Are our Economies Ready for Climate Change?

Welcome all to this Meeting Minds panel event on, are our economies ready for climate change? I'm Jean-Paul Carvalho. I'm an economist in the Department of Economics at Oxford, a fellow of New College, and co-director of UBEPP, which is the phenomenal executive education program that's been run out of the Department of Economics for 70 years. Meeting Minds is a forum for alumni to get an idea of the Oxford perspective on the largest and most pressing issues of our time, and this is one of them. The economic perspective in particular on this issue of climate change I think is critical. I was a graduate student when Nicholas Stern presented the Stern Review on the economics of climate change in the Department of Economics, and that was instrumental in making the future costs of inaction salient in the present. The economic analysis was really instrumental in that, and here we are 18 years on and we're discussing, are our economies ready for the, you know, for climate change and the adaptation to it, both climate shocks and also the regulatory adaptation? We have a fabulous set of panelists today. Firstly, from your right to left, and in that order I'll ask some questions. Andrea Kevary, who's Associate Professor of Economics at Oxford and at Christ Church College. He's a macroeconomist working on technological progress, market power, and climate change, among other things. Secondly, we'll have Banu Demir. She's Associate Professor of Economics at the University of Oxford and at Brasenose College. Banu is an expert on international trade and development economics and the intersection between them, and I'm particularly keen to hear her ideas on how climate change and regulation will reshape the pattern of international trade. And finally, last but not least, we have Robin Nuttall, who's a global leader at McKinsey working on ESG and regulation. He's an internationally renowned expert in this area. We're very keen to hear what he has to say on the business side of things. Robin did his doctoral work at Oxford, spent some time at Harvard, and did his undergraduate work at A different institution, unfortunately. And I'm delighted to be here with you today and to introduce this outstanding panel. I'll start with some questions for each of the speakers. That'll go for about 30, 35 minutes, and then we'll turn it over to you, and there'll be a mic going around, and we'll discuss that at the time.

Okay?

Fantastic.

Okay.

First set of issues, the macroeconomic side of things, Andrea. From a macro perspective, what are the estimated costs of climate change, and what are the nature of these costs, and how will they be estimated?

Okay, so let me start from what are these costs so that we can understand then why they are large and how we measure them. So we project that there will be many different types of costs that we expect from climate change on the economies. Among those, you can think that we expect climate change to bring big disruption to infrastructures and capital. So we estimated that climate change would increase the depreciation and the durability of capital that is installed in our economies. And you can think of this as things like we have types of capital that are not meant to work at certain temperatures or in certain environments. Think about lithium batteries that they can't work above certain temperatures. And the same goes for other inputs like labor. Like we know that there are huge physiological costs on workers coming from extreme temperature and extreme weather events. We also know that extreme temperature increases accidents at work and absentees. But what we start to understand more and more is that climate change will trigger huge reallocation of inputs in our economy. So we don't expect climate change to affect regions in the planet equally, but we expect to affect them unequally. And we expect huge migration from those areas that are most affected to those that are least affected. So this means relocate an incredible amount of workers and people away from the most affected areas and move our structures, our buildings elsewhere to undertake production. And these are the sort of costs that we envision. So just to give sense, under a moderate climate scenario of one— an expected increase of 1 degree Celsius over the next 50 years in temperatures, we expect an economic cost in terms of GDP losses that goes from 1% to 3%. And this is a very, very conservative scenario. So just to bear in mind and to interpret this number, this is one order of magnitude larger than economists think the cost of business cycles, of recessions, So just to bear it in mind, it's 10 times larger. This is how I would frame the kind of costs.

How would these costs be distributed across the developing and developed world, do you think?

So this is very important and goes back to the point that we expect climate change to be very unequal. And one of the facts that we don't expect the effect of climate change to be linear in the way of temperature interact with economic activities. So we expect that an average scenario of increasing temperature of around 2 degrees Celsius in the next 50 years or so, and think about this as an average scenario, which is very different if your average temperature in a country is 15 degrees and you move to 17, or if your average temperature is 28 and you move to 30s. And now we know that most developing countries are in areas which have much higher average temperature, so they are nearer the equator. So we expect those countries to suffer much larger losses, but on top of that, we also know that these countries have a much smaller fiscal capacity to counteract much of these disruptions that we expect. So this will be an extra margin that we expect to increase or further exacerbate the climate change losses for developing countries.

You know, there are various policies that can be undertaken, and we'll discuss, you know, some of them in detail today, but from a macro perspective, can you tell us, you know, what are the projected, you know, cost savings of this? So these estimates are, you know, contingent on various things like discount factors and, you know, a lot of technical details, right? But what is your assessment of the estimated costs from action to prevent some of these effects that you talked about?

