This is part of a series ‘Economists Exchange’, featuring conversations between top FT commentators and leading economists
“Jonathan Adair Turner, Baron Turner of Ecchinswell, is the UK’s technocrat for all seasons, a British version of a French énarque.” This is how I described the subject of this exchange in a “Lunch with the FT” in 2016.
A graduate in economics and history at Cambridge, Turner has been a director at McKinsey and director-general of the CBI. He chaired the UK government’s pensions commission between 2003 and 2006, which recommended the creation of a system of defined contribution pensions, with employees allowed to opt out rather than opt in. This has proved transformative. He was chair of the UK Low Pay Commission from 2003 -06, and was the last chairman of the Financial Services Authority between 2008 and 2013.
In the last role, he wrote the excellent Turner Review: A regulatory response to the global banking crisis, which was submitted to the government in March 2009. He has also written several books, notably Between Debt and the Devil: Money, Credit and Fixing Global Finance. In this important book, he explained that our addiction to credit, which lay behind the 2007-09 financial crisis, is not just economically unnecessary, but a threat to economic and social stability.
Although Turner’s intellectual interests remain wide, he has increasingly concentrated upon climate change. In 2008 he was appointed as the first chair of the UK’s Climate Change Committee, which is charged with defining the country’s path to a zero carbon economy and with holding government to account in the delivery of that objective. He left this position in 2012. He is currently chair of the Energy Transitions Commission (ETC), a global coalition of companies committed to achieving a net zero global economy by mid century.
I started our discussion with the most important question: is the energy transition really going to happen?
Adair Turner: My judgment is that if you asked whether we will get to something close to a zero-carbon economy by 2060 or 2070, I think it is inevitable that we will, because we have discovered and developed a set of technologies that are fundamentally superior to the existing fossil-fuel system. And when we get there, we will have an economy that is better for human welfare, including for climate change. Moreover, the impact of having got there on standards of living in 2070 will be so trivial that we won’t notice them. They may even be positive in terms of conventionally measured GDP.
The difficulty is that, unless we move faster, we will get there too late. There are global commitments to limit global warming to well below 2C and, ideally, 1.5C above pre-industrial levels. But by now it is almost impossible to limit the rise to 1.5C. What we need are strong policies that aim to limit it to 1.6C or 1.7C, bearing in mind that every 0.1C above 1.5C will produce additional harm.
The good news is, if you compare where several of these technologies are now compared to where they were in 2008, they have progressed far faster than expected: the reductions in the costs of solar photovoltaic (PV) panels, wind turbines and batteries have been far faster than we expected.
That’s my balance: long-term technological optimism, but a worry that we will just not go fast enough.
Martin Wolf: Sceptics would argue that the fall in the cost of renewables has indeed been dramatic. But we don’t know how to run a renewables-based grid, at the scale needed. How do you respond to that critique?
AT: It is the critique on which we at the ETC and everybody else involved have been focused for the last ten years. The question of how you produce a cheap kilowatt hour of electricity is no longer interesting. All the interesting questions are what do you do when the wind doesn’t blow and the sun doesn’t shine?
I am absolutely confident that we will be able to run systems that are as much as 70 per cent dependent on renewables. The question is: at what cost?
Over the next six years, we in the UK are going to see an important test of whether it’s possible, because we have a government that is committed to getting to zero grammes of carbon per kWh of electricity. Let’s assume that their true target is “near zero”, so just 20 grammes of carbon per kWh of electricity, and the date is 2030. I think they will get pretty close.
You have to balance systems on a second-by-second basis. You also have to balance energy supply and demand between day and night: if you’ve got solar electricity in the day, you still want to run your air conditioners at night, in, say, India. Finally, you need to balance supply and demand on a seasonal basis. This will be the biggest challenge in northwest Europe. You’ve got to work out what you do if you lose North Sea wind in winter, just when you have peak electricity demand, because you have electrified residential heating.
The second-by-second is definitively doable: there are already days when the German system has been running close to 100 per cent on renewables. That bit is solved.
The problem of day to night is going to be more doable than we originally thought, because across much of Latin America, Africa, India, Indonesia, south-east Asia, the predominant method of electricity generation will be solar. These countries do not have a big seasonal problem, but they have a big diurnal problem. But batteries are now getting so cheap that solar plus batteries will provide the dominant solution.
