The Rt Hon Chris Huhne MP speech: The economics of climate change
Check against delivery Thanks very much. I’m particularly delighted to be here among a group of people so responsible for seeing and delivering…
Check against delivery
Thanks very much. I’m particularly delighted to be here among a group of people so responsible for seeing and delivering our future prosperity.
Today, I want to set out three key arguments about the economics of climate change that I believe must be crucial to our national vision of the future.
First, we must get off the oil hook - and onto clean, green growth. The science demands it. Our survival requires it. And our living standards will benefit from it.
Second, this low-carbon revolution can offset fiscal tightening and turbo-charge jobs. It is a large part of the answer to the question of where the jobs and growth are coming from.
And third, our economy will be more stable and secure as energy imports wane. Every business will benefit from moderating boom and bust.
Together, these arguments make up the case for ‘green growth’: investment in the infrastructure, industries and technologies that can change our economic future for the better.
Introduction
Fourteen months ago our first priority was dealing with deficit.
One year on, and the IMF and OECD agree: we have struck the right balance between austerity and stability. The storm has receded. Now we must pick a path to future prosperity.
When we came to office, our economy was unbalanced. Bubble finance had inflated property and other asset prices.
Government spending was sustainable only if taxes and GDP were sustainable, and they were not.
Consumers had borrowed on an unprecedented scale to keep the merry-go-round turning. And then the music stopped.
More than a quarter of the rise in income - in GDP per head - between 1997 and 2007 was reversed during the financial crisis and recession.
Our economy was also suffering a deeper malaise: manufacturing’s share of our economic output halved between 1990 and 2010.
Our share of world exports fell from 4.4 per cent in 2000 to 2.8 per cent in 2009.[1] Our exporters had been hit by a decade of high sterling.
As Sir Winston Churchill -who is the patron saint of this Coalition, as he was prime minister of our wartime coalition and had served as both a Liberal and a Conservative minister - once said of his period as Chancellor: ‘I would rather see finance less proud, and industry more content’.
In the Coalition Agreement, we promised ‘to build a new economy from the rubble of the old’.
But what kind of economy do we want - and how do we want to build it? It is not enough to get out of the danger zone. We need a roadmap to recovery.
New directions
Unemployment is now nearly 8%. More than 80,000 young people under the age of 24 have been out of work for more than six months.
Our economy has brains and brawn to spare. The cost of capital is low. Savings are at record levels.[2] To stay globally competitive, we must seize this opportunity to rebuild our economy on firmer foundations.
The solutions that worked in the past are blocked off. We cannot pump-prime the economy as we did in the fifties and sixties, because the deficit is too big.
Nor can we deregulate the financial system as our pathway to growth, spurring more credit as we did in the eighties. We can’t afford another credit crisis.
Instead, we must turn to something else. A path that can deliver a dynamic, vibrant economy that is ready to compete in the next global growth sector.
I believe that green growth - investing in low-carbon technologies, industries and infrastructures - is the best way to rebalance our economy and build a better future for Britain.
Green growth boosts productivity, innovation and efficiency. It creates new markets, and builds investor confidence and stability. And it is in the UK’s direct economic interest to encourage it.
There are four compelling reasons why.
Innovation and investment
Firstly, a low-carbon economy presents an opportunity, not a cost.
Investment in our clean energy future should not be mistaken for a cost to the economy, or the public purse. Instead, as Lord Stern has shown, it can be strong driver of economic growth.[3] Boosting demand, and creating new supply in a sustainable way.
Globally, the low-carbon goods and services is worth £3.2 trillion, and employs 28 million people. It is growing by 4% a year, faster than developed world gdp, and will accelerate.[4]
It is also a sector driven by relentless innovation.
Between 1999-2008, patents for renewable energy increased by 24% each year. Electric and hybrid vehicles were up 20%. Energy efficiency up 11%.[5] Nearly 2,000 clean energy patents were filed in the United States last year, nearly treble the previous year.[6]
Private finance is already rushing in. In the first half of 2010, green technologies accounted for a quarter of all US venture capital investments.[7] Globally, investment in renewables now outstrips investment in fossil fuels.[8]
This extra inward investment brings jobs and sets the conditions for growth. It also drives learning-by-doing: making companies and economies more productive.
Resource efficiency
The second reason to choose the low-carbon path is self-evident: it is more resource efficient. It uses less energy and fewer resources per unit of GDP.
