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This is the personal website of Mark Cliffe, Visiting Professor at the London Institute of Banking & Finance, Visiting Fellow at the Global Systems Institute, Economic Consultant and former Chief Economist of the ING Group.

Labour should target national wealth, not debt

Politicians generally agree with economists in saying that investment isa Good Thing. After all, it’s seen as the font of economic growth and prosperity. And yet so often the public investment that politicians control falls victim to more immediate priorities. But this is not just about being short-sighted. At the heart of the problem are the politicians’ fiscal rules, which focus on debt rather than what really matters, the nation’s wealth. Indeed, the obsession with debt has blinded them to the obvious truth that we need assets if we are to grow the economy and cover our debts.

For all their talk about the need for the UK to catch up with the rest of the world on investment, both the Conservatives and Labour have cut back on planned public investment over the past month. In its latest Budget, the government chopped public sector net investment by £14bn over the next five years to help fund tax cuts in the hope of boosting its poll ratings.

Meanwhile, the Labour Party, embarrassingly slashed its plan to step up investment by an extra £28bn per year as part of its Green Prosperity Plan, despite having championed it for so long. Although this plan was entirely consistent with its own fiscal rule of borrowing to invest, it was concerned that it would fall foul of another rule, shared with the government, which commits it to cutting public debt by the end of the next five years. It feared relentless Conservative attacks about ‘unfunded spending’.

Source: Evening Standard

Politicians are fond of talking about the need to ‘balance the books’ while only looking at one side: what the nation owes, but not what it owns.  Yet the reality is that making cutting debt the overriding priority is fiscally irresponsible. By ignoring the other side of the balance sheet, public assets, iteffectively lumps investment in with current spending (government consumption) as being bad for the health of the public finances.

Successive governments have neglected vital investment and maintenance, progressively eroding the asset base of the public sector.  Seeing investment purely in terms of creating debt ignores the fact that it creates the assets crucial to meeting future debt obligations.  

It is something of a mystery why Labour have not made ‘only borrowing to invest’ its primary fiscal rule. Its whole programme is infused with talk of the need to promote growth, wealth and prosperity. The ‘borrowing to invest’ makes sense with a balance sheet rule that targets public sector net wealth, rather than just debt.  Such a wealth target would mean taking proper account of the assets that it acquires and the return that it makes on them.

Indeed, setting annual targets for the change in national wealth would transform government. This would be far more than an arcane accounting change. Government departments and agencies would be forced to pay attention to the assets that they control and use, starting with measuring them properly. They would be incentivised to make sure that they are maintained and used efficiently and deliver the returns that the public wants.

After decades of debt-distracted neglect many countries are now finding that running down assets to pay off debts, often with botched privatisations,has undermined their finances. The notion that ‘budget responsibility’ is enough has been found wanting. Indeed, the UK’s Office for Budget Responsibility (OBR) perhaps ought to be renamed the ‘Office for Fiscal Responsibility’. Better still, perhaps it should be merged with the National Audit Office and renamed the ‘National Wealth Office’.

Annual wealth targets would also dramatically improve the way that government is perceived. Aside from being in tune with Labour’s emphasis on wealth creation, they would set a positive hopeful tone to counter the current gloomy national mood. The government could be recast not as a deadweight on wealth creation of the private sector but rather as another source and facilitator of growth.  

This move would also increase the status of public sector workers, helping to attract entrepreneurial talent and generate the potential for higher pay and rewards as the government’s wealth-creating contribution became more visible.

The emphasis on wealth creation might create another virtuous circle. Genuine fiscal sustainability would be well received by the financial markets, lowering the government’s cost of funding. Lower interest costs would in itself give a boost to national wealth over time, and lower the cost of stepping up investment further. Now that would be a Good Thing.

This post was originally published by the Evening Standard, 26^th March 2024

Planet NGFS starts to look like the real world

The new ‘Conceptual note on short–term climate scenarios’ from the Network for Greening the Financial System (NGFS) is a potentially game-changing step forward. ‘Planet NGFS’ is now beginning to look more like the real world. In shifting from long term to short term scenarios, looking out 3-5 years, it has clearly outlined the practical limitations of its previous long term scenarios.

