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Will a 'Green Economy' drive economic growth?

The UK government plans to eradicate carbon emissions by 2050 - Will this cause an economic slowdown or will the economy flourish?

 

In June 2019 Parliament passed legislation requiring the government to reduce the UK’s net emissions of greenhouse gases by 100% (relative to 1990 levels) by 2050[1]. Energy and clean growth minister Chris Skidmore said: “The UK kick-started the industrial revolution, which was responsible for economic growth across the globe but also for increasing emissions… Today we’re leading the world yet again in becoming the first major economy to pass new laws to reduce emission to net zero by 2050 while remaining committed to growing the economy.”[2]


The targets to bring greenhouse gas emissions to net zero by 2050 will undoubtedly both incur costs and yield benefits, yet present-day economic models cannot reliably predict these. Economic models often fail to take into account the process of disruptive technological change and as a result tend to underestimate the rate at which costs can fall.[3] Despite the lack of clarity around specific costs, economists generally agree there will be a short term drag on economic growth due to the friction of transforming a long established energy market and the development and implementation of new technologies. However, the long-term opportunities within clean growth are exponential if innovation is nurtured and allowed to occur at speed, enabling the UK to become a global leader in green technology and high-value services such as financing low-carbon projects. This is of course assuming the world hasn’t descended into environmental destruction before then. However, to even achieve net zero emissions by 2050 the UK needs to undergo both an economic and societal transformation which involves developing and implementing new technologies and people and businesses making different choices.[4]


In the short term, there will be significant costs of transforming the UK to net zero carbon emissions by 2050. Economies do not stand still, and some sectors will benefit, while others, such as fossil fuel extraction, will decline. These changes will have implications for jobs and training[5] as many workers will become structurally unemployed. This transformation and the decline of some of these industries (e.g. fossil fuels) could see a reduction in tax income (e.g. fuel duty) which may result in alterations to fiscal policy[6]. To achieve success in clean growth implementation, a new fiscal policy must seek to abolish government investments in carbon-based industries and offer subsidies to firms developing new green technologies, thereby possibly reducing the overall friction of change.

In the UK, the Committee on Climate Change (CCC) suggests that reaching net zero emissions by 2050 could cost up to 1-2% of GDP per year[7], representing a considerable drag on economic growth. This drag may be exacerbated by the impact of the Covid-19 pandemic on the economy, where the government and wider population might be more reluctant to switch to a carbon neutral way of life given the likelihood of a higher initial cost until the infrastructure is established and operational.[8] This is particularly relevant to the cost of electricity and heating but also to food production and supply. In addition, economists suggest that the transition to a zero-carbon society, particularly relating to household energy bills, could be regressive because poorer households tend to spend a higher proportion of their income on energy costs, and so decarbonization imposes a greater proportional burden on them than on higher-income households.[9] This supports the notion that certain aspects of society would be reluctant to commit to the higher short-term costs associated with achieving net zero emissions.

A reduction in demand for carbon-based commodities such as oil may discourage big stock market firms like BP and Shell from wanting to invest in new ventures as lack of profits restrict their propensity to take risks in innovation. However, it can be argued that as people adapt to new ways of life it could be an ideal time to train people for greener industries, and this can be incentivised through government grants and other publicly funded schemes. This ‘greening transition’ could also be less costly than predicted given that many low-carbon technologies, e.g. solar and wind power, have significantly reduced in cost over the last few years[10]. In addition, many cost calculations might have failed to account for the economic benefits that will come from tackling greenhouse gas emissions, including reduced burden on health care and the vast economic growth potential that innovation and implementation of green technologies and systems offer.


Although a growth drag in the short term is almost inevitable, the long-term possibilities of reducing gas emissions to net zero by 2050 are significant both for the economy and society. These possibilities can be separated into three main benefits; the impact of improved health, the potential for innovation/growth of new industries, and the escalating costs of not taking immediate action.


Firstly, there is a direct and significant benefit of reducing carbon-related emissions with positive impacts on public health. Phasing out the burning of fossil fuels will bring down pollution levels and reduce mortality and health care costs. A switch towards plant-based diets with less meat and dairy will markedly reduce CO2 emissions and are likely to lead to healthier diets[11]. Such diets will lead to healthier people and direct cost savings through reducing the burden on the NHS for conditions like obesity and diabetes. It is estimated that in the UK air pollution causes tens of thousands of premature deaths per year and lead to more than six million sick days, costing the economy £22.6bn annually[12]. This evidence is supported by a recent report by the Centre for Research on Energy and Clean Air who suggest that sharp falls in road traffic and industrial emissions caused by the Coronavirus pandemic have resulted in 1.3 million fewer days of work absence[13]. Although it is difficult from this data to determine what percentage of the absence reduction is directly linked to lower pollution levels, it remains possible that better air quality will have positive economic impacts as work absence attributable to poor respiratory health and the burden on the NHS both reduce.

