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Getting back on track

There are numerous policy challenges on the road to a net-zero economy. Investing in green technology could well hold the key to a sustainable future. But continuing to miss agreed targets for reductions in greenhouse gas emissions risks driving up costs.

Tackling the climate crisis is at the top of many countries’ policy agendas. In recent weeks, numerous environmental issues have been hitting the headlines in the UK. But this has not been for reasons that the government would like to see, especially as it looks forward to hosting the 2021 United Nations Climate Change Conference in Glasgow later this autumn. Household energy prices are soaring, petrol shortages remain in parts of the country and Insulate Britain protesters have been blocking major roads.

The campaigners agreed on Thursday to a temporary truce ahead of COP26, as the upcoming summit is known. But the question now becomes whether direct action will give way to policy action. It will be tricky for world leaders to kick the can down the road with growing public awareness of the threat from greenhouse gas emissions and the need for far greater action to achieve the ambition of a net-zero economy by 2050.

This week on the Economics Observatory, two articles explored the price of a sustainable economy – and progress on reaching it.

Innovation fixation

Dimitri Zenghelis (London School of Economics) analysed the likely costs of the transition to a sustainable economy. For Dimitri, meeting climate targets can be achieved through the same mechanism that has boosted living standards for decades – rising productivity, which means getting more from less.

There has been a steep fall in the cost of renewable energy sources and electric vehicles over the last decade (see Figure 1). Cleaner energy and cleaner technology are now often cheaper than their fossil-fuel predecessors. The speed of innovation has taken many by surprise, and investment in renewable power generation (excluding nuclear and hydro) now exceeds that in oil, gas and coal generation combined.

Figure 1: Costs of electricity (constant 2019 $ per kWh)

Source:  Committee on Climate Change (CCC), 2020 
Note: Global average levelised costs of electricity are given in constant 2019 US dollars

But huge challenges remain. The 250% rise in natural gas prices this year (as a result of surging demand and lagging supply) has highlighted the weakness of the system. Speed and resilience are both essential if there is to be sufficient popular support for the green transition. The UK’s largest gas storage site was closed five years ago, with no replacement planned. Wind power might now be cheaper, but no amount of innovation can make the wind blow harder. But more encouragingly, the cost of lithium-ion batteries, which are typically used to power electric vehicles, has also fallen eight-fold since 2010.

Dimitri’s piece highlights that the benefits of sustainable investment are 40% higher than conventional technologies. Green transitions are also highly path-dependent: countries that go green sooner are then better at diversifying into other eco-friendly markets. The UK’s relative specialisation in ocean and wind energy is therefore a promising springboard to go further and faster into other sustainable sectors.

He is also hopeful about the post-pandemic potential to lock in more durable methods of production and future-proofed jobs. But the early indications are more alarming, with the Climate Transparency Report announcing this week that carbon emissions from the G20 will rise by 4% this year, having fallen by 6% last year. Emissions in China and India are set to climb above 2019 levels.

Policy-makers know they need to act. But they might also need to be reassured that the trade-off between sustainability and growth is not as stark as it first appears. Rather than having to reduce consumption, governments borrowing to invest in renewable technology can grow their economies too. Dimitri concludes that we don’t know exactly how much the low-carbon transition will cost, but the costs of inaction will certainly be higher.

Carbon counting

Sam Stephenson’s (University of Cambridge) article assessing whether the UK is on track to meet its climate commitments paints a gloomier picture. There are tangible benefits to the economy and the planet from decarbonising, but governments – including the UK’s – have been too slow to act so far.

Targeting a 68% reduction in emissions relative to 1990 levels by 2030, Figure 2 illustrates how the UK is projected to fall short by 16%, unless new policies are enacted quickly. A slew of new strategies have been announced recently, but none appear to reduce emissions significantly – except the commitment to phase out petrol and diesel cars by 2030.

Figure 2: UK emissions to date and projected reduction to 2030

Source: BEIS (2020)

Momentum is at least gathering. In the UK, the reduction in carbon emissions between 2010 and 2020 was nearly double that between 1990 and 2010. This was mainly driven by the switch from coal to gas, and growth in renewable energy generation. But with the lowest hanging fruit already picked, many argue that the UK cannot afford to roll back green initiatives (such as the Green Homes Grant, which was scrapped after just six months).

Sam’s piece provides a warning. With the net-zero deadline less than 30 years away, and the average time for new technology to achieve its full potential often three times longer than that, time is running out.

Minimal disruption was the plan for the UK’s pathway to net zero. But evidence from the last month suggests that this goal has so far been missed. The writers for the Observatory this week are clear in their messages: policy-makers need to be bolder and take tough political decisions without delay. Waiting risks further economic disruption and potential environmental catastrophe.

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Author: Ben Pimley
Photo by Mika Baumeister
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