A view from London

In 2015 the Paris Agreement set a goal to limit the increase in global temperatures to well below 2°C, ideally 1.5°C, above pre-industrial levels. In January, for the first time, the average global temperature breached this 1.5°C benchmark over a 12-month period. The Paris accord is based on average temperatures over a much longer period, so the January record does not break the target. Nevertheless, it is a stark warning of the challenges ahead in seeking to meet it.

Recent developments, particularly Europe’s energy crisis, illustrate some of those challenges. Shortages of natural gas across Europe following Russia’s invasion of Ukraine forced governments to keep the lights on by any means, with some countries temporarily using more polluting coal and oil to generate electricity.

Higher energy prices led to a major squeeze on consumer incomes.  Against this backdrop UK prime minister Rishi Sunak announced delays to some UK’s net zero policies last year, including pushing back the phasing out of new combustion engine cars and gas boilers. The prime minister said that though he remains committed to the UK’s net zero target, “We seem to have defaulted to an approach which will impose unacceptable costs on hard-pressed British families… If we continue down this path, we risk losing the consent of the British people. And the resulting backlash would not just be against specific policies but against the wider mission itself”.

The energy crisis also led to sharply higher government spending and indebtedness in a way that could constrain future spending plans. Earlier this year the Labour Party abandoned its 2021 pledge to spend an extra £28bn a year on green investment. Labour blamed Liz Truss’s 2022 mini-budget for raising the cost of government borrowing, though higher inflation and the energy crisis seem likely to have had more significant and lasting effects on borrowing costs.

The price of UK carbon emissions permits – which carbon-intensive industries must purchase – fell to a record low in February this year, due in part to mild winter weather and slowing industrial demand. Lower permit prices help to dampen electricity prices but also reduce the incentive to switch to renewables.

Forthcoming elections could also slow the drive to net zero. Donald Trump has vowed to “drill, baby, drill” should he win the US presidential election. UK-based climate website Carbon Brief estimates that Mr Trump’s policies could lead to an additional 4bn tonnes of US emissions, the equivalent of the combined annual emissions of the EU and Japan by 2030. In Europe some green policies, notably Dutch plans to reduce nitrogen emissions by cutting dairy production, have faced heightened opposition. A number of parties that have been critical of net zero policies seem likely to do well in the June 2024 European Parliament elections.

While the transition to net zero faces headwinds there have also been areas of progress. 

The increase in coal use in Europe in response to the loss of Russian gas has been reversed. A greater focus on energy security in the wake of the energy crisis has created a new impetus for decarbonisation. Higher energy prices, with the oil price well above average levels, add a further incentive for the economy in energy use.

The Biden administration’s Inflation Reduction Act (IRA), a mammoth programme of federal green tax breaks and subsidies, is having an impact. The American Clean Power Association, a trade group, says that 83 manufacturing plants focused on solar power, wind turbines, or batteries have been announced since the package was passed less than two years ago. The projects represent $270bn of investment—equal to the previous seven years of clean-energy investment combined.

The EU has pledged $270bn in green subsidies as part of its response to the IRA. The EU has also introduced a Carbon Border Adjustment Mechanism (CBAM) that will eventually levy a tax on the embedded carbon content of imports into the EU. The size of the European market means that the CBAM could create a bandwagon effect, driving other countries to price carbon and to avoid exports into the EU being taxed through the CBAM.

Nor are longer-term trends wholly discouraging. A recent book by Dr Hannah Ritchie, a data scientist, argues that impressive environmental gains made in areas including air quality, deforestation, protecting the ozone layer and the adoption of renewable energy demonstrate that rapid progress is possible. Perhaps Dr Ritchie’s most striking observation is that despite appearing to live more energy-intensive lifestyles than previous generations: “My carbon footprint is less than half that of my grandparents’ when they were my age. When my grandparents were in their 20s, the average person in the UK emitted 11 tonnes of CO2 per year. We now emit less than five tonnes. The gap between me and my parents is equally wide”. GDP per capita has risen 43% since 1990. Over the same period UK GDP per capita CO2 emissions have fallen by 35% on a consumption-based measure, one that captures the carbon embedded in imports. In the West, at least, the carbon intensity of economic activity has fallen significantly.

This has been made possible by greater energy efficiency, a move away from coal and the growth of renewable energy. In the last ten years the cost per megawatt hour of electricity generated from solar fell by just under 90% and from offshore and onshore wind by around 60%.  The International Energy Agency estimates fossil fuel consumption in all forms will peak by 2030.