Well, I think this goes back to your first question, because we care about the cost of climate change in the way they inform us about the cost-benefit analysis out of policy. So when we say that we expect climate change to affect our economies and to lower output by X percent, this means that policies will save us from those costs. And they will carry other costs, and we trade off between these 2 things to understand which policy will or will better suit us to counteract climate change. So normally we think about climate carbon taxes as one of these policies, and this is because we expect that carbon taxes will increase the cost of emissions, and this will avoid the rise in temperature that we were talking with the associated costs. So this is more or less what are the costs that we are gonna save out of—

I see. So one thing that has been a constant source of debate, and I don't know if you want to comment on this, but since the Stern Review, and that is how do we trade off the present with the future, right? We're going to undertake some costly measures in the present and then there is going to be some future— we're going to avoid some future costs, right, and risks in the future.

Yes.

And there have been various approaches to that. One is, you know, we discount the future in a certain way, and there's a debate how ethically, how do we discount the welfare of future generations, right, relative to our own. And that was a key part of the Stern Review all those years back, and that's still a common issue. Another approach is a kind of insurance approach, right, from a macroeconomic perspective, and that is there could be these catastrophic tail risks if we don't take action. We don't know, but we want to take measures to insure against those at least, okay? It's hard to project many years ahead, but we can at least try to rule out some of these catastrophic tail risks. So how would you—

yeah. I think this is very important, and like, it is important to realize that despite there are very different ways to take into account intergenerational costs of climate change, and as well as We think about these tail events, for example tipping points and things like that. At the end, all boils down to reducing the cost as much as we can with the available policy tools, and if possible, to avoid finding ourselves in a scenario where these things materialize. So when we talk normally through Econ 101, what carbon taxes do, they lower the incentive to emissions. Okay, so we don't turn the heater on as much because it's much more costly because this cost internalizes social cost of carbon emissions. But it's very important to understand that this is only a part, moving quantities to reduce emissions. The other is to incentivize technologies to avoid the unfolding of climate change. So we need new technologies. And carbon taxation goes as far in that in the sense that makes technologies that are so-called brown, so high in emissions, much less profitable.

So—

much more costly, but we may want to think about subsidies to speed up the incentives along the transition for green new technologies that substitute away from the existing ones.

Fantastic. Thank you, Andrea. On that note, let me turn to Banu, actually, on comparing the various schemes there are for tackling climate change. So Andrea mentioned subsidies. The US has been primarily geared towards subsidies for new technology, new green technologies and so forth. The EU has this CBAM, this carbon pricing scheme, and China has a totally different scheme. Could you talk a little bit about the difference between those?

Sure. So to talk about CBAM first, probably I need to talk a little bit about European emissions trading system because that was the starting point. So what EU does is they have identified a few very carbon-intensive industries, and they have established this what we call cap-and-trade system. What happens is we know what the carbon budget is, so the industry is allocated a certain amount of allowances to emit carbon. Of course, in the industry there are clean companies, clean producers, and dirty producers. And then trading part comes from the fact that those dirty companies, when they are out of their allowances, they need more, so they can purchase it from the clean companies. That is how it works. So if you're a cement producer located in the EU, then you have to— you are part of the European emission system, so you have to track your carbon emissions, and if you're out of allowances, you have to purchase it. So this imposes obviously extra costs for producers in the EU. So what the EU authorities decided later in 2021, so we need to level the playing field between, for the EU producers, because they are facing these costs and they are caring about environment, but at the same time they are facing unfair competition from other countries because cement producers in Turkey— I'm from Turkey, so I can name names— so cement producers from Turkey are not facing the same cost. So what happens is, oh, why would I bother? I can just import cheap cement or iron and steel from Turkey so I don't have to pay these costs. So, this is what we call leakage. So, leakage means if the policy, climate policy, is unilateral, it's only implemented by one country or a group of countries, then businesses find a way to relocate their production to countries with weak environmental regulations because it's cheaper. So, as long as any policy, any climate policy is unilateral or clubby, there will be leakage. There is no way to prevent it. But at least European Union took a big step in 2021 and said, okay, so it's not only for leveling the playing field, but also we don't want leakage. Yes, our production has become cleaner thanks to the emissions trading system, But if you look at EU's consumption, it has become dirtier. Because at the end of the day, they were importing the same products, even dirtier ones, from other countries whose production is even dirtier than an average EU producer's. So CBAM, Carbon Border Adjustment Mechanism, is doing the border version of the emissions trading system. So starting from January 2026, if a company wants to export, say, iron or steel product to the EU, then the European importer has to report the carbon emission embodied in that product or by the producer. And if it is above the allowed threshold, then there will be a financial cost, as in the case of emissions trading system. So, is this good? It is definitely a right step, but will it be effective in preventing leakage? Probably not, because the Turkish producer can always export to the US, because US doesn't have CBAM, right?

Hmm.

