Boris Johnson tells us we can have it all.
In his government’s net zero documents published last month, the UK prime minister says there will be “good jobs, green jobs [and] well-paid jobs” without sacrifices because the government will be “making carbon free alternatives cheaper” as the nation “build[s] back greener”.
Johnson’s views contrast with the government’s independent climate adviser, the Climate Change Committee, which estimates that eliminating net greenhouse gas emissions from the UK will come with a bill of £1.4tn by 2050.
That is the equivalent of £1,700 a year on average for every household, coming on top of £3,000 of tax increases unrelated to climate change that Boris Johnson’s government has also imposed over the next few years.
Who is right? What are the best estimates of the costs of reaching net zero? Who will pay? And what benefits would the UK gain from meeting its climate targets?
What are the gross costs of reaching net zero?
This is the £1.4tn figure. It was calculated by the Office for Budget Responsibility by adding up annual investment that the Climate Change Committee estimated was needed between 2020 and 2050 for the UK to reach domestically produced net zero emissions.
The CCC reckons that green investment needs to increase rapidly in the 2020s to about £50bn a year in real terms — more than 2 per cent of UK gross domestic product.
A huge expansion of offshore wind to both replace gas-fired power stations and to expand the capacity needed for the additional power for electric cars and heating is the largest part of the bill. The modification of home heating to be carbon neutral, either through heat pumps alongside insulation and new radiators or hydrogen technology, is another enormous cost. Higher capital costs of electric cars and vans and zero-emission trucks will also require significant investment.
Many analysts doubt whether the government is willing to pass laws to mandate these investments. Andrew Brigden, chief economist at Fathom Consulting, said: “Politicians fear the electoral consequences of higher living costs caused by action on climate, and this raises doubts about the political viability of carbon taxes and regulations to help make net zero targets a reality.”
What about the net costs?
The gross costs greatly distort the overall impact on households, however, because much green capital expenditure reduces future running costs.
Better insulation requires less heating, installing solar panels on roofs reduces the electricity households have to purchase, and electric vehicles are more efficient at converting energy into power and have lower maintenance costs.
The CCC estimates that households will ultimately gain £1tn by 2050 in lower running costs if the necessary investments happen, leaving the net costs at about 0.6 per cent of gross domestic product per year. That is roughly £12bn a year or just over £400 on average for every household per year.
Mike Thompson, chief economist of the CCC, said: “Just over half a per cent of GDP spread over the whole economy is so small in the scheme of things, it would not be noticed.”
Since the CCC’s estimate compares favourably with the impact of Brexit, which is expected to cost the nation about 4 per cent of GDP, and coronavirus 2 per cent, Thompson added: “It’s a pretty good deal to avoid the effects of climate change.”
However, in order to optimise the longer-term gains, households will have to be able to afford the upfront costs.
The CCC net figures take account of the fact that as the UK eliminates carbon, the Treasury will lose £30bn a year in petrol and diesel duties. They exclude both the household gains from not paying these levies as part of the offset and the likely imposition of alternative taxes or road user charges that the Treasury is eyeing.
Not everyone is convinced, however, with the CCC’s relatively low net cost estimates. Sir Dieter Helm, professor of energy policy at Oxford university, said the estimates were “both disingenuous and dangerous” because they ignore carbon emissions embedded in the UK’s huge level of imports, much of which are still made using coal. It also assumes that the government will make no mistakes and back the right horses all the way to net zero.
The UK’s record on reducing the overall consumption of carbon is not remotely as successful as its reduction of domestically produced emissions, Helm noted, and is “a really good example to the rest of the world of the perils of unilateral carbon production targets, and of neglecting carbon consumption”.
Who will pay? Government, companies or households?
Just as taxes are, in the end, always paid by households, so is the cost of decarbonisation. Governments might pay for infrastructure and then charge households in higher taxes or regulated prices for energy networks. And companies might provide the money for investment, financed from banks or investors, but they expect to see a financial return from households paying to use the new assets.
The good news is that the finance should be there so long as government sets the rules of the game to prevent people cheating and carrying on as normal.
Mark Carney, former governor of the Bank of England, was clear that finance can only ever be a facilitator and does not pay for net zero. “Finance never acts in isolation,” he wrote in the Financial Times. “Governments must back their net zero commitments with clear, credible, and concrete policies.”
What about the benefits?
The main benefit of the UK’s net zero target is that the country is playing a part in reducing the risks of global warming. As the OBR wrote in the summer: “Unmitigated global warming has the capacity to deliver catastrophic changes to lives and livelihoods.”
But since global emissions are still rising, UK actions will have a negligible effect on the world’s climate. Environmental economists are now stressing other potential benefits of the net zero target to offset the inevitable financial cost.
Professor Lord Nicholas Stern, of the London School of Economics and author of the Stern Review on climate change 15 years ago, said that economics should recognise that, in future, “there is unlikely to be a long-run growth story that is high carbon”, so nations would probably generate higher living standards the earlier they adopt green technology.
He added that stopping burning fossil fuels could also, “strongly reduce deaths and damage to health from air and other pollution”, providing some local benefits to offset the costs of net zero. These potential benefits are not yet added to the models of the costs of net zero yet.
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Source: Economy - ft.com
