy.
- Some shops have seen record sales in this snowy weather, with their shelves completely empty. Which shops would you expect to be in these circumstances and why? (See news item, A new concept for you – Thermal elasticity of demand)
- Which sector of the economy do you think will be the worst affected and why? Which sector’s losses are likely to have the biggest consequences for the UK economy?
Increasing traffic on the roads is observable by everyone and government policy is focused on reducing the demand for road space, rather than increasing its supply. One method has been to improve public transport and make it a viable substitute for car travel. Private costs of motoring have increased, but if there is no viable alternative, people will continue to demand car travel. Investment in buses and trains has improved their quality: they are more frequent, more reliable, arguably more comfortable and supposed to be part of an integrated transport policy. Local bus services provide a crucial link for local communities, but it is these services that are now facing problems.
In your economics lectures, you may have looked at local bus services, when you considered monopolies, oligopolies and possibly contestable markets. Oligopolies, whilst closer to the monopoly end of the market spectrum can be very competitive, but are also open to collusion and anti-competitive practices. The local bus sector has been referred to the Competition Commission by the Office of Fair Trading through complaints of ‘predatory tactics’ by companies. It is argued that local bus services, by limiting competition, are causing prices to rise and the quality of service to fall. One key issue is that those companies established in the market are alleged to be acting aggressively towards smaller bus companies and thus reducing competition in the industry. A low number of bids for supported service contracts in many areas, local bus routes dominated by a few large companies and predatory actions by incumbent firms are all complaints that this industry is facing.
This investigation is especially important, given the amount of public money that goes into the bus industry: £1.2bn. Investigations found that in areas of limited competition, prices were 9p higher. A number of take-overs have contributed to this situation. Two-thirds of bus services are controlled by only five operators. This limits competition in the market and hence is argued to be against public interest. Yet, industry representatives still argue that the market is competitive. Read the following articles and answer the questions about this issue. Was the OFT right to to initiate this investigation?
Local buses to be re-regulated BBC News (27/9/09)
OFT refers UK bus market to Competition Commission Dow Jones Newswires, Kaveri Nihthyananthan (7/1/10)
Office of Fair Trading prompts probe into bus services Guardian (7/1/10)
Trasport groups fear OFT competition probe over buses Telegraph, Alistair Osborne (4/1/10)
Bus industry competition queried BBC News (20/8/09)
OFT refers bus industry on poor service and prices Times Online, Francesca Steele (7/1/10)
Inquiry into local bus market ‘may delay investment’ Scotsman, Hamish Rutherford (5/1/10)
Questions
- Why are local bus services argued to be (a) a monopoly; (b) an oligopoly?
- What are the main aspects of UK competition policy?
- What is a concentration ratio and how does this apply to the bus industry?
- What predatory tactics are being used in the local bus industry and how do they affect competition, prices and quality?
- Why may limited competition be against the public interest?
- Traffic congestion is a major problem. Explain the economic theory behind government intervention in this area. Think about the effects of taxes; building more roads; investment in substitutes. Which is likely to be the most effective method?
In 2010/11, government funding for UK universities will be 7 per cent less (£518m) than in 2009/10. This has led to calls for substantial increases in student fees in order to stave off a serious funding crisis for many universities. One such call has come from David Blanchflower. As the first article below states:
“A leading economist has called for students from well-off families to be charged the ‘market rate’ of up to £30,000 a year to go to university. David ‘Danny’ Blanchflower, a former member of the Bank of England’s monetary policy committee, said the “poor have been subsidising the rich” for too many years.”
But just what are the arguments for and against a substantial rise in fees and who should pay any rise in fees? Should it be only students of very well-off parents or should it include middle-income parents too? Or if student loans are available to cover higher fees, why should not the same fees apply to all students? Then there is the question of who benefits from a university education? How much should external benefits be taken into account?
Call for universities to charge well-off students £30,000 a year Observer, Anushka Asthana and Ian Tucker (27/12/09)
A rise in fees would make university education fairer Observer (27/12/09)
Who wants a two-year degree? Independent on Sunday, Richard Garner (27/12/09)
Briefing: University funding Sunday Times, Georgia Warren (27/12/09)
Universities face £500m cut in funding Financial Times, Nicholas Timmins (22/12/09)
The nightmare before Christmas: grant letter announces £135m cut Times Higher Education, John Morgan (27/12/09)
Fast-track degrees proposed to cut higher education costs Guardian, Polly Curtis (22/12/09)
Questions
- Why is the government planning to make substantial cuts to university funding?
- What are the arguments for and against the university sector bearing a larger percentage cut than most other areas of government expenditure?
- Should any rise in fees be born by parents or by students from future income?
- Identify the external benefits from higher education? How does the existence of such externalities affect the arguments about the appropriate charges for higher education?
- What are the economic arguments for and against moving towards more two-year degrees.
- Discuss the case for and against increasing the participation rate in higher education to 50 per cent of young people.
- Is higher education a ‘merit good’ and, if so, what are the implications for charging for higher education?