Or Turkish producer can simply move its production elsewhere, I mean, make it cheaper and compensate for the increase in financial costs at the European border. So what we need if we want to prevent it, I know it sounds infeasible, but we need a global action. So climate change, carbon emissions is a global public good. So any regional or unilateral policy will not be able to address that. What we need as a climate club that will involve every country. That's the only way to prevent leakage, but I have no idea how to achieve that.

You spoke about responses, right, to the policy that, for example, Turkish cement manufacturers could take. How is the carbon impact of the production estimated, for example, for Turkish cement, and can games be played in that At that level?

So it depends on how dirty the production is for the producer, but some estimates go up to like 30%. And remember that tariffs are only like 3-4% on average, so these are pretty big financial costs. Now the problem is also reporting and monitoring.

That's right.

So for most of the exporters of these products to the EU, so these producers are not currently tracing their carbon emissions. Unfortunately, they don't even know how to do it and they don't have the means to do it. So what we are expecting, a producer in Mozambique, in Turkey— so Turkey is better, it's a middle-income country, but the ones that will be most affected actually are not the biggest producers, but the producers biggest exporters of these products to the EU, like Russia, Turkey, China, India, because these countries have very diversified export portfolio. If they don't export to the EU, they can export somewhere else. If they don't export iron and steel, they can export some— something else. But for some very small low-income countries, their exports of CBAM-affected products the EU account for a big share of their output.

Hmm.

So they are the ones that are most vulnerable, and they definitely need help, not only financial help, but also technical help to be able to prepare themselves for CBAM. We are expecting these small-sized producers in low-income countries to understand what climate change is. what carbon emissions are, how to measure it, how to report it, and how to reduce it, which requires investment. So that's a pretty big ask, I believe.

Yeah.

And that's probably one of the reasons why there's a long transition period for CBAM. So reporting has already started, but the financial burden will only start in January 2027. Probably EU authorities want to see how things are going, what else needs to be done. So we will all see.

Sure.

How is it— could you talk about the Chinese scheme?

Sure. So there is a way to avoid CBAM or taxing. So if you have a carbon market in your own country, if you can show that you are paying tax, the cost of emitting that carbon in your country, then you don't have to pay to the European countries. So that's one good motivation, I think, or one good potential consequence of CBAM. So some of these countries may actually establish their own carbon markets because governments can at least collect their tax revenues, right, instead of leaving it to the EU. But the Chinese carbon market works a little different from the European one. So it's pretty new. It was established in 2021, and they're constantly revising it. But currently it is only covering the power sector, while the European emissions trading system is covering other industries like aluminium, cement, iron and steel, so the usual suspects. And the second issue is the Chinese carbon market is more business-friendly because there the allowances are allocated based on carbon efficiency of production rather than absolute carbon emissions. So what is the difference? So the difference is There's a certain amount of carbon we can omit to be able to hit the climate target by 2050. Here it doesn't really matter whether we emit carbon in an efficient way or not. What matters for the temperature increase is how much carbon we have accumulated by 2050. So that's why European emission system is based on absolute carbon emissions, and it gives great incentive to producers to switch to renewable, greener, greener sources of energy. The Chinese one, on the other hand, is based on efficiency. What is efficiency? It's how much carbon you emit per unit of output. You don't have to do anything to change the numerator. If you find a way to increase your output for some other reasons, You will become more energy or carbon efficient, and you won't have to pay tax, or at least you will pay less cost, right? But at the end of the day, you will be emitting a lot of carbon, and you will be using the carbon budget. So it's not environmentally friendly, but it is very business friendly. I don't even know whether the European authorities will count even the extended version, sectorally extended version of the Chinese market as an eligible one.

Okay, fantastic. Thank you very much, Banu. Let's turn to Robin. Robin, do business leaders see genuine value in decarbonization? I know, you know, there have been big efforts up until now, right? We've been talking about the history of thinking along these lines. the next phase of decarbonization can be quite costly, right? So is there, is there a genuine— do business leaders see genuine value in this? How are they dealing with the higher costs of this next phase of decarbonization?

So I'll talk about the good news first, Jean-Paul, and then I'll hit you with the challenges, as you will. The good news is that business leaders do see clear sources of value creation from decarbonization. There are 3 of them in particular. One is cost impacts, the second is green premium and new customers, and the third is avoided carbon taxation. So if I give an example, if I invest in switching electricity to renewable sources or if I invest in heat pumps, then I will typically drive down my ongoing operating expenses, and that's very compelling to a business. Effectively, I'm becoming a more competitive business through that investment.

Yeah.

