RVHS H2 ECONS P1 QP RV

This document consists of 8 printed pages. [Turn over 1 ECONOMICS 9732/01 Paper 1 Case Study 16 September 2014 2 hours 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your index number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. Start each case study on a new sheet of paper. At the end of the examination, fasten your work securely together. Your answers for each case study are to be handed in separately. The cover sheet provided is to be place on top of your answers for Question 2. The number of marks is given in brackets [ ] at the end of each question or part question. RIVER VALLEY HIGH SCHOOL YEAR 6 Preliminary Examination 2 in preparation for General Certificate of Education Advanced Level Higher 2

2 Answer all questions. Question 1 Distortions in the energy markets Extract 1: Wind farm subsidies to top £1billion this year According to an analysis of official figures by the think -tank Renewable Energy Foundation (REF), the total annual subsidy for onshore and offshore wind farms in the UK has topped £1bn. The disclosure comes ahead of a long-awaited government announcement to cut the size of the subsidy which has benefited the big energy companies but is added on to household electricity bills as a levy. The subsidies were introduced by the Labour government to encourage green energy projects, including wind farms. However, it is now generally accepted that the subsidies are too generous due to advances in technologies. REF estimates that on current renewable energy targets, and with only modest cuts, the energy companies will have rec eived £100 billion in subsidies by 2030. REF said it expects 10 companies, between them, to pocket £800million through subsidies over the next 12 months. Out of the top 10, only two of the companies are British -owned. The remaining energy companies that m ake money out of British wind farms and British consumers are based in Germany, Norway, Spain and Italy. Source: The Telegraph, 14 Jul 2012 Extract 2: Wind power still gets lower public subsidies than fossil fuel Public subsidies for the development of wind power in the UK are far less than the tax breaks given to fossil fuels . Financial support for fledgling renewable energy industries has increasingly come under attack in rec ent months, but the new data shows that the older industries benefit to a far greater extent. The UK's greater subsidies for fossil fuels mirrors the global situation, with the International Energy Agency (IEA) recently showing that in the 37 countries it analysed, oil, gas and coal received $409bn (£261bn) in 2010 compared with $66bn for renewable energy. Almost 90% of the fossil fuel subsidy in UK comes from the reduced rate of VAT paid by households. In the UK, VAT on gas and electricity is 5% rather than 20% charged on most other goods. If such price cuts were intended to reduce energy costs for poorer h ouseholds, they were a very blunt tool. . The former chief executive of British Petroleum (BP), has backed wind power subsidies . "People forget the government suppor ted the oil and gas supply chain in its early days: with generous tax incentives, training programmes, strategic infrastructure and supportive regulation," he said in 2011. "The result today is a world leading industry, creating jobs in manufacturing and engineering across the UK.".

© RVHS 2014 9732/01 [Turn over 3 The government acknowledged that investing in wind , marine, solar and other renewable energy sources will help meet the nation's greenhouse gas emissions target, as well as provide economic opportunities for the UK and a less volatile energy market. It points to rising global gas prices as the major reason for the sharp rise in home energy bills in recent years. Opponents argue that investing in renewables is unaffordable in this eco nomic climate. Source: The Guardian, 27 February 2012 Extract 3: Fossil fuel subsidies One of the most surprising and alarming issues in the climate and energy arena is the fact that the fossil fuels causing global warming continue to receive substantial government support. While government support given to environmentally beneficial renewab le power sources is subject to seemingly endless media and political scrutiny , the 500% larger subsidies given to oil, gas and coal rarely get much attention. The IEA’s analysis focuses on the government policies designed directly to reduce the price of fossil fuels. The bulk of these "consumption subsidies" are given out in developing and transitional economies. One thing that is immediately striking here is th at consumption subsidies tend to be biggest in nations that export a lot of fossil fuels, whether it is Saudi oil or Russian gas. I n Egypt, subsidised low petrol prices were sustainable while domestic oil production were high but as the oil industry has de clined, subsidies have become a huge burden. And Egypt is not alone, many countries in Middle East, South East Asia, South America and Africa heavily subsidise petrol. Source: The Guardian, 18 January 2012 Extract 4: Phasing out fossil fuel subsidies could provide half of global carbon target Eliminating subsidies for coal, gas and oil could save as much as Germany's annual greenhouse gas emissions each year by 2015 and such a move could provide half of the carbon savings needed to stop dangerous levels of climate change. While the G20 nations pledged in 2009 to phase out such fossil fuel subsidies in the "medium term", the hundreds of billions that governments spend each year rose in 2010. As such, this has been undermining the competitiveness of renewables. Most developed countries have already phased out policies that directly sub sidise fossil fuel consumption. But recent analysis by the OECD suggests that these nations continue to prop up the oil, gas and coal industries in less obvious ways, such as providing tax breaks or favourable access to land and infrastructure. These indir ect mechanisms are worth an estimated $45–75bn. Coal, the most polluting of the three main fossil fuels, currently receives 39% of this support , mostly as a result of governments in Europe, and to a lesser extent Australia, Canada, Korea and the US, trying to ensure that changes to their coal -mining industries happen gradually rather than overnight. Source: The Guardian, 19 January 2012

4 Table 1: Own price elasticities of energy sources for selected countries Country Oil Gas Coal Japan -0.03 -0.00 -0.19 UK -0.04 -0.13 -0.18 USA -0.01 -0.00 -0.03 China -0.01 n/a -0.04 India -0.00 n/a -0.04 n/a = not available Source: World Bank, 2010 Share of fossil fuel subsidies received by the lowest 20% income group in surveyed economies, 2010 Source: International Energy Agency, 2011 Figure 1  Gasoline  Diesel  Kerosene  LPG  Electricity  Natural Gas            

© RVHS 2014 9732/01 [Turn over 5 Questions (a) With reference to the data in Table 1, (i) state how the own price elasticities of energy sources help to determine the nature of the good. [1] (ii) explain what determines the effectiveness of an increase in the price of oil in reducing total energy consumption in the UK. [4] (b