The Scottish and UK Governments have arguably set in statute the most ambitious (and interdependent) climate change targets of any countries in the world with a commitment of Net Zero emissions by 2045 and 2050 respectively. Our focus in researching this issue at the University of Strathclyde’s Centre for Energy Policy emerges from the fact that transitioning to Net Zero won’t be easy, and taking the leading role in the global effort, even less so. Especially getting on the road now where people, businesses and government have pressing priorities in getting social, economic and societal well-being back on track in light of the Covid-19 pandemic.
Thus, the need is more urgent than ever to recognise and consider what we need to do in transitioning to Net Zero as a question of how we evolve our economy, our society and our lives. The ‘easier’ side of that is to identify where net economic and lifestyle benefits can emerge and evolve if we plan and do things the right way. The more challenging side is when there may be net costs, for some time, or lasting into the foreseeable future. That really pushes us to consider who pays, how and when.
The challenge has two crucially important and challenging dimensions. First, to recognise that these are challenges that can be overcome, but with this requiring acknowledgement and understanding of a range of very real issues around the economic and societal challenge of transitioning to net zero, and the politics thereof. We need to reset, ask and address the right questions, including developing understanding of the potential economic and social consequences of different actions. We also need to get the right people involved in the conversation and the research that informs it and the way forward.
Secondly, to recognise that achieving a just transition that is fair to all – and ideally reduces inequalities in our society – is crucial if there is to be societal and, therefore, political ‘buy in’. For example, recognising that the justness of the transition – how people’s lives are affected and changed – depends on us understanding and dealing with the fact that industries need to sustain their competitiveness. It’s not just about returns to shareholders, it’s about people’s jobs and livelihoods, not just in those industries but in the extensive network of supply chains they support.
In short, it’s all about prosperity for people. Not least when we in the UK have taken a leading role in committing to and delivering Net Zero.
Understanding the economic opportunities and challenges of industrial decarbonisation
At the Centre for Energy Policy we’ve been engaged in one particular theme of research that focuses on industrial decarbonisation, which is seen as one of the key challenges of getting to Net Zero. Carbon Capture and Storage (CCS) is a technology which could allow essential industries like cement, steel and chemical manufacturing to continue production whilst drastically reducing their emissions. We took a first pass at considering the carbon capture element of CCS from a wider economic and just transition perspective. The key issue for us is understanding the implications of action.
For firms, doing carbon capture means the need to use more equipment – capital – to produce the same output. While returns can be restored by raising prices, when firms are operating in an international market place where competitors are not all doing the same, this can lead to an effective reduction in relative competitiveness. If firms lose competitiveness and demand this will lead to a contraction in sales and therefore activity, not to mention the risk of firms relocating overseas. Generally, if industry contracts there will be a contraction in the UK economy, earnings and tax receipts.
So far, we’ve focussed our applied work on the Scottish Chemicals sector and outcomes for the Scottish economy. In the scenarios we considered, Chemicals industry prices had to rise by between 4% and 8% due to the costs of implementing carbon capture. The consequent loss in competitiveness could trigger a lasting contraction in Scottish GDP of at least £175million per annum. This would take around £40million a year out the public budget and reduce Chemicals industry jobs by 10% or 600 people, with a further 750 jobs at risk in the wider Scottish supply chain.
We also explored an alternative option where government invested via a subsidy sufficient to avoid the competitiveness loss with the aim of protecting jobs and earnings in a region where they may be difficult to replace. But someone needs to pay. We considered the impacts of the costs of the subsidy being fully socialised via income tax. Increased taxation can cause a different type of contraction. People have less money to spend. The overall GDP contraction would be significantly reduced but hit in different parts of the economy: the sectors where households spend their money, and the supporting supply chains. This could actually lead to a higher number of job losses, albeit in lower paid sectors on average.
But the Just Transition requires we protect the lower paid too. So what is the solution? Could other elements of our Net Zero portfolio boost household incomes and spending power, such as ones that reduce the costs of heating our homes and delivering our transport needs? Indeed, could other Net Zero actions generate enough public revenues to remove the need to increase taxation to pay for costly elements of industry decarbonisation? Of course, the need to do so should decline as other nations, and competitors in the international market place, follow our lead.
The key point is that Net Zero is an economic system and societal challenge as much, if not more than an energy system and technology one. We need to join up our thinking, discussions and research on all of these elements if we are to deliver a Just Transition whilst meeting critical climate targets.
The research underlying this blog is supported by the UK Carbon Capture and Storage Centre (UKCCSRC), the Bellona Foundation and the UK Energy Research Centre (UKERC). For more details about the research please see our research brief and policy brief.
Karen Turner, Julia Race, Antonios Katris and Jamie Stewart, University of Strathclyde