Will Net 0 Greenhouse Gas Emissions Hit Economic Growth?

 by Alex Bradshaw

(image Wikicommons)

Scientists have agreed that the world must reduce greenhouse gases in order to avoid catastrophic climate change. The UK has agreed that by 2050 UK emissions will be reduced to a level of net zero. This means at least a 100% reduction of greenhouse gas emissions (compared to 1990 levels) in the UK. This can be achieved either by reducing the amount of greenhouse gases produced or by increasing the amount that we remove from the atmosphere. This will undoubtedly be extremely disruptive and potentially very expensive. It also has the potential to be a drag on economic growth. But the extent of change and disruption will also result in a considerable amount of innovation – so it also has the potential to be overall beneficial to the economy. In the following paragraphs I consider the impacts of the government targets on the two sectors of the economy that make up over 50% of the U.K.’s greenhouse gas emissions. I will conclude by considering whether economic growth will ultimately be slowed, accelerated or unaffected by these targets.

To gain an understanding of how the economy will be affected by the targets, we must first consider those sectors which make up the majority of greenhouse gas emissions. They, undoubtedly, will be the most affected by the changes made in light of the new targets.  The largest producer of greenhouse gas emissions is the transport industry, creating 28% of total UK emissions. This includes all vehicles (domestic and commercial) and planes leaving and arriving in uk airports. This is closely followed by energy suppliers producing 23% of the UK's carbon emissions through the burning of fossil fuels or other materials that release greenhouse gases into the atmosphere. These two sectors create 51% of the UK’s greenhouse emissions.

As transport is the largest producer of greenhouse gases in the UK, the government has developed an extensive action plan to reduce greenhouse gas emissions in this sector.

The main generator of greenhouse gases in the transport sector are cars, contributing 55% to domestic transport emissions, whilst heavy vehicles and vans produce 33%. This amounts to 88% of the emissions being produced on the roads. Due to this, the government will continue to pursue a tax system on road vehicles that incentivises the purchase of the most eco-friendly vehicles. This will include increases in road tax for less environmental vehicles, and subsidies for green vehicle manufacturers. The government has so far raised around £500 million in order to help implement these plans. Initially, the likely economic impact of this will be economic growth, as not only will the government spending on this initiative boost aggregate demand, but new incentives to buy eco friendly cars will create a boost in consumer spending. However clearly this all depends on the production of electric vehicles. Currently the UK car production industry is saturated by fossil fuel powered cars with only 10% of domestically produced cars being either hybrid or fully electric cars. 80% of UK produced cars are exported and this amounts to 12% of the total UK exports. I would assume that given the government rules there will not be an increase of numbers of cars on the road but instead a substitution of  petrol or diesel powered cars to electric cars. Inevitably, there will be lower demand for diesel and petrol powered cars in the future due to their negative impacts on the planet. Therefore unless the UK starts to invest in electric vehicle production, it is possible that they could lose up to £60.5 billion of car exports. The UK is not a big producer of electric vehicles, producing only 3% of the global total. This market is dominated by China who produce over 50% of electric cars worldwide. Despite previously consuming almost 100% of cars produced domestically, predictions show that due to their current functioning market China will lead the revolution to electric vehicles, exporting millions of cars globally in the years to come. This implies that the UK will be importing rather than exporting electric vehicles. This could mean a reduction in aggregate demand as the exports minus imports factor would be reduced due to the mass imports of electric vehicles. On the contrary, if the UK decided to invest heavily into the production of electric vehicles not only would they increase aggregate demand through business and government investment they could also create economic growth through additional exports of electric vehicles. The electric vehicle movement is a great step forward in reducing greenhouse gas production and ultimately, government investment and business investment into the electric vehicle market will lead to economic growth as not only will these cars be mandatory in the UK by 2050 but will also be in high demand globally, leading to a long-term sustainable market in exporting electric vehicles. But with all of these new electric powered cars on the roads, how will electricity generation be able to satisfy the increase in demand?

 

Similar to the transport sector, the UK energy  sector also has green alternatives in the form of renewable and nuclear energy. Currently renewable and nuclear energy make up 54.3% of the total energy produced in the UK (36.9% and 17.4% respectively). Last year, renewable energy managed to power our country for almost 50% of the year. The government's aim is to almost completely remove energy production through the burning of fossil fuels by 2050. In 2017 the UK had a net import of more than £18 billion worth of fossil fuels. Therefore, clearly by cutting fossil fuel energy production and replacing it with domestically sourced renewable energy there will be a considerable economic benefit. However, will the UK be able to provide enough electrical energy domestically without fossil fuels? Instantly removing 45% of the UK’s energy production would cause significant consequences for electricity supply around the country. Furthermore at least 70,000 jobs would be at risk. This could reduce our short run and long run aggregate supply due to the long term structural unemployment, and the workers associated with fossil fuel energy production may not be able to find other jobs given their specialised skill set. Moreover, the non-renewable energy market attracts 5.8% of business investment in the UK. A reduction in investment here could cause a reduction in aggregate demand and hence cause economic shrinkage. However the government's clean energy fund of £24 billion will help boost the economy and encourage investment in this sector. So an investment from the fund into producing more wind farms and other renewable energy capacity will increase numbers of jobs as workers will be needed to build and operate new facilities, which in turn will increase the disposable income for those workers and increase consumer spending. Furthermore, the government has plans to build more nuclear energy plants. In 2016 the government approved the project Hinkley Point C. It is a £22.5 billion next generation nuclear power plant that will supply 7% of the UK’s energy demand and offset nine million tonnes of carbon emissions per year. Not only will this be hugely beneficial for the UK’s carbon offset in the long run, but will also provide many jobs in the short run. In essence, the pursuit of net zero while at the same time delivering economic growth will require a substantial investment by the UK government and private sector in the development of domestic renewable energy capacity and a consequent reduction in the import of fossil fuels.

 

Across all sectors there will undoubtedly be innovation to help support the achievement of net zero. Technology such as the carbon capture and storage unit is a perfect example of investment in new capability and this along with many further innovations will undoubtedly help to drive economic growth.

 

In conclusion, whether or not there is economic drag or growth due to the pursuit of net zero targets is, I believe, a function of three factors: First, the extent of government and business investment in technologies and infrastructure that will drive a reduction in greenhouse gas emissions in the long run; Second, the extent to which economic output in fossil fuel industries is reduced as low carbon replacements take their place and; Third, the extent to which investment in the UK creates globally competitive low carbon capabilities and products that support a positive shift in the growth of UK exports over imports. Significant capital investment is required to reach the targets and it is certain that the government needs to give clear direction on policy coupled with clear incentives through subsidies and tax benefits if the private sector is to invest to its fullest extent. If adequate investment is made to ensure that both domestically and internationally the UK is a competitive global leader in a new low carbon world then I believe that economic growth and the delivery of net zero carbon emissions are not mutually exclusive goals.