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Decarbonisation is going to hurt

It’s hard not to hear the starkness in the UN’s most recent climate change report when the media is awash with images of people being evacuated from a burning Greek island.

The Intergovernmental Panel on Climate Change (IPCC) report makes for grim reading. Changes observed by the scientists were declared unprecedented in thousands if not hundreds of thousands of years, and some, such as rising sea levels, are now believed irreversible. The conclusion? Immediate, rapid and large-scale reductions in carbon dioxide emissions are urgently needed to prevent future, worsening catastrophes. Even with progress on emissions, the planet faces more years of extreme events: more intense rainfall, heat, drought, severe flooding. It’s nothing we don’t already know, but it’s a warning and confirmation that we’ve missed key exits off the road to self destruction.

The transition to a fully decarbonised world is a huge undertaking. The UK has cut dirty electricity by about 70 per cent, and greenhouse gas emissions here and in the EU have fallen significantly in the past decade through regulations, strictly applied standards, bans, taxes and tariffs, and sometimes sweeteners. But much of the progress to date has been the low-hanging fruit. Now it’s going to get more difficult, with an inevitable impact on our lifestyles and cost of living.

The tactics are being tightened up and rolled out to include every source of emissions. Hence the decarbonisation of transport is now targeting airlines and shipping. The latter is one of the world’s biggest polluters – studies have shown that 200 of the largest ships produce as much sulphur as all the world’s cars and that if shipping were a country, it would be the planet’s sixth biggest polluter. But vessels are now adapting to a cap on sulphur emissions which will be followed with one on carbon emissions.

The decarbonisation of buildings, which includes our homes, is next on the agenda. Gas boilers, responsible for most of household emissions, are on their way out, and across Europe, the EU’s Emissions Trading System is being extended to cars, buildings and aviation. Flying, driving and heating will all become more expensive (and tricky in the case of heating), although later there should be rewards in the form of lower running costs. Don’t expect savings on duties though as we all switch from petrol to electric: lost revenues from fuel duties are expected to be replaced with a pay-as-you-drive levy. And businesses are expected to pass on their transition costs to customers.

On top of their liabilities as taxpayers and householders, investors’ capital is at risk as they back new technologies and the transition strategies of the companies they hold. Nothing about this journey is certain. Scientists cannot rule out sudden accelerations in threats and there is no guarantee the solutions being developed will prove to be sufficient, or that the cost won’t double or triple.

Investors are exposed through their pension holdings too. The government wants pension funds to take on some of the risk of financing the innovation and infrastructure needed to totally green the economy, while new risks are being introduced as pension funds divest their fossil fuel investments in favour of carbon-free alternatives. That’s sensible given the complex path ahead for energy providers (Shell is appealing the ruling of a Dutch court on its emissions strategy but this week’s IPCC report won’t aid its case). The net-zero alternatives though are not always tried and tested, and there are issues around greenwashing and inflated prices which endanger future returns.

The government does not believe the impact on economic growth will be anything other than small thanks in part to the new growth opportunities provided by our low carbon future. Regardless of the accuracy of that belief, we need to take the hit in the coming decades to secure our long-term prosperity.