Ed Davey: The decarbonisation of capitalism is an opportunity for the whole country
By decarbonising capitalism, we can beat climate change and bring huge economic opportunity, says Sir Edward Davey
Dire predictions from the most recent IPCC report have been published around the world, but less reported is the conclusion that if we act now, and decisively, we can have it all – a good economy which helps the climate, and good climate which helps the economy. And as I emphasised at Policy Connect’s ‘Net Zero Britain’ roundtable in early December, climate change is a rare issue on which we can build cross-party support.
In my view, the next strategic step to beat climate change requires us to decarbonise capitalism. Since the technology solutions are being developed fast, the question is – can we deploy them fast? And that needs cash. We need to switch trillions from dirty fossil to clean green. Urgently.
The IEA estimates that $2trn per year needs to be invested globally in new energy supply to 2040. But today, $100trn of assets globally are high carbon and at serious risk of becoming stranded by the rise of new technologies and policies to limit climate change.
Recent leadership from Bank of England governor, Mark Carney, has driven a step-change in recognition of the materiality of climate change to the financial services sector. So much so that a group of 415 global investors with assets totalling $32trn has signed a statement warning UN delegates that climate change could result in a financial crash several times worse than in 2008.
In its latest consultation, via the Prudential Regulation Authority, the Bank explores ways to ensure that the majority of banks and insurance firms who are not taking climate change seriously can be pushed to consider the impact of climate change on their businesses through better risk management, governance and scenario analysis.
The parallel FCA consultation also just launched on green finance and climate change is particularly important given its coverage of contract-based pension schemes – through which millions of ordinary savers have their pensions invested.
While these are welcome first steps, we must learn the lessons from the last financial crisis. Raising awareness alone is not enough to overcome the short-term profit incentives of individuals and firms when they are way out of line with society’s best interests.
Disclosure by companies and banks of their climate exposure must be mandatory and meaningful to drive change. Current time horizons of under five years employed to stress-test banks’ financial health, for example, are woefully inadequate for protecting the health of the financial system from climate change.
The PRA recognises the high risk of a ‘too little, too late’ scenario, where significant action is taken, but too late to achieve climate goals. Disastrous for the planet, this could also result in a disaster for our economy if the most severe financial risks crystallise in the banking and insurance sector.
Therefore, firms should not just be mandated to disclose but also to align with more ambitious climate scenarios, as a firm’s actions contribute directly to determining which scenario will eventually become reality.
But if we want to shift trillions of dollars of capital out of fossil fuels and high carbon technology, they must find new homes. This represents a huge economic opportunity.
In the UK, renewable energy now provides some of the lowest cost power we have. As secretary of state for energy and climate change, I brought in new policies which have seen the cost of offshore wind farms fall from £140 per MWh to less than £60 per MWh in just five years. As a result, Britain is now the world leader in offshore wind. Meanwhile, solar power costs have plummeted, and the industry predicts that new solar farms in the UK will deliver £40 per MWh by 2030.
But rapid subsidy cuts, policy uncertainty and a generally unattractive investment environment in the UK under the Conservatives since 2015 have been counterproductive, with renewable investment actually falling more than 40% each year for the last two years.
Our lowest cost form of power, onshore wind, is effectively banned, while fracking is allowed to bypass local planners and community resistance. Tidal power is shunned as ‘too expensive’ despite the evidence that after the first-of-a-kind lagoon at Swansea Bay, costs would plummet, as they have with wind and solar.
We accept over £7,000 of costs to society for every diesel car driven in London but remove subsidies from EVs which reduce health impacts by five times compared to diesel cars.
The City of London’s Green Finance Institute has done some great work to signal that London is open for business as a global centre for green finance but we must also ensure that the benefits of the green finance revolution are not only felt in London.
The decarbonisation of capitalism is an opportunity for the whole country. Our wind, tidal and solar resources are spread throughout the country and those areas which suffer the most from decline of fossil fuels deserve strong support.
Delivering better jobs, better economy and a better climate won’t be easy, but given that we are the last generation with the option to keep warming below 2C, I think it’s a prize worth fighting for.
Sir Ed Davey is Lib Dem MP for Kingston and Surbiton, and a former energy and climate change secretary