The second component is that in some segments, if I invest in decarbonization, I'm going to be able to capture a green premium, so effectively a higher price. If you look at sustainable aviation fuel, that's priced at essentially 100% above jet kerosene. So it's double the price of jet kerosene, and yet there's enormous demand for it. Green ammonia, again, around about a 100% premium over the traditional product, if you will, because there is a very high demand for green materials now because the world needs to decarbonize. So if you can actually create a green product, then you can reap some premium and value from that, and you may tap into new consumer segments as well. If you look at the development of plant-based food and, you know, plant-based burgers and, you know, steaks and so on, you look at Gregg's vegan sausage roll, which is one of the most successful product launches in this country in the last 10 years, that is effectively addressing a new market which nobody really knew existed. So that's the second source. The third is avoided carbon taxation. So if I take steps to decarbonize then I pay less tax. And it's very interesting to hear Bernie talking about CBAM. You know, many companies now outside the EU are saying, hey, given the introduction of this CBAM, if I invest more and get down the carbon curve, then effectively I'm going to pay less tax, or the imports are going to pay less tax, and there's a value in that. There are, of course, softer benefits from decarbonization. Improves my license to operate, my relationship with the community, but there are very tangible business benefits. So that's the kind of good news, if you will, about decarbonization. The challenging news is that much of the low-hanging fruit has been taken by now. So many companies, most companies have reaped energy efficiency opportunities, switching to renewable energy through PPAs, purchase power agreements, and now we're into the tranche of much more difficult decarbonization. So do I switch to biomass, for example, if I'm a mining company? Do I install and invest in heat pumps? Do I invest in carbon capture and storage? Unit cost of carbon capture and storage at the moment is between $500 a ton and $1,000 a ton. So do I invest in that? These are very, very costly investments.

Yeah.

And at the same time, the demand side of the equation is challenged. You may have seen today that European sales of electric vehicles are down 30, 40% in some markets. The transition, you know, is under challenge now, and there's a retrenchment, if you will, to traditional products, you know, given developments, largely geopolitical developments, in the last 3 or 4 years. So it is a very challenging next wave that you're going to to see for businesses. And I think it just reinforces, you know, the need to have the right incentives in place for the businesses to make these investments. The other bit of good news, if you will, is that we've looked at all the climate technologies that are needed to get to 2050. 80% of the technologies to get to 2050 are known today. So they're known today— offshore wind, onshore wind, green steel, Green ammonia for agriculture fertilizer, different techniques in carbon capture, reforestation, and so on. Those are known today. The challenge is that they are very niche and they're not scaled. For example, I talked about sustainable aviation fuel. That's less than 0.5% of the market today. for fuel. If you're going to hit net zero by 2050 in aviation, just to take that example, you need to have 90% SAF by 2050. So effectively, you have to have moved away from jet kerosene entirely. As with vehicles, you have to have moved away entirely from petrol and diesel by 2050. So you need truly massive scale of investment, and that's why I think these incentives will be absolutely critical.

I see. Now, during COVID one of the, you know, a key issue was how robust are our global supply chains, right? They broke down in various ways. I lived in Southern California at the time, and you could look at the Long Beach Port and see the, the queue of ships, container ships trying to, you know, trying to get in, sort of a months-long queue. Do business leaders see that global— that climate shocks could disrupt supply chains, that we need to build a more— a supply chain system that is more robust to climate shocks? And if so, what are they doing about that?

Yeah, they're absolutely, you know, becoming more and more cognizant, I would, you know, I would say, in recent years. And one strategy is effectively to diversify your supply chain. So previously, you might have had your manufacturing in one low-cost country. You're now seeing more diversification to different countries. You've seen the growth of Vietnam. You've seen a return to Mexico, for example. So having a more diversified supply base, given the potential shocks, which could be climate shocks, they could be policy shocks as well, right? But you certainly, you always now have to have a plan B, not be reliant on one plant in one market, for sure. That also increases costs, by the way.

Yeah.

Relative to having one very low-cost plant.

Is there vertical integration that's going on as a result of that? Like, for example, at the time of COVID Home Depot, which is a US hardware store, sort of bought— started buying its own fleet so that it could get its, you know, goods from wherever it was being produced in a way that didn't rely on the global supply chain, so it was more robust to shocks.

You're seeing some greater degree of vertical integration, but the real game changer is the development of long-term offtake contracts.

I see.

So just as one example, which is in the public domain, Air France and KLM have written a 10-year forward contract with Neste, which is a supplier of sustainable aviation fuel. So effectively, from an economist's point of view, that gives you a 10-year demand curve as a producer of sustainable aviation fuel, which means that you can then invest very heavily and get down the learning curve. The learning curve that you've seen in solar and offshore wind in the last 10 years has been very, very steep. Those technologies have come down tenfold in unit cost, if you will. So the key is, how do you break the chicken and egg? At the moment, sustainable aviation fuel is very high cost because it's very low volume. Once you have massive volume, you ride down those learning curves. And that's what this new system of kind of offtake, long-term offtake contracts can engender.

I see.

