In March the Intergovernmental Panel on Climate Change released the final volume of its Sixth Assessment report on progress toward addressing climate change. The findings of the report aren’t encouraging, and point to an acceleration of climate impacts and continued growth in fossil fuel use. Possibly the most candid assessment of the report’s findings came in a statement from the United Nations Secretary General, Antonio Gutierrez, who stated that developed countries must reach net zero by the year 2040, well ahead of declared targets, if hope is to remain of minimizing climate risks.
In the podcast Simon Sharpe, Director of Economics for the UNFCCC Climate Champions and author of a newly published book, “Five Times Faster,” discusses his experience as one of the United Kingdom’s senior climate diplomats, and the frustrations, and alarm, that accompany the less than adequate pace of emissions reductions to date. Sharpe discusses his book’s exploration of the scientific, economic and diplomatic realities that have prevented rapid progress toward a net-zero global economy, and offers suggestions for constructive collaboration to accelerate the transition to cleaner forms of energy.
Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. Last month, the Intergovernmental Panel on Climate Change released the final volume of its sixth assessment report on progress towards addressing climate change. The findings of the report are not encouraging and point to an acceleration of climate impacts and continued growth in fossil fuel use. Possibly the most candid assessment of the report’s findings came in a statement from the United Nations’ Secretary-General, Antonio Guterres, who stated that developed countries must now reach net-zero by the year 2040, well ahead of declared targets if hope is to remain of keeping within the warming limits of the Paris Climate Agreement.
On today’s podcast, I’ll be diving into the challenge of moving quickly to mitigate climate emissions with the person who is intimately familiar with the global diplomatic process to address climate change and with the frustrations and alarm that accompany the less-than-adequate pace of emissions reductions to date. Simon Sharpe is Director of Economics for the UNFCCC Climate Champions and a Senior Fellow at the World Resources Institute. He has just published a new book titled Five Times Faster, that draws on his experience as one of the United Kingdom’s senior climate diplomats and explores the scientific, economic, and diplomatic barriers to accelerating the transition to a global net-zero economy. In the book, he challenges the scientific and economic communities to adequately assess climate risks and offers suggestions for constructive collaboration to accelerate climate efforts and the energy transition. Simon, welcome to the podcast.
Simon Sharpe: Thanks, Andy. It’s good to be with you.
Stone: Your new book is titled Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change. What drove you to write the book, and what’s in the name, in particular the “Five Times Faster” part?
Sharpe: The “Five Times Faster” refers to reducing global emissions, specifically the emissions intensity of the global economy, emissions per unit of GDP. Over the last twenty years or so, that has come down by about 1-1/2% per year, and this decade, if we’re going to meet the targets of limiting warming to below 1-1/2 degrees, then we have to reduce emissions per unit of GDP at about 8% per year, so that’s five times faster on net measure. The point is that’s a huge acceleration. How on Earth do we achieve that? How do we go five times faster this decade than we did for the previous twenty years?
The subtitle, Rethinking the Science, Economics, and Diplomacy of Climate Change refers to what I think of as the invisible infrastructure of climate change. It’s the infrastructure of ideas and institutions, how we think about things, how we decide things, and how we work on things together. I think there are structural changes that need to be made in each of those areas that are absolutely crucial to making faster progress.
I wrote the book because I thought all three of those really are under-recognized problems. They’re not the ones that people are focusing on. They’re not the things that the media are talking about, but I think they represent big opportunities in places where we can change things structurally and, as a result, make much faster progress without necessarily needing to have a whole generation of better political leaders or some kind of more of a revolution in society.
Stone: You’re a climate diplomat, and you played an important role in the UK’s hosting of COP26 in Glasgow in 2021. You’re currently Director of Economics for the UNFCCC Climate Champions, though you’re not an economist by training, I understand. Could you give us an overview of your role as a diplomat and the aim of Climate Champions?
Sharpe: My last job in government was on the diplomacy of COP26, and I was in the unit at the center of the UK government that was organizing the whole thing. People tend to think of the COP as an event, but actually I think the opportunity of it is more in the process, that you have always at least a year leading up to it, in our case two years because of COVID. And when you’re the presidency country, you can use that time. You have convening power that you can make use of in that time. You can bring countries together and get them to have conversations that they might not have otherwise.