There are credible analyses of the Indonesian power system showing that they could get 80 per cent of their electricity from solar by 2050 and could also balance the system from day to night with batteries. We’re already seeing huge progress in India, where renewable energy companies have to bid in to what are called “around the clock renewable auctions,” in which they commit to deliver electricity 80 per cent of all hours in the year, day and night.
The biggest challenges actually lie with the seasonal balance in high-latitude countries. This will mean keeping a significant number of gas turbines, but those gas turbines will, in future, probably run for just 10 per cent of the hours in the year, and will burn hydrogen rather than methane. That hydrogen might come from methane through what’s called “blue hydrogen”, with the addition of carbon capture and storage (CCS). Or it might come from electrolysis.
Now, you would be quite right to state that I’m arguing from models that prove we can do it in theory. Now we’ve got to prove it in practice. But you shouldn’t underestimate how much progress we’ve made already.
In the UK, in 2009, the carbon intensity of our electricity was 500g/kWh. So far this year, it’s been about 125g/kWh. So, we have already achieved a 75 per cent reduction in the carbon intensity of our electricity, partly by moving from coal to gas, but also by increasing the amount of renewables and running gas turbines when the wind doesn’t blow and the sun doesn’t shine.
This does require investment in grids. It requires investment in storage. But I am confident that all the technologies exist to do it. And again, if you look at India, where the ETCs partner, TERI, has done detailed modelling, it’s reasonable to believe that the total cost of electricity with the storage and the grids will be no higher than today’s fossil-fuel-based systems.
In sum, I’m sure we can do it and I think the costs will turn out to be less than many people fear.
MW: How much land will these solar arrays need to occupy in a country like India, which will also need a much greater amount of electricity than it has now, both because it will be replacing other forms of energy and because it hopes to be much richer?
AT: Extremely good question, which you have to assess at the level of the world, at the level of countries and at the level of densely populated countries.
The proportion of the land area of the world you would have to cover in solar panels in order to power an electricity system producing three times as much electricity as at the moment is roughly 1 per cent and just a third of a per cent if you could find a way to put solar panels on top of the sea, which we probably will be able to do.
The amount of the land area of Australia you would have to cover in solar panels in order to enable it to have all of today’s electricity — and even to produce five times as much in order to be the dominant producer of electricity-intensive products, such as “green steel” — is so trivial that you would hardly be able to see it if you were to put it on a map.
But how much of Bangladesh’s land area would you have to cover in solar panels to meet its future electricity needs? It could be as much as 8 or 9 per cent in a country where every bit of land is already dedicated to habitation or agriculture. India is an intermediate case. Analyses suggest that there is enough space to support a predominantly solar-powered system producing five times as much electricity as India does at the moment. But there would be competition for space with agriculture and habitation.
Happily, new technologies will improve this trade off. There is “agriPV”, in which you place solar panels at about 3 or 4 metres above the ground, with spaces in between, and you do agriculture underneath them. This might even be a more productive agriculture, because the solar PV will trap the evaporation, and so help deal with the water cycle.
We are getting to the point where temperatures are becoming so high that some crops don’t like them. Fortunately, estimates produced by an institute in India that works with German scientists suggest that the agriPV potential in India is so great that it could remove such constraints.
It may be, though, that in some countries we need another option. I don’t think Bangladesh has a 100 per cent renewable solution: it will, I think, need nuclear power or long distance imports of electricity. But its nearest neighbour is India, which is relatively densely populated, as well.
This is not a problem for China. China’s desert areas in the west and north are so huge that it can completely decarbonise. It is not a problem in Africa. It is not a problem in Brazil. But there are parts of south Asia and south-east Asia where either the land area or the renewable resource might be a constraint.
Let me give the example of Malaysia: Peninsular Malaysia actually has very low wind speeds. And although it’s pretty hot, it’s quite a cloudy place. But Thailand has limitless solar PV relative to its population. Are we going to be able to develop long distance cables that can take Thai solar PV and run it down into Malaysia?
Land area is, in the vast majority of countries, not a significant constraint. But in the most densely populated ones, it needs to be looked at carefully.
MW: There’s a footnote here. Europe became an industrial economy, essentially because it had coal. And then it started to import oil and gas, notably from Russia. That’s surely another argument for going solar. But are the foundations of comparative advantage not going to change in the world you’re describing? In particular, what we used to call “heavy industry” is going to migrate to countries with lots of sun?
