John FitzGerald: Action on global warming will come at a cost

This month's report from the Intergovernmental Panel on Climate Change highlighted the urgency of action to halt climate change. Extreme weather, delivering devastation and death, has brought this home to the wider public. While political leaders have made commitments to action, it is worrying that many of them are glossing over the reality that climate action won't be painless and will have costs.

US president Joe Biden and British prime minister Boris Johnson have played up the number of jobs to arise from investments to decarbonise their economies, but they have avoided any messages on the costs of climate action and why such costs are justified. A broad consensus must be built that halting climate change is essential and that some limited sacrifices today are justified to save the planet.

If governments are not straight with their voters around costs, they risk push back that could derail taking necessary measures. As the gilet jaunes protests showed, public acceptance of the need to act cannot be taken for granted.

As dirty assets like fossil fuel power stations or diesel cars become obsolete, those who own or operate them will be losers when the music stops

There will of course be new jobs in retrofitting buildings, in renewable energies, in making electric cars. However, there will also be significant job losses.

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While it is obvious there will be jobs lost in “dirty” industries like coal mining, turf harvesting and making combustion-engine cars, many other job losses are less easily identifiable, but nonetheless real. When spending is redirected to tackle our climate goals, it means we spend less in other areas, and those markets will shrink and jobs will be lost.

As dirty assets like fossil fuel power stations or diesel cars become obsolete, those who own or operate them will be losers when the music stops.

A recent paper by economist Jean Pisani-Ferry summarises the macroeconomic impact and challenges of climate policies.

To tackle climate change effectively, the world must invest in new technologies, such as renewable energy. Such climate investments could amount to about 2 per cent of national income over a sustained period. Funding investment on this scale will have economic consequences.

Unless societies choose to save more to fund this investment, the effect of increased demand internationally for an unchanged pool of savings will be to push interest rates up slightly. Alternatively, savings might switch away from other uses towards climate-related investments.

Whether the outcome is higher interest rates or a squeeze on investment finance, it will, of course, have wider implications for economic activity in areas like housing.

If European countries need to invest 2 per cent of national income per year in tackling climate change, the result will be 2 per cent less a year to spend in alternative ways. That will have knock-on implications for what families and governments can spend elsewhere.

For example, someone who borrows to retrofit their house, will have a bit less to spare for meals out, clothes, entertainment, or holidays, as they pay back the loan. As Pisani-Ferry says: “Undoubtedly, consumers will be better off in the long run, as they will benefit from a preserved climate. But in the short run their welfare is likely to take a hit.”

The public finances will also be affected. Governments will need to spend money to adapt to climate change, protecting against more frequent fires and floods. That will mean less to spend on education or hospitals.

At likely carbon prices, many businesses and households will find it won’t be profitable or affordable to decarbonise to the extent that needs to happen. So governments will need to provide some level of subsidy if change is to happen, particularly to those on low incomes.

If we can avert climate catastrophe... the economic disruption from investment to tackle climate change will be worth it

Governments also need to support just transitions across certain sectors. These pressures will require higher taxes, reducing private consumption.

The Pisani-Ferry paper suggests that the overall magnitude of the change required in the world economy to tackle climate change will be similar to the oil price shock of the 1970s, which resulted in a big cost in terms of world gross domestic product. The impact today is likely to be less extreme as the change will be spread over a longer period.

This change would have been even less disruptive if we had started earlier. The 1970s crisis marked a huge redistribution of wealth towards oil-rich states. This time round, the costs and benefits of the climate investment will be more evenly spread across countries.

If we can avert climate catastrophe – which would also carry immense economic, as well as human, costs – the economic disruption from investment to tackle climate change will be worth it. Another positive spin-off for society as we decarbonise our economies will be significant technological advances.