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Climate Promises Cost Nothing. Change Will Cost a Fortune.

Niall Ferguson

We’re all going to a dear green place for the sake of averting climate change. The place is Glasgow, host city for the fast-approaching Conference of the Parties 26. The parties are the countries that have signed the United Nations Framework Convention on Climate Change, which came into force in 1994. This will be the 26th UN climate change conference. And I can promise that it will be both green and dear.

As a boy growing up in Glasgow, I was taught that the name meant “dear green place.” According to the encyclopedias, Glasgow is Brittonic (an ancient language close to Welsh) in origin, combining glas, meaning “grey-green” and cou, “hollow.” Hence “green-hollow,” which may refer to the ravine to the east of the city’s cathedral. Or it may just describe the way Glasgow nestles on the banks of the River Clyde, with the wilds of the Highlands to the north, and the gentler Lowlands to the south. Either way, as COP26 attendees may soon discover, the location is a perfect rain trap.

In other respects, the name “dear green place” always struck me and my friends as absurd. Glasgow in the 1970s was in the vanguard of post-industrial decay and urban blight, its steelworks and shipyards moribund, its squalid tenements giving way to high-rise slums, its streets notorious for sectarian gang violence.

Yet more recently, the phrase dear green place has taken on a new significance. Indeed, nothing could be more appropriate on the eve of COP26. For it is belatedly dawning on many participants and observers that shifting the world to a greener energy mix is going to be, well, dear. To paraphrase Marx and Engels, a specter is haunting the world — the specter of greenflation.

It is a truth now almost universally acknowledged, at least in polite company, that there’s a serious problem with climate change and that human economic activity — including but not only the burning of “fossil fuels” (hydrocarbons) — is the principal driver. Since 2013–14, when the Intergovernmental Panel on Climate Change published its Fifth Assessment Report, the worst of its “representative concentration pathways” has grown more, not less, probable, meaning higher greenhouse gas emissions, temperatures, precipitation and sea levels.

The contrarian argument has been made by Bjorn Lomborg, Michael Shellenberger and others that this is a slow-moving problem that can be addressed with affordable mitigation measures, and that at least some of the drastic remedies touted by youthful activists could do much more harm than good. I am sympathetic to that view.

We ran the experiment last year to see what the effects of a near-total cessation of emissions would be — not in response to Greta Thunberg’s demand at the World Economic Forum, but in response to the rapid spread of Covid-19. The lockdowns had the side-effect of drastically cutting greenhouse gas emissions. They also caused a collapse of output and employment. So we learned an important lesson last year: Demands for instantaneous action are economically unrealistic.

Still, the uncertainties surrounding the future behavior of the complex system that is the world’s climate argue strongly against the combination of procrastination and virtue-signaling that has characterized the global response to climate change for much of the past quarter century.

The impacts of climate change will clearly be unevenly distributed. A recent study by Jose-Luis Cruz Alvarez and Esteban Rossi-Hansberg projects “welfare losses”—a broader concept of living standards than just GDP losses—as large as 15% in parts of Africa and Latin America (but gains in northern regions in Siberia, Canada and Alaska). They see migration as the most likely form of adaptation: Unlike an exponentially spreading pandemic, climate change doesn’t kill so much as it moves people.

But climate change could kill indirectly if it leads to famine or war. The latest report of the Institute for Economics and Peace identifies three “belts” of impending ecological disaster, which look particularly susceptible to political conflict and socioeconomic collapse as the world warms: one that runs from Mauritania to Somalia, another from Angola to Madagascar, and a third from Syria to Pakistan.

The problem is that it is vastly easier to give a speech pledging to “get to net zero” in greenhouse gas emissions than it is to explain how exactly you will do so.

In the months immediately prior to COP26, the world has experienced a surge in the price of all fossil fuels. In the U.S., Henry Hub natural gas is up 103% since this Jan. 1. West Texas Intermediate oil is up 69%. Last week, more gas stations were over $4 per gallon (1 in 8) than were under $3 per gallon (1 in 10).

The situation is even worse on the other side of the Atlantic. Rotterdam coal is up 231%. European gas is up 339%. Having just come through a bout of gasoline (petrol) shortages, Britons are now looking at rocketing heating bills as winter approaches, even if utility prices are kept well below spot prices by long-term contracts and subsidies for residential heating.

There are coal shortages in India. There are electricity shortages in China, where the price of coal is up 25% since January. And these higher energy prices are having important knock-on effects. Europe and China are cutting back metal refining, decreasing the supply of copper and aluminum. China’s steel output is likely to drop because of power shortages and energy price hikes.

