12 JUN 2012

The economic impact of EU environmental policies

By Dr Richard Wellings

EU environmental policies are already having a significant negative effect on the British economy. They are piling costs on businesses and households and acting as a major obstacle to desperately needed growth and recovery.

In this context, one of the most worrying features is the intransigence of EU elites. Despite the most severe downturn for generations, there is little evidence of a change of direction; little appreciation of how environmentalism is hastening European decline.

Instead green infrastructure investment is seen as the answer to the crisis. Apparently it will create jobs and drive recovery.

This is economic nonsense of course. Investment relying on taxpayer subsidies and rigged markets, directed by politicians and bureaucrats, will destroy wealth. Resources will be diverted into uneconomic green projects and away from the productive, entrepreneurial, private sector.

The impact of EU environmental policies is likely to be particularly negative for the UK, partly because the UK was foolish enough to agree to very ambitious targets on climate change and renewable energy.

The scale of spending involved is terrifying: perhaps £200 billion over the next decade for the electricity industry alone. In the region of £70 billion has already been spent meeting various water directives, with more to come.

Numerous building regulations have and are being introduced to meet green targets, adding thousands of pounds to the cost of new homes. And billions are spent every year on waste and recycling regulations. Indeed, a whole fake industry has developed as a result.

The impact of EU regulations and targets on transport – such as the gradual inclusion of the sector in the Emissions Trading System, biofuels etc. - is harder to quantify, but already costs a huge amount. Upgrading the electricity grid to recharge electric vehicles could be enormously expensive.

Energy, water, transport and housing costs are, of course, key components of household and business budgets. In terms of household budgets, housing is typically the biggest single spending item, followed by transport.

Accordingly, these policies will have a particularly severe impact on people with low incomes. Not only will they have to spend more on energy; higher transport costs will also make it harder for them to get jobs, thereby increasing unemployment. There will inevitably lead to calls for higher welfare benefits as more people struggle to pay for the basics.

In addition, many businesses will be forced to close by the EU's green policies. Others will relocate to locations where energy and transport are cheaper and environmental regulations less burdensome. Potential entrepreneurs may not even bother starting new ventures in the UK.

Unsurprisingly, several economists have cited the costs of current environmental policies as a major reason why Britain will probably experience economic stagnation over the next decade. Moreover, as green policies destroy wealth here, this will have a very negative impact on poor countries trying to develop through trade with the West.

Environmental policies are also likely be far less effective than hoped at meeting their own objectives – for example through 'carbon leakage' to countries such as China and India.

A far better approach would be to implement policies where it is very clear that the benefits of action outweigh the costs - in other words, win-win policies where there are both efficiency gains and environmental benefits.

A good example is phasing out agricultural subsidies – the sector being a major source of greenhouse-gas emissions. Another is respect for property rights and stopping giving foreign aid to governments stealing land and ripping out rainforests. A third win-win policy is to end subsidies to energy-intensive industries.

Unfortunately the chances of EU institutions adopting this kind of rational economic approach to environmental issues are extremely slim. The political culture is too focused on centralisation, bureaucracy, and command and control. Environmentalism has played an important role in the growth of EU institutions and it is in the self-interest of such bureaucracies to expand regulation further, despite the economic costs.

There are therefore good reasons to take policy out of the EU's hands. At the moment, EU environmental policies - and climate change policies more generally - are causing far more problems than they solve.

Dr Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs and Director of the IEA's transport unit.

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Not to mention the EU Large Combustion Plant Directive - which is forcing many of our coal powered stations to close by the end of 2015. If the lights go out in 2016 (as many predict), it will have been caused directly by EU environmental policy. It's madness, many of these plants were due to close in the 2020's anyway, why not let them continue to produce electricity until then, giving us more time to look to other options (fracking, LNG imports from America, nuclear etc).
- Ben Lodge

This is an excellent informative blog, it says it all re:environment problems.
- Joanna Daly

As above; This is an excellent informative blog, it says it all. This is the sort of thinking we should be getting from Westminster.
- Tony Rowe

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