A survey of 300 top executives from large global corporations found more than three-quarters of respondents expect their annual clean energy technology spending to rise over the next five years.[9]
No wonder 72% of global CEOs actively support policies that promote economically, socially and environmentally sustainable growth.[10] They know that a green economy is also more resource efficient. It saves money, boosts the bottom line, and helps shareholder returns.
In the UK, businesses can save up to £23 billion a year from using raw materials, energy and water more efficiently.[11]
Let me give two practical examples I have seen recently. The Ford Transit plant at Southampton cut its energy bill in just one year by £2.3 million or 28%, mainly by tightening seals on compressed air systems and turning unused machinery off.
But there are also leaps in technology. A rare earth precision laser can save 90% of the energy cost of a traditional laser - one of the key tools in the modern factory.
And at the macro level, the International Energy Agency projections show the 17% extra global investment in low-carbon energy systems by 2050 would bring cumulative fuel savings of $112 trillion.[12]
Companies realise that locking in high-carbon technology is a risk for the future. Sticking with yesterday’s fuels could be tomorrow’s headache. With rising energy prices and finite supplies of fossil fuels, not many want to bet against low carbon.
Protection against shocks
There is a third reason to pursue green growth.
Businesses hate unpleasant surprises, as the first two oil shocks showed.
Green growth can protect our economy - reducing our exposure to price shocks. That is good for every business in the land from corner shop to conglomerate.
After all, dependence on oil for transport and gas for power puts us at the mercy of international markets over which we have no control.
We cannot rely on the North Sea. We were once self-sufficient in oil and gas; now we importing 27 per cent of our energy. That vulnerability is projected to double by 2020.
And even home-produced oil and gas exists in a world market. It can still give us a nasty price shock.
The IMF’s World Economic Outlook for 2011 devotes an entire chapter to oil scarcity. It notes that - and I quote -
‘the persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term’[13]
Those emerging market economies will be ready and willing to compete for scarce resources.
In extreme cases, control of and access to hydrocarbons will likely become a matter for militaries, not treasuries.[14]
So what is to be done?
We should head off the challenge of price and supply insecurity by getting off the oil hook.
That way we can protect our consumers from high prices, and our economy from price shocks - which can not only impede recovery, but trigger recessions.
That means investing now to secure benefits in the future. Remember that the cost of our low carbon policies by 2020 is just 1 per cent on the average household energy bill, and even that calculation by DECC economists presumes that we can buy oil at last year’s cheap rate of $80 a barrel with gas prices in line.
But the oil price reached $100 a barrel in January, which is the point at which our economists calculate the British consumer breaks even. And the oil price, as we have seen this year, could well be higher.
In the medium term, the US Department of Energy forecasts $108 a barrel by 2020, and $125 a barrel in 2035.[15]
If oil prices stay high, and gas prices rise to meet them, then our consumers will be winning hands down from our energy policy. Paying less through low carbon policies than they would pay for fossil fuel policies.
The demand for oil and gas, of course, does not come down easily whatever the price. We cannot simply stop using them overnight. We are committed to car journeys. And locked into fossil fuel using capital equipment.
So protecting ourselves from price shocks is not the work of a day, a week, or a year: we must free our economy from carbon addiction over the long haul.
Some countries already have a head start. Electricity prices in France are set to rise by just 3% this year. Compare and contrast with Britain, where prices are rising by three times as much.
It is no surprise that France is the European country with the least reliance on fossil fuels, and enjoys some of the lowest prices - 9.4 per cent below ours.
We have a long way to go. But every long journey begins with a first step.
For us, that means building cleaner power plants, and encouraging the electrification of heating and transport. These are the fundamental components of a strategy that will deliver green growth.
Timing is everything
The fourth and final reason to pursue such a strategy is simple: we cannot risk being left behind. Green growth is in our direct national interest.
Around the world, governments are responding to the green energy challenge. The race for the future is already underway.
One of the great myths surrounding the economics of climate change is that we are somehow going it alone. Why should we be the only ones to sacrifice, the sceptic says, when no-one else is committing to carbon cuts or green growth?
Nothing could be further from the truth.
Some 89 countries have renewable energy policy targets. By the way, almost all EU countries have more demanding targets than we do. Some 81 countries worldwide have feed-in tariffs, to reward small-scale generation. And 73 have biofuels mandates.[16]
China already has a target to reduce emissions per unit of GDP by 40-45% between 2005-2020. It aims to produce 16% of its primary energy from renewable sources by 2020. It is upping its research and development spend to over 2% of GDP by 2015.