This is much more than a shift in time horizons, it has recognised that:

• different drivers are involved
• chronic physical risk is a ‘predetermined’ over such horizons
• smooth pathways need to be replaced with volatility and non-linearities
• financial market expectations and stress are key
• greater sectoral and geographic granularity will be needed

These are welcome points which the Real World Climate Scenarios (RWCS) Initiative has been emphasising for some time. The new set of NGFS scenarios based on this new thinking are likely to highlight much bigger risks and opportunities than previously suggested. While the NGFS notes that their primary purpose is to integrate climate risks into stress testing and macroeconomic forecasting, this will have profound implications for not just policy but also for financial institutions as they look to develop and implement their transition plans.   

But while this a great leap forward towards greater realism in climate scenarios, there is still some way to go, particularly to make them practically useful for financial institutions:

1. Economic growth is not just an impact, it’s a driver 

NGFS made a fateful decision when it began developing its long term scenarios to use just one baseline economic growth pathway. Specifically, it uses the IPCC’s Shared Socio-economic Pathway (SSP) 2 , aka “middle of the road”, which assumes that global GDP growth continues smoothly in line broadly with historic trends. Since then the NGFS has effectively ignored the other four IPCC pathways, which have the global economy growing at very different rates, reflecting different economic and political narratives. Thus, while SSP 2 points to gain in global real GDP of 111% by 2050, SSP1 shows a rise of 160%, and SSP3 66%.

So the focus of the NGFS is resolutely on the impact of climate risk on the economy, not the other way around. This is despite the obvious reality that growth has been both a key determinant of emissions and a source of shocks, affecting politics, climate policy, technology and consumer choices. A simple illustration of this the observation that the only year that we have achieved the required reduction in global emissions was 2020, in the midst of the recession triggered by the Covid 19 pandemic.  

Short term scenarios should therefore consider a variety of different pathways for GDP. In other words, rather than a climate-economy frame, their scenarios should use an economy-climate-economy frame.

2. The disruptions that lie ahead are still being underestimated. 

Decarbonisation implies a whole economy transformation which involves disruptions greater than the NGFS is even now conceding. Although it recognises non-linearities, it is still approaching the analysis with an equilibrium mindset in which ‘shocks’ are largely cyclical disruptions around a trend, rather than potential tipping points for both physical and non-physical systems. Disappointingly, the modelling section of the report makes no mention of non-equilibrium models.

Moreover, the first criterion in its selection of shocks was “they could be modelled within existing climate and economy models”. In other words, rather than realistic narratives driving models, their models are, in part, dictating the narratives. 

We are not only hurtling towards several critical climate tipping points, we must contemplate potential political, economic and technological tipping points, both negative and positive.

At one point the NGFS report rightly asserts that ‘the chronology of events is also critical.’ The idea that evolution of systems, including the climate, political and economic systems, is path dependent is a key insight of complexity science that is notably absent from the models that the NGFS discusses. This leads to a blindspot about ongoing structural changes which could take the world further and further away from the past trends (which are enshrined in SSP2).

3. Politics is the elephant in the room

Transition risk dominates four of the five scenario narratives presented in the NGFS report, an important element of which is the trajectory of climate policy. But these narratives are still largely on ‘Planet NGFS’, where climate policy is represented largely by a (shadow) global carbon price, phased in either gradually or suddenly.

The rich real world diversity of policies and cross-country differences are acknowledged but barely addressed. This is hardly surprising, because the bare-knuckle political fight that is taking place nationally and internationally over climate policy is not confronted by the NGFS. Yet the widespread political polarisation over climate, which has already seen some countries not merely delay action, but reverse it, has to be confronted in any realistic set of scenarios. It is worth noting that between now and 2030 we will have 20 elections in ten key countries where election results are not pre-ordained.

The nearest that this report gets to this point is its final scenario, ‘Diverging realities’, which focuses on a broad divergence between the advanced and emerging world as a result of a failure of capital to flow from the former to the latter. This is indeed an important issue, but other obvious questions, not least about the consequential tension between the West and China and/or Russia, and between energy exporting and importing nations, are left unasked. Politics, not policy, deserves to be the key driver of climate scenarios alongside economics. 

