Dutch energy policy (wins and fails)

Dutch political leaders have announced a program to limit energy prices to households, up to a limit (the average family’s use, calculated to be 1,200 m3 of gas and 2,400 kWh), after which they will face spot market prices

Since we use around 300 m2 and 1,600 kWh, I was a bit angry that others will receive more subsidy. I still think that a straight subsidy (to people poorer than us, by the way) would be better than an energy-targeted subsidy, but there’s a significant advantage to the government’s proposal, in the way it reduces risk. (I’m now assuming I understand the proposal, but  may be wrong on details.)

Put simply, the government is taking on all the price risk above its target prices (€1.50/m3 and $0.70/kWh) for the target number of units. Knowing this, people will not turn off all their energy in fear of high spot prices, but will be very careful about reducing their consumption.

I therefore think that their plan is a better “second best” than my theoretical “first best” — in terms of psychological impact but also reducing risk, which my first best doesn’t include.

Also note that the government, which announced “sufficient” supplies in storage for the winter, may also benefit from a fall in energy prices, thereby reducing its downside (or “up price”) risk. So this structure really resembles an insurance scheme. (This article also points out how people may “rush” to improve their energy efficiency in order to make sure they stay below the ceiling.)

One critique of the policy is how it is aimed at households rather than individuals, which means that a household of one will get the subsidy but a household of five may exceed the “consumption ceiling” and face much higher prices. This same issue exists for increasing block rates in pricing water, which is one reason (there are more) I recommend against them.

But an easy solution is available for the government’s energy subsidy scheme: using registration data (you’re required by law to tell the government where you live) to determine how many people live “behind the meter” and then scale the subsidy to a per capita consumption. That would help with the large household problem.

Such a program would also encourage people to register where they live so they can get the subsidy where they are consuming energy. Since many people (maybe 10 percent?) register at an address with lower taxes or to avoid utility charges, this might also improve finances in cities (such as Amsterdam) where these costs are high.

My one-handed conclusion is that the government’s policy (as I now understand it) has a good balance of reducing risk and discouraging energy use.

Where are the fails? Let me count the ways:

  1. The government (a part owner in the airport) has neither banned short-haul flights nor raised the “landing charge” high enough to wipe out cheap (but environmentally terrible) flights.
  2. Amsterdam wants everyone to be “gas free” by 2040, but has not used a price signal (such as an exponentially increasing tax on natural gas) to push in this direction.
  3. Amsterdam’s “circular economy” strategy is a disaster of wishful thinking (“encouraging change”), Soviet planning (tracking tons of materials rather than environmental harms), and irrelevance in the face of citizen’s massive consumption of fossil fuels, shit from everywhere, etc.
  4. The government was so busy making hundreds of billions in profits from its natural gas royalties that it ignored the earthquakes that were damaging everyone’s homes.
  5. Energy use (and pollution) from the oversized agricultural industry is socializing the costs of private profits.
  6. There are probably more, and the US is worse, but let’s call a spade a “spade.”

Oh, and there are some wins, e.g., high gasoline taxes (which may be dropped, to “protect motorists”) and the way energy taxes (were?) charged on consumption and rebated per household (per my policy advice for water).

H/T to CK and GH

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Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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