By Bruno Prior
Observers of energy policy often assume that national success must be explained by some favoured technology. Nuclear enthusiasts insist that cheap power requires reactors. Hydro advocates point to dams. Wind and solar partisans proclaim that their chosen renewables hold the key. Yet the evidence from Europe’s electricity markets suggests otherwise.
Look at Scandinavia. Norway, Sweden, Finland and Denmark enjoy some of the lowest industrial electricity prices in Europe. So, too, do Portugal and even Malta. And yet their generation mixes could hardly be more different.
Nuclear? Finland produces about 40% from nuclear; Denmark produces none.
Hydro? Norway runs on 89% hydro; Denmark has none.
Wind? Denmark reaches 57%; Norway just 9%.
Solar? Denmark gets 13%; Norway zero.
Biomass? Denmark manages 15%; Norway none.
Gas? Malta 85%; Sweden less than 1%.
Plainly, no single technology explains low electricity prices.
What the Scandinavian countries do share, however, is something less glamorous: they introduced carbon taxes decades ago. And not the elaborate pseudo-markets of emissions trading schemes, but straightforward Pigouvian carbon taxes.
This was not supposed to happen. Policymakers, consultants, and would-be industrial strategists insisted that carbon taxation was politically impossible and economically ruinous. Instead, governments should “pick winners,” subsidising chosen technologies until they became cheap enough to dominate. Germany and the UK were world-leaders of that approach, showering subsidies on favoured technologies in hopes of producing world-beating industries.
Although most economists recognise that a suitably-designed carbon tax is the preferable economic tool to address climate change, many economists lent intellectual cover to the "winner picking" approach. They claimed that since the “first best” of a carbon tax was politically out of reach, the “second best” of industrial strategy must be improved as far as possible. Yet the great economists are remembered precisely because they resisted this temptation: they described the world as it is, leaving triangulation to politicians.
And here we are. The results are plain. Where governments imposed a credible, technology-neutral carbon tax, investors had every reason to select the most competitive options for local conditions. The market discovered, country by country, what worked. Where governments insisted on steering investment through subsidies, the result has been rampant economic rent, regime uncertainty, white elephants, expensive energy, and industries that struggle to compete abroad without continued subsidy.
The lesson could not be clearer. Affordable energy is not primarily a technological problem but an institutional one. Governments need to stop trying to steer markets and instead set the right framework: let markets meet demand cost-effectively, and if there are genuine social costs, internalise them through a Pigouvian tax—provided the transaction costs are lower than the benefits.
This is not a new insight. It was well understood by the late 1980s, articulated by economists such as David Pearce. Yet in the decades since, most academic and policy development has moved backwards, not forwards.
We will not repair the damage inflicted on our economies until we abandon faith in “magic bullet” technologies, reject the rent-seekers who promote them, and return to the basic economic principles that actually work.
Bruno Prior is a Trustee of the Institute of Economic Affairs and a Director of Summerleaze Ltd, which is involved in the construction materials, property, waste management and energy sectors. For most of his thirty years with the company, Bruno’s main focus has been renewable energy – firstly, the generation of electricity from landfill gas, and then the supply of wood pellets for heating.
Surely, any more taxes are unsustainable. The drive to control energy is at the heart of the problem. We used to have control until they were all sold off by Thatcher. And the private cash grab before proper required and sufficient investment is the cause of our woes now? And that control means we still build houses without their own ability to be self sufficient. All new stock should come with solar wind and ground snd air source heat pumps. Why are we being made to accept that control at huge expense. It’s foreign ownership that has made it all expensive and a lack of investment since the sell off has been woeful. I must say looking at problems without panning out to look at the round is not fully understanding the symptom let alone any prognosis .