4. There is still a dubious presumption that the transition will be inflationary 

The NGFS report baldly states “transition scenarios are expected to be more inflationary than scenarios involving physical risks”. This predisposition again betrays the NGFS equilibrium thinking and modelling, where the presumption is that policy driven reallocation of resources leads to friction, inefficiency, higher prices, and lower growth. This, perhaps inadvertently, has had the baleful effect of supporting the political backlash against ‘Net Zero’ policies.

Yet Appendix 1 of the NGFS report quotes a Banque de France (BdF) report that raises possibility of a positive productivity shock from green innovation, which would lower prices and raise output. Looking at the evolution of green technologies such as renewable energy, which has plunged in price as it has grown, this possibility needs to be factored much more prominently into the scenarios.

Addressing these points will certainly be challenging. As the NGFS says, this remains an ‘emerging field’.  It is to be hoped that academia and business steps up to support the development of more decision-useful scenarios, based on more realistic narratives. The recently published University of Exeter-USS report ‘No Time To Lose’, featured in my previous post, aims to do just that.

No Time To Lose

The first fruit of my new role as Visiting Fellow at the University of Exeter’s Global Systems Institute is a report written on behalf of the Universities Superannuation Scheme (USS), entitled ‘No Time To Lose – New Scenario Narratives for Action on Climate Change’. In it, along with my co-authors Jesse Abrams, Tim Lenton, Mike Clark and Jack Oliver, I argue for a paradigm shift towards shorter term narratives that embed the volatility and financial implications critical for ‘decision useful’ scenarios.

The report builds on the thoughts discussed in my previous post. At its heart is a new set of four scenarios based on different combinations of high or low policy activism and high or low market dynamism. The most optimistic scenario, ‘Roaring 20s’, has both drivers working in harmony, resulting in rapid decarbonisation. In the most pessimistic scenario, ‘Meltdown’, a toxic political climate compounded by dysfunctional markets frustrates progress.

In addition to support of our Exeter colleagues, the report drew on a 40+ team of experts from a wide variety disciplines. Special thanks are due to Mirko Cardinale, János Hidi, Mark Carney, Nigel Topping, Simon Sharpe, Caroline Cook, Marek Piskorz, Kingsmill Bond, David Carlin, Michael Bradshaw, Jo Paisley, Gillian Tett, Peter Young, Tim Buckley, Louie Woodall, and Tim Hodgson.  

We’re living on Planet VUCA, not Planet NGFS

In my latest article, published in the May 2023 edition of The Actuary magazine, I argue that official climate scenarios, promoted as the de facto standard by the likes of the Network for Greening the Financial System (NGFS), are no longer fit for purpose.

Planet NGFS is a world without storms, floods, wildfires, droughts or rising sea levels; where the economic damage caused by global warming grows gradually, and, for a few decades at least, modestly. There are no pandemics, wars, policy errors, recessions, stock market crashes; no unemployment or banks. Markets work, rising carbon prices shift the world smoothly away from fossil fuels and carbon removal takes off.

This is the story, or fantasy, built into the integrated assessment models (IAMs) underpinning the climate risk scenarios of the NGFS, the International Energy Agency and others.

Thankfully there is growing awareness that standard climate narratives and models are missing crucial risks, tipping points and feedback loops, thereby understating the risks and opportunities. The disruptions flowing from Covid, the war in Ukraine, energy and supply chain dislocations, financial crises and extreme weather events have exposed the unreality of Planet NGFS. We need scenarios to embrace the fact that we are living on Planet VUCA: one characterised by volatility, uncertainty, complexity and ambiguity.

The Real World Climate Scenarios initiative, which I co-launched last year (with Mike Clark of Ario Advisory and Willemijn Verdegaal of Ortec Finance), is dedicated to addressing this. Given governments’ and businesses’ diverse needs, these scenarios must cover a greater variety of time horizons, scales and scopes – thus requiring a broader range of methods and models.

