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At the heart of attempts to halt damaging climate change is a pair of ideas: decarbonise electricity and electrify the economy. So, how is it going? Badly, is the answer.
Will things change soon enough? Not on today’s trajectory. Worse, the politics, always difficult, have become even more so: people just do not want to pay the price of decarbonising the economy.
Here is a sobering fact: in 2023, the production of electricity generated by fossil fuels reached an all-time peak. The share of electricity produced this way did fall, from 67 per cent in 2015 (the date of the celebrated Paris Agreement) to 61 per cent in 2023. But global output of electricity jumped 23 per cent in those eight years. As a result, even though generation from non-fossil-fuel sources (including nuclear) rose by an impressive 44 per cent, that from fossil fuels rose by 12 per cent. Alas, the atmosphere responds to emissions, not good intentions: we have been running forward, but going backwards. (See charts.)
The explanation for this explosive rise in electricity generation is the desire of people and businesses in emerging and developing countries to enjoy the energy-intensive lifestyles of high-income countries. Since the latter have no intention of giving these up, how can they complain? Yes, there exists a politically irrelevant “de-growth” movement. But halting growth, even if it were politically acceptable (which it is not!), would not eliminate demand for electricity. That would require us to reverse the growth of the past 150 years, instead.
The only solution is faster decarbonisation and so greater investment in electricity generated by renewables, nuclear, indeed any source other than burning fossil fuels. But we have to recognise that so far, for all the talk, emissions are not falling and so both stocks of greenhouse gases in the atmosphere and global temperatures are rising.
A far more dangerous, because far more politically potent, response to this than that of “de-growthers” comes from their opposites — the free-marketeers and nationalists. This is: “Who cares? Let the fossil-fuel economy rip.”
To this viewpoint a recent paper from researchers at the Potsdam Institute for Climate Impact offers an important counter. It finds that “the world economy is committed to an income reduction of 19 per cent” by 2050, with a likely range of 11 to 29 per cent, given uncertainty, relative to what would have happened without climate change. The word “committed” here merely describes the outcome of past emissions and “socio-economically plausible” future scenarios, or “business as usual”.
The study also asserts that the costs of mitigating this, by limiting the temperature increase to 2C, are just a sixth of the costs of the likely climate change. It adds that the largest losses will be inflicted on poorer countries in “lower latitudes” (today’s “Global South”), who are not responsible for the trap in which they find themselves.
One does not have to believe any such specific analysis. But one does have to believe in the not particularly sophisticated physics of global warming and the folly of running irreversible long-term experiments on the only habitable planet we have. Moreover, it is clear by now that past predictions of global warming have proved largely correct. To persist with scepticism is immoral and stupid. Even a free-market fanatic cannot deny that environmental externalities are a form of market failure. Climate is the biggest externality of all. It also creates the largest possible collective action problem, one that not only affects all of humanity, but that also has huge distributional consequences within and across generations.
Until recently, I still hoped we could be lucky: market forces (plus massive investment by China) might drive the world towards renewables fast enough. This no longer seems plausible, because the pace of the switch to renewables needs to be vastly accelerated (quite apart from the many other needed investments). In his book, The Price is Wrong: Why Capitalism Won’t Save the Planet, Brett Christophers argues that the falling price of electricity generated by renewables does not make these an attractive investment for investors: it is profits, not marginal costs, that matter. If Christophers is right, some combination of heavy carbon taxes, long-term subsidies and changes in the design of electricity markets will be needed.
Nor is this all. As Lord Nicholas Stern and Joseph Stiglitz argue in “Climate Change and Growth”, among the most important problems in this area is the failure of capital markets to price the future appropriately. Thus, the returns today’s investors seek imply that the welfare of future human beings is close to irrelevant. This only makes sense if one can assume that the future will be fine. But what if the decisions investors are taking ensure it will not be? Then institutions — governments, evidently — must influence, if not override, those decisions. This makes the case for influencing (or setting) the cost of capital very powerful. This is particularly important for emerging and developing countries, where costs of capital are punitive. An important recent paper from Bruegel, “The economic case for climate finance at scale”, makes a persuasive case for financing an accelerated exit of these countries from their reliance on coal.
A hundred years from now, people are likely to remember our era as the time when we knowingly bequeathed a destabilised climate. The market will not fix this global market failure. But today’s political fragmentation and domestic populism make it almost inconceivable that the needed courage will be forthcoming either. We talk a lot. But we find it effectively impossible to act on the needed scale. This is a tragic failure.
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