AT: We already have an industry that moves where there are cheap renewables, and that is aluminium. Aluminium production across the world is close to large hydroelectric resources and has been for some time.
I think it is clear that in future, the logical places to produce “green steel” will be where there is the cheapest wind and solar energy. Australia is beginning to think that “we used to send metallurgical coal up to Japan and Korea. In future, we have limitless supplies of renewables, we could produce hydrogen and send it up to Korea and Japan, alongside iron ore, for them to do iron making in Korea and Japan with our hydrogen. But why would we send the iron ore with all that extra weight of oxygen and the hydrogen, rather than just send the iron ready made?”
Now the good news is that quite a lot of the employment and value is in steelmaking and the speciality steel finishing rather than in iron making. It doesn’t mean you lose the whole of your steel industry, because a lot of the stuff that naturally sits close to the customer might stay in the existing industrialised countries. But the first step of the process, which is taking iron ore and turning it into sponge iron will shift.
So, you’re quite right that there are some industries that will shift. But these are industries whose share of employment in rich countries is now trivial.
MW: Let’s move to the economics of all this, with two sets of questions. The first is how much is all this going to cost? And, crucially, where is it going to have to take place? Obviously, a very large amount of the investment is going to have to occur in emerging and developing countries.
AT: Well, a lot of people have done analyses of this. We’ve done it at the Energy Transitions Commission. The International Energy Agency, widely accepted as the global authority, has done so, too. All of us end up with the same orders of magnitude.
In 2020, the world was investing about a trillion dollars a year in things to do with the new economy, at the core of which are solar, wind, batteries, grids, etc. Analysis by both the ETC and the IEA suggests that the gross investment needed to build a global zero-carbon economy will rise to around $3.5tn-$4tn a year by 2030, with 70 per cent of this needed to build larger, decarbonised power systems. The second biggest cost, after electric power, is buildings, particularly in the richer parts of the world: heat pumps and insulation. That $3.5tn-$4tn would be around 3.3 per cent of global GDP in 2030. That scale of investment will then need to be maintained for another 20 or so years, before tailing off.
That investment in clean energy would, however, be offset by a fall in fossil-fuel investment, which is currently running at around $950bn a year. Moreover, with global investment in clean energy systems already over $1.5tn in 2023, according to the IEA, the increase above what we are already spending would only be 1.5-2 per cent of global GDP. Moreover in developing countries, a significant share of the gross investment would be needed to meet rising energy and in particular electricity demand, even if we were not concerned about climate change.
But that investment still has to be financed, and while the IEA shows $1tn global investment in 2020 already increased to over $1.5tn in 2023, that increase has so far has been almost entirely concentrated in the developed world and China.
Broadly speaking, in high-income countries and China, we need to double investment by 2030. But in upper-middle, lower-middle and low income countries, we need to increase investment fourfold.
Where is the money going to come from? In the rich world, most of it can come from the private sector, provided other aspects of the economy are appropriately designed — for instance, provided one has appropriate structures for contracting with offshore wind developers and we have carbon prices applied to such processes as steel production.
I do not, however, exclude a role for public-private partnerships, or publicly supported funding, even in rich, developed countries. But in the rich countries, you probably could get there even without such ideas, provided you have carbon taxes and what are called “contracts for differences”, to ensure predictable prices for wind-generated electricity.
The further you go from upper-middle to low-income countries, the greater the amounts of money that will have to come from outside, especially from the global development banks, simply because these countries are exposed to risks — political risks, exchange rate risks, credit risks — that will make the cost of private capital too high to keep renewable energy financially feasible.
The crucial thing to realise is that the cost of capital is much more important for a green energy system than one based on fossil fuels, because the former involves investment spending up front and zero marginal cost once they have been built. That’s also why we will enjoy energy at zero marginal cost, once we’ve built these installations.
To give an example, Africa has essentially limitless solar potential. If the cost of capital in Africa were the same as it is in northwest Europe, there would hardly be a need to develop a fossil-fuel-based electricity system at all. But if the cost of capital goes from 5 per cent to 15 per cent, you build a gas turbine, not solar PV, and if it goes to 25 per cent, you buy a diesel generator. The higher the cost of capital, the more you economise on the capital asset, even if it has far higher running costs.
So the role of development banks is crucial, and respected experts have produced a series of reports — NK Singh and Larry Summers and Nicholas Stern, and Vera Songwe — on the need to reform and turbocharge the development banks to provide more finance.