Now that the focus is on delivering net zero, transition planning is the priority. This means that the urgent need is for short-term scenarios focused not systemic risks but on the bespoke needs of both governments and business. Since global warming is a given on horizons of less than 10 years, the such scenarios are driven instead by the interaction of transition risks and extreme weather events.

Moreover, since the success of any organisation is contingent on the behaviour of others, bespoke scenarios need to acknowledge that organisations run risks not just in moving too slowly on decarbonisation, but also in moving too quickly.

The full article can be found here.

The Fed’s Climate Complacency

The US Federal Reserve’s new pilot climate scenario exercise for major US banks is likely to understate both the risks and opportunities of tackling climate change.

Photo by Jp Valery on Unsplash

The US Federal Reserve is being dangerously complacent about climate change. It understandably does not want to take the lead on an issue that remains so politically polarizing in the United States. But its newly announced climate scenario exercise with six major banks is set to woefully understate the risks and opportunities offered by the transition to net-zero emissions. In the process, it will do little to foster the ambition to tackle climate change shown in the Biden Administration’s landmark Inflation Reduction Act.

Having failed to absorb the lessons from similar exercises by central banks in Europe and elsewhere, the Fed is relying on scenarios created by the Network for Greening the Financial System (NFGS), despite a growing recognition that these rest on flawed foundations.

Central banks have long conceded that crucial risks are missing from the mainstream integrated assessment models (IAMs) that they use. Yet they fail to admit that these gaps leave their analyses systematically biased against climate action. They have ignored trenchant critiques from eminent economists such as Nicholas Stern and Joseph E. Stiglitz, who note that “IAMs have very limited value … They fail to provide much in the way of useful guidance, either for the intensity of action, or for the policies that deliver the desired outcomes.”

The increasing frequency and severity of extreme weather events is now too obvious for central banks to ignore. Yet while the Fed’s exercise will include a scenario in which a major hurricane hits the US East Coast, its NGFS-style modelling will omit many critical factors and processes. Disruptive shifts in politics, policy, financial markets, and technology will all be glossed over. The complex interactions between climate-driven events and human behaviour, involving tipping points and non-linear changes or discrete jumps in climate-risk probabilities – will barely be captured.

This means that possibilities such as a prolonged war in Ukraine, a return of White House climate denialism, a renewables trade war with China, recessions, or stock-market crashes are nowhere to seen. Nor are more positive possibilities, such as a surge in the popularity of progressive green politics, an explosion in electric-vehicles sales as they reach price parity with internal combustion engine vehicles, or continued rapid technological progress.

Far from being mere technical details, these kinds of modelling flaws could lead to disaster. The NGFS scenarios would have us believe that in a “business as usual world” heading to 3° Celsius warming, global GDP in 2050 would be only around 4% lower (implying a loss of less than two year’s growth) than in a world where we have achieved net-zero emissions and kept warming within 1.5°C. No wonder central banks foresee only modest financial losses. Yet this outlook contrasts starkly with climate scientists’ frantic warnings about the enormous damage that continued global warming will do.

Compounding the problem, the NGFS scenarios downplay the potential benefits of the net-zero transition. In fact, they suggest that it will lead to higher inflation and lower growth, while ignoring the possibility that green technological progress will lower prices and boost growth.

This brings us to another problem with the Fed’s climate-scenario exercise: It will do little to help banks meet the NGFS’s own call for them to consider climate risks and opportunities in all their decision-making. Banks in Europe have already cast doubt on the usefulness of their local supervisory exercises, and a similar reaction is likely in the US. Scenarios that are woefully inadequate for assessing long-term systemic risk obviously are even less useful for stress-testing specific banks.

Having issued their own net-zero pledges, banks are under more immediate pressure to develop and execute their transition plans. Many have already committed to interim targets such as halving the emissions that they are financing by 2030, implying reductions of 8% per year. Such robust changes will transform their strategies, business models, and credit and investment decisions.

