Sunday, July 11, 2021
A hefty bill to achieve net zero - who will pick it up?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

Follow the money, they say, and these days quite a lot of money is going into responding to climate change. Two big recent motor industry announcements, Nissan’s battery gigafactory and Vauxhall’s decision to built electric vans at Ellesmere Port are both responses to the challenge of shifting towards a net zero economy.

People are shifting too. The new car market remains below pre-pandemic levels but in the first half of this year 41.2 per cent of vehicles sold were alternatives to full diesel or petrol, mostly hybrids, up from 21.6 per cent last year. More than a tenth, 10.7 per cent, of new cars sold in June were battery electric vehicles, up from 6.1 per cent a year earlier.

People and businesses are voting with their feet, or their wheels, and that shift is happening more quickly than expected. But it is important to recognise that this is one of the easier bits of responding to climate change, though it is not without its costs.

Those costs and others, particularly to the public purse, were one of the focuses of the latest Fiscal Risks Report, published by the Office for Budget Responsibility (OBR), the fiscal watchdog, a few days ago. There is a sting in the tail of its assessment, which I shall leave until the end.

The OBR, drawing on the work of the Climate Change Committee and the Bank of England, has looked at the fiscal costs of getting to net zero by 2050, the government’s ambition. These are, of course, not the only costs. Households and businesses will separately incur bills running into hundreds of billions.

Climate change and getting to net zero are complicated issues. The UK has on the face of it, a good record, with greenhouse gas emissions down by 44 per cent on 1990 levels, not least because coal usage has largely disappeared. We have also outsourced some of our emissions to China, a point often made by Greta Thunberg. The UK’s “consumption” emissions, based on what we buy and use, have fallen by a smaller 29 per cent.

It gets harder from now on, according to the OBR. “Getting the rest of the way to net zero by 2050 will require us to find ways of overcoming both the technological obstacles to delivering cost-effective carbon removals at scale, and the delivery challenges associated with upgrading insulation and installing low-carbon heating systems in more than 28 million homes,” it says.

To cut through the complexity, there are three simple points that can be made. The first is that, far from scaring us off the sums involved in tackling climate change, the two “once in a lifetime” shocks of the past decade or so – the financial crisis and the pandemic – may instead have taught us that these things are more manageable than we thought.

The OBR’s big number is that the fiscal costs of achieving net zero will add 21 per cent of GDP to public sector net debt by the middle of the century, £469 billion in today’s prices. That, the OBR says, is “somewhat smaller” than the debt increase resulting from the pandemic. The fat that it will happen over a much longer period should be reassuring.

Second, the early you act, the better it will be. The OBR notes that its “early action” scenario, or at least the one it has borrowed from the Bank, will cost more in the short-term but significantly les in the long run. Under a late action alternative, debt would be 44 per cent of GDP higher by 2050, 23 percentage points higher than from acting early.

Third, and this is also a pandemic point, you cannot leave climate change unaddressed. If it were allowed to continue unchecked, or “unmitigated” then the negative effects on the economy would be much greater, as would be the additional government debt. The coronavirus was a risk that the country was not properly prepared for. There would be no excuse for repeating that with climate change.

That said, this is still the trickiest of issues. There will be people who look at the charts in the OBR’s report and conclude that while plucky little Blighty is the fifth or sixth largest economy in the world (there’s a battle going on with India), this country is a minnow when it comes to greenhouse gas emissions, just 1 per cent of the total. The big ones are China, America, India, Russia, Indonesia and Brazil.

The biggest increases in emissions in recent years, unsurprisingly, have been in China and India. This creates a political problem, rooted in the economics of net zero. As the OBR puts it, the physical risks from global warming are “largely exogenous”, in other words coming from outside this country, while the costs and risks are “endogenous”, and have to be borne at home.

That is what makes it a challenge. It is one thing for the government to take on its share of the cost of decarbonisation, it is another to persuade the public to do so without very large incentives. Let me take a couple of examples.

We have an old and energy inefficient housing stock, with most heating provided by gas boilers. Achieving the kind of insulation programme needed to address that and persuading people to install what Boris Johnson described the other day as “10 grand a pop” heat pumps looks like something that any government would prefer to leave to its successor.

Or, returning to cars, where I started. Carbon taxes will be needed to shift people and businesses away from traditional energy sources. Fuel duty is a kind of carbon tax, albeit one that chancellors have been too timid to increase for the past 10 years.

Eventually, however, these receipts will be lost, a natural consequence of decarbonisation. If they could be replaced with other course of revenue, the fiscal costs of moving to net zero would be greatly reduced. The OBR says that if the tax burden on motorists was maintained, the debt would be 24 per cent of GDP lower than it expects by the middle of the century. How do you maintain the tax burden on motorists, either by ramping up the road fund licence to very high levels or by road pricing? Would governments which have been fearful of raising fuel duty do that? You tell me.

What about that sting in the tail I mentioned earlier? Climate change is one of three fiscal risks analysed in detail by the OBR in its latest report, the others being the legacy of the pandemic and the danger of a rise in the cost of government borrowing, pushing up the debt interest bill.

These are only three of 87 risks identified by the OBR and, to simplify the analysis, it isolated each of these in terms of their impact on the public finances. When the OBR looked at the long-term outlook for the government’s finances a year ago, in its Fiscal Sustainability Report, its central projection was for public sector net debt to rise above 400 per cent of gross domestic product over the next 50 years, largely driven by demographics and the ageing population. In the long run, we have a problem.