You can also leverage the international organizations, the philanthropies, the NGO community. Everybody wants to help, and if you can configure all those different elements in a good way, you might be able to get something useful done. So my job was to oversee campaigns that we had in the power sector, in road transport, and in land use. In each of those areas, we were trying to get groups of countries and other actors to come together and do some things that they couldn’t do alone, though it would help change the global economy more quickly and make it easier for many countries to make transitions to zero emissions.
So that was my work then, and I expect we can get into talking about that a bit more, but one of the outcomes of that COP26 was a commitment by many countries to a process — they call it “the breakthrough agenda” — which was to work together in each emitting sector to try and cross the tipping point where the clean technologies become more affordable, accessible, and attractive than the fossil fuels. And at the same time as making that commitment, the countries asked three international organizations to advise them on exactly how should they work together in each sector to speed up progress.
The International Energy Agency, IRENA, and the UN Climate Champions, were those three organizations that together agreed to produce annually and advise the governments on that subject. So I joined the Climate Champions team so that I could be part of that process.
Stone: Yes, we’re going to get to that issue of tipping points a little later in the conversation. It’s a very interesting one, but first I want to talk about the book. You write about why policy action hasn’t been adequate to address climate change and mitigate emissions broadly. You point out that policy-makers often don’t have an adequate sense of climate risk, and as a result, they don’t really push or promote policies that are up to the task of mitigating the speed and forcefulness that’s really required.
You point out that this inadequate framing of climate risks often begins with scientists who, for a variety of reasons, may be hesitant to state the full magnitude of climate risks that they see. Essentially a watered down version of these risks is what gets through. Could you explain this problem as you’ve observed it through your work?
Sharpe: First let me just say something about the premise here, because a lot of people might think, “Well, surely we all know how bad climate change is.” And of course many policy-makers — I count myself as one — are deeply worried about climate change and would do the most that they possibly could about it from whichever position they find themselves in. This issue of risk assessment, I think is particularly important at the very top level of government. At the very top, it’s only really the President or the Prime Minister and the Cabinet, if they have one, who can make the decision about how strongly to prioritize climate change compared to all of our national objectives. And so it’s crucial that they have an understanding of how big a threat it is to their national interests. That will never be sufficient to get a government to act in a proportionate way to counter the threat of climate change, but it’s surely necessary. That is my premise. It doesn’t matter how good the economic opportunities of the low-carbon transition are, it’s still going to be politically difficult. It’s a huge political economy challenge, and you have to have some strong reasons to act on that.
So it would be crazy if your heads of government didn’t have a clear assessment of exactly how bad the risks are. And what I’ve found is actually they don’t, even in a country like the UK, which has been in a strong political consensus on climate change for many, many years — all kinds of institutional structures that we’ve created. We still don’t actually have a risk assessment designed to inform the head of government and the Cabinet. In all the time I spent working in the UK government, I saw materials go to the top level an incredibly small number of times, and they certainly didn’t include any sort of strong and full assessment of the risks.
So there’s an institutional program within government, but then as you were getting at, there is also a problem with the science community itself, the process of generating and communicating knowledge or risk. This is something I discovered as I was trying to find out what is the best information I can get and communicate through my system to the top of government. I think I’ll break it down into three broad parts. One is perhaps the most important. There is an emphasis in the science community on prediction, rather than risk assessment. And those are very different things. Prediction tends to say, “First, what’s likely?” And second, after we’ve said what’s most likely to happen, “What effect does that have on anything we care about?”
Risk assessment does it the opposite way around. It asks first, “What’s the worst that can happen in relation to our interests?” And second, “How likely is that?” For climate change, that has to be a question of how likely is that as a function of time, because all the risks tend to increase over time. An example of that is the impact of climate change on crops. If you’re just trying to predict how climate change might affect a particular crop in a particular place, you can make a projection of a change in yield and have an enormously wide range of uncertainty.
