A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.

In 2015 the Paris Agreement set a goal to limit the increase in global temperatures to well below 2°C, ideally 1.5°C, above pre-industrial levels. In January, for the first time, the average global temperature breached this 1.5°C benchmark over a 12-month period. The Paris accord is based on average temperatures over a much longer period, so the January record does not break the target. Nevertheless, it is a stark warning of the challenges ahead in seeking to meet it.

Recent developments, particularly Europe’s energy crisis, illustrate some of those challenges. Shortages of natural gas across Europe following Russia’s invasion of Ukraine forced governments to keep the lights on by any means, with some countries temporarily using more polluting coal and oil to generate electricity.

Higher energy prices led to a major squeeze on consumer incomes.  Against this backdrop, UK prime minister Rishi Sunak announced delays to some net zero policies last year, including pushing back the phasing out of new combustion engine cars and gas boilers. The prime minister said that though he remains committed to the UK’s net zero target, “We seem to have defaulted to an approach which will impose unacceptable costs on hard-pressed British families… If we continue down this path, we risk losing the consent of the British people. And the resulting backlash would not just be against specific policies but against the wider mission itself”. 

The energy crisis also led to sharply higher government spending and indebtedness in a way that could constrain future spending plans. Earlier this year the Labour Party abandoned its 2021 pledge to spend an extra £28bn a year on green investment. Labour blamed Liz Truss’s 2022 mini-budget for raising the cost of government borrowing, though higher inflation and the energy crisis seem likely to have had more significant and lasting effects on borrowing costs.

The price of UK carbon emissions permits – which carbon-intensive industries must purchase – fell to a record low in February this year, due in part to mild winter weather and slowing industrial demand. Lower permit prices help to dampen electricity prices but also reduce the incentive to switch to renewables.

Forthcoming elections could also slow the drive to net zero. Donald Trump has vowed to “drill, baby, drill” should he win the US presidential election. UK-based climate website Carbon Brief estimates that Mr Trump’s policies could lead to an additional 4bn tonnes of US emissions, the equivalent of the combined annual emissions of the EU and Japan by 2030. In Europe some green policies, notably Dutch plans to reduce nitrogen emissions by cutting dairy production, have faced heightened opposition. A number of parties that have been critical of net zero policies seem likely to do well in the June 2024 European Parliament elections.

While the transition to net zero faces headwinds there have also been areas of progress. 

The increase in coal use in Europe in response to the loss of Russian gas has been reversed. A greater focus on energy security in the wake of the energy crisis has created a new impetus for decarbonisation. Higher energy prices, with the oil price well above average levels, add a further incentive for the economy in energy use.

The Biden administration’s Inflation Reduction Act (IRA), a mammoth programme of federal green tax breaks and subsidies, is having an impact. The American Clean Power Association, a trade group, says that 83 manufacturing plants focused on solar power, wind turbines, or batteries have been announced since the package was passed less than two years ago. The projects represent $270bn of investment—equal to the previous seven years of clean-energy investment combined.

The EU has pledged $270bn in green subsidies as part of its response to the IRA. The EU has also introduced a Carbon Border Adjustment Mechanism (CBAM) that will eventually levy a tax on the embedded carbon content of imports into the EU. The size of the European market means that the CBAM could create a bandwagon effect, driving other countries to price carbon and capture emissions domestically to avoid exports into the EU being taxed through the CBAM.

Nor are longer-term trends wholly discouraging. A recent book by Dr Hannah Ritchie, a data scientist, argues that impressive environmental gains made in areas including air quality, deforestation, protecting the ozone layer and the adoption of renewable energy demonstrate that rapid progress is possible. Perhaps Dr Ritchie’s most striking observation is that despite appearing to live more energy-intensive lifestyles than previous generations: “My carbon footprint is less than half that of my grandparents’ when they were my age. When my grandparents were in their 20s, the average person in the UK emitted 11 tonnes of CO2 per year. We now emit less than five tonnes. The gap between me and my parents is equally wide”. GDP per capita has risen 43% since 1990. Over the same period UK GDP per capita CO2 emissions have fallen by 35% on a consumption-based measure, one that captures the carbon embedded in imports. In the West, at least, the carbon intensity of economic activity has fallen significantly.

This has been made possible by greater energy efficiency, a move away from coal and the growth of renewable energy. In the last ten years the cost per megawatt hour of electricity generated from solar fell by just under 90% and from offshore and onshore wind by around 60%. The International Energy Agency estimates fossil fuel consumption in all forms will peak by 2030.

Net zero envisages the swiftest and most complete energy transition in history. Such a vast and contested venture was never going to happen seamlessly. As Dr Ritchie puts it, “We need to go much faster…but there is a lot of progress to acknowledge”.

Write to us with your comments to be considered for publication at letters@reaction.life