Reconciling Dieter Helm’s 4th May 2022 article “How to pay for energy” with Ekins and Zenghelis (2021)
Helm says in “How to pay for energy” (2022):
“Whilst the public have been led to believe that net zero is a free lunch (or at least a manageable 1% of GDP or less), it is very much not so. Important and worth doing, but a much bigger cost of living rise than our leaders, and the campaigners against climate change generally, would like us to believe. They fear scaring the horses, but they cannot stop us being confronted with the cost.”
I believe the 1% he cites is the estimate from Lord Stern in “The Economics of Climate Change – The Stern review” (2007) that solving AGW would cost about 1% of global GDP:
“Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more. In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.”
Ekins and Zenghelis, on the other hand, say, in "The costs and benefits of environmental sustainability" (2021):
"Recent evidence suggests the short-term GDP impacts of well-designed environmental action could be positive, crowding-in rather than ‘crowding out’ the drivers of future growth. This paper provides evidence that not only makes the environmental case for action, in terms of its benefits for human health and welfare, it also shows how such action can generate economic returns in terms of productivity, jobs and income and reduce the costs of meeting any emissions and resource use targets. A cost effective low-carbon, resource-efficient transition can generate a cleaner, quieter, more secure, innovative, and productive economy for all countries at all stages of development."
So, Ekins and Zenghelis suggest that the net cost of acting to address AGW is not 1% of GDP but, well, less than zero, ie there is a net benefit in acting, not a net cost, providing we take the right actions.
How do we reconcile these seemingly conflicting views? Through realising that they might both be true, but only when taking into account all future timelines, not just the next few years.
It might well be the case that there might be a net cost of the transition to a decarbonised national or global economy over the next few years or even a decade or two. This might also exceed the 1% Stern estimate. Because we have underinvested in the necessary infrastructure changes since 2007 (when the Stern Review was published), we have a lot of catching up to do if future investment is to be large enough to achieve the same end objective of global net zero carbon by mid century.
However, if an appropriate discount rate is used in a Net Present Value (NPV) calculation, and future net benefits of a net zero carbon economy are factored in once the transition is complete or nearly complete (and for all future years beyond that point), then the overall NPV for deciding to act and invest robustly enough for decarbonisation might well be a positive number. This positive NPV would be one way of expressing Ekins and Zenghelis’ suggestion about action being GDP-positive.
The Planetary CFO - working towards a sustainable World Balance Sheet.