If you say, “What’s the worst that could happen,” then you could say, “Well, the worst that could happen is that you get crop failure because you are passing the limits of tolerance of that crop in that place so repeatedly that it’s not worth planting that crop in that place anymore, and you have to find a new alternative. And that’s a situation with huge risks to food security. If you start by understanding that threshold and then work backwards and ask, “How likely is it?” — Then you get much more valuable information for risk assessment. But that’s not the way the science community is going about it at the moment because the science community is not structured to produce information on risk assessment. That’s not what it sees as its job, and that won’t be its job unless it’s funded to do that very explicitly.
Stone: You’ve pointed out that scientists need a certain level of certainty to be able to publish their findings. It’s interesting you point out in the book that every few years, the IPCC comes out with a new assessment report and what might have been an extreme case one year becomes more of a middle case two or three or four years later. So I think there’s an interesting phenomenon here as we go through time, our view of risk recalibrates. And it generally recalibrates for the worse. I wonder if you could tie that into the message that does get through from science.
Sharpe: Yes, I think there are two things going on here which interact with each other. One is underestimation of risk, and the other one is understatement of risk. To see the underestimation, it’s hard to see it because the IPCC reports don’t generally systematically compare what they’re saying one time with what they’ve said the time before. But where they get closest to that is the bit they call “the reasons for concern.” They have these categories like extreme events and global aggregate damages and tipping points in the climate system. Lots of people will have seen it, the burning embers graph that has color coding for how large those risks are at different temperatures.
When you track those over time, from I think it was the third assessment report, where they first used them all the way through until now, the sixth assessment report. The trend is absolutely clear, that consistently each time the scientists update their judgments, then they say, “We’re seeing a higher risk at a lower change in global average temperatures.” So their assessment of the risk is only going in one direction, that it’s greater than we thought it was before. That’s really significant as a non-expert when you’re looking at different expert judgments and uncertainty. How do you know what to think?
Well, look at the change in expert judgment over time. That gives you a strong signal about whether the experts are likely to be overestimating or underestimating the risks. And it seems like they’re underestimating them. That then ties in with how do they communicate what they do know? And here in the work that I did on risk assessment, something very interesting came up where an insurance professional and a scientist both recognized from different ends the completely different professional cultures that they have. And it comes down to error bias which are you more averse to a false positive, saying something is true when it isn’t, or a false negative, saying that something is not true, when it is.
Science has a really strong aversion to false positives, but it does have relative tolerance of forced negatives. It’s quite happy not to say something that might be true, whereas the professional culture of risk assessment, of risk management is exactly the opposite. You need to really guard against false negatives. That’s like saying there won’t be a problem, when in fact there might be one. So the insurance guy, who I spent a lot of time with, he said he’d realized that the meaning of the word “conservative” was au passé in science and risk management. In his field, a conservative estimate was one where you tend to assume that the worst case outcomes will happen. You know, you assume the worst. It’s like overstating what the problem might be, whereas in science, a conservative statement of your results is one that understates their significance.
You really see that coming through when you get close to the sciences. One way you see it is when you talk to them individually, and you say, “Tell me about this problem. What do you think might happen, and how big a problem could that be?” And they tell you something very shocking. And then when you see what they’ve written down in their peer-reviewed science papers, you read it, and you think, “That doesn’t sound anything like what he just told me. It sounds a lot less worrying.” And that’s what’s kicking in there. It’s that difference in the professional culture.
Stone: You just mentioned the professional culture, the professional culture of science. Is there a way that you see that that culture may adapt, change, or rise to this need to communicate risk onto policy-makers? Is that possible within the scientific cultures that exist, or is it outside of what may be possible?
Sharpe: I think it’s unrealistic and possibly unfair to ask the scientists to change their professional culture. They have it for a good reason. Unfortunately, it just turns out to be unhelpful for us when it comes to risk assessment. But I think there are really important things that you can do. One, for a start, is fund research that is deliberately designed to find out what we need to know to better understand the risks. So focus on the thresholds, for example. Ask the scientists about limits of tolerance of people to heat stress or crops to high temperatures, or coastal cities to sea level rise. Ask them to investigate those thresholds first, and then when they’ve found out enough about those, ask about the likelihood of crossing those thresholds, as a function of time or temperature rise or sea level rise.