MW: There is an argument that one of the problems is how we’ve designed our grid system, and particularly, the pricing in our grid system. Which makes it relatively risky for a capital intensive, zero-marginal-cost player to invest, because the prices at which they are going to be rewarded are unpredictable.
AT: The essence of this problem lies with the high capital cost, zero marginal cost, and intermittency features we have discussed. Suppose the system had zero marginal cost and you attempted to have a competition organised in a half-hour by half-hour market. It follows from basic economics that the price would fall towards zero and the case for private investment would collapse.
The market structures we created back in the 1990s do not work for this new system. So most of the North Sea offshore wind has been developed on “contracts for differences”. They’re just a fancy way of giving somebody a fixed price, and we need to keep them, not because they’re a subsidy, but because we need to provide a fixed price to the providers on at least some of their output. That fixed price contract may be at a price that is on average below the future price of gas- or coal-based electricity. So, there is no subsidy. But you still need to guarantee a fixed price.
We went through a period when people were deluded by the idea that we would eventually go back to a half-hour by half-hour market, and that would solve everything. Indeed, in theory investors look forward to estimate future expected carbon prices, and future electricity prices by time of day, and plan to sell battery-stored electricity in the high priced hours: and work out that there was in theory an economic return. But, in practice, the need to estimate all these highly uncertain future prices would blow the risk-adjusted cost of capital through the roof.
So, you need long-term, fixed-price contracts to reduce the cost of capital to investors.
MW: Do you think any countries have got this right?
AT: Well, broadly speaking, the UK has been doing this so far. Our North Sea wind has been developed with this. We had a hiccup last year: we got greedy and set maximum prices too low. But, broadly speaking, the UK has a correct market structure. What we now really need to think about is the market structure for storage. How are we going to make sure there is enough battery, compressed air, pumped hydro or hydrogen storage capacity?
There are a variety of different ways to do that. You could push it down to the generator and say that your fixed price contract is for around-the-clock delivery. They would then have to work out the combination of different generation and storage options that enables them to meet that contract. Or you could have the centre contracting for battery or hydrogen capacity. But the design of the power market is crucial.
So, too, is the correct regulation of the companies who build transmission grids. And here the challenge is to allow building ahead of demand growth, because you can’t build suddenly just in time when demand growth occurs.
A lot of our challenges involve getting away from what has happened over the past 20 years. Over the past 20 years, UK electricity demand has not been going up, so the grid has not been expanding, and the whole focus of regulation has been how to minimise the investment that National Grid and others do? How do you keep it as small as possible, to limit the charges that are put through to the consumer?
That makes sense if you’re in a stable environment. But when you say, as we do now in the UK, that we’ve got to take our UK electricity supply from 300 TWh hours today to 600 or 650 by 2050, and decarbonise it, too, you have to let the grids invest, and you have to let them invest before the demand is there, because it simply takes time. The system has to be set up to deliver this investment.
MW: That links to the next area, which is policy and politics. What does policy need to do in order to have a reasonable chance of accelerating our movement towards the zero-carbon world?
AT: The answer is that policy varies by different sector of the economies. One is the power system. You do need a strategic vision here. It may well be delivered by private enterprise, but government needs to say, broadly speaking, we think it’s going to have to grow this amount by 2030 and this amount by 2040.
In the UK, we know that a large amount of the growth will come from offshore wind. You’ve got to decide your nuclear strategy, too. You’ve got to be overt about that, and you’ve got to use those fixed price contract structures for at least some part of supply. You’ve got to use at least some targeted government investment and support. You’ve got to change the planning and permitting system. There is a big role for private developers, but it can’t be sufficient without a vision.
When you go to heavy industry and aviation and shipping, there is a challenge. But there’s also good news. This is that these are energy-intensive businesses, and therefore, they’re carbon-intensive businesses. But the very fact that they’re energy-intensive and carbon-intensive means they will respond to price signals, because the cost of energy and the cost of carbon (provided there is one) will be a large part of their cost of production. And they are run, unlike individual households, by professional managers who sit down with Excel spreadsheets and work out the net present value of alternative courses of action.
If the steel industry knows that in future if it buys coking coal and puts it into a blast furnace, the cost of that coal is going to go up because they’re going to face a carbon price as well, they will themselves think they should surely be investing next time in a zero-carbon form of steel.
