Advanced countries will have to pay for climate change
Even with the IPCC’S latest horror story, developing markets are not going to gladly make sacrifices
There is a reason why imagined apocalyptic and dystopian futures are so popular in literature and in film: it is because human beings like catastrophising.
“End of days” has been a perennial theme across cultures throughout human history. But never mind imagined annihilation – there are quite enough real-life threats to worry about.
Once it was nuclear war that was about to wipe us all out. Today’s apocalypse comes in the forms of the pandemic and climate change. A cynic might say that the most promising solution to the second would be a deadly version of the first, but of course the aim must be to survive both, so that we can live happily ever after like they do in the movies. Darker endings are not made for Hollywood.
We seem to be coping quite well with Covid, though admittedly this is not a particularly lethal pandemic by past standards. The costs, however, have been off the scale.
Britain’s Office for Budget Responsibility (OBR) reckons that by the time it’s all over, the lockdown measures deemed necessary to mitigate the disease will have added around 24 percentage points to the national debt in the UK alone, with some £10bn a year of ongoing legacy costs.
There are some superficial similarities between the threats posed by Covid and that of climate change, insofar as both are global phenomena that ultimately require global solutions. But otherwise they could scarcely be more different.
The threat from Covid is an immediate one requiring an equally immediate public health response and mitigating economic strategy; despite the latest blood curdling warnings this week from the UN’S Intergovernmental Panel on Climate Change (IPCC), global warming is a slow burn threat requiring potentially very expensive behavioural and technological change, the costs of which many people are still not even remotely reconciled to.
The problem is essentially this: that the potentially catastrophic costs of greenhouse gas emissions are not borne by those producing them today, but by future generations. It’s hard to persuade people to pay for things they don’t obviously benefit from.
Politically these are therefore much trickier waters to navigate, especially when it doesn’t make a blind bit of difference what individual nations do to reduce their emissions unless everyone does it. Solutions require a high degree of both altruistic behaviour and international cooperation.
Almost everywhere, governments have signed up to the climate change agenda, but the gap between the rhetoric and the required actions remains in most cases vast and seemingly unbridgeable.
If the IPCC is correct, and there is even less time to limit the damage than previously thought – “code red for humanity”, as the panel called it – then governments must soon grasp the nettle with meaningful investment and tax incentives. It is no accident that the Government has still not published its own internal assessment of the costs; it is not yet ready to tell it as it is.
Yet others have indeed taken a stab. The starting point for the OBR in its most recent “fiscal risks” report in assessing the likely impact on the economy and the public finances is that, assuming the science is right, the costs of failure will be hugely more than the presumed costs of doing something about it. Hard to disagree, if today’s extreme weather events are anything to go by.
Fortunately, the UK is already a little way down the road, having reduced emissions by 44pc compared with 1990 levels. But that’s the easy bit, achieved largely by closing coal fired power stations and by offshoring much of our carbon footprint to overseas manufacturers such as China. It’s as much about merely transferring our emissions to others as real progress.
Even so, the OBR reckons, as does Britain’s Climate Change Committee, that with early action the costs of the transition are not as great as one might imagine. In the Bank of England’s “early action” scenario, a steadily rising carbon price is assumed that weighs on economic activity, but with GDP settling at “just” 1.4pc below where it would otherwise have been. That doesn’t seem a huge price to pay.
The Climate Change Committee has estimated the whole economy investment cost of getting to net zero by 2050 for the UK at £1.4 trillion; of that, the OBR says about a quarter will fall on the public finances, or £469bn in today’s money. That sounds a lot, but spread over three decades, it’s actually not that big – 0.4pc of GDP a year in net terms.
The long-term impact would be to add an additional 21pc of GDP to the national debt, or slightly less than the pandemic. This might be thought rather better value for money than the amounts splurged on lockdown, though it’ll be largely pointless unless everyone else does the same.
Unfortunately, these numbers refer only to the exchequer’s costs. The OBR’S numbers also assume a partial offset from carbon taxes, reaching a peak of 1.8pc of GDP in 2026-27. Three quarters of the cost of the energy transition on the OBR assumptions falls directly on households and business, heat pumps and green boilers being the main item here. The upfront capital costs of electrifying the entire energy infrastructure will also have to be paid for somehow or other, even if the new infrastructure eventually promises much lower operational costs and therefore prices.
Yet in the scale of things it’s not as big a burden as might have been feared. There are also potentially substantial offsetting economic gains in the shape of jobs and investment. None of this is to deny the challenge of selling the costs to the public.
The much bigger challenge, however, is that of persuading the rest of the world to do the same thing. Even with the IPCC’S latest horror story to concentrate minds, the developing world is not going to take gladly to the sacrifices required. In all likelihood, we’ll end up having to pay for a large part of their costs on top of our own.