That could get us a lot more valuable information on the risks themselves. Then to deal with this communication and error bias problem, I think you have to do something which a former intelligence person explained to me that is often done in the world of intelligence, which is separating the roles for information gathering and assessment. The scientists in this case are the information gatherers. They gather the knowledge in one place and then get some other people to do the risk assessment. Get people who have expertise in disciplines like public health, national security, even insurance. Get those kinds of people to have an exchange with the scientists where, if we’re talking to them, they understand the severity of the risks. And then, instead of accepting it as the threshold for our understanding, a scientist has to be confident enough that he or she can write it in a peer-reviewed paper. Instead, the threshold is: What’s our best estimate in areas of deep uncertainty? So if you separate those roles, I think it’s absolutely possible to come up with risk assessments that really tell us how serious the risk is.
Stone: It’s interesting you say that, because I think here in the United States, the military is often seen as being at the forefront of truly understanding climate risks, right? Sea level rise and its impact on naval stations on the East coast. Global insecurity, border issues — these types of things. But what I’m hearing here is that in spite of that type of example, this risk is still not being adequately assessed and then communicated on to policy-makers.
Sharpe: Yes, I think that’s absolutely right. I think the military could play a very important role in doing that. What we have to avoid is that they take too narrow a view. I went to the Department of Defense in the US ten years ago or so, when I was working on this. And I found something which was actually very similar to the Ministry of Defense here in the UK. They were looking at the threats to their own military bases. They were looking at risks of instability in the short term in other countries, but not looking much further than that. And there’s a good reason for that, which is in military planning. It’s only worth planning a few decades ahead. You don’t know what the technology will be beyond that. So planning is not so useful.
But climate change is unlike all of the other risks that we normally deal with in government, in the sense that it is systematically increasing over time. And so if you don’t look to the long term, you’re cutting out all of the biggest risks, and thus violating the number one rule of risk assessment, which is, “Focus on the biggest risks.” So to do this properly, we really have to look long term, and we need institutions set up to do that.
Stone: If I just may make a note on my personal reaction to the book, through the first third of the book or so, it really impacted me, I have to say. The thought that came to my mind as I was reading was, if I can articulate this correctly, I think even in my mind, I’ve kind of been lulled into viewing climate change as a 1.5-degree or 2-degree proposition, and I think that comes from the fact that we — I, myself tend to think of climate in that context because that’s the context of the Paris agreement. And those are kind of the goals that are bandied about all the time. And I think I personally — I don’t know if I’m alone on this or not — have lost track of the bigger risks that you’ve been writing about here. And that really kind of came home in reading the first part of this book. It got much more positive later on, but I was a little down after reading that first part. But I also appreciated that re-setting of perspective on this whole issue. So that was my personal take-away from the book at this point.
So you’ve just talked about science. You then go on in the book to focus on economics, okay? And you state that mainstream economics, as it is practiced today is not up to the challenge of addressing climate change. And in the book, you highlight Lord Nicholas Stern, the British climate economist, who has been critical of this current state of economics and in fact, Nicholas Stern was on this podcast a year ago, and he talked about how economics failed to capture the true level of risk that climate change poses. Tell us about this current dominant school of economics, which I believe is called “equilibrium economics,” and why you believe it has failed to provide an adequate response to climate change.
Sharpe: You can certainly talk about its failings with regard to risk, but I think let’s talk even more about its failings with regard to pointing out the solutions. You’re right that I’ve described the mainstream current of economic thinking as “equilibrium economics.” It’s not a label that everybody uses. I’ve deliberately chosen it to be as precise as I can be in what I think the problem is. And it’s really since the 1870s that there’s been an increasingly dominant current of economic thinking that starts from this assumption of equilibrium. What does that mean? It’s defined in the Oxford Dictionary of Economics as “a situation in which nobody has any immediate reason to change their actions so that the status quo can continue, at least temporarily.”
So a situation where no one has got any reason to change their actions, so nothing much really changes — what kind of situation is that? Certainly we might come across some situations like that, but clearly that’s not very useful for understanding processes of change in the economy, things like innovation, growth, financial crises, socio-technological transitions including low-carbon transitions. These are all processes where many people have many reasons to change their actions, and the status quo doesn’t continue. It gets replaced with something completely different.
