Saturday, September 25

Climate change and the price of electricity

While it is hard to escape Afghanistan’s massive human and geopolitical tragedy right now, the summer has also brought other worrying news. The two that have probably made the most headlines in recent weeks have to do with climate change and electricity prices.

In the first case, the news comes from the sixth report of the International Panel on Climate Change (IPCC) in which scientists explicitly and forcefully corroborate the responsibility of human action and especially of greenhouse gas emissions in the modification of the climate that is occurring on the planet. The news has coincided with a whole series of extreme weather events that are largely attributable to global warming. The deadly heat waves in North America, the deadly storms and floods in several European countries and in some regions of China, or the great fires that have spread breaking records in different parts of the world throughout the summer, make it clear that the The negative effects of climate change are not a thing of the future, they are already here and cost lives.

In parallel, in Spain electricity is reaching record highs with megawatt-hour prices above one hundred euros in the wholesale market for many days in August which, as is obvious, translate into considerable increases in electricity bills.

In this globalized world in which we receive enormous amounts of information, we tend to see each news item as an independent flash without stopping to establish the relationships that may exist between them. But in the case of these two issues, there are a whole series of connections that can give us interesting clues to better understand the deep socio-environmental crisis in which we are immersed and the complex problems that it entails.

The first connection between climate change and electricity prices is quite obvious. Global warming increases the frequency of extreme heat waves and this means that the demand for electricity for artificial air conditioning, that is, for the use of air conditioners, is growing exponentially in the summer months. To the extent that an important part of electricity is still generated today with the burning of fossil fuels that emit CO2 into the atmosphere, we are entering a rather diabolical vicious circle in which climate change itself creates the conditions to increase energy consumption. emissions that contribute to the greenhouse effect and, consequently, aggravate global warming itself.

But the connections between climate change and electricity prices also depend on another important factor, which is CO2 emission prices. Electricity companies, like all companies that use fossil energy, are assigned a limit on the number of tons of CO2 they can emit, and are obliged to buy pollution rights if their emissions are higher than that limit. According to a recent report by the Bank of Spain, the price of CO2 emission rights is one of the factors that explain the rise in the price of electricity. Since the end of 2020, these rights have become more than 70% more expensive, due, on the one hand, to the environmental regulations themselves that seek to curb emissions, but also to the incipient economic recovery after the pandemic and, of course, to speculative operations. that all this is generating in the emission rights market itself.

Orthodox economic theory could tell us that this market mechanism serves to tackle climate change: as electricity based on fossil energy is becoming more and more expensive due, among other things, to higher emission rights, incentives are being generated. to abandon dirty technologies and jump towards cleaner, sustainable and cheaper ways of generating electricity. But to what extent does this mechanism work?

That the electricity companies have to buy emission rights indicates that they emit more than necessary, that is, that the decarbonisation duties are not being done well. But for now, these companies do not seem to be uncomfortable with this state of affairs. Although their production costs have risen, they pass this rise on to consumers, in such a way that their income statement does not suffer. Furthermore, some companies, in a clearly opportunistic behavior, have taken the opportunity to increase their profits by emptying swamps at a time when they could place hydroelectric energy very cheap to produce on the market, at prices for electricity from thermal sources that are much more expensive. In other words, the market incentives to jump to cleaner energies are so decaffeinated that companies not only do not seem to be in a hurry to do so, but are also looking for loopholes with which to make the most of the business opportunities offered by the current situation, sometimes forgetting ethics.

But the main problem is that this type of mechanism generates socially very unjust situations. While some can combat extreme temperatures by increasing the power of the air conditioning at all costs, others do not have the necessary resources to face the rise in prices. Sustaining the energy transition exclusively on these market adjustments is as much as loading change on the backs of the most vulnerable social sectors.

The high price of electricity that we are suffering at this time may have something of a temporary nature, but it is also an indirect manifestation of the climate crisis and, in general, the socio-environmental crisis that we are experiencing. Moving towards other ways of producing and consuming energy is one of the things that we have to do to face this crisis. But it seems clear that the dictates of the “business as usual” By themselves they will not get us out of the quagmire. A just ecological transition necessarily involves taking other economic policy measures on which we should be debating now and urgently.