So these big investments that you talk about, they're going to require leadership, right? It's not that everyone is going to make the first move, because if you make the first move and you're wrong, it's much more costly for you in terms of reputation, etc., than if you, you know, move with everyone else and you're wrong, or you have got— where do you see the leadership coming from?

So there's a fundamental strategic question now, which is Is it an advantage to be a first mover, or is there a first mover disadvantage, if you will? And effectively, to believe that I'm a first mover and I have an advantage means that I effectively get preferential access to green materials, I get the first access to customers, and I move the industry. So again, another public example of this in container shipping is Maersk, the world's largest container shipping company, which has made a big bet on bioethanol, and effectively they're betting that they can bring the whole industry and supply along with them.

Yeah.

You're seeing the same thing with DHL, by the way, in the world of logistics, in fuels, biofuels. And effectively, the bet there is that by going out very strongly, I will drive down costs, I'll get preferential access to sources of supply, and I'll get preferential access to customers as well. However, a lot of businesses see the risks of being a first mover advantage, which is that you're the person who is lumbered with a high-cost technology that doesn't work. For example, there's a lot of question marks at the moment about hydrogen in transportation. So do you want to be the first person who's installing green hydrogen buses in your city? That's quite high risk from a decision-maker point of view. So there's always this question of you know, where should I be a first mover, or am I better off, you know, effectively being a fast follower or a cautious follower?

Well, we've spoken— Banu spoke a bit about China, and a lot of what we're talking about is not invariant to policy moves in China, right?

So what do you think will be the impact of China on the various issues that we've I can just say a few words about the business aspects in China, which is the extraordinary investment and progress in climate technology. So China has the top 10 out of 10 solar manufacturing firms. It has the top 6 out of 10 battery firms. The other 4, by the way, are in Japan and South Korea. It has the world's largest EV manufacturer. It can produce, you know, an electric vehicle now for $14,000, right? It's not something that you'd find in your local Oxford dealership. So the scale of investment and progress in climate technology is quite breathtaking, and it's going to, you know, be, you know, quite fundamental to the economy globally.

Okay, fantastic. Thank you, Robin. Let's turn it over to you, I think Emma will be going around with a mic. I will take questions for the remainder of the time. I ask you to keep the questions, you know, short and sweet and to be genuine questions. I really look forward to them. Hands. It's relatively easy to talk in general terms.

about the technical things, the economic things, the political things, the intercontinental things, and whatnot, but history seems to show that it really—

the rubber hits the road when you go from the words to the numbers.

How near are we getting to actually achieving any of these great ideas, and how much are they still just great ideas?

Robin, do you want to—

So I'll just give a couple of examples. I think that, you know, there is pockets of good news on progress towards net zero. If you look at the United Kingdom, emissions are actually down largely because of the switch away from coal-fired energy production. We are seeing enormous investments in solar that you can look at the numbers, but the growth of solar and even offshore wind, which some years back we weren't confident whether that was a long-lasting technology or transitional technology is now very much cost-effective. So there are pockets of good news. I think when the Committee on Climate Change published its most recent report, just with a UK focus, it said that we are behind. So pockets of good news, but overall we are behind on on progress, essentially because of this challenge of not scaling, and very fundamental investments like the switch to heat pumps, you know, are way behind, you know, around in UK residential properties. So I would agree completely that when you start to look at the numbers, there are some challenges that emerge, but there are some pockets of good news as well.

Emma, do you want to— should we come down here? And then we'll take it. Go for it.

My name is Aisha. I'm a senior lecturer in finance and economics. Actually, my question is on the government's readiness for climate change and especially on the adoption of electric cars globally. Actually, recently, most Car company, electric vehicle producers—they switch from producing electric cars to hybrid cars due to reducing demand in electric cars. Why? And it—it's because the lack of infrastructure, sufficient infrastructure in most of the countries, because there is no stations. And most countries, for example, like Brazil, Latin American countries—it's hilly and it's not. Easy to set up infrastructure which enables the increased number of the use of electric cars in their countries. So instead of these, I think, I feel like, and as far as I'm aware from the scholars' views, being ready or preparing for climate change Using technology is sometimes, like in the electric cars use, is not that efficient. Instead of focusing on technological changes in order to adapt or mitigate climate change effects, why governments don't use economy to change attitudes and behaviors of Public, because most of the carbon dioxide emissions comes from human activities. So, for example, car-free days, the penetration of the use of bicycles. Why economies are not or governments are not focusing on policies that could you just clarify the question?

So, so, so you're talking about Vanna, did you instead of focusing on technology?

Yeah. Why it's not new? The policies are not why economies are not preparing for, for example, remote working in order to reduce the use of public transport. Thank you. Yeah, thank you so much. Thank you.

