Security and cheap energy have thundered to the top of political and corporate agendas everywhere. As a result, a range of government and company commitments to stabilise the stock of greenhouse gases (GHGs) in the atmosphere (net zero) are in retreat.
In a military context, retreats can have remarkably different outcomes. The pullback of British and East India Company forces from Kabul in 1842 led to the almost total annihilation of that army. However, the Dunkirk evacuation in 1940 saved thousands of allied troops, who later returned to Europe on a path to victory.
Professor Sir Dieter Helm addressed this question at our Investec energy seminar with a plea for a reality check. He highlighted two facts:
Institutionally, our efforts to control GHG concentrations in the atmosphere are failing. The United Nations Framework Convention on Climate Change (UNFCCC) – an international treaty to prevent dangerous human interference with the climate system – came into force in 1994. Ever since, the stock of GHGs in the atmosphere – a key driver of climate – has been rising.
As detailed in Professor Jean-Baptiste Fressoz’s book: More and More and More, our relationship with energy has not been one of transition - with wood superseded by coal, coal by oil, and oil by gas. Instead, it has been one of accumulation. The world now burns more wood and coal than ever before, and energy consumption keeps rising. Framing the current move from fossil fuels to renewables as a transition is similarly mistaken.
These realities have potentially serious consequences for planet earth. One view expressed at the seminar was that humanity acts only after disasters, not preemptively. If so, the investment message is clear - prepare for a 2029 Great Crash!
Conversely, other attendees saw energy efficiency as a tool to reverse our craving for more energy and a deteriorating atmosphere.
There is certainly scope for large net efficiency gains from the greater electrification of transport and heating. Moreover, innovation continues to throw up new efficiency benefits. But all this needs to be set against rebound effects (behavioural responses offsetting efficiency gains) and continuing economic development and growth. For India alone, medium-term growth projections (6.0 - 6.5% per annum) imply the addition of a ‘new India’ to global energy demand in just over a decade.
Overall, the audience was divided on just how much energy efficiency will quench our energy thirst. Dieter emphasised that whatever one’s view, the most critical issue was to focus on evidence not dogma – a sound piece of advice in today's political context.
There was a broader consensus across the room on the cost of capital for infrastructure investment. This will depend critically on policy stability. As the UNFCCC is not delivering, the only way forward is to build a bottom-up coalition of the willing, with a focus on carbon consumption rather than production. Such a pivot can create a consistent climate policy framework, a clear carbon price signal, and a flow of low-cost capital*.
Even with a low cost of capital, future investment will require tough commercial choices. In electricity generation, most attendees thought that the UK’s relative comparative advantage lies in offshore wind and nuclear, with an urgent need to build out our grid infrastructure to accommodate these assets. A robust grid architecture (including interconnectors) has the added advantage of enabling a digital economy.
However, others saw a longer-term threat from siloed ‘big asset’ thinking. Distributed energy systems based on solar and battery storage could be disruptive to large transmission and generation assets.
What type of energy system will future consumers prefer? The truth is that, today, the answer is not certain.
As a result, it is important to keep a range of energy options open and competitive forces alive to discover the future system that consumers prefer. What we don’t need is the choices being driven by ill-informed political whim.
There was one final reflection by a member of the audience. Only by encouraging our children to understand the wonders of nature and energy can we hope to create a sustainable energy system. Similarly, frontier technology research is still essential for new discoveries. Investment in education may prove to be an unseen but effective strategy to combat the risk of environmental collapse.
My own conclusion? We need not retreat, at least in a disorderly way, from our broad environmental goals – properly articulated, these are the best hope we have to underwrite our survival. Other societal goals relating to security or economic fairness only make sense if we can beat the bleak evolutionary odds and survive as a species.
That said, a re-consideration of what exactly those environmental aims should be – their scope, tradeoffs and timelines - now seems in order. A retreat from where we are today might be part of a sensible strategy for longer-term environmental victory.
One thing seems sure – a bucket of cold water over the head and a re-set now is likely to be a lot less damaging for humanity than fine words, a continuation of the status quo, and future climate collapse.
* Further Reading: Climate realism – time for a re-set, Dieter Helm. Available at www.dieterhelm.co.uk
Dieter Helm
Dieter Helm is Professor of Economic Policy at the University of Oxford and Fellow in Economics at New College, Oxford. From 2012 to 2020, he was Independent Chair of the Natural Capital Committee, providing advice to the government on the sustainable use of natural capital. In The Cost of Energy Review, commissioned by the government in 2017, he set out a framework for transitioning the UK energy sector to net zero while maintaining energy security.
Dieter specialises in three key areas: Energy & Climate; Regulation, Utilities & Infrastructure; and Natural Capital & the Environment. He provides extensive expert advice to UK and European governments, regulators and companies across all three areas.
In his latest book, Legacy: How to Build the Sustainable Economy, Dieter addresses the question: what would the sustainable economy look like and what would it take to live within our environmental means?
Dieter is a Vice President of the Exmoor Society, a Vice President of Berkshire, Buckinghamshire and Oxfordshire Wildlife Trust, and Honorary Fellow, Brasenose College, Oxford.
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Disclaimer: The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.
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