These developments ought to force a radical shift in climate-scenario analyses. There is a glaring need not only for more realistic long-term scenarios, but also for more suitable short-term and bespoke scenarios. These would be profoundly different from the NGFS scenarios. But, again, the Fed seems not to have gotten the memo. Although it has shortened the time horizon for its exercise from 2050 to 2032, it is sticking with the NGFS.

This makes little sense. For scenarios extending less than ten years, global warming is not a risk; it is a near certainty. The crucial uncertainties are those stemming from extreme weather events and transition risks involving the interplay of geopolitics, local climate policies, and financial-market volatility. True, the NGFS has announced plans to address this gap by developing short-term scenarios. But it remains to be seen whether these will be able to meet banks’ immediate needs. Most likely, banks in the US and elsewhere will be forced to take the initiative themselves.

But this points to another problem with the Fed’s incremental approach. More bespoke scenarios will shift the focus toward banks’ own risks, and away from those of the broader system. Individual banks are concerned not just with their own climate footprints and supply chains, but also with the behaviour of their competitors (and hence their relative performance). While banks certainly run a risk in “going green” too slowly, they may also face a risk of moving too fast, because if everyone else fails to meet their net-zero goals, their green loans and investments may turn out to be loss-making.

The Fed deserves credit for putting climate-scenario analysis on the agenda. But in prescribing scenarios that fail to capture the realities of climate change, it risks distracting banks from the urgent task of reallocating capital flows. The world can ill afford another lost year in the pursuit of Net Zero.

An edited version of this post was published by Project Syndicate.

Pandenomics Revisited – Podcast

Back in April 2020, only a few weeks into the Covid-19 pandemic, I published a report entitled “Pandenomics – 15 Ways that Covid-19 could change the world”, with a subsequent spinoff for the CEPR’s VoxEU.  Now that the pandemic is thankfully in retreat, I was delighted to be invited by Gabriel O’Brien of Chief Disruptor Live on a podcast (link here) to take stock of these themes.

In the podcast I outline how they are still playing themselves out, with the global disruption from Russia’s invasion of the Ukraine giving them additional spin. We discuss the evolving role of big government, deglobalisation, and technology. An overarching theme is the need to go beyond traditional data-driven risk management techniques to navigate radical uncertainty.

Climate – The Sting is in the Tails

Why increasing volatility in the weather has more immediate impact than global warming

Source: rmets.org

Scientists have long warned that climate change will adversely affect weather patterns and living conditions around the world. These warnings are turning into a painful reality. Worse, the range of possible outcomes is becoming increasingly “fat tailed”: extreme weather events such as heatwaves, severe storms, and floods are more likely than normal statistical distributions would predict.

None of this bodes well for future political stability or economic prosperity. Our best hope is that the sharp sting in these tails will goad us into the necessary remedial action before things get even worse. But will it?

The public is increasingly aware that global warming is leading to more volatile weather. There have been record-setting heatwaves around the world this year, not just in India – where temperatures reached 49.2°C (120.5°F) – but also in places like the United Kingdom (40.2°C). France and China are experiencing their worst droughts on record, and four consecutive years of failed rainy seasons in Eastern Africa have put more than 50 million people at risk of “acute food insecurity.” Meanwhile, devastating storms and floods have hit Madagascar, Australia, the United States, Germany, Bangladesh, and South Africa.

This rising volatility in the weather is crucial. Short term weather fluctuations often have a much bigger impact than longer term trends. While temperature increases of 0.5°C here or there are barely perceptible, droughts, floods, and other short-term weather fluctuations can wreak deadly havoc. These events cause hundreds of thousands of deaths and enormous economic and financial damage each year.

Moreover, extreme weather events can cause changes that last far beyond the immediate shock and damage. Crucially, they can accelerate developments that might otherwise take many years. Scientists are increasingly worried about “tipping points” – such as the melting of polar ice sheets – that would carry us across thresholds of irreversible change. This could create damaging feedback loops between interconnected climate risks, all of which would spill over into the real economy, driving defaults, job losses that disproportionately harm disadvantaged communities, and political turmoil. 

Aside from the damage to the physical environment, extreme weather may therefore trigger abrupt and sometimes permanent shifts in social attitudes and public policy. When people start losing their homes, livelihoods, or even their lives, politicians must respond.