Energy Boost

Fossil fuel prices have soared this year (Jan. 1=100)

There are of course many confounding variables at work. The Covid pandemic has caused significant disruption to supply chains. Massive fiscal and monetary stimulus to offset the impact of lockdowns has led to a surge in global demand for energy (and everything else). Global growth is surging as Covid goes from pandemic to endemic: The IMF estimates 5.9% real growth this year, more than twice the 2019 rate. Last year’s cold winter depleted global gas supplies. In Britain, there’s the added complication of Brexit.

Yet there is no question that all the environmental policies that tend to get lumped together as “green new deals” are a part of the story. After all, one of the mechanisms environmentalists favor is to “raise the price of carbon.” Well, they certainly look like they’re succeeding. After languishing below $10 between 2011 and 2017, the price of European emissions permits has surged above $50 this year.

Let’s remember how we got here. The primary goal of the Paris Agreement — negotiated in 2015 at COP21 — is to stop global average temperatures from rising more than 2 degrees Celsius higher than the pre-industrial level and, ideally, to limit the increase to 1.5 degrees Celsius. According to the IPCC, limiting warming to 1.5 degrees Celsius means reaching net-zero carbon dioxide emissions by 2050, combined with deep reductions in other greenhouse gases such as methane.

Ambitious in its goals, Paris was and is toothless. National emission targets are set by signatory states, but these are not legally enforceable (unlike the reduction targets set by the 36 developed countries that met in Kyoto in 1997). In Paris, countries promised nationally determined contributions, laying out their planned emission cuts. These national contributions were to be updated at least every five years. Last year, the UN found that only six G-20 members were on track to meet their promises.

In 2019, the UN warned that global greenhouse gas emissions must fall by 2.7% annually between 2020 and 2030 to meet the 2 degree Celsius Paris goal, and by 7.6% annually to keep the temperature rise to 1.5 degrees Celsius. To meet these targets, existing nationally determined contributions will not suffice. According to the UN, to achieve the 2 degrees Celsius goal, national contributions submitted since Paris must increase threefold — and fivefold to meet the 1.5 degree Celsius target. Ahead of COP26, 114 signatory countries plus the EU have submitted more ambitious contributions.

The U.S. is among them. President Joe Biden rejoined the Paris Agreement, reversing his predecessor’s withdrawal. In April, the U.S also updated its nationally determined contribution, promising to reduce net greenhouse gas emissions by 50% to 52% (compared to 2005 levels) by 2030, nearly double the previous target of 26% to 28% by 2025).

In theory, these new targets can still be met. History shows that it’s possible to give up coal, which was the dominant resource in British and European energy use from the 1860s to the 1960s. Moreover, according to a new working paper by Rupert Way and colleagues at Oxford’s Institute for New Economic Thinking, solar and wind power have the potential to take the place of fossil fuels entirely within 20 years.

According to their estimates, “the provision of energy from solar photovoltaics has, on average, increased at 44% per year for the last 30 years, while wind has increased at 23% per year.” This is a rate of increase “similar to that of nuclear energy in the 70’s, but unlike nuclear energy, [wind and solar] have … consistently experienced exponentially decreasing costs.”

These declines in cost were much more rapid than anticipated by forecasters. Something like Moore’s law seems to be at work in the field of renewable energy generation, as well as in energy storage. Way et al.’s conclusion is that a “fast transition” to a “greener, healthier and safer global energy system” is not only possible, it is also likely to be cheaper than the alternative scenarios of either slower or no transition from fossil fuels.

This fast transition sounds almost too good to be true. In any case, it is not what is happening, except maybe in parts of western Europe. In the U.S., the reduction in carbon dioxide emissions achieved since 2007 has mainly been driven by a shift from coal to natural gas, which has become the primary source of U.S. base-load generation.

If simply spending public money could save the planet, the Biden administration would be well on its way to net zero. The bipartisan infrastructure bill allocates around $100 billion for energy and climate-related measures. If Democrats succeed in passing a $3.5 trillion spending bill via reconciliation this year (a total that seems less and less likely), it will include an additional $750 billion of energy and climate measures. (The bill also includes a clean electricity standard, though that will likely be struck from the final version.)

Yet neither passing this legislation nor restoring the environmental regulations scrapped by President Donald Trump is going to get Biden anywhere close to his target. Emissions-free power generation by 2035 looks unattainable because (among other things) regulatory bottlenecks stand in the way of updating the country’s electricity transmission system. Biden might try to revamp President Barack Obama’s Clean Power Plan, which authorized the Environmental Protection Agency to cap states’ emissions from power generation. But the plan was struck down by the Supreme Court in 2016.