So, I mean, okay. So under the stated policies, so if you just take into account what governments have committed as of 2021. We are still way behind the target, first of all. So we need to do more. So that's also going back to the earlier question in terms of like how we are doing with numbers. But I don't agree that most of the carbon is actually coming from, oh, we take bus and we travel. So if you think about it, iron and steel alone, accounts for close to 10% of global emissions. This is a huge number. And what we have realized is, so what you said is right, but it is not enough. So we need technology to change, and we need to change human behavior and behavior of businesses, so responsiveness, right, to switch to new, better, green technologies. They don't have to be efficient. What we are trading off is not, oh, what is the most efficient way of doing this right now versus, oh, so this is not so efficient. This is going to reduce my output now. So we are trading off today with tomorrow. So what we understand for— so what we mean by carbon budget is it is what we do now, what future generations do now, and as we delay mitigating it, adaptation will be more costly. So this is a very long-term phenomenon. That's why we need to change behavior and we need to change technologies. We need to change sources of energy right now. If we change now, it's gonna be easier to change it tomorrow. So it's going back to Robin's talk. Because so if you create scale, if you create sufficient demand, it's going to be easier for the next business or for the next person to switch. So that's why we need to create that mass or this dependence, path dependence.

Thank you.

That's how I see it.

Sure, fantastic. Emma, do you want to— whoever's next.

Thanks very much. My name is Jethro. I'm not an economist, but I work with a lot of economists, so this is really a question for you all as economists. You were talking at the beginning about some tail risks, the possibility of perhaps a little further into the future, end of the century, very catastrophic climate change, 3 or 4 degrees, the collapse of, you know, certain ecosystems and certain supply chains. And that gives you a point on the graph, if you like, for our loss function between temperature and, and GDP, a very nonlinear function. So the challenge that my colleagues get a lot is that from other professions, risk professionals or scientists, they really don't recognize the numbers that economists are coming up with about the costs of climate change. They seem much, much too small. You, you were only looking, I know, 30 or 40 years ahead with that 1 to 3%. But that really— there seems to be a big disconnect. So I wondered, have you been exposed to that challenge? Do you have a response to it as economists?

André?

Perhaps I should say something on this. So there is huge variety on the numbers that are reported, as there is huge uncertainty how these costs will manifest and how they— where they manifest themselves. So, and I see since we talk about learning curve, we are getting better and better and better recognizing this cost. So I see that they getting higher and higher and higher. The divergence between what we do and what people coming from natural science and this kind of fields find is also at the kind where we zoom in. So normally when you see these very large costs of climate change, they look into mortality, then into biodiversity and all these things that we sort of value, but economists wouldn't put immediately in their loss function. Not because we don't recognize as important, but because we, we see those things as not our core business. So when we say these are the economic costs, these are really the daily basis economic costs for our economies. These are not the human welfare loss function in a sense. So I would see this distinction as as a big part of these different numbers.

Over there, yeah.

My name is Claire. I am not an economist, although I read some economic articles. I wondered if you could comment on the political side of things with the upcoming US election. Is the momentum at state level going to offset or in any way mitigate what might happen at the federal level in November?

Who wants to tackle the US election? The— Vanu? Yeah.

I'm not a political scientist, and let me I mean, I don't know what's going to happen in November. There's no way. But even the current US policy is not really promoting global sustainability, I have to say. So if you think about the Inflation Reduction Act, it is— I mean, it looks like good policy and it is a good one. So it's subsidizing green investment, providing a lot of incentives and so on. But at the same time, it's imposing a lot of restrictions on trade. So according to many people, it is actually delaying progress in terms of environment, in terms of fighting climate within the US, because what it does is— so it is imposing tariffs and restrictions on the movement of cheaper materials and inputs for the production of green products. If you think about it, China is doing the same. And this is sort of a second game between US and China after 2016, after the US-China trade war. So, they did it before, and now they're doing it again. And this is quite bad. So, I don't know how worse it can be. after November or better, but even the current policy is not really facilitating global— even domestic sustainability within the US. So the counterfactual could be much better.

Let me mention one thing, as taking my prerogative as a chair. My field is political economy, though not related to climate change, but let me mention one thing. What you're getting at really is this kind of popular backlash to some of these policies that are going on, especially policies that are imposed on the consumer side. And my sense is that part of this, and something that hasn't been— is not being fully addressed, is that part of this has to do with the fact that various policies have distributional implications, and in fact the burden can fall on low-income earners disproportionately. So that would suggest that the policy packages have to be designed and communicated as packages with redistribution in mind as well, so that it doesn't seem like this is, you know, that this is going to have very adverse distributional effects, and that will increase the buy-in to some of these policies. That's just my very simple suggestion from a political economic point of view. Yes. We'll go this side, this gentleman here.

Thank you.

Thanks.

