November 15, 2021

News in Charts: Do not run to the hills yet

by Fathom Consulting.

COP26 is coming to a close, and the magnitude of the task we face is daunting. It is easy to be cynical in the face of exponentially rising emissions: to conclude that short-termist politicians with weak mandates will never be able to reverse trends like that, so we might as well give up on trying to find a collective solution. That conclusion is wrong.

The chart below shows the number of crimes recorded in the UK. In 1992, it would have been easy to conclude that rising crime was an inexorable feature of advanced economies, rising as there was more to steal, for example. However, after 1992 the number of crimes recorded in the UK fell sharply, in both per capita and absolute terms. There is no way a forecaster could have called the peak in 1992 ahead of time, but it happened nevertheless.

IN-HOUSE

If it can be achieved with crime, it can be achieved with greenhouse gas emissions. The circumstances are in place to make it possible.

First, let us look at how not to do it. The path to net zero that goes via de-growth is neither desirable nor feasible. The biggest recession of all time, which occurred in 2020, put global CO2 emissions temporarily on a path consistent with net zero by 2050. To stay on that path through de-growth would mean repeating that experience every year for the next 28 years at least. There is no way that trade-off is worth it, and no elected politician could support it and remain in office.

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Instead, the path to net zero must involve governments accepting that not everyone can afford a ticket on the train, and embracing the free riders. In this example, it might work by paying for the train service entirely out of taxation, so that the cost of travel at the point of travel is zero. Tickets are free, or very cheap. The same logic applies here: to avoid a market failure brought about by free riders, make decarbonisation free or very cheap for everyone. Of course, someone has to pay, which will also involve making clear, credible choices about what exactly they are paying for. That someone is developed economies, via transfers of technology and funds where necessary to developing economies.

The path to net zero must also involve technology. Japan and Germany ripped it up and started again after WWII. And they were the world’s star economic performers for the next three decades as a result, benefiting from the newest and most efficient technology the world had to offer. The same can be true now: a global strategy of substantially higher investment and R&D in carbon-free or carbon-reducing technology could be strongly beneficial not just in terms of the reduction in negative externalities that would otherwise arise from climate change, but also in the positive impacts on economic efficiency in the round.

Notably, ‘new energy’ is one of the nine high-tech fields targeted by President Xi’s Made in China 2025 plan. Our proprietary dataset, which tracks China’s progress in these fields, reveals that it has secured top spot, with a global market share in ‘new energy’ exports of 14.4%.

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It has to be said that, as things stand, no such paths have been agreed. The numbers involved are undeniably huge: in our estimates, the value of the stock of ‘stranded’ capital that will need to be scrapped or retrofitted on top of the normal process of depreciation and capital growth over the next 30 years or so is in the order of $20 trillion. And that does not count other stranded assets such as oil and gas reserves that will have to be left permanently underground for net zero to be achieved.

But the COVID vaccine race showed that we can achieve marvels if we put aside our cynicism and bend our collective minds to it. That is what COP26 should be aiming for.

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