In the run-up to Budget Day today, 6 March, a new paper by a former World Bank economist and published by The Global Warming Policy Foundation warns that the UK’s current decarbonisation timeframe is unrealistic and threatens to be economically and socially unsustainable.
Professor Gordon Hughes’ paper comes two weeks after the ‘European Climate Investment Deficit’ report warned that European Union member states would have to fill an annual investment gap of €406 billion if its 2030 climate goals are to be met.
In his paper, Hughes reveals that a realistic estimate of Britain’s planned energy transition also has an astronomical price tag. Large investments in capital-intensive technologies for producing and consuming non-carbon energy are estimated to be a minimum of 5% of gross domestic product (“GDP”) for the next two decades and might easily exceed 7.5% of GDP.
The capital cost of the energy transition in the UK runs from 100% to 150% of GDP, which is about £2.6 trillion in current prices. However, just like the high-speed railway line HS2, the energy transition will experience cost inflation. “It would be reasonable to increase the expected cost by 50% or more to allow for the consequences of attempting delivery on short timescales,” Prof. Hughes said.
Although considerable optimism is required to believe the energy transition can be achieved within 20 years, for £2.6 trillion it would involve devoting a minimum of 5% of GDP to fund the investments required, Prof. Hughes said.
Our economic history tells us that there is no chance of borrowing an additional 5% or more of GDP annually for two decades to finance the energy transition
.… the only viable way of financing the UK’s energy transition is a drastic reduction in consumption to free up resources for the huge level of new capital investment required … Realistically the reduction in private consumption would have to be 8%-10% for 20 years. Such a shock has never occurred in the last century outside time of war, and even then never for more than a decade.
Ignoring the macroeconomic and fiscal constraints will almost certainly lead to yet another long-running policy fiasco like HS2 with results that achieve little in concrete terms. Rather than pretence and muddle, it would be better to extend the period and pace of the energy transition to match the resources that can realistically be afforded.
Financing The Energy Transition: Do the Numbers Add Up? Gordon Hughes, March 2024, Executive Summary
Lord Frost of Allenton welcomed Prof. Hughes’s economic realism and said:
The message in this briefing from Professor Gordon Hughes could hardly be more urgent.
Either we must be honest with the public and be clear that they are going to have to pay at a currently unanticipated level, or we must extend the time period for the transition – that is, delay the net zero 2050 target, perhaps out till 2070 or 2075.
Failure to do either – sadly, perhaps the most likely outcome – will mean that we simply muddle on, pretending we are making progress, spending at high levels, but achieving little. Meanwhile, the rest of the world outside the West will look on, incredulous at this unprecedented act of economic self-harm.
Financing The Energy Transition: Do the Numbers Add Up? Gordon Hughes, March 2024, Foreword
Sources for this article include: Former World Bank economist warns of energy transition’s fiscal risks, The Global Warming Policy Foundation, 5 March 2024
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