Just picking up on something that Robin was saying earlier on, I wonder if you'd like to make some comments on how we balance the sort of the obvious risks of climate change against the other risk of becoming very, almost totally dependent for our resources on Robin, do you want to? I mean, from a resourcing perspective, you know, there are still various, you know, global markets remain absolutely critical. So, for example, Brazil and Indonesia, for the production of biomass and reforestation, absolutely critical. For the production of resources, obviously Africa, Canada, and so on. So I think that there is a global distribution of different resources. If you think about the critical resources needed for the transition, so lithium for batteries, copper for grid, for example, biomass—

Cobalt.

Cobalt. Cobalt as well, again, for electrification. They are distributed in different countries globally, and not just in one market. But clearly, you do tend to see some concentration in the ownership of those resources. But it's not only a question of, you know, of those resources being in one country, in China.

Okay. At the far— if you can reach over there.

Thank you.

I just wanted to pick up your point about redistribution and looking towards the budget in the UK and fiscal policy and the sort of opportunities there are about leveraging behaviours And having the fiscal opportunity, whatever, fall in a redistributive way, and price signals for— being talked about volume of air travel, you know, the more you fly, the more you pay, and these kind of ones that could be seen to be quite redistributive, quite popular in that sort of sense, whether that would be something that you've considered.

For me? No, I didn't want to inject. You started this. I'm just chairing this. But I think my— well, I don't know how I got called upon to comment. I shouldn't have interjected myself.

Sorry.

But I think that seeing these things as not separate, right? This is a very broad philosophical point maybe, but we divide the world into various separate silos, separate spheres. And we do that in a university. We have an economics department, we have a political science department, we have engineering department, etc., we have biology, and then we have, you know, but we have bioengineering, right, at the intersection of that. And so we tend to think of things as separate. We're talking about climate change now, but that's not just necessary, that's not entirely independent of our broader public finance needs and also the broader political feasibility of various policies. We have to think about these things as packages. That's my only kind of simple point, that these are not separate things. Redistribution— to have these policies not be seen as regressive in the sense of taxation policies, right? That means that the burden is falling disproportionately upon the low-income earners. If that can be reversed, then there'll be much more buy-in. That's fine. Okay, lady in the white here.

Hello, thank you.

I wondered if you can answer your own question about are our economies ready for climate change, and are there any countries that you would say their economies are ready, or would it have to be a region Or does it have to be global?

That would be the first time the question on the in the title would have been answered at one of the things. So, but yeah, thank you. Okay, who would like to answer?

Anya. I can give it a try. I don't think any country is ready, and as I as I try to explain, climate change is global and it's a global public good. So there is no way one country can say, oh, I'm done with it. So this carbon budget is not allocated between countries. So it doesn't happen. It doesn't really matter where we emit carbon. So it's going to be— it's going to end up in the atmosphere and it's going to increase the temperature. So that's why international cooperation is key here. So, instead of imposing more protection, particularly on critical materials or other inputs that can be imported cheaper and that will facilitate or speed up the transition, instead of doing this, if you say, oh, I'm going to do— I'm going to be leader, so I'll protect my domestic industry so it's going to grow, become more competitive. So that thing doesn't work anymore. And if we start from there, then there is no way we can move to a world where all countries belong to the same sort of climate club. That's what we need. So we can't exclude anyone. So a climate club without China, a climate club without the US, it will not work. As I said before, there will always be leakage. And if you look at the projections of where industry is moving, so it's very easy for advanced economies to say, okay, so I'm reducing my carbon emissions. Of course, because advanced economies have— are focusing on services. Services is green. It is clean, relatively clean. And if you look at where the industry is moving, like metals or more, most carbon-intensive industries. So the projections say it's going to end up in Asian Pacific regions, and these countries are using coal. So if we don't stop this movement, if we don't do something for these countries to make the transition, it's not going to work because it doesn't matter whether the carbon is emitted in Africa or in the US. It's gonna end up at the same place and it's gonna cause the same consequence.

Okay, we'll take a question over here on this side. This gentleman behind there.

So I'm a climate venture capitalist, so I do believe in the technology solutions here, but my biggest worry is for them to have impact at the mega-gigaton scale, it feels like the private capital markets have failed. If you look at the 9,000 London red buses, I think we've managed to replace about 3% of those to fully electric. If we feel so dependent on capital, private capital markets to stimulate that change, what's going to happen for public sector state intervention to sort of bridge that chasm for new technologies to be adopted?

Robin, do you have any thoughts on this?

So, I mean, obviously I defer to your deep knowledge of the investing space. I would just observe that for many of our clients, you know, who are global multinational companies typically, there is financing available for climate investments, you know, which have some prospect, right? So in other words, the bottleneck for making that investment, at least in the space where we operate, is usually not the lack of availability of the financing. It's usually some other bottleneck. So I think as the lady said, you know, do you have the right infrastructure for EVs? That sort of kills the business case almost immediately if you don't have it.

