Why the Chancellor’s statement on the cost of a net-zero transition in the UK could imperil the country’s climate ambitions
Chancellor Philip Hammond’s assertion that the cost of transitioning to a net-zero-carbon economy in the UK will exceed a trillion pounds by 2050 – made in a letter to Prime Minister Theresa May yesterday – is simply incorrect. The evidence for this is set out clearly and in detail in the Report of the Advisory Group on Costs and Benefits of Net Zero for the Committee on Climate Change (CCC), which was drafted by a panel of experts including a senior economist from Shell International and the chief economist of the Confederation of British Industry.
The advisory group to the CCC, on which I served, concluded that the economic case for action to achieve net-zero greenhouse gas emissions by 2050 is fully justified. We argue that the UK is well placed to be among the economies most likely to benefit from a transition to net-zero, provided that policy clearly and consistently indicates that this is the 2050 objective. By sowing early uncertainty, the Chancellor’s comments have, highly regrettably, already undermined this objective and raised the policy risk premium attached to decarbonisation investments.
A coordinated response now means a cheaper transition in the long run
In our advice we explain the concept of ‘resource costs’. This is a measure of the real expenditures that are required to meet a net-zero emissions target, over and above those required to meet the current emissions target – an 80 per cent reduction on 1990 levels by 2050.
The most crucial characteristic is that these costs are a function of the decisions we make now. The more coordinated our response to managing a zero-carbon transition, the cheaper it will be. The costs will be largely determined by the extent of public support for low-carbon innovation, government working in partnership with business to develop and deploy the required new technologies at the necessary speed and stimulating the consumer demand to pull these technologies through markets at scale.
It is precisely such support that has driven the remarkable speed with which renewable and other energy technology costs have fallen. The cost of energy generated by solar photovoltaics has fallen tenfold over the past decade. Renewable energy is now cheaper than fossil fuel-based energy in many parts of the world. Within the next decade it is likely to be cheaper almost everywhere. This is why investment in renewable energy generation, excluding nuclear and hydroelectricity, has outstripped investment in coal, oil and gas power stations in recent years.
The CCC advisory panel sees no reason to believe that such cost reductions will not occur for other key technologies, such as batteries, fuel cells, electric vehicles and a range of other low-carbon technologies. However, these cost reductions will similarly depend on mass deployment of these technologies, and not just on research and development. Government must stand ready to support and incentivise this deployment, especially in the early days of technological roll-out, and to put in place the necessary infrastructure. If we work with the investment replacement cycle and avoid locking into high-carbon inefficient infrastructure as old kit is retired, we can avoid the need to replace and retrofit the investments prematurely. At the same time, this will provide a credible signal to innovators and investors to develop and deploy new networks of connected, resource-efficient renewable technologies, inducing further cost reductions while keeping potential benefits high.
Underestimating the opportunities and co-benefits of climate action
There has been no appreciable difference in rates of economic growth between those countries that have reduced emissions substantially and those that have not. Yet the former are arguably in a stronger position to benefit from a global transition to a net-zero-carbon economy in years to come. Moreover, economies that have integrated decarbonisation into other policy aims will have generated growth, for example by improving energy efficiency, reducing productivity losses from particulate pollution and congestion and attracting skilled workers to cleaner, more sustainable and technologically advanced cities. As the Chancellor’s figures lamentably show, the potential magnitude of these benefits is often omitted or underestimated.
For a medium-sized open economy like the UK, early action and a clear policy steer can help foster a comparative advantage in one of the world’s fastest growing markets. Given the potentially large damages from unabated climate change, and the non-negligible existential risk of such change, there is an economic and commercial case for strong mitigation action. This is reflected in the fact that share prices for renewable goods and services have outperformed those of carbon-intensive sectors worldwide, as investors attach growing risk to asset stranding and devaluation in businesses that are not viable in a low-carbon future. By contrast, the Chancellor’s backward-looking defence of the industries of the past could cost the UK dear.
The CCC’s report did note that, as with any technological and industrial revolution, there will be transition impacts affecting those sectors that no longer gain market share in a low-carbon resource-efficient economy. Retraining and retooling programmes, energy efficiency measures and compensation schemes for low-income and otherwise vulnerable people will need to be implemented to help people and businesses adjust to the decline of some sectors as others are growing to take their place, and to potential short-term increases in energy prices. The UK Industrial Strategy’s focus on securing strong domestic supply chains needs to be extended and integrated to support the full spectrum of decarbonisation activities.
Finally, we concluded that while there are economic advantages of being among the global leaders in decarbonisation, there are risks of being too far ahead of the pack. It is a matter of judgement on where to draw this line, but on balance the Panel concluded that there is a greater risk, when the rest of the world is decarbonising, in being a last rather than a first mover. Credible policy design, including a stable long-term direction with clear governance, regular and transparent reviews for flexibility, use of markets to spur innovation and approaches that are tailored to the needs of each sector, while maintaining consistency across the system, is what will keep the resource costs of transition low.
The Committee on Climate Change remains right
I worked at Her Majesty’s Treasury for 10 years, as Head of Economic Forecasting and then as a lead author on the Stern Review on the Economics of Climate Change. To see such a great institution lose its strategic lead by failing to understand the dynamic opportunities for the UK and the stakes that the world is playing for is a source of personal regret. There are great possibilities for British industries and influence as the UK redefines its place in the world. Growth strategies that harness the potential for discovery, innovation and growth should drive policy, not narrow backward-looking ‘incrementalism’.
The CCC remains right. Ambitious and early action, targeting net-zero emissions by mid-century, is the surest way to secure a thriving, productive and competitive UK economy in a low-carbon future.
The views in this commentary are those of the author and are not necessarily those of the Grantham Research Institute on Climate Change and the Environment.