Secondly, in the long term, the greatest benefit of implementing a net zero carbon strategy in the UK by 2050 is the huge potential for economic growth via the innovation of new technologies and becoming a global leader in this market. It Is believed that global trade in low carbon goods could grow from £150bn in 2015 to between £2.8-£5.1 trillion in 2050, by which time UK low-carbon goods exports could be worth more than the UK’s entire exports in 2015. Low carbon industries could grow from around 2% of UK total output in 2015 to 8% of UK GDP by 2030 and 13% by 2050.[14] By becoming a leading competitor in this industry the UK could benefit from expansion of new markets across the world. Accessing these new markets might ease the challenges associated with leaving the EU and existing trade deals.[15] As about 80% of UK GDP comes from the services industries there will be many opportunities in high value industries such as financing low-carbon projects, climate risk assessments and consulting expertise, fulfilling the current government’s desire for the UK to become a developer of world leading ‘green finance’ capabilities.[16] Therefore, the benefits of implementing net zero emissions in the UK include a substantial opportunity for long-term economic growth which would neutralise and invert any short-term drag.


Finally, actively pursuing net zero emissions will avoid certain environmental costs that may occur if immediate action is not otherwise taken. Many models do not include the economic implications of reaching a level of global warming that would create irreversible changes, such as collapse of ecosystems, melting of ice sheets and extreme heat events.[17] If not addressed these events represent the greatest threat to human livelihoods, development and economic growth. It is also suggested by the IPCC that the longer we wait, the less coordinated the approach to managing a zero-carbon society and the higher the costs are likely to be. The World Bank estimates the cost of adapting to 2 degrees of warming by 2050 might be between $75-100 billion per year.[18] However, a report by the United Nations Environment Programme found this to be a significant underestimate and put this cost instead at $280-500 billion per year.[19]


In summary it appears that any short-term costs are completely outweighed by the huge long-term potential for clean growth in the UK and the avoidance of even greater long-term costs that may occur if climate change is not addressed. However, the ever-looming economic and societal problem of a desire for infinite growth on a finite planet should also be considered. If not environmental destruction, then other problems such as societal collapse via social inequality or extreme overpopulation will bring humanity closer to complete ecological collapse. The solution is not straightforward, but it begins with challenging the notion that endless growth is a good thing, as Kate Raworth suggests through her ‘Doughnut Economics’[20] model where a sustained development of societal and economic objectives meet the needs of all within the means of the planet.


REFERENCE LIST

[1] The Climate Change Act 2008 (2050 Target Amendment) Order 2019 is available at www.legislation.gov.uk/uksi/2019/1056/contents/made [2] UK becomes first major economy to pass net zero emissions law. New target will require the UK to bring all greenhouse gas emissions to net zero by 2050 https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law [3]How will acting on climate change affect the economy? https://www.imperial.ac.uk/grantham/publications/climate-change-faqs/how-will-acting-on-climate-change-affect-the-economy/ [4] How will acting on climate change affect the economy? / Grantham institute – Climate Change and the Environment / Imperial College London [5] Net zero: economy and jobs https://eciu.net/analysis/briefings/net-zero/net-zero-economy-and-jobs [6] How will acting on climate change affect the economy? / Grantham institute – Climate Change and the Environment / Imperial College London [7] Ekins, P et al (2019) Report to the committee on climate change of the Advisory Group on the Costs and benefits of Net Zero. London 2019. [8] Ekins, P et al (2019) Report to the committee on climate change of the Advisory Group on the Costs and benefits of Net Zero. London 2019. [9] Gough, l. et al (2011). The distribution of total greenhouse gas emissions by household in the UK, and some implications for social policy. [10] Ekins, P et al (2019) Report to the committee on climate change of the Advisory Group on the Costs and benefits of Net Zero. London 2019. [11] Jennings, N. et al. (2019). Co-benefits of climate change mitigation in the UK: What issues are the UK public concerned about and how can action on climate change help to address them? Grantham institute on Climate change and Environment, Imperial College London. [12] https://eciu.net/analysis/briefings/net-zero/net-zero-economy-and-jobsEconomic growth and tackling climate change A net zero economy [13] TheGuardian.com 30/04/2020 (Clean air in Europe during lockdown leads to 11,000 fewer deaths) [14] https://eciu.net/analysis/briefings/net-zero/net-zero-economy-and-jobs The economy in 2050 is going to look very different irrespective of a net zero emissions target, Economic growth and tackling climate change. [15] Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., & Tanaka, M. (2018). Climate change challenges for central banks and financial regulators. Nature Climate Change, 8(6), 462–468. https://doi.org/10.1038/s41558-018-0175-0 [16] Net zero: economy and jobs / Energy and Climate intelligence Unit [cited 2020 Jul 12] [17] IPCC (2014). Climate change 2014: synthesise report. Contribution of working groups I, II and III to the fifth assessment Report of the intergovernmental panel on climate change . IPCC, Geneva, Switzerland, 151 pp. [18] World Bank (2010) Economics of Adaptation to Climate change: synthesise report. Washington DC: World Bank. [19] UNEP report: Cost of adapting to climate change could hit $500B per year by 2050 – United Nations Sustainable Development. https://www.un.org/sustainabledevelopment/blog/2016/05/unep-report-cost-of-adapting-to-climate-change-could-hit-500b-per-year-by-2050/ [20] https://www.kateraworth.com/doughnut/# Kate Raworth exploring doughnut economic, what even is the doughnut?...

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