Surprisingly, while we are all acutely conscious of extreme weather, forecasters still widely overlook its role in accelerating structural changes. Mainstream climate scientists and economists tend to focus on the longer-term effects of climate change brought about by global warming, with an emphasis on scenarios involving global average temperature increases in the range of only 1.5°C-2°C – the targets enshrined in the Paris climate agreement. And even in higher-temperature scenarios, it is assumed that the effects – on sea levels and agricultural output, for example – will accumulate only gradually, implying that the ultimate reckoning is several decades away.

But a recent paper – “Climate Endgame: Exploring Catastrophic Climate Change Scenarios” – shows that this conventional scenario analysis gravely understates the long-term risks, because it fails to give the more extreme climate outcomes (the fat tails) the attention they deserve. As the statistician Nassim Taleb has pointed out in the context of financial markets, conventional models struggle to handle the consequences of fat-tail events, creating a dangerous blind spot in their  outlook.

Cascading Global Climate Failure

Source: Climate Endgame: Exploring catastrophic climate change scenarios – Kemp et al 2022

Higher temperature pathways would unleash what the authors call the “four horsemen” of the climate endgame: famine and malnutrition, extreme weather, conflict, and vector-borne diseases. It does not take much imagination to see how this herd of apocalyptic harbingers might create social and political chaos, especially when they are all galloping together – as is already the case today with the global food crisis, war in Europe, and the ongoing pandemic.

Worse, the mention of the second horseman, extreme weather, suggests that the more immediate risks of climate change are still being underplayed. After all, extreme weather is also a driver of the other three horsemen,  making it arguably the most important.

And crucially, it is already with us. Weather shocks cause suffering that grabs society’s attention far more than abstract (though no less warranted) warnings of long-term doom. Polls show that support for climate action is greater for those who have personally experienced extreme weather. Although the current upsurge in inflation means that people are less enthusiastic about measures that would hurt their own finances, the growing incidence of disasters is shrinking the minority that remains skeptical of climate change.

In this way, the fat tails of the weather – rather than the fat tails of long-term climate change – are far more likely to prompt action within the shorter time horizons that preoccupy politicians and business. That at least is the hope that should sustain us as the stings from these tails become ever more common and painful.

An edited version of this post was published by Project Syndicate.

Climate Shock: time for more stressful tests on banks

Extreme weather events are becoming bigger and more frequent

There is no doubt that the central banks, supervisors and regulators recognise the urgency of climate change. This is why they are conducting stress tests on the financial risks that it poses to the banks and other financial institutions. Sadly, the signs are that the scenarios that they have so far provided for this purpose will not be stressful or shocking enough to make much difference the financial institutions’ behaviour. Perhaps inadvertently, they risk fostering complacency.

I was privileged to be invited to address this in an article for Environmental Affairs, Policy Exchange’s quarterly policy journal, published just ahead of the COP26 climate talks in Glasgow. In it I note that despite the central banks’ humility about their current modelling, their scenarios suggest that climate risk will make little difference to growth or financial losses even on a 30 year horizon.

In the ECB’s case, the cumulative total difference in GDP between their business-as-usual ‘hot house’ scenario and an orderly policy ‘Net Zero’ scenario is barely 3%. This is despite escalating physical risks and the dramatic transformation in the economy that decarbonisation will entail. This modest range of variation is against the basic essence of the scenario method, which is to explore a wide enough range of possibilities to provide strategic insights.

If the central banks wish to inject the needed urgency into the financial institutions’ embrace of climate risk the next phases of their stress testing exercises will have to rise to the challenge set by the BIS for an ‘epistemological rupture’. There are four ingredients that could feed into the rethink required; their scenarios should:

1. Focus on shorter time horizons in line with traditional solvency stress tests and the planning horizons of the financial institutions. Most of them are already signed up to being ‘Net Zero’ by 2050, so the challenge is to operationalise this now and to recognise that the financial risks and opportunities are far larger and more immediate than the central bank scenarios suggest. The ECB’s latest announcement that next year’s stress test will incorporate policy and weather shocks in 2022 is therefore a welcome step forward. 

