Philip Hammond recently sent a letter to the soon-to-be-ex-prime minister claiming that tackling climate change simply isn’t affordable. The Chancellor suggested that the cost of transitioning to net zero carbon by 2050 would be upwards of £1trn.
This is less money than was made available to the banks at the peak of the financial crisis. The reason that such huge sums could be found during the crisis – and why Hammond’s argument is so fatuous – is that the British state doesn’t face a clear monetary constraint on its spending. As long as there is demand for sterling-denominated assets, the government can issue bonds or currency to pay for spending commitments. The bailouts, and the £435bn made available to the banks through quantitative easing, are a testament to this fact.
But while the state doesn’t face a monetary constraint, it does face a resource constraint, which is why we cannot rely on endless borrowing or money creation that is not used for productive purposes. Hammond’s argument relies on the idea that investing in our economy to halt climate change is somehow not “productive”.
On a superficial level, this is false. A green New Deal of the kind that would allow us to reach net zero by 2050 (or, ideally, 2030) would entail huge levels of investment in green transport and energy infrastructure, research into green technologies and a substantial programme of green housebuilding and retrofitting. Such a programme would create jobs today, boosting demand, as well as expanding the amount the economy can produce over the long term.
On a deeper level, too, Hammond’s argument is nonsensical because the costs of not acting on climate change are astronomical.
It is this failure to account for the impact of climate change that has allowed the powerful to tell us that going green is unaffordable. As a result, the global economy is currently facing a giant carbon bubble.
A bubble emerges when the price of an asset rises above the value that asset will generate over its lifetime. The reason bubbles emerge so frequently is that the future is uncertain – the value an asset will create is inherently unknowable.
Expectations about the future – and the forces of optimism and pessimism – are more important determinants of asset prices than what is going on in the economy today. Wild optimism can lead to wild overvaluations. And when it comes to climate change, wild optimism – driven by denial of the scale of the problem – is exactly what we have.
If we’re to deal with climate change, trillions of dollars’ worth of fossil fuels will have to stay in the ground, leaving fossil fuel companies with “stranded assets”. When one accounts for this issue, equity valuations in the industry look extremely optimistic. With current prices exceeding likely future returns, we appear to be facing a carbon bubble worth between $1trn and $4trn.
If, on the other hand, those assets are retrieved, we’ll be facing an overlapping environmental, political and economic catastrophe that will create trillions of dollars’ worth of damage anyway.
The question, then, isn’t whether or not tackling climate change is affordable – it is who will pay for it.
Hammond seeks to shift the costs of the inevitable adjustment on to those least able to bear it. This tactic should be familiar to a country that has endured an austerity programme so harsh it has been linked to 120,000 deaths over the past decade.
Island states, states bordered by desert such as in the Sahel region of Africa, and those already subject to extreme weather will end up paying for our inaction. And when mass migration, food shortages and political chaos start to affect the UK, the wealthy will shield themselves and impose the costs on working people. Hammond made this clear when he argued that tackling climate change would entail huge cuts to public services, as opposed to other revenue-raising measures
The climate emergency exposes the ideological underpinnings of fiscal conservatism. When the wealthy hoard society’s resources and fail to invest in our collective future under the guise of fiscal rectitude, the poorest suffer. Perhaps the next time the Chancellor tells us “it’s unaffordable”, we’ll have learned enough to respond ‘‘unaffordable for whom?’’
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This article appears in the 12 Jun 2019 issue of the New Statesman, The closing of the conservative mind