Economics and politics for a Net Zero world 

Political and economic decisions, investments and innovation play a fundamental role in defining the model of society that will enable us to move towards a net zero world. Collaboration and coordination between these areas is crucial if we want to create a sustainable, resilient and inclusive future for all. So says expert Dimitri Zenghelis.

Prof. Zenghelis was among the experts at our last Future Trends Forum Building a net zero world. He is a special advisor to the Wealth Economy Project, which he co-founded and directed, at the Bennett Institute, University of Cambridge, and is a Senior Visiting Fellow at the London School of Economics (LSE). He is also a Senior Associate of the Cambridge Institute for Sustainability Leadership. Until recently, he has been Head of Policy at the Grantham Research Institute at the LSE and Chief Economist at the Global Commission on the Economy and Climate.

In his presentation at the Future Trends Forum, he explains how policy and economic measures can be implemented to move towards Net Zero:

Following is a summary of some of the insights provided by Dimitri Zenghelis:

Politics matter in reaching Net Zero

Prof. Zenghelis is optimistic about the Net Zero challenge. With a “conditional optimism” rather than complacent, as defined by Paul Romer, the 2018 Nobel Laureate in Economics, in his writing Conditional Optimism. In other words, the expert supports the Nobel laureate’s theory of endogenous technological progress, which states that policy choices are even more important than traditional economic theory suggests.

For a Net Zero world to happen, policy and economic measures should be put in place to support entrepreneurs and innovation. Including investment in R&D and intellectual property laws, which will further help to foster innovation, which, in turn, will generate persistent and sustainable economic growth.

Economic measures to reach Net Zero are crucial

To the question “How much will it cost to get to Net Zero?”, the expert offers an interesting new perspective. The answer is not x% of GDP. The answer is that, if the necessary economic measures are taken, it could turn out not to be a cost, but a benefit.

Which measures should be taken? Following the Nobel laureate’s argumentative line, Prof. Zenghelis says it is a matter of creating incentives that guide innovation toward discoveries that are positive (Net Zero) and away from discoveries that are harmful (any innovation around more efficient extraction of fossil fuels, e.g.).

According to the work done by Zenghelis and his colleagues at the Global Commission on the Economy and Climate, between 50% and 90% of the Net Zero target could be met in just the next 5 years, and without additional costs to the world’s GDP. Why and how? By reducing costs associated with traffic jams (time) and pollution (health), and by increasing energy efficiency[an1]  as a result of innovations.

By taking the right economic steps and highlighting the short-term benefits of taking the path to Net Zero, the right environment is created to attract public and private investments in Net Zero innovations, and the process is hastened, entering into a win-win feedback loop of investments, innovations and solutions.

So the cost of reaching Net Zero in 2050 will be extremely dependent on the political and economic decisions that are made right now, and how they are orchestrated.

Economic incentives to reach Net Zero

The fossil fuel economy is an economy of materials (from the fuels themselves to all the machinery and engineering required for their extraction, conversion and transportation) and, to date, the renewable energy economy is basically an economy of ideas and technological innovation. Therefore, it is an emerging market with enormous growth potential.

In short, faced with the restrictions of not polluting and not consuming so many natural resources, a knowledge economy is emerging that will lead us to smarter solutions, to be more productive, to use abundant resources in more efficient ways.

What Zenghelis argues is that by limiting the consumption of energy and non-renewable materials, the knowledge economy will produce exponential growth in wealth. As an example, the transition to a sustainable low-carbon growth path could yield a direct economic gain of $26 trillion by 2030 compared to business-as-usual, according to analysis by the Global Commission on the Economy and Climate.

It is a huge political challenge as the short-term consequences on the labor market could be quite bad, but what about in the long term? Zenghelis believes it will be positive and, moreover, it is the only smart solution: It’s not just about avoiding a future we don’t want. It is about creating the future we do want. What he is proposing is to start now to drive, design and build that Net Zero future.