So we desperately need to understand those processes of change in the economy, and if we’re stuck on this idea of equilibrium, it gets in the way of understanding all of those things. We’re actually assuming that the things we care about don’t happen. So it’s very important that we stop limiting ourselves to this special case behavior of a complex system. Equilibrium is one special case, and it’s essentially a highly unlikely one. Most of the time, a system will be in disequilibrium. All of its parts will be moving.
A simple analogy of this is to think about a football game. You’re watching a football game. Actually, a lot of it is fixed. The components are fixed. The rules are fixed. Much of it is not changing. But do you ever see a situation where nobody on the field has any immediate reason to change their actions? No, of course you don’t. It’s never an equilibrium. The players and their teams are constantly trying to think of new strategies that will help them win. And it’s certainly the case in the economy, too, because that’s happening not just with competition with businesses, but with technologies evolving and changing all the time, as well.
So those interactions give rise to all kinds of possible behaviors — bubbles and crashes and technology transitions and all the rest. So that’s what we need to understand. To give one more example of why this matters, why did none of the economic models that central banks and finance ministries all over the world have predict the global financial crisis of 2008, 2009? The reason is really simple. Their models were designed to represent the state of equilibrium. They couldn’t represent the crash. It was just out of scope of the model. It was like having a weather model that forecasts that every single day will be a calm, sunny day with no wind. That model is never going to predict a thunderstorm. Whereas if you actually built a model that wasn’t constrained by equilibrium, it turns out you could simulate a financial crisis. You didn’t know when it was going to happen, but you could see that the build-up of great discrepancies in the economy was making that very likely.
So now when the task before us is huge, structural change in each of the greenhouse gas-emitting sectors of the global economy, we need ways of thinking about that change and ways of modeling it that don’t assume it’s not going to happen. They need to get to grips with those dynamics and help us understand the points of leverage that change.
Stone: Just to re-state what you’ve said, equilibrium economics, I think at the most fundamental level, and this may be an oversimplification, but it assumes a finite world of fixed and never-changing resources and basically the movement towards equilibrium and balance amongst these resources. As you said, climate change brings new elements into this system that are changing, right? And this goes to the next idea that the equilibrium economic construct doesn’t leave room for innovation — innovation in terms of the technologies that may arise to address climate change. These are constantly developing. They’re constantly appearing. I wonder if you could explain the role of innovation within the model and how it’s left out and why it’s so essential.
Sharpe: From the very beginnings, the ideas of equilibrium had to assume a fixed set of resources. And that has been such a deep assumption that it’s gone into a common definition of economics itself, that it’s about the allocation of scarce resources. But if that was the only thing that we’d been doing since the Stone Age, we’d still be allocating stones. Whereas in fact the diversity of products and services in the global economy has multiplied exponentially, so clearly it’s not just allocation of scarce resources. Something is happening which is also about configuring abundant resources in different ways to create new possibilities.
So that is the reality of the economy in a more limited modeling sense. If you have an equilibrium model, you can only really deal with diminishing returns to scale. That’s the only way your model can keep showing equilibrium. The more we see in the real world, which is really important for solving climate change, is that innovation has increasing returns to scale. You have these reinforcing feedbacks — learning by doing, which is the more you make of something, the better you get at making it. And economies of scale. The more of it you make, the cheaper it gets.
In the emergence of complementary technologies, the more that one technology spreads, the more other technologies emerge that make the first one more useful. And it’s these reinforcing feedbacks that give us the chance of really fast progress. That’s why we see things like solar panels coming down in cost by a factor of around 10,000 over the last 50 or 60 years. So clearly that is the dynamic that we have to focus on. That’s what we want to achieve. We definitely don’t want to just stay fixated on how do we rearrange the existing technologies that we have. So that innovation point is right in the center of the challenge, and to get it done, we have to be thinking about those feedbacks and how do we strengthen them.
Stone: I guess the answer to that equilibrium economics that we’ve been talking about is something else that you bring up in the book. The answer to that would be something you term, I think, “ecosystem economics.” A number of times in the book you mention an economist, Mariana Mazzucato, who has coined the term “mission-oriented policy” as a kind of positive model for climate action. My understanding is this is a very focused form of climate policy, and you write that some European governments are putting this to practice. Could you explain it? And how could it be helpful in speeding climate action?