Then the crucial thing is certainty about the future carbon price or regulatory regime. We do know how to decarbonise aviation with sustainable aviation fuel and we know how to decarbonise shipping by burning ammonia or methanol. In these cases, the alternative technologies will be more expensive than conventional fossil fuels. Thus, when I think about the impact on living standards in 2070, I think of electricity being no more expensive than at the moment, electric vehicles being much cheaper than existing vehicles, but people paying more for shipping, aviation and steel.
With aviation and shipping, we can set mandates. We can say that at a certain time you, the shipping company, will have to ensure that 10 per cent of its fuel, then 20 per cent, then 30 per cent, then 40 per cent, and eventually 100 per cent has to be zero-carbon fuel. Now, we could work out a “shadow” carbon price equivalent. But quantitative regulation is likely to be more powerful than price, because it tells the developers of ammonia or methanol or sustainable aviation fuel directly that there will be a certain level of demand for their new technology at a particular time.
For a variety of reasons, I think that with aluminium, steel, chemicals and cement, I would go primarily via the carbon-price route, but with aviation and shipping, probably with a combination of carbon-prices and quantitative levers.
And the biggest challenge in these areas is international co-ordination. If there were a global government that simply said, “Here is my regime of quantitative regulation and carbon-price targets set out from now to 2050”, I would have a high degree of confidence that we would see this happening.
The EU is getting close to that. The European emissions trading scheme is going to get very, very tight in the 2030s. It will start generating carbon prices well in excess of €100 a tonne. But I think one of the biggest issues is how we get a wider spread of carbon prices across the world to apply in particular to long-distance transport and heavy industry?
It could work by what I call “unilateralism plus incentives”? Europe says it’s going to have a carbon border-adjustment mechanism (CBAM). Chinese and Indian steel companies might say that this means I have to decarbonise, because otherwise I won’t have access to the European market. Or Chinese and Indian policymakers might say, that if our steel companies are going to have to pay a carbon price at the EU border, why wouldn’t we impose the carbon price back here in India or China, so that we get the revenue, not the EU?
And I’m somewhat optimistic from conversations with Indian steelmakers, Chinese steelmakers and Indian and Chinese policymakers, that “unilateralism plus incentives” is beginning to work. But it would be speeded if prices could be internationally agreed in some way.
One of the huge problems in this debate is that for a set of domestic political reasons, it has been impossible to get the US to agree on a carbon price. And that, of course, is why the US has gone down a subsidy route rather than a carbon-pricing route. But it does mean that we don’t start with the US. If the US had a carbon price that could be co-ordinated with the EU’s, that would be highly favourable.
You may know there was a letter to the Wall Street Journal back in 2017, organised by a group called the Climate Leadership Coalition, which included old style Republicans, such as George Shultz and James Baker, which argued for a carbon price as the rational thing to do. Unfortunately, it had no impact on American politics whatsoever.
MW: There’s a big political backlash against “green” policies now, principally over the distributional consequences. Poorer people do not want to be forced to buy new vehicles or install heat pumps. How dangerous is this? And what do you think can be done to shift these objections, and how?
AT: Well, I think you’re right to say there are these major distributional issues. Even if I’m right, that the impact on conventionally-measured living standards will ultimately either be trivial or, indeed, positive. There will be winners and losers in the transition.
I think we will end up with cheaper road transport for everybody, but more expensive air transport: people who fly a lot will face a hit to their living standards that people who drive a lot will not. I think the crucial thing is for governments to understand how the distributional consequences will work and to make sure that they are focused on managing them.
And let me give you three examples. One, there’s an area where the distributional effect is not problematic. Steel, aluminium, chemicals have a green cost premium, which is significant at the level of business-to-business selling of, say, steel. But by the time you get down to the individual consumer, it’s relatively trivial: if it costs $150 a tonne more to make zero carbon steel, the cost of the car you buy will go up by half a percentage point. And that cost is spread somewhat proportionately to income.
Then, let’s go to a second example. Compared with ICEs [internal combustion engine vehicles], electric vehicles have a much simpler and eventually far cheaper engine. But they have a much more expensive battery than a fuel tank. And those two in combination, have until now been more expensive for electric vehicles. But in future, the batteries will get cheap and so the combination of engine with battery power will make for electric vehicles cheaper than ICEs.
In China, the average cost of electric vehicles is now below that of internal combustion engine vehicles. Moreover, it turns out that this is not just because the former are smaller: detailed analysis by Bloomberg New Energy Finance shows that for cars of equivalent size, EVs are now cheaper than ICEs.
