Beating the Recession, Sustaining Growth and Protecting the World

There are two crucial lessons we must learn from the financial turbulence the world has been facing. First this crisis has been 20 years in the making and shows very clearly that the longer risk is ignored the bigger will be the consequences; second, we shall face an extended period of recession in the rich countries and low growth for the world as a whole.

Let us learn the lessons and take the opportunity of the coincidence of the crisis and the deepening awareness of the great danger of unmanaged climate change; now is the time to lay the foundations for a world of low-carbon growth. This moment is of special importance, not only for the opportunity it brings, but also because we are in the middle of the two-year journey from Bali, where negotiations were launched, to Copenhagen which hosts the crucial meeting of the UNFCCC at the end of next year when the world must craft and agree a global deal on climate change to replace Kyoto.

High-carbon growth will by mid-century have taken greenhouse gas concentrations to a point where a major climate disaster is very likely. We risk a transformation of the planet so radical that it would involve massive movements of population and widespread conflict; put more prosaically, high-carbon growth will choke off growth. To manage the climate sensibly we must cut world emissions by at least 50 per cent by 2050, as recognised at the G8 summit in Japan this year. Given that rich countries’ emissions are far above the world’s average, their cuts should be at least 80 per cent, as clearly recognised in Europe and in the UK with the government’s recent adoption of that target.

We do not know the length of the recession we have now entered, but it is unlikely to be short. The relevant policies are being put in place to avoid plunging us further into crisis and to start to build a more robust financial system. But as banks rebuild balance sheets and look for higher capital ratios they will have to restrict lending. Monetary policy alone, important though it is, is unlikely to pull us out of the recession any time soon: fiscal policy to expand demand must play a role. But increased government spending should be focussed not just on boosting short-term demand. We must promote growth that can be sustained.

The coming period of growth can be firmly based in the low-carbon infrastructure and investments which will not only be profitable, with the right policies, but also allow for a safer, cleaner and quieter economy and society. And if, as we must, we halt deforestation, the source of 20 per cent of greenhouse gas emissions, at the same time we can also protect and enhance our biodiversity and water systems.

The International Energy Agency estimates that world energy infrastructure investments are likely to average around $1 trillion per annum over the next 20 years. If the majority of this is low-carbon and some of it is brought forward it will be an outstanding source of investment demand. So too, will be the investments for energy efficiency, many of which can be labour intensive and are available immediately.

It is surely clear that a programme can be put together which both boosts demand in the short term and prepares for efficient, strong and sustainable growth in the medium term. It must be structured carefully with both public and private sectors working together. It will be the private sector that makes most of the investments but the public sector must shape the incentives and the investment climate that allows the investment to take place. That will mean working with the EU and the UNFCCC in Copenhagen to sustain a price for carbon, by use of carbon trading and taxation. It means regulation, for example, on car emissions to give clear signals that allow economies of scale and reduce uncertainty.

It is not, however, just a matter of the right motivation for the private sector and the appropriate scale and structure of public spending. The investment climate must be right too. There could be a clear limit on time for planning decisions and a national energy strategy which shapes decisions. We should have a very open-minded attitude to technology and let the markets decide which to choose, without putting obstacles in the way that might arise from an antipathy to a particular technology. Demonstration of carbon capture and storage for coal and gas on a commercial scale in electricity generation should be a special priority, given the likely prevalence of coal in the future growth of many countries. Reform of the grid structure will be necessary to allow decentralised and local decisions for generation such as wind, solar and combined heat and power. And the energy strategy must factor-in energy security and peak-load supply. With sound policies all this is possible, consistent with low-carbon technologies.

The next few years present a great opportunity to lay the foundations of a new form of growth which can transform our economies and societies. Let us grow out of this recession in a way which both reduces risks for our planet and sparks off a wave of new investment which will create a more secure, cleaner and more attractive economy for all of us. And in so doing, we shall demonstrate for all, particularly the developing world, that low-carbon growth is not only possible, but it can also be a productive and efficient route to overcome world poverty.