Meanwhile, the administration is exploring various options to wean America off gas: carbon capture and storage, “green” hydrogen, and nuclear power (two new plants are being built). But nuclear is bound to be resisted by progressives. Finally, as renewables provide only intermittent energy, there will also need to be massive investment in batteries and energy storage. (The U.S. has around 23 gigawatts of installed storage capacity, compared to 1,100 gigawatts of installed generation capacity. Only around 2.5% of American power is cycled via storage, compared to 10% in Europe and 15% in Japan.)

By comparison, the European Union is setting itself tougher targets and pursuing them more consequently. In December 2018, the European Commission, the EU’s executive branch, proposed to steepen the EU’s 2050 emissions reduction target to net zero. In September 2020, it proposed to tighten the 2030 emissions reduction target to a 55% cut compared to 1990 levels. And on July 14, the commission presented a new package, named “Fit for 55,” which tightens most of the EU’s existing climate policies and adds some brand-new ones.

For example, the EU will reduce the supply of permits under its Emissions Trading System. It will create a new trading mechanism for emissions from road transport and buildings. There will be a Carbon Border Adjustment Mechanism — in effect, a tariff on imports of carbon-intensive goods from countries that don’t meet EU green standards. The Energy Taxation Directive will raise minimum tax rates on all fossil fuels. New vehicles with internal combustion engines will be banned, starting in 2035. And on the list goes, as ambitious — and as bewildering in its complexity — as a Soviet five-year plan.

True, as in the U.S., there are bound to be political compromises. Some of these hair-shirt measures will not make it through the European Parliament and Council of Ministers. Nevertheless, there is no doubting the seriousness with which Brussels is pursuing the renunciation of fossil fuels in all their forms.

The real climate change problem is neither American nor European. It is Asian, and in particular Chinese. Last September, President Xi Jinping announced that China would “scale up its intended nationally determined contributions [under Paris] by adopting more vigorous policies and measures,” and pledged that China would hit peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060. In December, he vowed to cut carbon intensity by “at least 65%” from 2005 levels by 2030, from a previous goal of “up to 65%.” Similar pledges have been made by China’s state-owned steel, coal and power companies.

But nowhere in the world is the gap between words and deeds more glaring. In 2003, the year of Greta Thunberg’s birth, China accounted for 22% of global carbon dioxide emissions. By last year, it was 31%. Its share of global coal consumption rose from 36% to 54%. Put differently, China is responsible for 64% of the 32% increase in emissions since 2003, and 93% of the 39% increase in coal consumption. Xi, like St. Augustine, intends to become virtuous — just not yet. With the latest electricity shortages, Beijing is in fact ramping up its coal-fired capacity.

True, it’s not just China that is increasing emissions and burning coal while the Western world tries to turn green. The rest of the Asia-Pacific region is responsible for around 21% of global carbon dioxide emissions. India’s coal-burning infrastructure is relatively young and is composed mostly of high-polluting subcritical plants. However, India’s shares of emissions and dirty fuel consumption are dwarfed by China’s.

Carbon in …

Share of global coal consumption

Source: BP Statistical Review of World Energy, July 2021

EU data is for 27 current members

… Carbon Out

Share of global carbon dioxide emissions

Source: BP Statistical Review of World Energy, July 2021

EU data is for 27 current members

The Biden administration has tried to apply diplomatic pressure on Beijing and the other Asian governments ahead of COP26. That has been climate czar John Kerry’s thankless task.

But no new nationally determined contributions have been forthcoming from either China or India. And Wang Yi, China’s foreign minister, has stated that Beijing’s cooperation on climate depends on how the U.S. treats political issues such as the status of Taiwan, civil liberties in Hong Kong, and the repression of Uyghurs in Xinjiang. There is little appetite in the White House for that kind of linkage.

The International Energy Agency says that the amount of investment in renewable energy needed to reach net-zero emissions by 2050 is $4 trillion a year for the next decade. That’s four times the average spent over the past five years. But critics of the IEA, such as Philip Lambert of Lambert Energy Advisory Ltd., argue that the current energy price surge is the result of “monumental misallocation of capital.”

In May, the IEA published a roadmap for achieving net zero by 2050 that recommended a suspension of all new exploration for oil, gas or coal. This, Lambert argues, is the culmination of a campaign to discourage investment in “dispatch-able, flexible, gas-fired electricity generation,” without which — pending revolutionary technological advances in energy storage — the shift to intermittent renewables is doomed to fail.

I am inclined to agree. Increasingly, it becomes clear that the European and British decisions not to invest in hydraulic fracturing (“fracking”) and the German decision to renounce nuclear power after the 2011 disaster in Fukushima, Japan, have left Europe dangerously dependent on gas imported from Russia. Only too late are governments realizing that there has to be a cushion — a source of power that can be relied on when the wind drops and clouds cover the sun. Numerous countries — including Japan, the U.K. and (on a massive scale) China — are scrambling to build a new generation of nuclear reactors. But that takes time. And winter is coming.