This has occurred because the cost of batteries is hurtling down, above all, in China. But the question that poses for Europe is whether we are willing to have ordinary people buy cheap Chinese-made electric vehicles or electric vehicles made by Chinese-owned factories in Europe?
Because otherwise, I think that, as we come up to the date for bans on ICE vehicles, eg 2030 as the UK government plans, we will get hit by a popular campaign, saying that this is all very well for the rich, who can buy their electric sports utility vehicles (eSUVs) for £40,000 or £50,000, but where’s my EV for the masses at £10,000, £15,000? Well, the BYD Seagull sells in China for $9,700.
How do we play that trade-off? This is crucial, but also transitional. I’m very confident that at some stage, electric vehicles will be cheaper to buy and cheaper to run.
The third and much bigger challenge is residential heat pumps. I think some of the challenges are overstated. You can now have what are called “high temperature” heat pumps, which do circulate the water at 60C or so, so you can put them through your existing radiators. The argument that in order to have a heat pump, you have to insulate, insulate, insulate is overstated.
This brings us to the cost of capital issue within countries. Let’s suppose that, on average, every one of 20mn homes in the UK is going to have to spend, say, £10,000, on a combination of a heat pump and some level of insulation. It will tend to be more for the bigger houses than the smaller houses, but let’s say that’s the average.
What is their cost of capital of doing that? For the well off, the cost of capital is probably the rate of interest they are getting on deposit accounts. For a great block of middle Britain, the cost could be that of increasing their mortgage. But for low-income Britain, the cost of capital is the cost of borrowing on credit cards or even more expensive lenders.
So, you have this huge difference, in affordability. This is where you’ve got to think about that distributional mix. I think at the top end, frankly, it should be via sticks: surcharges on council tax, if you haven’t got round to improving the energy efficiency of your house or things like that. For the great swath of middle Britain, what we need is our mortgage providers to add £10,000 to your mortgage, maybe with interest rates sweetened by some government guarantees to providers.
And then at the lower end, there will just have to be government money and subsidy. And we will need to do that, and we will need to work out how to fund that.
I would be amazed if Rachel Reeves is not thinking about significant increases in the vehicle excise duty for ICE cars. I think we should put back the fuel duty escalator. And I think nobody should be allowed to land a private jet in the UK without putting sustainable aviation fuel into it or paying a tax equal to the difference between sustainable aviation fuel and conventional jet fuel. And I’m sure there are lots of other ways to think about getting tax revenue out of people who have very high carbon footprints.
And the fourth area is global redistribution, which we’ve already discussed. There are some obvious sources for climate finance. Here are two. First, in order to win the argument for CBAMs [Carbon Border Adjustment Mechanisms], Europe and the UK should say that all the revenue we get from the CBAM will be devoted to climate finance in low-income countries. Or let’s take the idea that was put on the table last September in Nairobi by President Ruto of Kenya, that of a global carbon tax on shipping, with the funds hypothecated to support climate finance in low income countries.
To me, that is an absolute no-brainer. So, there are areas we could begin to create revenue sources that would also be valuable in driving decarbonisation.
MW: The Chinese have pushed resources into developing a robust comparative advantage in all these sectors, and some of it with subsidies. The reaction at the moment lies in these massive tariffs that Biden, of all people, not Trump, has imposed on Chinese EVs. And then we’ve got Trump in the wings. How does this play out?
AT: First of all, I think it’s really important to distinguish two things: a comparative advantage created by past forms of subsidy, but which is now structural, from a current subsidy.
When it’s the first category, let’s be clear, we all do that. The US got an advantage in everything to do with integrated circuits, because of support for the military and space complexes in the 1950s and 1960s. They turbocharged that development with government money, which then turbocharged a set of technologies that the private sector was able to turn into profitable products.
China has done the same. China has developed in each of these industries, what you might call “ecosystems”. By this, one means competing suppliers with huge capacity that are driving technological advances and learning-by-doing. When you assemble a solar PV panel, you have the cells, but you have many other different things that go into it — silver paste, aluminium frames and so forth.
And so when you are a solar PV manufacturer in China, you are surrounded by multiple potential providers, each of which is large enough to achieve economies of scale, and each of which is competing madly against all the others. All of that creates a huge structural advantage. Also, let’s be clear, this is not just about low cost. Chinese solar PV manufacturers are driving the cutting edge of solar PV technology. Companies like CATL and others are driving the absolute cutting edge of battery chemistry, etc.
