Lord Nicholas Stern on green recovering from Covid.
In this episode of Cleaning Up, Michael Liebreich speaks to Lord Nicholas Stern, IG Patel Professor of Economics and Governance at the London School of Economics.
Stern argues that G7 and G20 nations need to invest in recovering from the shock of the coronavirus pandemic and the continued challenges of ecological collapse. He then discusses the differences for lesser developed countries and how China doesn’t need to reach the same target as wealthier nations.
This is an abridged transcript of the conversation, edited for clarity.
Michael Liebreich: Nick, great to have you on Cleaning Up. We’ve just seen the communique from the Cornwall G7 meeting, and you were involved in preparations for that meeting. What have you been doing to get that meeting up and running and make sure it came to a successful conclusion? Also, what are your thoughts on the communique?
Nicholas Stern: We could see that the right way out of this Covid and ecological crisis was to invest strongly in the right things. We didn't want a consumption boom of the roaring 20s and we didn't want the premature dive back into austerity that we had a dozen or so years ago after the great financial crisis. We knew we had to invest out of this.
The fiscal responsibility was about getting growth through investments and then building your tax position up as you start to recover. And further, it was crucial to invest in the right things, invest in the technologies of the future, invest in the technologies that didn't damage our biodiversity, as well as climate. So as a result of those discussions a couple occasions last year, he asked me to put this together. So that's what we did.
The G7 communique, which does acknowledge the report, but the substance of that communique is strategically along the lines of this how to recover. My main concern is that the means to deliver on the strategy and the declared ends were not adequate.
ML: Let's talk about the means to deliver. You had this sort of $1 trillion figure…
NS: If you look around the world, except China where investment is very high already, what you need to do is change the composition of investment, not necessarily increase it. But outside China, the world faces challenges in terms of recovery, infrastructure deficits across the world, and in terms of the investments we need to make the opportunities for investments we have, particularly in the energy sector, but also natural capital. We’ve suggested that 2 percentage points of GDP invested in the recovery.
ML: What did you say about the mix the sorts of things that trillion ought to be going into? Because you've talked a lot about infrastructure. But you’ve also talked about technology. So, what sort of mix do you see?
NS: If we move strongly into hydrogen, you need a lot of electricity, so their estimate is, and it fits with the International Energy Agency as well, roughly a quadrupling of electric power between now and 2050. All of that of being net zero electricity by 2040. So that is the big part of the challenge. That needs the kind of investment numbers we've been talking about. Now, these are investments with wonderfully attractive returns. So much cheap electric power investment in renewables with storage is already cheaper than the dirty last century of fossil fuel stuff.
So, these are investments with great returns. We close to 10 million people around the world from air pollution out of a total number of deaths a bit more than 50 million people. Not all of it from burning fossil fuels but a lot is.
ML: If you go outside of the G7, do you worry that there will ultimately be a resurgence of inflation that will require addressing? I'm very struck in an article which mentioned Keynes, he wrote something about how to finance the war. He suggested using war bonds, which would suck demand out of the consuming economy during the war in order to allow space for the wartime economy, or in this case, it would be the climate economy to absorb talents and absorb resources without driving inflation. Do we need to be thinking about something like that? Maybe not for the next five years. But if that you want to keep the pedal flat to the floor for the next 10 years, let's say?
NS: Yes, and beyond. But the first thing is that this position of planned investment is too small in relation to planned savings, and this has been with us for some time. Larry Summers has spoken about secular stagnation. We've seen interest rates zero or in real terms, negative sometimes in nominal terms, negative in some countries. So, I think the challenge of having to control consumption is not yet there because you’ve got this surplus savings.
ML: What about the next group, the countries that are fully dependent on exporting fossil for their economies? What's the prescription for them?
NS: Well, they have to make a transition, if it turns out that what you're selling is a product for which the world is rapidly going to reduce its demand, then there's no doubt that you have to reorient your activities. For example, the arch oil exporter is Saudi Arabia and they are already starting to move strongly because they also have deserts and lots of sunshine. They're also moving quite strongly into the possibilities of renewables. They're looking at algae, for example.
ML: I'm on the Board of Trade and I'm trying to grapple with the current flavor of the moment, which is carbon border adjustments, and everybody's decided that they're desirable. I've been talking about them and sort of saying that they’re probably an inevitable part of the landscape for quite some time. What is the strategy regarding the lesser developed countries who may or may not have the natural resources available the transition?
NS: Well, let me take the border adjustments, first. We looked at it at the time of the Stern Review 2006. The evidence relocation of production to somehow take advantage of relaxed environmental policies was very weak.
That was in 2006 and I think the evidence is still very much the same way. Of course, in the meantime we've had more carbon taxes and carbon pricing. That's another kind of environmental policy. But still, the only places it makes much difference are in the energy intensive trade exposed sectors, there are not many of those, perhaps half a dozen, steel, aluminum, cement, some plastics, that kind of thing. Now, but rather than erect something which is incredibly complicated, you know, border carbon adjustment right across every product, you should focus on those few where it is of relevance.