Welcome back. Today, we are discussing the dilemmas, the difficult choices that are faced by governments when it comes to energy pricing. The price at which energy is made available to the consumers has huge importance in determining the economic and environmental outcomes. So we frequently discuss about energy sources. It's not so frequent that we discuss about prices, but prices are really a fundamental detail if you wish or the one fundamental variable which determines the choices of the consumers and producers, so they need to be taken into account. Very frequently, indeed most frequently, it is felt that low energy prices are beneficial in a sense, so to speak, implicit embedded in the notion that energy should be affordable which means it should be relatively cheap. So many governments opt for policies that keep prices rather low, in some cases, artificially low, and they may do so through subsidies or by setting prices below the cost recovery point. Now, energy of course is a cost for all producers. In some cases, an important item of course, in other cases less important, but it's a cost for all producers, all economic activities. Therefore, lower energy price may facilitate enterprises that are active in basically all fields, and generally enterprises or economic activities are in favor of keeping energy prices low. In the poor countries, the majority of household does not even have enough purchasing power to pay for the full cost of providing energy to them, especially if it is for electricity. So what this means is that they may be able to pay some for their electricity, but when considering the entire cost of investing in new generation capacity, new transmission lines, and serve a population which is often dispersed over a vast territory, they are not truly able to pay this cost, especially since they have not been able to access electricity until now therefore, their economic productivity must be very low because precious few things you can do if you have no access to electricity or other modern commercial forms of energy. So in these cases, it is frequently the case that utilities are forced to sell energy below cost, they are told you must sell electricity especially at a costs which is affordable for the people, and that price which they can get is not sufficient to pay the entire cost of generating the electricity, transmitting it, bringing it to the consumer. So if that is done, the end result is that the utilities are starved of capital because they don't receive enough money, there cash flow is not sufficient to pay for their investment and even less to fund additional investment. Therefore, they become unable to meet the requirements of expanding demand. They cannot invest in expanding generation and in expanding transmission capacity. So the paradox of countries where there is no electricity available for large number of people, in some cases, the vast majority of people is justified because the utilities don't have the money to invest, which would be necessary to invest in order to reach out to all in the country. So accessibility, in other words, the access to commercial energy suffers out of this situation as many or in some cases a majority, are left unconnected. The incentive side, the result of this situation is that the incentive to move to cities from countryside to cities, from countryside where electricity or modern commercial energy is not available to city where even if you are poor at least the connection is available, the electricity is available, this incentive is reinforce and that's one motivation together with other ones because in cities you have all services, health, education, but also energy. So the fact that the vast majority of the people in the countryside it's not connected is a incentive for these people to move away and move towards the city creating situations of excess population residing in cities. Energy subsidies or providing energy at below cost encourages energy consumption and frequently leads to extravagant consumption or excessive use of energy. So we end up with energy being wasted for purposes which really are not worthwhile or simply out of carelessness. The consumer doesn't care because it costs so little that I have no reason to mind about how much I consume. Therefore, in principle, it is always a good idea to charge customer at least the full cost of the service. As long as they are charged for the full cost of the service, they will pay sufficient attention to how much they consume. So as we argued in Week 2, the full cost of the service should include the costs caused by global warming because until now, these costs have not been included. This we said is a failure of the market. What is needed is the internalization of costs which has remained outside of the system in the sense that no one paid for the environmental damage that has been done. It is not easy to exactly calculate the cause of global warming, we don't exactly know how large these costs will be and how soon that will happen, so this is not a practical approach. The approach which is feasible in practice is to charge for carbon emissions at a level that is sufficient in order to set in motion the required process of decarbonisation. So we need to include a price for carbon and this price has to be high enough that it will stimulate the decarbonization, it will bring about decarbonization at the rate at which is necessary in order to prevent global warming. Some countries especially in Europe and in the Far East. In the far East Japan, South Korea, Taiwan, and so on, have traditionally resorted to taxes on certain forms of energy, especially oil products. There are taxes on gasoline, taxes on diesel, especially for transportation. These taxes have been imposed at a high rate, and mostly for fiscal purposes. In other words, the government needs the money and finds that it is convenient to impose taxes on transportation fuels. Why is it convenient? Because demand for these products is inelastic, so you can charge more and demand will not be reduced significantly, so you will be able to raise more money. In this sense, transportation fuels offer an excellent taxation base. When we speak of introducing a carbon tax or price for carbon emissions, we need to ask therefore, should a charge for carbon emissions come on top of the existing taxes, so raise the price even more, or in exchange for the existing taxation? In countries where a carbon tax has been introduced, it has often been introduced in exchange for existing taxation. So the consumer has not really seen or suffered for this tax. It is just a change of justification for an existing tax. In other countries of course where taxes have been low, this is not the case. If we consider that energy is a necessity and some people view it as a necessity. Question is, all of the energy that we consume or only some of the energy that we consume is a necessity? But if we see it as a necessity, then taxes on energy end up being what we call audience taxes, who was very unpopular. Such as in the past centuries, where taxes on bread or taxes on salt, stuff that people needed to buy and which were considered extremely unpopular, which were extremely unpopular. Any tax, any levy that brings about an increase in the price of energy will be resisted by the producers, by enterprises active in basically all sectors, but especially enterprises that operate in the energy intensive sectors. So you have situations such as, for example, what we see in Germany, where a levy on electricity consumption has been imposed on electricity consumption not on carbon emissions, properly speaking, and this levy has been imposed in order to finance the subsidies for renewable sources; wind and solar. All consumers should pay in order to subsidize renewable sources. But the large energy intensive industries have convinced the government that they needed to be exempted from this levy, because otherwise they would be forced to abandon their business, they would be driven out of the market, and so they obtained an exemption. The end result is that there is a levy on electricity consumption and this levy is paid only by finite consumer and smaller industries not by the real large producers of energy intensive products. If our goal is decarbonization, this way of ranging things is not rational at all because you are not specifically pursuing decarbonization, you are pursuing something different and you are exempting the energy-intensive industries that are in fact the major sources of carbon emissions. So should energy prices be higher or lower? This is a very difficult question. It is difficult to strike a balance in between these two extremes. High prices reduce affordability and negative affordability, but they may be positive for accessibility, because they bring enough money in the coffers of utilities and therefore the utilities have the possibility of expanding production, of expanding transmission networks. High prices damage producers but low prices lead to excessive use of energy, so there is a trade-off in any case. Ideally, we would like to have a price of carbon that is high and a price of energy that is low. In other words, what we need to discourage is carbon emissions, not energy consumption per se. But frequently, taxes are imposed on energy consumption, not on carbon emissions. Finally we need to keep in mind that discriminatory treatment of energy sources, in other words, favoring some against others, taxing only some energy sources and exempting others or taxing only some categories of consumers and exempting others, all of this creates winners and losers. This happens for short-term tactical political reasons answering to lobbies, and it may end up in creating an irrational price structure which will not deliver what we need to deliver, i.e abundant, cheap, and carbon-free energy.