Yes, it’s probably the case that the solar PV manufacturers who are selling PV panels at 11 cents a watt are pretty close to short-run marginal cost, and so you could say that is an unsustainable thing. But it’s down from 28 cents two years ago. I can tell you: if they were selling at 14 or 15 cents a watt, they would be making very large profits. What that immediately tells you is that 70 or 80 per cent of the cost reduction over the past two years is structural, rather than selling below the cost of production.
So, what do we do about it? We just have to understand there is a trade-off here. At one level, Europe and the US should aim to have a role in these industries of the future. On the other hand, today, if we say we’re not going to buy Chinese solar panels, we will increase the cost of decarbonising our electricity systems. If we say we’re not going to buy Chinese EVs, we will increase the cost — in particular, to low and middle income people — of the policy commitments we’ve made.
We have to think through a balanced response. And I think one can begin to define some principles.
One, I think it is reasonable to have elements of industrial strategy that say we want to have some of these value chains inside our economies. But when you introduce tariffs, introduce them on a factual basis, somewhat in line with WTO rules, which means trying to work out whether there’s something that could reasonably be called a current subsidy. Don’t just try and exclude a structural advantage.
I think the good news is that whereas the Biden 100 per cent tax on EVs is absolutely not that, what the EU has done does have some analysis behind it and has led to a differentiation between different Chinese EV manufacturers. And so, it is trying to do an element of tariff protection, but not to a level at which you’re trying to exclude them forever. That is principle number one.
I would say that principle number two is, broadly speaking, location matters, not ownership. If these Chinese companies want to own EV factories here in Europe, let them do it. After all, the UK automotive industry has been owned either by the Americans, Ford, the Japanese, Toyota and Nissan, or the Indians, Jaguar Land Rover, for decades now.
And remember that inward investment is one of the most effective ways of getting technology transfer. And here, I think I have seen, in the past year, the single most stupid example of shooting-yourself-in-the-foot industrial policy I’ve ever seen.
As the Chinese set out in the 1990s to develop a modern industrial base, they deliberately used inward investment and technology transfer to achieve this. They encouraged western companies to invest in China. They often encouraged them to form joint ventures. They subjected them to local content requirements. But as Chinese engineers learnt the new techniques, they achieved technology transfer.
There was a proposal over the past year for a technology transfer joint venture between CATL and Ford. Ford was going to have control, Ford was going to own the majority. The factories where the actual batteries were going to be built were going to be Ford factories with American employees in them, but there was going to be inward technology transfer from a country which has got ahead of America. That was stopped by political opposition to the very name, a Chinese battery company.
As an example of observing that you have a technological disadvantage, and then deliberately doing something which will cement it for the future, I can’t see anything more blatant than that.
MW: Last question. If you look at everything we’ve discussed, the optimistic view is that human intelligence and ingenuity have created a situation in which the challenges we confront are soluble. That’s the good news. But the bad news is that we’re going too slowly. And a significant part of the reason for that is politics. On balance, which do you think is going to win?
AT: Look, I’m an absolute technological optimist. The way I sometimes put it is that if a benevolent deity was above us, and if she was to send a squad of angels to steal about three quarters of our known fossil fuel reserves, so that we only had the amount we could safely burn left, we would over the next 30 or 40 years build a zero-carbon economy across the world. And once we got to the end, we would say that this was far easier than we had thought. That’s what I believe.
I think that the politics, the politics of nations, the distributional politics, the politics of international policy co-ordination, mean that we will get there far later than is ideal. If you had me guess, I still think we have a chance of limiting global warming to well below 2C. If you want to have a bet, I think it’ll be 1.8C, 1.9C. But I try to devote a lot of my energy to making it 1.6C rather than 1.9C. And between 1.6C and 1.9C, there are quite a lot of people who will die of extreme heat in the North Indian Plain. And there are tens of millions who will leave Africa and attempt to migrate north, away from desertification.
I think that, despite the politics, we will avoid the absolutely catastrophic 2.5C or 3C rise, but we will end up in a significantly warmer world than it would have been if we could solve these political problems. But we need to try and solve them as best we can.
MW: Thank you very much. You have presented the issues in a way that our readers will find fascinating.
The above transcript has been edited for brevity and clarity
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