Sharpe: Let me try to say first how a few things relate to each other, because often in economics you get these different labels, and people get very hung up on them because it’s a bit of a tribal thing. What matters, I think, is this fundamental distinction between assuming equilibrium and not assuming equilibrium. And as soon as you take away that assumption, then you’re in the world of dynamic systems. How does stuff change? How do we understand that? What does it mean that we do?
Mariana Mazzucato, as you say, is one of the people who is thinking in that context, and she is particularly thinking in a disequilibrium world, a world of change. Then how do we understand the role of governments? What’s the role of the state? And traditionally, if you think the economy is fixed and self-optimizing, then you think the government should just stand back and do nothing because anything it does will distort the economy and lead to some kind of less good outcome.
But if you think of the economy as an ecosystem, which is how I very much think that we should, it’s constantly evolving. It has many different directions it can evolve towards. Some may be better than others, depending on your preferences. And also you can’t assume that it is innovating all the time as much as it necessarily could do. There might be very important actors in the economy that are just exploiting their position, acting in rent-seeking ways, you know, maximizing the benefits of incumbency.
And so what Mariana Mazzucato argues is that there is an important role for the government in setting a direction, at least in respect to some economic activity and encouraging innovation towards solving problems that society agrees are important. And so climate change is a great example of that. Of course the direction is low-carbon development or the development of zero-emission technologies. And the mission-oriented approach is where you say, “This is so important that we need to throw everything at it. We need to use all the leaders of policy that we have, so research and development, public procurement, tax regulation, subsidy, infrastructure investment — let’s do all of that.”
The reason that can work, and of course it’s not guaranteed to work, but the reason it can is that in a complex system, the effect of different actions in combination is never the same as the sum of its parts. It can be more, or it could be less. And if you use many leaders of policy in a reinforcing way, a mutually reinforcing way, then they may be able to have an outsized, positive effect. One example of that, you look at what China did on solar power when it realized that was an important opportunity. It used all of those policy leaders, and it managed to go from supplying about 4% of the global market in solar PV, to something close to 70 or 80% in less than a decade. So it was incredibly powerful. That’s an example of what can happen when it works.
Stone: Earlier in our conversation, you mentioned the idea of tipping points, and it seems like what you point out in the book is that policies should be very focused, and they should drive certain key industries as rapidly as possible towards certain technological or economic tipping points that hopefully will cascade and accelerate action and potential. Could you tell us a little bit more about these tipping points, how they work, and I guess a little bit more about the policy frameworks that speed us towards them?
Sharpe: If you think of any technology transition, almost by definition there must be a tipping point in there somewhere. Why is that? It’s because the new thing starts off being worse than the old thing. So for example, the transition from horses to cars — the first cars were worse than horses. They were slower. They were less reliable, and they were more dangerous, more expensive, as well. Why would you want one? But then over time they improved in many respects, and there came a point where suddenly they were better. With any technology transition, there’s likely to be some tipping point where the new thing becomes more attractive to consumers than the old thing. Then manufacturers want to make the new thing. The investors shift, and they abandon the old one, and everybody gets onboard with the new thing.
In dynamic terms, that’s when the reinforcing feedbacks that are accelerating the transition start to dominate the behavior of the transition. And the balancing ones that were holding you back and locking you into the old technology — they’re no longer dominant. So how do you make that happen? How do you speed it up? Well, if you look back at these transitions in the past, how did they happen? Then you see they go through stages. In the early stage, it’s really a search for new options, a search for new solutions. And there, of course, research and development is absolutely crucial.
Then once you’ve got some viable solutions, the most important thing is creating a first market for them. And often public procurement is crucial there. In civil aviation, for example, it was the US Postal Service that created the first market, a form of government procurement. It was the same in the transition from sailing boats to steamships, except there it was the British Empire using public procurement again for post, actually. Ocean-going vessels created the first market for the steamships. So public procurement is then very important.
And then you get targeted investment. That helps the new technologies to grow. Subsidies, grants, concessional finance — all of that helps strengthen the reinforcing feedbacks that I was talking about earlier, the learning by doing, the economies of scale. Then once the technologies have got a bit more mature, and they’re diffusing rapidly through markets, regulation becomes usually important. Regulation redirects investment in the sector.
