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Everything in the economy, from power plants to coffee cups to your childhood home has a life expectancy. Many of the things we produce and consume last only weeks, months, or even years. Many infrastructures last for many years, tying future generations to the same paths as their predecessors. This is the classic story of climate change. However, it isn’t just about capital assets. People matter in this story.
Individuals, corporations, and governments have made significant investments in carbon-dependent infrastructure over the past decade. They expected that these investments would yield long-term returns. However, as the climate crisis approaches, maintaining this infrastructure is rapidly becoming incompatible. To abandon these investments prematurely – to create what are known as “stranded assets” – means taking an economic hit. Crucially, the longer we wait to set aside these investments, the larger this “carbon bubble” grows, and the larger the economic hit will be.
This issue was investigated by my colleagues and me. Our research (published as a preliminary working paper with a journal article forthcoming) sheds new light on the trillion pound risk posed to the UK’s economy by its growing carbon bubble.
We find that if – a very hypothetical if – all new economic assets (buildings, machines, vehicles and so on) were exclusively zero carbon from 2022 onwards while the existing economy continued to be retired at its natural rate, the UK would still miss its climate target of net zero by 2050.
To reach that target, nearly £11 trillion in planned returns on investment may need to be discarded before 2050. This would mean that all oil rigs and factories will be shut down, as well as airports, regardless of how much money has been invested in them. This is equivalent to 35% in current UK GDP.
However, if new investment in the carbon-emitting economy continues until 2030, just eight years later, this number balloons to over £19 trillion.
The longer it takes to transition to net-zero, the more irresponsible you are in creating new carbon-intensive infrastructure. And the more difficult it is to change your path.
People are the capital asset most at risk
Although our research is not the first time that we have estimated the potential value of stranded assets it is the most comprehensive. our methodologyIt is not possible to assign expected lifetimes for everything in the economy. In the stranded asset debate it is easily overlooked that estimates for the total capital value of economies are dominated not by what you might expect – houses, cars, computers or office blocks – but by what is dryly referred to as “human capital”.
Adam Smith (18th-century economist) said that such capital was necessary to meet the needs of society. represents “the acquired and useful abilities of all the inhabitants or members of the society”. Like other parts, humans also have working lives, which average around 40 years. The largest and longest-lasting part of the economy is therefore made up of humans.
Christopher Willans/ shutterstock
Society will experience significant disruption due to unemployment and shortages if it changes faster than it can retrain, relocate or provide new workers. Rapid transition to net zero will undoubtedly lead to large numbers of people in energy, transport, and resource extraction looking for work. While some steelmakers can produce wind turbines as easily as oil rigs and other steelmakers can make them, pilots flying aeroplanes may not be as well-equipped to drive trains.
We therefore include human capital in our analysis on the economic financial risk. Human capital makes a large contribution to the total capital value of developed nations like the UK. Therefore, we consider it to be at significant risk from a quick last-minute transition towards net zero. Of a transition that kicks off in 2030, over £14 trillion of the £19 trillion capital risk will take the form of workers rather than objects.
This means that we need to demand an urgent, managed, and not delayed, hasty transition. It also highlights the necessity for this to be a “just” transition, which directs funds towards the skills, education, finance and finance needed to support the industries of the future.
Not the next decade, but this decade of action
The UN recently released emissions gap report warned that while a 30% reduction in projected carbon emissions by 2030 is needed to see a 2°C world, and a 55% reduction for 1.5°C, current pledges have us on course for a mere 7.5% reduction. Around the globe, countries are looking to buy time before taking the necessary decisive actions.
These preliminary findings are still under review. Much more work is needed to understand the financial implications of rapid economic transition. But one thing is certain: decisive actions cannot be delayed because the risk to workers and capital will only grow.