Of course, energy prices are historically volatile and make up a smaller share of inflation indices than they did back in the 1970s. Transport (14%) and housing, electricity and gas (18%) are relatively large categories in the European Central Bank’s harmonized index of consumer prices basket, but the sub-components that link directly to gas prices are much smaller. The “electricity, gas and other fuels” sub-category accounts for around 6% of headline HICP.

On the other hand, there are some energy experts who believe conventional measures of energy inflation understate the problem. According to a recent study by Rob West of Thunder Said Energy, current green energy policies are going to “exacerbate inflation in the developed world,” raising price levels by between 20% and 30%. “Each $100/ton of carbon dioxide abatement creates c.6% inflation across developed world economies,” West argues, “including 15-40% gains in categories such as food, mobility, materials and electricity, which hits lower-income consumers hardest.”

Moreover, there are feedback loops, so that “each $100/ton of carbon dioxide abatement cost inflates the capex cost of wind by 6%, solar by 30% and hydrogen by 5-10%.” West and his colleagues warn that greenflation “could lead to unrest and threaten support for net zero,” as the IEA’s latest scenario implies a hit of 20% to 30% to the average American’s income.

Economically, higher energy prices act as a regressive tax on households as well as a dampener on consumer confidence. Politically, they can send people into the streets. Remember the gilets jaunes? In late 2018, French President Emmanuel Macron raised fuel taxes. The move sparked a popular protest movement that came close to unseating him, suggesting that even in wealthy Western Europe, consumers will resist actually paying for the green transition.

Small wonder that in France, Italy and Spain, governments are introducing measures to limit the impact of the rise in energy prices on consumers. With good reason, they fear gilets jaunes on a pan-European scale.

The geopolitics of the energy transition are no less concerning. In 1973, Arab members of the Organization of Petroleum Exporting Countries imposed an embargo against the U.S. and other Western countries, in retaliation for the U.S. decision to re-supply the Israeli military in the Yom Kippur War. The embargo triggered a surge in the price of oil and the most traumatic phase of the great inflation of the 70s.

This time around, the energy crisis is being inflicted on Western voters by their own leaders. The winners are the major hydrocarbon producers: the Gulf states and Russia. The former are quietly enjoying oil above $80 a barrel, with the possibility of even higher prices to come.

Russian President Vladimir Putin has been more brazen. Last week he severed ties with NATO, said he wouldn’t appear at either COP26 or the G-20 summit before it, and declined to release new gas supplies to ease Europe’s energy crunch. Those who warned that the Nord Stream 2 pipeline under the Baltic Sea to Germany was a scheme to increase Europe’s dependence on Moscow have been vindicated, even before the gas tap has been turned on.

Young European environmentalists say their future is being stolen by the slowness of the transition to net zero. But what about the poor of Asia? Exiting poverty is almost synonymous with increasing energy consumption. Those who talk most vehemently about climate change usually pay lip service at least to the problems of global poverty and inequality. They seldom admit that the goals of limiting carbon dioxide emissions and of reducing poverty and inequality are, for the foreseeable future, in conflict.

Greta Thunberg likes to rant at the Western political elite. I would like to hear her explain to ordinary Indians why they should forgo indefinitely the domestic comforts into which she was born. As Larry McDonald pointed out last week in his Bear Traps report, “the household ownership of air conditioning units in India today is a mere 7% … of the roughly 320 million households in India, fewer than 22 million have air conditioning units.” As global temperatures rise, who are we to tell Indians to stew? Peak heat in India can be lethal.

You never need air conditioning in Glasgow. It is a city of grey skies and black humor, much of it unintelligible to visitors because of the strongly accented English spoken by the locals. (In the comedian Stanley Baxter’s spoof language course “Parliamo Glasgow,” “Whirra-helza marra?” translates as “What exactly is incommoding you?” and “Wherra-helza booze?” means “Do you happen to know where I can get an alcoholic beverage?”)

As I write, Glaswegians (Weegies, as they are sometimes known) are no doubt looking forward eagerly to welcoming thousands of climate policy makers and activists to their city. If the great stand-up Billy Connolly were still performing — if Parkinson’s disease had not forced his retirement, today’s woke types would have canceled him by now — he would be having great fun with COP26. (Weegies have been praying for climate change for centuries, and so on.)

But I would advise any visitor not to feel flattered if one of the locals offers a “Glasgow kiss,” an expression most easily translated as a head butt, long a staple of the city’s late-night social life. With petrol now up to $6.89 a (U.S.) gallon, the mood is grim. The dear green place has never been dearer.

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