
The government is right to want a third runway at Heathrow. It is exactly the type of pro-growth measure the country needs.
It is, however, a decision that it is difficult to justify if one’s sole focus is reducing carbon emissions. Aviation is hard to decarbonise and, for all the arguments about planes currently circling Heathrow waiting for a landing slot, or how passengers use other hub airports, an additional runway will mean more flights and more flights will mean more emissions.
We live in a world of trade-offs and the government has evidently concluded that the cost of suppressing emissions from Heathrow is too great given the damage this does to economic growth. It cannot explicitly admit this without offending those who believe that the UK must not compromise in the fight against climate change, including the Energy Secretary, Ed Miliband, and a fair proportion of its natural supporters. As a consequence, ministers spent much of last week sounding evasive as they denied the tension between their environmental and growth objectives.
Uncomfortable though this was, the row over Heathrow is manageable. In all likelihood, however, it foreshadows a much bigger row that is imminent. What is the government going to do about energy prices?
Businesses are increasingly vocal about the uncompetitiveness of energy prices. It has long been the case that Europe has higher energy prices than the US because the US has embraced fracking. President Trump is going to inflict many wounds on the US economy, but his “drill, baby, drill” approach to energy policy will lower the cost for US businesses further.
Even in the European context, our energy costs are high. Industries such as steelmaking and chemicals are increasingly priced out of the UK for this reason. Nor is this just a problem for established industries. Artificial Intelligence requires data centres and data centres require a lot of energy. An ambition to lead the world in AI is incompatible with high energy prices.
There are those who argue that the route to lower energy prices is to abandon fossil fuels and embrace renewables, pointing out that the marginal costs of renewables are much lower than fossil fuels. But as Oxford professor Dieter Helm (no climate change denier by any means) has pointed out, what really matters is the systems cost. Intermittent renewables, such as solar and especially wind, require back-up options and the cost of these need to be included. Once this is taken into account, alongside the costs of installing renewable sources of energy, abandoning fossil fuels is expensive. Our high levels of renewables and our high energy prices are not a coincidence.
It is argued that the cost of renewables continues to fall and there are hopes that battery storage will be able to address concerns over intermittency. But when it comes to anticipating energy prices in future, investors show little sign of believing that the UK has got the right approach. For all the talk that the UK is set to deliver cheap energy prices, investors in energy intensive industries do not believe it.
This is an economic problem for a government that is seeking to prioritise growth. It is also a political one. Reform has always opposed the net zero objective and the Conservatives under Kemi Badenoch have moved away from it. Recent polling has shown that 48 per cent of UK voters favour abandoning net zero, with only 34 per cent disagreeing.
Rather than decarbonisation being a great opportunity for the economy, as some argue, the reality is that net zero results in higher energy prices which have a negative impact on growth. The divergence in energy prices between those nations more committed to renewables and those who are not has exposed the arguments of the trade-off deniers. Good things do not always go together.
The more ambitiously we pursue net zero by – for example – attempting to decarbonise our electricity grid by 2030 – the greater the short-term cost which will have to be picked up by consumers or taxpayers. Either way, this will have an impact on growth as businesses will face a combination of higher prices and higher taxes.
This would matter less if every other major economy was adopting the same approach, recognising the need to lower emissions for the good of the planet. But we know that, at the very least, this is not going to be the case for the US. (The rest of the world could respond by applying a Carbon Border Adjustment Mechanism on US imports, essentially pricing in the high levels of carbon emissions involved in US products, but that will still impose a cost on consumers and exacerbate a tariff war with the Trump administration.)
The most likely scenario is that energy prices increasingly make the UK uncompetitive, with businesses and opposition parties calling for a change of approach to net zero and the opening of new oil and gas fields. The Treasury – determined to increase growth – will find these arguments persuasive; as might No 10 if public opinion continues to move in a sceptical direction over net zero. Ranged against that view will be Miliband and the more environmentally focused part of Labour’s coalition, as well as the Greens and (probably) the Liberal Democrats.
Like the decision over the third Heathrow runway, the impact of net zero on energy prices is a matter over which economic growth and environmental considerations pull in different directions. This tension is soon going to cause the government some very big problems.
[See more: The cost of net zero in the town that steel built]