By the time High Speed Two connects the 163 kilometres from London to Birmingham, China will have built 16,000 kilometres of high-speed rail. It wants new industries including energy saving and clean energy vehicles to rise from 3% to 15% of the economy by 2020.
Korea’s National Strategy for Green Growth commits 2% of annual GDP to green growth programs and projects. The $46 billion Korea is investing in its ‘Green New Deal’ will create 960,000 jobs by 2012.[17]
South Africa’s state-owned Industrial Development Corporation has committed £2.2 billion to new investments in South Africa’s ‘green economy’ over the next five years.[18] And yesterday, the South African energy minister told me about her ambitious plans for renewables and nuclear power.
Norbert Roettgen, the German Environment Minister, makes a convincing case:
‘Germany’s economy has come out of the crisis even stronger than before. This is partly due to our strength in exporting modern energy and environmental technologies, where we have up to 30 percent of the world market share. And this share is rising’[19]
Profound technological shifts favour countries that are well prepared. Change first drives productivity growth in the innovating sector. Lower prices for low carbon equipment then drives greater investment, and production is increasingly re-organised around the new technology.
UK advantage
Those are potential markets in which UK companies can thrive..
We must make good on our competitive promise. Britain has a strong engineering, research, and science base. We have significant renewable resources in wind, wave and tide. And we have a proud history of converting innovation into commercial success.
In areas like offshore wind, wave and tidal power, we can consolidate our considerable natural resources and competitive advantages.
We are also one of the world-leaders when it comes to carbon capture and storage - which is why we persuaded the Treasury to sink £1 billion into the first commercial scale CCS plant. CCS is a key future technology. We need it to deal with peaks and troughs in a more variable energy system, and we need it to provide base load power where coal is abundant.
Indeed, IEA analysis shows that carbon capture and storage will have to deliver around 20% of global emission reductions by 2050.That’s around 3400 CCS plants by 2050, a fast-expanding market where the UK technology puts us in pole position.[20] Around the world, some US$40 billion has already been earmarked for CCS projects. Independent analysis suggests export opportunities for the British economy could reach £3 - 10bn a year by the late 2020s.
So what could all this mean for Britain? The recent Potsdam-Oxford study for the German government found that more ambitious emissions targets bring considerable benefits for the UK economy: a 7.3% GDP boost, the 3rd highest of the 27 member states.
The 2nd highest GDP growth rate increase, 0.8 percentage points.
And a 36.6% increase in total investment - that’s a 4.1 percentage point boost in investment as a share of GDP.[21]
We have a clear incentive for aggressively pursuing green growth. Greater investment will raise our long-term productivity and improve our infrastructure. This is the safe foundation for sustainable growth.
Josef Ackermann, the chief executive of Deutsche Bank, puts it plainly:
‘Make no mistake: a new world order is emerging. The race for leadership has already begun. For the winners, the rewards are clear: Innovation and investment in clean energy technology will stimulate green growth; it will create jobs; it will bring greater energy independence and national security’.[22]
We would be mad to miss this boat. Turning our backs on the next global growth sector when the world’s economic dynamos are pursuing it so strongly would be economically suicidal.
Green growth will make our economy more efficient, more secure, and more competitive.
So how can we encourage it?
Our approach
Everyone has a role to play. It is for government to set the right framework to allow growth to prosper. Markets will follow long-term policy signals. Government can unlock private investment at scale.
Let me give you three examples.
Firstly, we are using policy instruments to create new markets.
The industrial revolution in the nineteenth century would not have happened without the innovation in Britain of the joint stock company, and the limitation of shareholders liability to their initial capital in the 1855 Act.
The biggest projects would simply not have been financeable. Rich individuals would not have been prepared to take on unlimited liability. We would all have been losers.
In the same way, we are creating new markets today that will also stimulate investment.
The Green Deal is our pioneering programme to refit British buildings, offering energy efficiency improvements with no up-front costs to consumers.
When the Energy bill becomes law, business will be able for the first time to make their returns back over the lifetime of the improvements, as the twenty-year payback will be attached to the energy bill even when the householders move on.
Millions of homes and businesses right across the country could benefit. The Green Deal could cut our energy imports by up to £3 billion per year, save households up to £400 per year in gas and electricity, and help us cut our carbon emissions.
It will also create a whole new market in energy efficiency, with implications for supply chains across the country. The number of people employed in insulation alone could soar from 27,000 to 100,000 by 2015, and 250,000 at its peak.
