The writer is a senior fellow at Harvard Kennedy School
Politicians on both sides of the Atlantic are learning that, in the words of Kermit the Frog, it’s not easy being green. They have been quick to point out that the transition to a carbon neutral economy presents opportunities, with US president Joe Biden claiming that “if we act to save the planet, we can create millions of jobs and economic growth and opportunity”. European Commission president Ursula von der Leyen equated Europe’s Green New Deal to “our new growth strategy”.
The problem is that reality will take a while to match the sales pitch. There are inevitable short-term economic costs that risk generating a backlash against efforts to fight climate change. That is something the planet simply can’t afford.
The transition to clean energy will undoubtedly provide a negative supply shock for the global economy, pushing prices up. In the short-term, this is because renewables cannot yet fill the gap left by the shift away from fossil fuels. We see this already in skyrocketing European energy prices. One of the many causes: the wind blew at the slowest pace in 20 years.
Ultimately, decarbonisation amounts to putting a price on carbon emissions where there was none before, either directly through taxes or indirectly through regulation. According to a study by Jean Pisani-Ferry at the Peterson Institute for International Economics, the cost of carbon must rise from roughly $10 a tonne globally now to $60 a tonne immediately, and $75 a tonne by 2030 in order to hit the Paris Agreement targets. The IMF estimates an increase from $3 a tonne to $75 a tonne by 2030, while the Bank of England predicts an even larger jump.
Higher energy prices will feed through into the production of many goods, and prices overall will rise. The BoE estimates inflation will increase by nearly 0.6 percentage points by the early 2020s if there is an orderly transition to net zero and 2 by the early 2030s if it is disorderly. According to Pisani-Ferry’s calculations, the global supply-side shock of decarbonisation could be roughly of the same magnitude as that sparked by the oil shock in the 1970s. This is a worst-case scenario, as the oil shock was much more unexpected than anything anticipated for decarbonisation, but it is a scary one.
In response to the jump in energy costs, there will be a flurry of investment in new technologies, research, development, infrastructure and building renovation. Resources for investment will be diverted from consumption. While consumers will benefit in the long-run from a preserved climate, their welfare will take an immediate hit.
Finally, the transition will have a negative impact on public finances. In addition to pushing up public investment, a carbon tax (whether direct or indirect) will require transfers to offset tougher regulations and cushion the impact on vulnerable households. Debt burdens will increase further, having already risen significantly to fund the response to Covid-19.
The ideal speed for the transition depends on whether you want to mitigate transition risk (from the shift to cleaner energy) or physical risk (from extreme weather events). A slower transition increases physical risk, which comes with its own problems. A hotter planet with more extreme weather would make inflation more volatile. Floods, droughts or wildfires could cause supply chain disruptions and push insurance premiums up. But they may also result in large financial losses, lower wealth and suppressed growth, ultimately providing disinflationary forces.
Most estimates for how we can achieve net zero over the next 30 years assume we will develop affordable technologies to capture carbon and can avoid suffering a major decline in real incomes and standards of living. That is a big assumption. Even if it’s right, the transition will inevitably create winners and losers.
To be clear, the potential costs from transitioning and physical risk are less severe than those we’d incur by continuing to destroy the planet. I am not arguing that because there are costs, we shouldn’t do it. But politicians must be upfront about the price, financial or otherwise, and have concrete plans to support the losers.
Not doing so risks replaying the globalisation debate. The theory argued that while some workers and industries would initially suffer from increased competition from China, over time they would shift into different roles, and overall the economy would be better off. But there were real short-term costs for many. These costs have driven the anti-globalisation backlash. We simply do not have time for a similar backlash against the shift to a greener, cleaner future.
Source: Economy - ft.com