Net zero envisages the swiftest and most complete energy transition in history. Such a vast and contested venture was never going to happen seamlessly. As Dr Ritchie puts it, “We need to go much faster...but there is a lot of progress to acknowledge”.

Our review of last week’s news

The UK FTSE 100 equity index ended the week up 1.1% at 7,996. The index came within three points of an all-time high during trading on Friday as the increasing strength of the dollar boosted the stocks of UK companies with significant dollar earnings.

Economics

Data showed that last month was the warmest March on record with average temperatures 1.68°C warmer than pre-industrial levels. The record temperature experienced for the tenth consecutive month can partly be explained by the El Niño weather system but has sparked some concerns that the world is warming at a faster than expected rate.

US inflation rose above expectations to 3.5% in the 12 months to March, up from 3.2% the previous month.

The rising price of oil, which has broken through $90/barrel in recent weeks, contributed to a 6.4% increase in US petrol costs from February to March, driving the overall inflation reading upward and creating political problems for president Joe Biden.

Financial markets scaled back their expectations for US rate cuts following the inflation news, and now expect one to two cuts this year while the dollar strengthened, rising to its highest level against the sterling and the euro since November.

Bank of England policymaker Megan Greene warned that the UK faced a heightened risk of persistent inflation and said that “rate cuts in the UK should still be a way off”.

This development, together with US inflation data, also dampened expectations for rate cuts in the UK. Markets are now pricing two to three interest rate cuts in the UK this year. The slower pace of cuts is negative for the public finances due to prolonged higher borrowing costs.

The ECB kept its benchmark interest rate on hold at 4% and hinted it could begin rate cuts in June. Later in the week officials downplayed the impact of higher rates in the US, the FT reports.

The UK economy grew by 0.1% in February, following upwardly revised growth of 0.3% in January. It now appears highly likely that the UK will post positive growth in the first quarter and exit recession.

A review of the Bank of England’s forecasting approach by former Fed chair Ben Bernanke was critical of the Bank’s economic modelling and recommended a number of changes.

Chinese consumer prices fell by 1.0% from February to March, the largest decline since the beginning of the pandemic, renewing fears over deflation and weak domestic demand.

The value of Chinese exports dropped by 7.5% in March in dollar terms compared with the same month in the previous year amid concerns over low prices and overcapacity in export sectors.

US Treasury secretary Janet Yellen warned China that the US would not accept a repeat of the “China shock” of the early 2000s when rising Chinese imports displaced American manufacturing jobs as she urged Beijing to reduce excess industrial capacity.

The population of Japan fell by 595,000 in the year to October 2023, in large part due to low birth rates. A fall of 837,000 Japanese nationals was partly offset by rising immigration.

Business

Blackrock, the world’s largest money manager, announced growth in assets under management to a record $10.5tn, in part due to the success of a new Bitcoin exchange-traded fund.

Workers at Tata Steel’s Port Talbot and Llanwern sites voted to strike for the first time in 40 years over plans to replace the two remaining blast furnaces with electric arc furnaces that require a much smaller workforce.

The UK’s Financial Conduct Authority said it would scrap rules that prevented investment banks bundling fees for investment research and trading, introduced under MiFID II.

US banks JPMorgan, Citigroup and Wells Fargo reported better than expected results in the first quarter.

The UK National Farmers’ Union warned of substantially reduced food production this year following extreme weather and flooding linked to climate change. Vice president Rachel Hallos warned that “these extremes could soon become the norm”.

The NHS England waiting list fell for a fifth month, down to 7.54m in February from a peak of 7.75m.

UK supermarket Tesco reported 4.4% sales growth and a 159% increase in profit before tax and noted an easing of inflationary pressures.

Global and political developments

Iran attacked Israel with over 300 drones and missiles with almost all being brought down before striking their intended targets. Israel's war cabinet said the country would respond "in the manner and at the time of our choosing". The US urged restraint as it sought to prevent a slide into a wider Middle Eastern war.

Greater Manchester Police announced that they were investigating Labour deputy leader Angela Rayner over allegations that she broke electoral law by failing to properly declare her main residence.

Labour would pursue an “ambitious” programme of closer relations with the EU including deals on security and alignment of standards to facilitate trade, the FT reports.

Ukraine’s military intelligence chief said that Ukraine should expect a large Russian offensive in late spring or early summer.

US president Joe Biden said he would defend the Philippines from any Chinese attack in the South China Sea following rising tensions in the region.

And finally… earlier this month, The Telegraph reported on great-grandfather and Southport resident John Tinniswood who was awarded the title of the world’s oldest man at the age of 111. Mr Tinniswood attributed his long life to the consumption of the British staple fish and chips – a chip off the biological clock.