So for example in road transport now, the fastest progress is being made in the countries where they have a regulation that is forcing the industry to supply a certain percentage of the cars it sells as zero-emission vehicles, which in practice means electric, battery-electric vehicles. That regulation is incredibly powerful. Shift industry investment from the old to the new, and again, it accelerates the progress and the development of the new.
All of that eventually gets you to the point to where you’re really close to the tipping point. And once you’re there, it may be that just a very small further intervention helps you cross the tipping point and accelerate down the side of the transition. It could be a subsidy. It could be a tax. It could be regulation. The important point about the tax is it’s not the absolute value that matters. It really doesn’t matter what you think the social cost of carbon is. What matters is the relative value. If you want to use tax to cross the tipping point, use it in a way that helps make the clean technology cheaper than the fossil fuel technology in a given sector. And if you do that, the results are likely to be very large.
Stone: You just mentioned taxes, and there’s one more economic issue I wanted to ask you about here. It relates to taxes — before we go on to the issue of diplomacy. But on the economic fundamentals, let’s talk about the issue of carrots and sticks and the policy tools that governments have at their disposal to, for example, push for the implementation of clean energy and emissions mitigation. You have strong opinions on what policy tools are most effective, with subsidies, which I guess we could call “carrots” having certain advantages relative to sticks, such as a carbon price or a carbon tax. What advantages do you generally see in subsidies?
Sharpe: It matters what stage of the transition you’re at, but in all of the emitting sectors now, we’re early in the transition, so let’s focus on that. Imagine you’ve got a market where 5% of the market is some clean technology; 95% of the market is incumbent fossil fuels. That clean technology needs support to grow. If you invest in it directly, if you use subsidies, you’re directly channeling resources to the new technology, the new system that you want to develop and grow.
What happens is you get the payback of those reinforcing feedbacks. You get the learning by doing. You get economies of scale. Whatever you do, you get compound interest on it. And that’s why we’ve seen the development of solar, wind, batteries, electrolyzers — it’s been massively faster than anybody expected. The deployment of solar power globally in 2020 was about 14 times higher than governments and analysts had predicted 15 years before that. And that’s because of these increasing returns to scale.
If instead, you just taxed the incumbent system, you’re putting a small amount of pressure on a well-established, strong, resilient, incumbent system. At best, you’ll nudge it to function a bit more efficiently, but that doesn’t really help you. You don’t get any of those reinforcing feedbacks. There’s nothing self-amplifying about that effect. So in dynamic terms, that’s very much inferior.
Stone: What I understood also is that a lot of money gets thrown away through that process, right? So if you put a carbon tax on an industry, for example, a lot of money will be spent making that industry more efficient, cleaner, but there will be a limit when all those efforts need to be dropped, and you switch to a completely different technology, a fundamentally cleaner technology. Did I understand that part correctly, as well?
Sharpe: Yes, that’s absolutely right. And I think the reason this hasn’t been always recognized in economics is that the problem has been wrongly framed. Often it was framed as a problem of marginal abatement. In other words, you asked the question, “What is the cheapest way of reducing one ton of emissions?” And often the answer to that is, “Well, let’s make a coal plant slightly more efficient.” Ten years ago, that’s what the International Energy Agency was advising countries to do. But of course marginal change is not the objective. Structural change is the objective. We’re trying to get to a system that is entirely zero-emissions, and we can’t do that just by making the fossil fuel system slightly more efficient. We have to have much larger-scale change.
So then the question of, “How do you achieve that structural change in the cheapest way?” is very different. And exactly as you say, you could spend lots of money making the existing system more efficient, but then at some point, you still have to throw it all away and replace it with something new. So why not start straightaway on building up the new thing, the new system that is going to replace the old one. It turns out that is a much more effective way. It’s like fixing a house before you knock it down. It’s not really worth doing. You might as well just knock it down straightaway and build the new one.
Stone: This is all very interesting because economists love carbon taxes, right?
Sharpe: Of course.
Stone: All right. So you provide some real-world examples of effective policies and tipping points, and you focus on the UK with its phasing out of coal from the power sector, and Norway with its quick transition towards EVs, which I think make up the bulk of new car sales in that country. What specific policies or policy combinations worked in those countries to drive to these goals?
