Opinion: The rush to net-zero could hit the economy as hard as the 1973-74 oil crisis - The Globe and Mail

For decades, we have been led to believe that transition to carbon neutrality – countries representing about 65 per cent of global emissions are committed to reach net-zero emissions by 2050 or 2060 – will not wreck economies; there would be no shock and awe moment.

Tamir Kalifa/The New York Times News Service

You own a house that needs repairs, but you’re a lazy penny-pincher who keeps delaying the jobs. A violent rainstorm hits your house, your basement floods and the roof leaks. Suddenly, you’re rushing to arrange hugely expensive overhauls to keep the house livable.

The scenario is similar to the one facing our rapidly warming planet.

Greenhouse gas emissions have climbed relentlessly in spite of decades of United Nations-led efforts, including the Kyoto and Paris accords, to bring them down. The endless delays mean we are running out of time to prevent the potentially catastrophic warming, defined as an increase of global average temperatures of more than 2 degrees Celsius above preindustrial levels. July was the warmest month in recorded history; wildfires raged across Europe and North America.

A daunting amount of work needs to be done in a relatively short time and the collective bill in the form of higher carbon taxes and pricing, new regulations and deficit-financed government subsidies will be enormous. How can all this not be disruptive and damaging to the economy even if it’s absolutely necessary?

For decades, we have been led to believe that transition to carbon neutrality – countries representing about 65 per cent of global emissions are committed to reach net-zero emissions by 2050 or 2060 – will not wreck economies; there would be no shock and awe moment.

The argument promoted by many governments and environmental groups is that there is more to be gained than lost. The flood of public and private spending devoted to the green economy will, of course, eliminate many jobs in coal mining, oil refining and other “dirty” businesses. But it will create even more jobs as entire industries, from electricity generation and air travel to shipping and bitcoin mining, are cleaned up.

So, yes, the 50-year-old guy making gasoline engines in the Ford plant will go into early retirement whether he wants to or not, but his engineer daughter who specializes in offshore wind machines will have a meal ticket for life.

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The trouble with this techno-optimism scenario is that it may not be true, and has an even smaller chance of being true given the accelerated decarbonization process we face. The decades of delays mean that we blew our chances of a relatively slow and benign transition to a clean economy. Emitting carbon will have to become a quick and expensive process, one that might create more economic losers than winners.

In a recent note, the French economist Jean Pisani-Ferry, of the Peterson Institute for International Economics and the European University Institute near Florence, said that “fundamentally … decarbonization amounts to putting a price on a resource that used to be free.”

Mr. Pisani-Ferry is no climate-change skeptic. He is not advocating a slow transition to a green economy; a burnt planet means no economy would exist to be saved. He is just saying that an “abrupt” decarbonization campaign could be much less comfortable than advertised. In effect, we have been brainwashed into thinking the opposite, partly because so little macro-economic analysis has been done on climate-driven rapid decarbonization.

The obvious parallel – and one he makes – is the first oil crisis, which was triggered by the OPEC oil embargo of 1973-74. Oil almost quadrupled. Inflation took off, the stock market crashed and stagflation set in. The price shock almost crippled Western car makers, whose gas-guzzling land yachts were suddenly unaffordable to drive. “The 1974 shock was the same order of magnitude as the one that is bound to be triggered by efforts to cut emissions in the decade ahead,” Mr. Pisani-Ferry said.

To be sure, he could be somewhat wrong, and he admits as much. For instance, carbon price increases are to be expected; the oil price shock was not, and new technologies – those that do not exist yet or barely exist, such as “green” hydrogen – could remove some of the decarbonization pain.

Still, there will be pain and it will intensify at higher carbon prices. In 2019, the global average carbon price was a bargain US$3 a ton, according to the International Monetary Fund, effectively giving no incentive to decarbonize. But if it were to go to US$75 or US$100 (some scientists and environmentalists thinks US$300 would be required to get the job done), the transition shocks could be fast and furious. Mr. Pisani-Ferry said that US$100 a ton would cost the equivalent of 4.1 percentage points of 2019 world GDP, well above the repricing shock triggered by the 1973-74 oil crisis.

The faster the transition to net-zero, the greater the economic disruption. But a fast transition might be required to prevent catastrophic climate change. Under that scenario, highly polluting industries might have to be sent to the scrap heap virtually overnight. “Procrastination has reduced the chances of engineering an orderly transition,” Mr. Pisani-Ferry said.

Another risk is rising public debt. Governments will have to subsidize the transition and support employees who are made redundant. Debt-to-GDP ratios, which are already soaring to finance pandemic expenditures, could reach astronomical levels.

Some of what Mr. Pisani-Ferry said can be challenged. His report’s true value is his small but compelling effort to end the fantasy that achieving net-zero emissions will be a net jobs generator, so stop worrying. The effort could be hellish. We got started too late and our global house needs emergency repairs.

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Opinion: The rush to net-zero could hit the economy as hard as the 1973-74 oil crisis - The Globe and Mail
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