5 December 2019

How to build a green economy that boosts growth and saves the planet

By Dr Gerard Lyons

In the past there has been scepticism about climate change. The scientific evidence has put paid to that. It is unequivocal.

Now, instead, the scepticism appears to be about whether economic growth can be achieved alongside addressing climate change. It can. But this message needs to made clear.

The UK’s progress in addressing climate change is admirable; it is now high up our political agenda and in late 2020 we will host a possible game changing summit on this issue in Glasgow.

The most important previous annual summit was the 21st Conference of the Parties (COP 21), held in Paris in December 2015. There, countries committed to the Paris Agreement, including unveiling national plans to address climate change. As the 2006 Stern Report made clear, the costs of action are less than those of inaction.

This week in Madrid at COP 25, two unresolved issues from Paris have featured: having a common time frame for national plans; and the need for international carbon markets. Both are indispensable. Closing the emissions gap is essential and a global market mechanism, with a carbon price, is part of the solution.

There still needs to be a robust economic debate about the best way forward. My concern is the linking of a climate crisis with a desire to throw out our current economic model. Addressing climate change should be complimentary to economic growth globally, and not tied to an anti-growth agenda. It is also part of helping rebalance the UK economy.

This requires sensible public policy but can only succeed with the financial and private sector onside. There needs to be not only better policy, a social agenda, but a profit motive too.

Between 1990 and 2017 the UK’s emissions of total greenhouse gases have been reduced by 42% and continue to fall. Currently, such emissions in the UK emanate from: transport 27%, energy supply 24%, business 17%, residential 15%, agriculture 10% and waste management 4%.

During 2019 the UK Government committed to achieving “net zero” carbon emissions by 2050. This would end the UK’s contribution to global warming. This implies a focus on emissions reduction and removing as much carbon as we put into the atmosphere. Reforestation as well as increased carbon capture and storage would be part of this, plus likely new technologies.

It will have major implications for farming and land use. Farmers, and businesses more generally, will respond to regulations and changing human behaviour. In addition to being asked to fly and travel less, people may eat less meat, consume less milk and dairy products and eat from local sources and more seasonal foods. There is already underway a UK-led Dasgupta Review into the economics of biodiversity. One outcome may include aligning the needs of investors’ environmental objectives with what can be achieved on the ground.

Incentives matter and the UK has the ability to use this to its advantage. Stronger sustainable growth would likely require more investment in high productive areas such as technical innovation, mechanisation and energy. Already there has been increased use of renewables (although oil and gas will still remain important).

Improving the energy efficiency of homes is essential, but retrofitting and changing energy sources needs to be handled carefully to minimise cost.

The UK’s role in greening the financial sector is pivotal. One consequence will be that banks and insurance companies better manage their risks in the area of climate change and there will be greater incentives for lending to clean growth areas. This is meaningful. The economics of smart cities, sustainable finance and green growth are part of the current Fourth Industrial Revolution.

Actions will drive the outlook. The Grantham Institute has produced a list of nine things people can do in their everyday behaviour. These range from protecting green spaces to reducing energy use and to responsible investment. Indeed, across the private sector, firms are starting to respond to changing consumer habits, and to highlighting their green credentials. This is welcome.

As well as informing people so that they can choose freely, it is important to aim for market solutions instead of removing or restricting market access. For instance, suggesting people are taxed heavily for their once-a-year holiday flight may not be credible, particularly if advocated by those who show little intention of cutting down their own air travel. So one focus should be on more fuel efficient planes and carbon offsets.

While we show leadership at home, the reality is that this is a global challenge. So, over the next year, the big focus is whether we can not only move the climate change agenda forward but to do so in an all encompassing way for more nations. This has to be a pro-economic growth friendly direction to ensure global buy-in.

In line with the aims of COP 21 in Paris more countries must update their national plans and climate action pledges by Glasgow 2020. There is a need to bring ambition into line with targets, and more countries should have long-term strategies of net zero by mid-century.

Since Paris, the global picture is mixed. The biggest challenge is that the US plans to leave this global agreement the day after the 2020 US Presidential election. In contrast, China’s Five Year Plan points to continued pollution control. Another challenge is to encourage countries located along China’s global Belt Road Initiative not to opt for coal production to meet their energy needs.

Climate action is one of the all-important Sustainable Development Goals that the UN and all countries can commit to. Hence the national action plans of small or poorer countries are critical, as is how they can be helped.

Expect a focus on raising long-term finance on an ongoing basis to help green the planet. Earlier this year, a newly formed Coalition of Finance Ministers for Climate Action was formed. They endorsed the Helsinki Principles to drive growth and promote national climate action through fiscal policy.

Also, as we are seeing with the European Central Bank, the green agenda may have wider policy implications, and may influence their future bond buying.

There is ample scope to develop international public policy in areas such as carbon pricing and taxation, perhaps of international business travel, and prioritising research into clean energy of all forms.

Data, too, needs to be used to provide timely and accurate information. This includes transparency in achieving national plans on pollution control or in terms of how we can assess other areas of this debate.

Above all, there needs to be a greater role for the private sector in climate action, including mobilising private finance to invest in green schemes. Achieving success should not be at the expense of economic progress and points to more sustainable future growth.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Dr Gerard Lyons is an economist and writes in a personal capacity. He is a member of the Advisory Board at the Grantham Research Institute on Climate Change and the Environment.