And we are now talking to manufacturers about the opportunities of the Green Deal: now that the market is Tesco and not Harrods, the sky is the limit. Big scale means big savings on heat exchangers, wall insulation, and air-source heat pumps. And big chances for suppliers.
Secondly, we are making existing energy markets fairer, clearer and more stable.
Take the electricity market reform project. Over a quarter of our power plants will close over the next decade. OFGEM estimates over £200 billion must be spent to secure our energy supplies by 2020. This is double the normal level of energy infrastructure investment needed, a key part of our growth story.
The next time someone asks where the growth is coming from, you can tell them. Green energy.
Our reforms will reduce the risks for investors in low-carbon by setting out a clear and stable investment framework - and creating the right conditions to attract the capital needed to transform the system.
By offering certainty and clarity, we can secure the scale of investment we need. By attracting in new investors, we also increase competition in the UK energy market.
The Green Investment Bank will also help. It will be the world’s first national development bank dedicated to the green economy. It will open for business in 2012, using public money to unlock private investment in the companies that will deliver green growth.
Its reach will extend far beyond the City: steering major new sources of capital towards low-carbon projects, including offshore wind and energy efficiency.
Conclusion
We need a vibrant, new economy.
One that is resource-efficient. That saves money. That boosts productivity. Where British innovation and research can deliver new success in engineering and manufacturing. With dynamic low-carbon markets driving the products and processes that will build the future.
There is no credible alternative.
The strong recovery from the last great recession of 1929 to 31 was not led by the old industries like textiles, iron, coal and shipbuilding.
It was unleashed by carmakers, electrical appliance makers, light manufacturers. It will be the same in this recovery from deep recession. Our economic success will depend on the industries of the future, not the past.
We must own this opportunity to change. We must, to borrow a phrase, ‘win the future’.
In so doing, we can redefine climate economics. We can and should move the argument from costs to benefits. And we can break the chains tying pollution to progress.
Delinking carbon and growth is the biggest structural shift in the global economy for decades. The most important since the information revolution. And we are doing it.
In Britain, we have grown by 48 per cent since 1990. But our carbon emissions have fallen by 28 per cent. We are already showing the way.
The future will be about green growth. We need resourcefulness, not resources. Respect for nature, not rapaciousness. Renewal, not retreat.
Our low-carbon economy will be more efficient, more competitive, and more resilient.
By getting off the oil hook, we can deliver clean, green growth. We can offset fiscal tightening and turbocharge jobs. And we can make our economy more secure.
We will face stiff competition: green growth is the hottest ticket in town.
But no-one ever won a race by starting last or running slowest. Let’s get going.
[1] HMT/BIS, ‘The Plan for Growth’, March 2011
[2] Zenghelis, D., ‘A Macroeconomic Plan for a Green Recovery’, 2001
[3] Romani, M., Stern, N. and Zenghelis, D., ‘Policy brief: the basic economics of low-carbon growth in the UK’, 2011.
[4] BIS, ‘Low-carbon and environmental goods and services: an industry analysis’, 2009
[5] OECD, ‘Towards Green Growth’, Summary for policy makers, 2011
[6] CEPGI, Clean Energy Patent Growth Index, 2011
[7] OECD, ‘Towards Green Growth’, Summary for policy makers, 2011
[8] UNEP, ‘Global Trends in Green Energy’, 2010
[9] OECD, ‘Towards Green Growth’, Green Growth Strategy Synthesis Report, 2011
[10] PWC 14th Annual Global CEO Survey, 2011
[11] HMT/BIS, ‘The Plan for Growth’, 2011
[12] IEA, ‘Energy Technology Perspectives: Scenarios and Strategies to 2050’, 2010
[13] IMF, ‘World Economic Outlook’, 2011
[14] “Control and access to hydrocarbons will remain important and major powers are likely to use their defence forces to safeguard supplies”. Ministry of Defence, DCDC Global Strategic Trends 4th Report, 2010
[15] DOE, Annual Energy Outlook 2011
[16] ‘The Geopolitics of Clean Energy’, Michael Liebrich, Chief Executive Bloomberg New Energy Finance, 2011.
[17] OECD: ‘Towards Green Growth’, A summary for policy makers, 2011.
[18] Ibid.
[19] German Federal Environment Minister Norbert Rottgen’s speech to UNFCCC Cancun, 2010.
[20] IEA: ‘Energy Technology Perspectives’, 2008.
[21] ‘A New Growth Path for Europe: Generating Prosperity and Jobs in the Low-Carbon Economy’, 2011.
[22] Josef Ackermann, address to Global Metro Summit, Chicago 2010.