How much the energy transition will really cost. Report Ft
According to the International Monetary Fund, it will be possible to decarbonize the global economy without putting public finances in crisis. But is it really like that? The Financial Times article
In the utopian vision of net zero promises, from 2035 there will be no more new petrol cars on EU roads, American industry will run on green hydrogen, wind farms will swirl in the North Sea and solar energy will bring everyone Africans affordable energy. The Financial Times writes.
The IMF argues that all this can be achieved without putting a strain on public finances.
Estimates from his staff, presented at a recent conference, suggest that cooperation on decarbonization could ensure countries meet their net zero goals with an overall economic cost of just 0.5% of projected global GDP for 2030. For most countries, the fiscal impact would be positive or neutral by the end of the current decade, although some would suffer losses thereafter.
IMF ESTIMATES AND ECONOMIC OBSTACLES TO DECARBONIZATION
Taking the Fund at its word, reaching net zero appears “entirely feasible and surprisingly cheap,” said Luis Garicano, a professor at the London School of Economics and former member of the European Parliament.
But there is an obstacle. The IMF estimates assume a global agreement to set a price or tax on carbon and redistribute the proceeds to developing countries, including eliminating current subsidies for fossil fuels.
The reality of countries' attempts to decarbonise their economies is far from these hypotheses.
Less than a quarter of global emissions are currently covered by a carbon tax or price, while governments' commitments to green targets are increasingly at risk. “The IMF scenario is desirable, but it will not happen,” said Jean Pisani-Ferry, a professor at Sciences Po.
The consequence, said Helen Miller, deputy director of the UK's Institute for Fiscal Studies, is that when it comes to reaching net zero, policymakers may opt for politically convenient but less economically efficient solutions.
HOW MUCH WILL THE INVESTMENTS AMOUNT
By any reasonable estimate, the amount of funding needed to reach net zero is enormous. In 2021, the International Energy Agency calculated that annual investments are expected to rise from $2 million to almost $5 million, or 2.5% of global GDP, by 2030. In 2050 the total would still be of 4.5 million dollars.
Lord Nicholas Stern, president of the Grantham Institute of the London School of Economics and former chief economist of the World Bank, believes that an additional $3 million a year, for a total of $100 million over 30 or 40 years, is needed to boost renewable energy, electrify transportation systems, decarbonize building heating and cooling, and promote green hydrogen.
Economists agree that most of these investments must come from the private sector. “Some estimates of the transition to climate change are stratospheric,” said Mahmood Pradhan, head of global macroeconomics at the Amundi Institute. “The demands of a zero-emission economy are too high [to be met by governments alone]: they must come from the private sector.”
But governments are already spending hundreds of billions on incentives and subsidies for businesses and families, on research and innovation, and on public infrastructure, from electricity grids to flood defenses to cycle paths.
WILL THE CARBON TAX BE ENOUGH?
Meanwhile, revenue from carbon taxes – if they succeed in reducing emissions – may not make up for the loss of revenue governments receive through fuel taxes.
“Even if they succeed – and that might be a good thing in itself – they won't raise much,” said Judith Freedman, a professor of tax law at the University of Oxford.
New OECD modeling, based on a policy mix closer to current reality, points to a higher fiscal cost than IMF projections. Globally, net government revenues will decline by 0.4% of GDP in 2030 and by 1.8% in 2050.
Fiscal costs would vary across regions, being lower where governments rely more on regulation to reduce emissions, and rising to 3.4% of GDP in the Americas, due to generous US subsidies in laws such as Inflation Reduction Act.
“The scale of the transformation needed must be taken into account,” said Shardul Agrawala, head of the OECD's division for environmental and economic integration. “We shouldn't present things as a free lunch.”
A big uncertainty is whether green investments will replace other investments that may, in the short term, have done more to raise productivity – or whether they will be complementary, injecting energy into mature economies suffering from slow growth.
Stern argued that while there are significant challenges to government spending, green investments will more than pay for themselves over time, especially when taking into account welfare gains, such as improved air quality, for future generations.
“We still live in a world where planned saving is greater than planned investment,” he said. “This is the growth story of the 21st century.”
However, the few countries that have done their own calculations on the likely costs of the green transition predict a larger impact than the IMF.
The UK's Office for Budget Responsibility said in 2021 that reaching net zero would lead to an increase in debt equal to 21% of GDP by 2050, with the loss of fuel tax being the biggest cost.
Pisani-Ferry, who led a recent report for the French government, estimated that it could add up to 25 percentage points of GDP to public debt by 2040.
THE IMPACT ON FAMILIES
This higher figure is partly due to the fact that taxpayers are likely to shoulder a larger share of the costs in a country where the state traditionally plays a larger role.
Pisani-Ferry also believes governments have underestimated the extent to which they will need to help families. For French people with an average income, installing a greener heating system would cost a year's earnings, he noted, adding: "It is too much to assume that this would happen without significant public support."
The mantra is “no additional borrowing, no additional taxation,” Pisani-Ferry said. “I still don't see how this can be considered.”
Without new sources of revenue, governments would need to consider whether higher public debt could finance the green transition – an important ask given soaring borrowing costs and the need for more spending in other sectors, from defense to pensions and healthcare, with the aging of the population.
However, the bill to reach net zero must be paid, no matter how high it is. “The real metric is: What is the cost of inaction?” Agrawala said.
(Extract from the eprcommunication press review)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/decarbonizzazione-impatto-finanze-pubbliche-fmi/ on Sun, 10 Sep 2023 05:05:54 +0000.