Stern’s gone global, but is the Treasury still listening?
This week, the New Climate Economy (NCE) project published its report spelling out the compelling economic logic behind moving to a low carbon world. In contrast to the earlier Stern Review, there has been a focus on large and fast growing developing countries, which are expected to generate the largest growth in CO2 emissions in the coming decades.
But, here at the home of Stern’s original report, is the UK – and in particular the Treasury – still heeding its advice? The latest scaling down of ambition for the deployment of renewable energy in the Treasury’s Infrastructure Pipeline will inevitably raise doubts.
The NCE is the flagship project of the Global Commission on the Economy and Climate set up by seven countries, including the UK. The Commission is chaired by Felipe Calderón, the former President of Mexico, and includes senior figures from the worlds of politics, economics and business. The NCE report makes recommendations – largely relating to cities, land use and energy systems – on how to achieve high quality economic growth and address dangerous climate change.
The mind boggling scale of infrastructure investment needed
To get a sense of the scale of the challenge it is worth looking at what NCE recommends on infrastructure. It reckons that even before we take actions to combat climate change, the world needs $89 trillion of new infrastructure investment over the next 15 years. This is to meet the needs of a growing population and emerging middle class in developing countries. The sums involved are mind boggling, although spread over 15 years and 7.2 billion people, it equates to about $800 (£500) per person, per year.
As the report points out, we will need to change the composition of these infrastructure investments if we are to have a chance of keeping global average warming below 2°C. In other words, we will have to spend more on some types of infrastructure and less on others. The NCE calculates that an extra US$13.5 trillion will be needed in investments in energy efficiency (in buildings, industry and transport) and low carbon energy (such as renewables, nuclear and carbon capture and storage). At the same time they reckon that there will be savings of US$9.4 trillion from reduced investment in fossil fuels (power plants and the supply chain), savings in electricity transmission and distribution and reduced need for urban infrastructure in less sprawling cities. So, on balance, the extra infrastructure needed from a low carbon transition could be US$4.1 trillion, or five per cent higher than for ‘business as usual’ high carbon growth.
Avoiding climate change reduces infrastructure and other costs
But, as the NCE report says, these figures do not tell the whole story. Taking action to avoid damaging climate change should help to reduce the need for infrastructure investment to adapt to the impacts of climate change, such as flood defences and storm protection.
Also, focusing on the upfront cost of infrastructure ignores potential lower operational expenditures, for instance from low carbon energy (which they suggest could lead to net savings of US$1 trillion). Naturally, there are major uncertainties around all such calculations but, if they are broadly right, then any additional costs from investing in low carbon infrastructure are likely to be relatively modest. And this is before we consider any other benefits from such investments, such as improvements in local air quality.
In the UK, the Treasury has been keeping track of plans for infrastructure investment through the publication of its infrastructure pipeline. This pipeline is meant to provide a strategic overview of the large infrastructure investments planned by the private and public sectors. Between 2014 and 2020, the total pipeline is £233 billion (an average of £600 per UK citizen per year, a little above the NCE’s global average) and a further £122 billion after 2020.
A downturn in UK renewables spending and less clarity
At Green Alliance we have been following the regular updates of the Treasury’s infrastructure pipeline. When we first crunched the numbers in early 2013 we were really encouraged to find that the vast majority of planned spending was on public transport and low carbon energy. However, when the pipeline was updated in December last year, we noted a cut in planned renewable spending of £7 billion up to 2020. And with the July 2014 update of the pipeline, expected spending on renewables has been further reduced by around £6 billion (all figures in constant 2012-13 prices).
In addition to the downward shift in renewables spending to 2020, there has been a move towards less clarity on the type of generation expected. In the past, offshore and onshore wind, wave and tidal all merited their own specific headings in the pipeline. Increasingly spending is being subsumed into other headings such, as ‘various renewables’ up to 2020 and the even more generic ‘post-2020 generation’ thereafter.
It is important not to over emphasise these changes. Despite the reductions in renewables, the majority of expected spending in the pipeline still comes from low carbon energy and public transport. However, the pattern of steadily scaling back renewable energy investment plans, combined with an increasing lack of clarity on the type of generation expected to be delivered, and even whether it will be low carbon post-2020, hardly inspires confidence that plans are on track.
The Treasury needs to regain the initiative
The Treasury has a key role in effecting the UK transition to a low carbon economy, particularly in instilling the confidence that is vital to deliver private investment in renewables. There is a damaging perception that it is primarily focused on short term costs rather than the benefits of environmental policies. This is seen in its continued practice of significantly discounting the long term benefits of environmental policies.
It is also present in its use of economic models which include the financial costs of environmental policies, but exclude the benefits such as reducing the risks to UK growth from climate change or improved public health due to better air quality. Such unbalanced approaches to economic modelling in finance ministries were criticised in the NCE report.
The Treasury needs to regain the initiative it had in this area when it commissioned the Stern Review, particularly at a time when some are calling for the economic and finance functions of the department to be separated. It should not ignore the growing weight of economic evidence, provided by the NCE report, that it is economically prudent to invest early in the decarbonisation of our infrastructure.