2. Stop ignoring or downplaying crucial risks. Extreme weather events, political disruptions, policy shifts, financial markets, behavioural and technological change are all aspects that are difficult to calibrate and model. But failing to account for them severely reduces the realism and useful of the scenarios for stress testing purposes.

3. Recognise that non-linear dynamics will accelerate change, for good or ill, making the likelihood of extreme outcomes far more likely. The central banks’ models yield smooth orderly changes and fail to capture the risk that the climate may breach thresholds beyond which damages may accelerate and become irreversible or existential. Socio-political disruptions, policy shifts and market spikes and crashes could all feature in more illuminating short term scenarios.

4. Adopt a systemic approach to factor in the complex interactions between the drivers and impacts of climate change. Earth systems and the economic, financial, political and social systems are interdependent in a way that can lead to powerful feedbacks. This adds layers of uncertainty which argues for embracing the ‘precautionary principle’ by making assumptions that result in a broader range of outcomes. 

A prime illustration of the problem is that the central banks’ scenarios start from the same economic growth baseline, even though it is obvious that different growth rates and cycles would dramatically alter the evolution of climate risks. What makes this particularly odd is that macroeconomic shocks are at the heart of traditional stress testing exercises.

But the scenario method provides room to develop plausible narratives to address these complexities. The pandemic has provided a timely lesson in how nature can trigger rapid changes in human behaviour, whether it be politics and policy, markets and innovation, or social norms and consumer behaviour. In the case of climate change, official forecasts continue to underplay the fact that the costs of renewables are falling, partly through policy support, in a way that is triggering tipping points in business and consumer demand.

On the flipside, the central banks also understate how policy inertia or missteps could crystallise longer term financial risks from stranded fossil fuel assets and labour well before 2030, let alone 2050. It is time to inject some real stress into their climate stress tests.

ea-stressful-test-article-oct-2021-1Download

Note: A longer version of the Environmental Affairs article will be published soon.

Where’s the Beef? – a recipe for decarbonisation

Where’s the beef? Cutting consumption to cut carbon

^{Source: Gianluca Milanesi (Unsplash)}

Here’s a link to the podcast of my interview by Gavin McLoughlin of Newstalk radio on “Reducing Consumption and Committing to Decarbonisation”. It was a broad-ranging conversation, touching on spending patterns, lifestyles, jobs, innovation and policy. We began by discussing the rise of meat and dairy alternatives – here are some of my key points:

The rapid growth in meat and dairy alternatives:

“Governments around the world are setting even more ambitious goals in terms of climate change, and agriculture is part of that story, so it’s not just about people’s changing diets it’s also about the warming of the planet”

“over time as more and more consumers make the switch that’s going to increase the volumes. That in itself will reduce the cost of these alternatives [and] there’s a huge amount of money going into innovation in this area which will also reduce the cost”

“this is a rapidly growing and profitable area and [producers are] going to give the consumers a further push by marketing these alternatives more aggressively”

“ the growing middle class in particular in Asia sees things like meat and indeed dairy products as aspirational products […] this is a little unfortunate when we’re trying to reduce things like methane emissions from cattle”

“it’s extremely important that we put rocket boosters in under some of these changes and we head off [..] the changes in people’s consumption habits right across the world but particularly in Asia”

“another lever here […] could be regulations which may well be focused on trying to encourage farmers to come up with methods that reduce the amount of methane that’s being produced”

“another part of [the policy response] is the dreaded ‘t’ word, which is tax. We could see some kind of luxury tax be eventually being imposed on some food items”

“historically this has been a bit of a ‘no-no’ because of course it’s something which is seen as particularly hurting the poor. But there [is a way to tackle] that problem which is to redistribute some of the tax revenues that you get from taxing for example on meat and dairy products and using that to reduce taxes particularly on poorer households to compensate them”

The cross-border challenges

“there are two different things going on here on the what one is what’s happening to consumption and the other is the competitive aspect of production. You we see this in some of the very tetchy sort of trade negotiations that we’ve had in the last few years”

“this is going to be a messy process but you have to hope that the politicians who will be getting together in the coming months on these topics will start to address these problems head on”

“there will need to be some kind of agreement amongst the developed nations to effectively transfer funds to the emerging world to help them in this transition, otherwise this is going to be a very protracted and painful process.”

