Chris Huhne

The Economics of Climate Change

SOLENT LEP. ‘THE ECONOMICS OF CLIMATE CHANGE’ (check against delivery)

 

Thanks very much. I’m delighted to be here.

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.

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

When the Coalition 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.

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. Our exporters had been hit by a decade of high sterling.

Unemployment is higher than we would like. Our economy has brains and brawn to spare. The cost of capital is low. Savings are at record levels.

To stay globally competitive, we must seize this opportunity to rebuild our economy on firmer foundations.

But 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. 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.

Investment in renewables now outstrips investment in fossil fuels.

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.

No wonder 72% of global CEOs actively support policies that promote economically, socially and environmentally sustainable growth. They know that a green economy is also a more resource efficient economy. That saves money, boosts the bottom line, and helps shareholder returns.

The Treasury and the Department for Business estimate UK businesses could save up to £23 billion a year from using raw materials, energy and water more efficiently.

Let me give a practical example, from just down the road. The Ford Transit plant cut its energy bill by £2.3 million or 28% in one year, by tightening seals on compressed air systems and turning unused machinery off.

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.

There is a third reason to pursue green growth. As the first two oil shocks showed, Businesses hate unpleasant surprises.

Green growth can protect our economy – reducing our exposure to price shocks. That is good for every business in the land.

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 import 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. 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.

That means investing now to secure benefits in the future.

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 % below ours.

Yes, 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.

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. 81 countries worldwide have feed-in tariffs, to reward small-scale generation. And 73 have biofuels mandates.

China already has a target to reduce emissions per unit of GDP by 40-45% between 2005-2020.

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.

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.

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 re-organised around the new technology.

 

UK advantage

Those are potential markets in which UK companies can thrive.

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.

So what could all this mean for Britain? A 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, and a 36.6% increase in total investment.

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’.

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 of what we are doing.

 

Firstly, we are using policy instruments to create new markets.

The Green Deal is our pioneering programme to refit British buildings, offering energy efficiency improvements with no up-front costs to consumers.

Millions of homes and businesses right across the country could benefit. 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.

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 – and a key part of our growth story.

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, 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.

Delinking carbon and growth is the biggest structural shift in the global economy for decades. The most important since the information revolution.

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.