In this NERI Blog, NERI Co-director Tom McDonnell discusses the need for climate action and how to make it happen.
Climate change means rising temperatures and sea levels, increased water stress, more extreme events, threats to food security, climate migration, and of course biodiversity loss. We need climate action. But climate action and a successful net zero transition will not happen by themselves. Leadership matters.
Joe Biden’s Inflation Reduction Act in the US is catalysing investment into domestic energy production and sparking a transformative shift towards green energy with significant cuts in greenhouse gas emissions. His attitude is that these are investments rather than costs. On the other hand, Rishi Sunak’s climate strategy is apparently to renege on the UK’s net-zero pledges and to adopt a head in the sand attitude to global warming. He appears to think the cost is not worth paying and presumably that adopting such a stance will help him politically.
It is true that the net zero transition has employment implications for a number of sectors, but there will also be new types of employment. The one constant of the last two hundred years has been creative destruction and change. The labour market will adapt but we need to manage that change.
There is no doubt that ‘selling’ the need for climate action and convincing people and businesses to change is a tremendously difficult political challenge. For example, stricter regulations and taxes on pollution are both effective policies. But they also create losers and add to costs. They can also be regressive. The up-front costs make ‘stick’ policies inherently vulnerable to sectoral lobbying and to political reversal.
The correct sequencing of green measures is crucially important for political economy, social consensus, and just transition reasons. Green policies will need to focus on the ‘carrot’ rather than the stick if they are to be politically sustainable during the transition to net zero.
Most economists will argue that increasing taxes on greenhouse gas emissions and abolishing fossil fuel subsidies will bring us to net zero emissions in the most economically efficient way. The evidence is pretty compelling that such measures are indeed pretty effective.
Yet such measures are inherently vulnerable to being rolled back and need to be accompanied by measures that provide households and businesses with non-polluting alternatives. Indeed, the ‘just transition’ principle demands it. Provision of affordable alternatives will require significant targeted interventions by governments in a range of areas. This includes directly retrofitting social housing and subsidising private retrofits; the roll-out and expansion of widely available and subsidised public transport, and ongoing supports for climate and biodiversity sustainable farming.
Also required is significant government support for and investment in green R&D, in renewable energy infrastructure, and in the retraining and up-skilling of workers in affected sectors.
All of these measures are costly and will add to the significant budgetary challenges we are set to face over the next 20 years. The ageing population will exert increasing fiscal pressure via less tax receipts from employment and higher spending on pensions and healthcare.
In addition, in the long-run, tax yields on pollution will fall close to zero if countries are actually successful in achieving their net zero and biodiversity targets. This suggests that policymakers should not treat green sources of revenue as sustainable over the long-term, and, therefore, should not use them to pay for ongoing current spending or to cut taxes elsewhere. Instead, there is a case for explicitly linking ‘green’ revenue yields to some of the temporary transition investments needed such as retrofitting homes or building out renewable energy infrastructure. One way to do this would be through the establishment of dedicated green investment funds.
This brings us to Ireland’s windfall corporation tax receipts. The Government intends to invest much of these receipts into a fund to generate a new revenue stream over time. This makes sense. It would be reckless to use potentially transitory receipts to cut taxes or to make long-term spending commitments that are hard to reverse. However, it does make sense to use a portion of the windfall receipts to pay for once-off transition costs, even if these investments take place over a two decade period.
Indeed, in my view there is a compelling case to use a portion of the windfall receipts to finance a two decade programme of green investments. This would ‘socialise’ much of the transition costs, make the net zero transition politically more likely to succeed, and would ultimately boost the productive capacity of the economy. Ongoing green tax receipts such as from carbon could be used to supplement the green fund.
The key is to change the narrative so that climate action is seen as an investment in a future that will benefit everyone in society rather than a cost for people to bear.
Hopefully we will get the right type of leadership.