Premium

Hammond's £1 trillion bill for hitting net zero is innumerate nonsense

Philip Hammond
Chancellor Hammond’s leaked spoiler is a clutter of absurdities and category errors. It conflates spending with investment to come up with the outlandish tariff of £1 trillion.

If anything can distill the essence of conservative philosophy it is Edmund Burke’s paean to the “great primaeval contract of eternal society”.

His Reflections on the French Revolution lay out our obligation to our children’s children through the ages: “a partnership between those who are living, those who have lived before us, and those who have yet to be born.”

I doubt that Burke would have had any difficulty concluding that the risk of runaway global warming today is a threat to this “contract between the generations”.

There were plausible reasons for climate scepticism in the early 2000s during the “hiatus” in surface temperatures - if you overlooked the oceans - but this has since been overwhelmed by the hottest years on record and an avalanche of science. Our knowledge is orders of magnitude greater than fifteen years ago. The weight of evidence points only in one direction.

Theresa May is the authentic Tory in this intra-party fight over climate policy. Her plea for zero emissions by 2050 - the first legally-binding target among major nations - was almost Burkean. She called it the “defining decision of this generation in fulfilling our responsibility to the next”.

Historians might judge this parting shot to matter more than her Brexit travails. It is certainly good diplomacy. The UK led humanity with the first climate law in 2008. It has now beaten Emmanuel Macron’s France to the ultimate pinnacle. Mrs May’s ambition confounds the false global narrative of an island sinking into self-absorbed nostalgia and the swamp of reaction.

It is the Treasury that should be in the dock. Chancellor Hammond’s leaked spoiler is a clutter of absurdities and category errors. It conflates spending with investment to come up with the outlandish tariff of £1 trillion. “It confuses costs that have a payback with those that don’t,” said Michael Liebreich, founder of Bloomberg New Energy Finance.

From what we know it assumes there will be no further falls in the cost of wind, solar, and renewable energy over the next thirty years, no falls in hydrogen costs from electrolysis, and no leaps in plant technology. This takes a brass neck.

Photovoltaic costs have dropped by 83pc since 2010; offshore wind contracts are already coming in at £69 (MWh) for the early 2020s, 40pc lower than original estimates for 2030. LED lighting has jumped from 5pc to 40pc of the world market; electric vehicles have reached 50pc sales penetration in Norway - and this will turn into global cascade once EVs reach purchase cost parity in 2022.

Mr Hammond writes in tones almost of surprise that there will have to be a ban of petrol and diesel cars by 2050 to meet the target. If the Treasury think such cars will still be legal in any European city much after 2030 they are living on another planet.

When the Committee on Climate Change first called for emission cuts of 80pc by 2050 - deemed romantic at the time - it cautiously estimated net investment costs of 1pc to 2pc of GDP each year.

In fact the UK was able to slash its emissions to levels not seen since the 1890s at a “cost” nearer 0.2pc, even using the most primitive form of accounting and ignoring all the co-benefits of better air and better health, and the spin-off growth from green industries.

The Chancellor’s letter oozes mischief. It implies that investing more in energy infrastructure with a positive return takes away from spending on schools, police, and hospitals. “The £1 trillion figure is propaganda, not analysis; you can pluck any number you want,” said Lord Adair Turner, ex-chairman of the CCC.

“It reflects the institutional arrogance of the Treasury. They have this ethos that the rest of the cabinet can’t be trusted and that they are the only custodians of economic rigour but they are not being rigorous at all. Their narrow model does not capture the nature of technological innovation, or even engage with the fundamental point.”

There are echoes of Project Fear in the Treasury method. Remember the 500,000 job losses, the surging Gilt yields, the house price crash, the deep recession, if Britons voted to leave? The Treasury’s computable general equilibrium model was not even internally consistent. It failed to adjust for the macro-economic stimulus of its own predicted fall in sterling. It neglected the monetary shock absorbers of the Bank of England. It was - again - a travesty of static analysis.   

Professor Michael Grubb from University College London said the Treasury has long been out of its depth on energy technology, and has in this case played fast and loose with the concept of net cost.  

“I recall the Treasury’s furious opposition to the UK offshore wind energy programme just five years ago, based on gross cost projections that have turned out to be twice as high as those realised in practice already. When will the Treasury finally acknowledge that it is a victim of economic theories that reflect zero understanding of industrial innovation?” he wrote to the Financial Times.

As of today, Britain can borrow for fifty years at an interest rate of 1.38pc. This is free money. Such is the global misalignment between excess savings and under-investment.

The relevant question is whether climate investment pays a positive return: either directly, or by boosting economic growth in a Keynesian virtuous circle that raises exchequer revenue. If carried out in a downturn with a big output gap there is a turbo-charged multiplier effect, and a global downturn is what we are soon going to get.

In my view the Government should prepare for a green blitz using ear-marked “project bonds” - to keep rating agencies sweet - and damn the deficit torpedoes. Fiscal “sinners” will be the winners of the next phase of global economic history: fiscal “saints” will be the losers; austerity is self-defeating in a slump.

When combined with deft use of tax and regulation policy, “net zero” can help to unlock over £500bn of idle cash sitting in the accounts of UK firms because they cannot find a better return on capital. Mr May’s plan is in this sense a God-given catalyst for the revival of investment. Think of it as economic rearmament, 1938 without spitfires.

It is also how we restore energy independence rather than bleeding a net 2pc of GDP each year in fuel and power imports, often to despotic regimes. Did the Treasury factor in the colossal gain to our balance of payments if the Government goes ahead with the CCC’s plan for 75 gigawatts of offshore wind power and turns Britain into the aoelian Arabia of the northern seas? I doubt it.

Dimitry Zenghelis from the Grantham Institute, who helped draft the CCC report, said the “resource costs” of meeting the zero target depend on how vigorously the policies are pursued and how quickly Britain achieves economies of scale.

Mr Hammond has just made it that much harder. “By sowing early uncertainty, the Chancellor’s comments have, highly regrettably, have raised the policy risk premium attached to decarbonisation investments,” he said.

Mr Zenghelis, ex-Treasury and now apostate, said it is far from clear that there is any net cost for the British economy from the push for zero emissions. The plan may instead be a net accelerant to GDP growth - analogous to the upheavals of steam power, electricity, and digital technology - once you factor in dynamic feedback loop from creating new skills and putting dead savings to work.

Britain is a world player in green finance, bond issuance, and insurance. It has carved out a flourishing niche in green technology. Yes, there is a risk from being too far ahead of the pack. There is an even bigger risk of being the “last mover” trapped in fossil obsolescence.

The Bank for International Settlements issued a stark warning two weeks ago. There is a dawning worry that the industries of coal, oil, gas, cars, ships, and aviation may all have broken business models.

It said climate risk is no longer something in the distant future for financial markets. It has become a “clear and present danger”.

The BIS invoked Gaston Bachelard’s “epistemological break”. It is a posh way of saying non-linear. We are about to jump suddenly into a post-fossil world. The sooner Britain secures a ticket to this new destiny, the better. Brava Theresa.

  • Read Ambrose Evans-Pritchard's weekly column on telegraph.co.uk every Wednesday from 9pm