The impact on jobs

“Policymakers have really got to take care of the people of losing out in this transition not just on the consumer side, poorer households who might be facing bigger bills, but also on the jobs side”

“they will have to start putting money into, for example, disadvantaged parts of agriculture [such as] the idea of paying people to conserve nature”

“this kind of stuff can’t happen just overnight you’re going to have to phase in some of these changes”

“an important principle […] is you need to front run the compensation. In other words, you need to start anticipating the people who are going to lose out in this transition and put a lot of policy energy into thinking about how you can take care of those people”

Restraining consumption

“Consumption patterns will have to change and the sad fact is and this is not an easy message for politicians to get across”.

“we can’t expect to live our lives in the way that we have in the past. We are just consuming too much stuff”

“we can’t have the planet aspiring to running around in two and a half tonne SUVs even if they are electric”

“we’re going to have to look at other policy measures which are pretty radical so, for example, let’s take cars again I think you could anticipate that eventually there’s going to be much higher taxation on bigger cars”

“we need to get into position where the default position is actually I just need a vehicle that’s fit for purpose. Because the vast majority of people are travelling around either on their own or with just one passenger and for most journeys a small vehicle is perfectly adequate. If anybody wants to use a big vehicle for longer trips they’re just going to have to start thinking about renting them”

“ we’re going to have to start thinking about lifestyle changes as well there’s no way around the fact that lives will be transformed by the decarbonization”

Green credits

“the idea here is because you could be generating quite a lot of revenue from these taxes why not start to compensate some of the people are losing out in this transition by giving people flat rate credits up front”

“poorer households in essence would potentially be net beneficiaries from this package because the flat rate credits would be worth more to them than it would be to richer households who obviously consume a lot more of goods and bigger houses and other things that would be subjected to much heavier taxation over time”

“it’s not something that could happen overnight it would have to be phased in and there be obviously a huge amount of fuss about this, but the good news is I think we’re beginning to see people change their attitudes”

Will it happen?

“I’ve putting these ideas forward just to try and provoke debate and hopefully get people to tune into the idea that there are radical policy measures that could be enacted”

“it is no good NGOs just pointing the fingers at business. Business has got its part to play for sure but in the first instance it’s a case of market failure where policy needs to change”

“…whether that’s regulation or taxes and subsidies or massive public investment that has to happen in a big way over the next few years”

“the longer we leave it the bigger the challenge will become”

How Green Credits might ease the way for Green Taxes

My video contribution to the Royal Society’s #2050challenge for #NetZero argues the case for green credits to ease the way for progressive consumer taxes on resource-intensive goods.

We need to do more than decarbonise: we are over-exploiting the earth’s resources in general. We need to give up on the idea that we can tackle this without tackling the world’s growing demand for ‘stuff’. The good news is that curbing resource use would also accelerate progress towards Net Zero, by reducing embedded energy usage and the scale of capital investment needed to decarbonise the world economy.

Like any tax, progressive consumption taxes would also face resistance. But since many governments are not in immediate need of more tax revenue, and can borrow cheaply, the prospect of higher green taxes could be made more palatable by giving everyone equal ‘green credits’ upfront. And since these equal payments would disproportionately help the poor, the package would be seen as fair.  

Only later would the green taxes be phased in, and green credits could be used to pay them. The taxes would also be designed to fall more heavily on the rich, meaning that after allowing for the credits, poorer households would be both absolutely and relatively better off.

The rich account for a disproportionate share of consumption of energy and resource intensive goods, and green consumption taxes could be made even more progressive by relating them to the size and weight of goods and homes. So for example, by taxing big cars at a much higher rate, say by an extra 10% on purchase and with premium fees for usage, the rich would be hit a lot harder. This would encourage people to buy smaller, less resource intensive items, or share them, or generally switch their spending towards services.