Rishi Sunak’s proposals to adjust some of the timetables on the path to net zero have provoked outrage in many quarters. This is despite the fact that the UK has already made more progress than most countries in moving towards net zero.
We might usefully compare it to this time last year, when the public debate was over how people would afford to consume enough energy in the wake of the war in Ukraine. Now, in contrast, those very same commentators are concerned people will be consuming too much.
The anger is directed at a slackening of the targets for the reduction of emissions. The ultimate goal – of net zero by 2050 – still remains in place, but the intermediate ones were adjust to square them with the reality of our economic situation.
Last year, as the energy crisis set in, it was widely argued (and eventually implemented) that the government must provide massive subsidies so that households could continue to generate exactly the same levels of emissions as before. Without these, we would have had the same outcome as net zero targets which don’t take into account the cost: ordinary people out of pocket and unable to pay for essentials.
To be consistent, many of those now attacking Rishi Sunak ought to have welcomed the sharp rises in energy prices. Consumers would have had a big incentive to use less energy.
History provides us with an example of this. In 1973/74, oil prices quadrupled. Energy had previously been incredibly cheap. But the huge increases in costs incentivised companies to innovate. Through innovation, the energy required to produce a unit of output has fallen by over 50 per cent over the subsequent decades.
In survey after survey, respondents support the concept of net zero. But these are merely what economists describe as “stated preferences”. When substantial costs are involved in moving towards net zero, the population reveals its true preference. It likes the idea but does not like to pay for it.
For the avoidance of doubt, I think the achievement of net zero is a wholly desirable aim. Perhaps the sentence should appear in capitals to put it beyond doubt. But it is essential to bring the public along to ensure sustainable progress. And this is why the role of innovation is so absolutely central.
Imagine, for example, that nuclear fusion could be scaled. We would then have access to clean and unlimited amounts of energy without any of the potential side effects of current nuclear technology.
An important idea to encourage innovation is put forward by Michael Kremer, the co-recipient of the Nobel Prize in 2019, who runs the Development Innovation Lab at the University of Chicago. The concept is called “market shaping instruments”.
In traditional intervention policy, the state tries to pick a winner in advance, and subsidise that company or product. Instead, Kremer argues that funders should commit to subsidising future purchases of a new product. This leverages future demand to drive innovation now. A major advantage of such a market shaping instrument is that it can be open to all firms.
Kremer suggests that market shaping instruments can be particularly effective in promoting the green economy and addressing the issue of climate change.
In essence, this is what we had in place for the production of vaccines when the pandemic hit. Although there was no explicit commitment, it was obvious that governments would buy in large quantities any vaccine which was effective. As a result, innovation was rapid and effective.
The government needs to innovate in policies which promote innovation. It is only by innovation that public support for net zero can be maintained.