Hmm.

You know, do I have the right policies on climate, you know, on climate pricing, as Banu was saying. But we've estimated the amount of dry powder, $30 trillion of sort of funding globally which is looking for climate projects, NPV-positive climate projects, if you will. And there does seem to be a lot of private capital out there chasing projects which have a return. The challenge is that often just the project economics given some of these factors, are not necessarily that compelling. But I'd actually be really interested to hear your point of view and what you're seeing in the space as well.

Briefly.

Very smart. That's a difficult question. I know.

From our point of view, there isn't a single market or geography that won't be impacted by this simply because everything we do as humans requires energy to move, eat, live. And so we put a threshold on if a technology doesn't have a capacity to at least abate 100,000 tons of carbon per annum, right?

Yeah.

It's never going to have the impact at scale.

Yeah.

The point about the infrastructure is heated. If you look at the 9,000 London buses, we've done less than 2%. If you look at China, I think they're putting thousands of buses down pretty much every month. Yes, the carbon intensity in China is very different to where it is here, but I feel there is greater need for state intervention in these different areas, or the sustainable aviation fuels, for example. There's multiple ways of achieving this. The technologies are largely known, but the pools of capital available, there's probably not sufficient at the earlier stage where I take risk. to then jump to the growth where the economies of scale start to kick in, like the wind, the solar has happened over probably 30, 40 years minimum. We probably haven't got that time, and I think the case for state intervention hasn't really been made loudly enough to say, how do you accelerate and bridge that chasm alongside private capital? And I don't think anything politically— and the policies aren't necessarily aligned to help and ease that transition.

Right.

Fantastic. We'll take one more question down here. Thank you.

So I work at the intersection of asset management and natural capital, so believer in natural capital solutions as well, to answer this question. We're experimenting with natural capital accounting. So my question to a panel of economists is— and maybe that might answer this question— is, do we have the right metrics in place? So in our field, I'm thinking sort of beyond GDP metrics or metrics of success at a country level, but also at a private sector level. And we're experimenting with natural capital accounting to measure our success as an asset manager and delivering value to our investors, which goes beyond a typical P&L and captures non-financial metrics in there, such as the carbon sequestration potential of an investment or a biodiversity long-term, and that might help counter some of that intergenerational trade-offs that you were talking about. Is that something that— is talked about more widely at a policy level or a wider level.

It's being talked about in economics, right? I mean, my colleague at New College, Dieter Helm, wrote the book Natural Capital, which is what you're talking about. Do you want to say something about that?

Yes. I think this is very interesting, and no one thinks that GDP per se captures anything above and beyond what is like the the amount of production that there is in economy, in the sense that we understand it doesn't capture many things that are in the— creates value for societies. It's normally— it's well understood how to calculate it. It is highly correlated with many things that are associated with the high welfare standards. But beyond calculate— like agreeing that this is imperfect, that doesn't change the fact that we need solution to understand how to So I can agree with you that this is important to understand what is the cost of climate change, and perhaps different metrics, as we were discussing before, would give you larger cost of climate change. But aside from telling us that maybe we are underestimating the cost of climate change, doesn't tell us how to address it.

So this way— sure, please. Just across the street in Blavatnik School, Karthik Ramana is a professor of accounting, and has developed a system called e-liability. So e-liability is essentially applying accounting principles to counting molecules of carbon as they go from production and then down the value chain. And it's absolutely crucial. I completely agree with you. If you can't count the molecules of carbon, you have no idea whether you're making progress to the earlier question about the numbers and so on. And the e-liability, the exact protocols for measuring, for example, Scope 3 emissions, which is the upstream and downstream value chain, which is typically 90% of a company's emissions. Those are highly imperfect because, for example, they take an average emissions factor across the whole industry, whereas I might have a supplier who's 10 times more carbon efficient than my competitor. That's not taken account of in the current methodologies. Not that I'm criticizing, by the way, you know, methodologies because they've had to be developed out of zero, but the idea of the e-liability is that you really count that molecule, you count it once, not twice, and you follow it down the value chain like a value-added tax, and then ultimately it's paid for by the consumer because ultimately who else is going to pay?

Okay, we should leave it at that. Let me just leave— finish with a thought. Which we won't address, but let me just throw it out there. The gentleman in venture capital mentioned that everything humans do requires energy. Well, we have a somewhat new player on the scene in terms of AI, and the data centers that are being built require immense amounts of energy. Amazon has— you know, there's new nuclear power coming online to power these data centers. Microsoft has a forward contract for 2028 for fusion energy, which is It doesn't exist at present. And so one of the ideas is that this will help us to discover new clean and abundant sources of energy, but we don't know, right? So that's something for the future. Anyway, I want to thank our panelists and for you, and you, the audience, for the questions. Excellent questions. Thank you. Thank you.