The UK economy will be larger, its households better
off, unemployment lower and its businesses richer if it chooses to
cut emissions. Say what?

Most studies show tackling climate change will be a
drag on the economy, but a new report from Cambridge Econometrics
is different. It says the UK economy would be 1.1 per cent bigger
in 2030 if it met its carbon targets, despite the costs associated
with decarbonisation.

To understand how it came to such a counterintuitive
finding, read on.

What the study found

The report found that tackling emissions would
be beneficial across the UK economy, from households to industry
and even the Treasury. Apart from the boost to GDP, it found there
would be 190,000 more jobs in 2030 if carbon budgets are met than
if no further action to cut emissions is taken.

It found that energy bills would go up by £127
per household in 2030 and that each home would have to spend
another £155 per year. But the cost savings from using less energy
would cancel out almost all of these costs.

In total, households would be £565 better off in
2030 because there would be more and better paid jobs. The
government would be £5.7 billion in 2030 better off because of
higher prices on carbon markets and increased revenues from VAT,
income tax and National Insurance contributions. These would more
than offset the reduced take from fuel duty.

The UK would also save £8.5 billion in 2030 on
oil and gas imports, a significant dent in the £58 billion spent in
2013. The study found that even heavy industry would benefit from
decarbonisation efforts, because there would be higher demand for
its products like steel in wind turbines and glass in double

What the study did

These results are surprising because most
economic models, including those developed by HMRC and those
referred to by the Intergovernmental Panel on Climate Change,
conclude that cutting emissions will be a drag on the

For instance, the government’s Committee on
Climate Change says meeting the UK’s carbon budgets would cost 0.5
per cent of GDP by 2030. As the Cambridge Econometrics report says,
it seems intuitively appealing to assume that decarbonisation
efforts would lead to a loss of GDP.

So how does its own analysis come to the
opposite conclusion, that tackling emissions will be good for the
economy? It explains it like this:

“Macroeconomics is
concerned not only with costs, but also benefits, since any
transaction is a cost to the buyer and benefit to the seller…
changes to the energy system do result in slightly higher costs but
they also change the structure of the economy with net

That sounds pretty easy to understand. But to
really see what’s going on we need to dig deeper into the opposing
economic world views that lie behind the opposing

Economic world-views

One of these world views is exemplified by
George Osborne
that public spending crowds out more
dynamic investment by private businesses. According to this view,
the market always ensures that money is perfectly allocated to the
most productive areas of investment.

That means it isn’t possible to increase
investment in one sector – like energy efficiency – without
reducing investment elsewhere. The more productive investment is
said to have been ‘crowded out’.

Another assumption in this economic view is that
everyone who is willing to work at the market wage will be able to
find a job, so that no-one is unemployed unless they want to be.
That mean jobs created by a low-carbon transition can only come at
the expense of losing other, more productive jobs

The report sums up what this means:

“The assumptions [in
this world view] mean that low-carbon policy intervention will
always result in GDP losses: the baseline assumes an optimal
outcome, so any departure from this baseline will incur a net

Put simply, if you start from the top of the
mountain there is
nowhere to go but down

These assumptions might sound like a bit of a
stretch. It implies that all policy interventions – not just
decarbonisation – will be bad for growth. An exception might be
cutting taxes or regulations that distort the market.

Cambridge Econometrics associate director Phil
Summerton tells Carbon Brief that even though there are known
deficiencies with this economic approach it is supported by many

Indeed this same approach
lies at the heart
of the economic models
that show decarbonisation to be a drag on growth, as well as the
Treasury’s model of the UK economy.

Cambridge Econometrics takes a different
approach. It does not assume an optimal baseline with perfectly
allocated investment and only voluntary unemployment. Instead it
uses real information on the behaviour or individuals and
organisations based on the last 30 years of data, to gauge how the
economy might react to policy change.

As a result, it finds that a well-designed
climate policy can boost GDP and reduce unemployment by
transferring spending away from oil and gas imports towards more
labour-intensive domestically produced goods in the low-carbon

It says:

“This transition [to a
low-carbon economy] means that UK businesses will benefit from
increases in demand, at the expense of countries that export oil
and gas to the UK.”

Fighting austerity, cutting

Unfortunately for those pushing a low-carbon
agenda it is George Osborne’s outlook – the one behind government
austerity measures in the UK and around the world – that has been
in the ascendancy in recent years.

WWF commissioned the report from Cambridge
Econometrics as a way to push its preference for strong climate
action. Can it hope to succeed in this strategy when the economic
model it relies on seems to have been
roundly defeated
in policy

WWF head of climate and energy policy Nick Molho
tells Carbon Brief:

“I’m quite optimistic on
where government is on this. We’ve had more and more engagement
with Treasury officials interested in different [economic]

He says that if the whole of government rejected
the Cambridge Econometrics approach, then it wouldn’t have

confirmed the UK’s fourth carbon budget

Molho thinks this alternative economic outlook is
gaining traction, though he admits that change will take time and
is gradual. Already much of the current debate in Europe recognises
that those arguing for ever more government spending cuts are
failing to present a long-term narrative for the future, he

It is here that the argument for the low-carbon
transition can step in, he suggests, offering the prospect of
investment now to drive more competitive and faster-growing
economies in future.

Molho says:

“In Brussels we’ve
really noticed renewed momentum around interest in

The debate over whether the low-carbon
transition is a current cost or an investment in the future has
loomed large during discussions of the
EU 2030 energy efficiency target
. So far,
there have been moderate gains for those who see it as an
investment – a slightly higher than expected 30 per cent goal has
been put forward by the European Commission.

The UK election next May is another source of
optimism for Molho. He has presented his positive arguments for the
benefits of climate action to all three major parties and argues
the thinking can be adapted to each of the parties’ political
philosophies. If he’s right, maybe we can expect to see a renewed
focus on climate in the May 2015 manifestos.

For now, the government is backing climate
action even though it officially thinks it will be costly,

that the avoided climate damages
justify those costs. How much easier might it be to secure strong
climate action, if governments thought that action was economically
beneficial in its own right?