The accidental wisdom of Mr Sunak
How much does the transition to net zero have to fear from populism? In the UK, populist wannabe, Nigel Farage, has turned his sights on net zero, having recently dismissed Brexit as having ‘failed’. His recent rant against ‘meters’ would be humorous if it didn’t influence government policy. Prime Minister, Rushi Sunak promptly made an attempt to bid for the same ground. Unwittingly, Sunak parodies the populist approach to electoral manipulation espoused by Dominic Cummings during the Brexit referendum. In that instance, Cummings states that the strategy was to silence the trade wonks and focus on the NHS – even though Brexit had nothing to do with it – because that’s what people care about. Sunak takes this a step further. Presumably motivated again by AI-driven electoral insights, and alert to Farage’s populist acumen, Sunak announced with great fanfare than he is taking a ‘new approach to climate change’, which involves scrapping policies that don’t exist, making cosmetic changes to the nation’s policy on electric vehicles, and backtracking on a number of measures affecting residential building emissions, albeit simultaneously increasing subsidies.
Encouragingly, the media reaction to Sunak’s ‘straight-talking’ typically dismissed this as an attempt to treat voters as fools. Equally revealing is the consistency of the narrative response from informed business and activists to counter Sunak’s rhetoric: the green transition is about cheaper sustainable energy and transport, it requires investment in our infrastructure, in technology and in electricity generation which makes us more productive, collectively wealthier, and creates jobs. To a significant extent, the reflex association of green with higher costs and economic sacrifice has been broken.
The right net zero policies are a winning political strategy
In our book, Supercharge Me: Net Zero Faster, we argued that the association of ‘green’ with ‘tax’ was not only bad economics, but terrible political economy. Sadly, poor economics has done untold damage in climate policy. In striking contrast to a carbon tax-based approach, the policies that have been shown to work are extreme positive incentives for change (EPICs), and regulatory changes aimed at reducing the cost of capital and accelerating investment in regulated electricity utilities. There is consensus that effective and timely emissions reduction requires greening our electricity grid, and electrifying as much as possible across buildings, transport and heavy industry. It is also precisely how the UK has cut emissions to date. Raising the share of sustainable electricity in total generation is about accelerating investment in our utilities.
Making the green option cheaper – a lot cheaper – is the only way to make the transition work at the speed and scale we need. If green cars are cheaper, mortgages for well-insulated sustainable buildings are lower, who wouldn’t support the green transition? The fastest way to create this price differential is to accelerate investment in low carbon technologies across sectors: let the cost curve take effect.
As Doyne Farmer et al. show, transitioning from a resource based energy system to a technology based system will collapse the cost of our energy systems and drive structural productivity growth. His summary: “we are in a race between armageddon and awesome.” The technologies that underpin the green economy; clean energy generation and storage are demonstrating a Moore’s law like collapse in cost and increase in productivity. This is a property unique to true technologies; a resource such as fossil fuel could never deliver such benefits. Countries that transition faster to the technologies of the green economy will reap these benefits faster; lower cost of energy to consumers and businesses, and second order productivity benefits to the whole economy.
The right policies are a winning political strategy. Accelerating investment in cheaper electricity is a positive supply shock which raises productivity and living standards in a direct and tangible way. The losers are not the general population or consumers, they are in fact winners. The losers are the owners of existing polluting assets – who happen to be largely “theocracies, thugocracies and the 1%”. There is no huge cost to the state because we end up with higher productivity and any liabilities incurred should have a corresponding, higher yielding, asset. This is wealth-creation.
The political and economic consequences of the green transition extend beyond this, particularly since the invasion of the Ukraine. We had already argued in Supercharge Me, that a significant motivation to scale renewable energy for economies like India and China, was self-sufficiency and global leadership in the future technologies of cheap electricity production. This has dawned on Europe post-Ukraine and on the US in the form of the Inflation Reduction Act.
It is also now clear that a substitute-based EPIC approach to net zero creates an interest group far broader than the fossil fuel industry, rebalancing the calculus for politicians seeking to get elected or stay elected. When we made these arguments, only two years ago, they were not received wisdom, as a debate in The Economist magazine highlights. The Inflation Reduction Act and the intervention of energy engineers, not economists, changed all of that. Most smart economists are now entirely on board, as this superb summary of the state of climate policy by Noah Smith reveals.
A closer look at Sunak’s strategy in recent months suggests even he believes it is in our economic interest to invest heavily in the green transition. Sunak’s intervention targeted a straw man of various green taxes which he was going to repeal; a meat tax, a tax on flying. These taxes do not exist, and if they did exist, they would not drive the lion’s share of emissions reduction. Carbon taxes play a secondary, sequenced, role, and only really work when intelligently imposed on firms rather than consumers.
Rishi is playing multiple games of duplicity. Not only is he positioning net zero policies he is against as ones that don’t even exist, and are not not central to the UK’s net zero pathway, but he is also quietly supporting the policies which really are indispensable. Just two weeks prior to Sunak’s supposed ‘U-Turn’, his housing secretary Michael Gove announced the intention to remove planning restrictions on on-shore wind development. This is likely to have a far more significant impact on our emissions trajectory than the changes Sunak fanfares. The 2015 restrictions on planning restrictions collapsed the rate of new onshore wind projects by an estimated 96%.
So it seems, Rishi is trying to say net zero is too expensive, but a closer look at his actions suggests not pursuing net zero is too expensive. The debacle reveals the economic rationale of net zero is now aligned with vested interests. The logic of net zero is irrepressible for any politician with an eye to growth and the economic conditions of the electorate.
This episode marks an encouraging moment for climate activists. The economic logic of net zero is too powerful to be ignored, and everyone knows it. Or at least almost everyone. This discussion of the recent electoral under-performance of Germany’s Green Party on the UK’s most listened to political podcast, The Rest is Politics is striking. Rory Stewart suggests that we have captured the ‘low hanging fruit’ of the green transition, and what remains is the hard stuff, which will impose high costs on low income households. There is some truth in this, to the extent that retro-fitting home heating systems is one of the most challenging areas of policy, although as Sunak has correctly concluded by raising the subsidy, the way to do it is by minimising inconvenience and using an EPIC. The right policy will be popular, albeit potentially costly in the short-run. But this is a relatively trivial observation the context of the overall transition. Due to technological innovation, the ‘low hanging fruit’ falls lower and lower, until the analogy becomes obsolete. They become irresistible, in economic terms. Within 18 months it is likely that electric vehicles in the UK will be cheaper than their carbon-intensive competitors, even without subsidy. A long-run trend in declining electricity prices is also a logical consequence of accelerated investment in renewables. Renewables currently account for 30-40% of UK electricity generation, the target should be 80-100%. The technologies that drive the bulk of the transition are cheaper; cheaper to develop and provide a boon for consumers.
Part of our goal in writing Supercharge Me was not just to shift economic and policy thinking, but also to change the public narrative and help policymakers understand why the green transition will benefit almost everyone. A punitive tax-based approach was not just bad economics and ineffective for driving an industrial revolution, it would also be grist to the mill of populists and climate deniers – epitomised by Farage. Unexpectedly, and unintentionally, Rishi Sunak has strengthened the case. He has also triggered a warning shot to populists positioning net zero transition as the new strawman enemy, that such a strategy can backfire.