Sharpe: These are both good examples of how a carbon tax can be helpful in the right context, where the relative value of it is appropriate. In the UK example, we were doing many things the same as other countries in the power sector. We have some air pollution standards that apply to coal plants. We have subsidies for wind and solar power that were helping them grow very fast, and we were part of the European Union’s Emissions Trading Scheme, which is a cap and trade carbon-pricing scheme.
All of those were the same as many, many other countries. Then we had one thing that was different, which was a fixed carbon tax in the power sector. Not very much, about 18 pounds a ton, but it just so happened that it turned out to be extremely useful. What it did was it tipped the balance between coal and gas. Before that, gas was the cheaper of the two, and gas would generate first, and the coal would have to wait and only come on when it was needed to make up supply.
The carbon tax added to the EU ETS carbon price. It switched them over, so gas became cheaper, coal had to wait until all the gas had finished generating. So coal generated for far fewer hours. A really important thing is this is happening in the context of massive growth of renewables and a shrinking share of the market that the fossils are having to fight each other over. So if you think you’ve got the upper hand compared to coal, then actually you’ve tipped coal from being profitable into unprofitable, and as a result, lots of the utilities start closing down their coal plants, and even blowing them up in quite spectacular style.
And that is what got the UK the fastest power sector decarbonization in the world, roughly eight times faster than the global average over the period of about a decade. And it was the combination of all those policies that did it. And the carbon tax was just enough to activate that tipping point. There are many similarities between that and the Norwegian example in road transport. Again, they have a large package of different policies, which all act together. You drive an electric car in Norway, you get to use the bus lane. You get to park in places for free. You get less road tax — all kinds of benefits. But the one thing the Norwegian Electric Vehicle Association says was most important was that they have a combination of subsidy and tax that makes it cheaper to buy an electric vehicle than to buy the equivalent petrol or diesel car. And when you line that up compared to other countries, you see no other country actually did that. And Norway, by doing just enough of that tax and subsidy to cross that break-even point, it looks as if they activated a tipping point in consumer preference. And many more people prefer to buy an EV instead of a petrol car.
A few years ago, when we did this paper, Tim Lenton and I, on positive tipping points, then at that time, Norway’s electric vehicle share of car sales was about 20 times higher than the global average. So I find those examples very optimistic. It doesn’t mean that policy-making is easy, and that you can just do one thing and it solves it all. But it does mean that faster progress is absolutely possible — faster not just by a bit, but by a very large amount, if you have the right combination of policies.
Stone: Well then, we get to the issue of diplomacy and making action move on a global scale, right? Action hopefully as strong as what we’ve seen in the UK and Norway, but again on a global scale. And in the book, there’s a lot here. But one of the ideas that really stuck with me was that diplomacy is not as collaborative as it needs to be, or maybe it’s more about there’s a different quality of collaboration that’s needed in global climate diplomacy to reach our mitigation goals.
I wonder if you could talk about this idea of, again, collaboration — what you see is lacking and where this needs to go.
Sharpe: I think it’s all about how do we make diplomacy effective? In what kinds of ways are we trying to collaborate, and how can we do that so that it works?
Stone: And I just have to interject. I think of diplomacy as innately collaborative, right? The process, the signing of the Paris Climate Agreement — that was all global collaboration, so what new type of collaboration or different type of collaboration, again, are we looking at?
Sharpe: Yes, let me break that down into a few different dimensions of diplomacy. The first one is scope. How do we break up this problem that we’re trying to solve? When you look at the history of diplomacy, when has it ever been useful in solving a problem? It always broke the problem down into something manageable. So we’ve never had a treaty on world peace. In fact, we have — we had one. It was called the Kellogg-Briand Pact back in the 1920s. It wasn’t usually successful. The successful peace treaties have been ones that involved small numbers of actors first focusing on specific problems. Same if you talk about poverty and development. We’ve never had a global negotiation to end poverty. There’s a good reason we don’t do that. That’s too big a problem. You have to break it down to get anything done.
And it’s the same with climate change. If we only negotiate over economy-wide emissions targets, that’s far too big a scope to be really useful. You can’t have a useful discussion with countries about that. It doesn’t give you good opportunities to cooperate in a practical way that makes it easier for each other. So breaking it down, as I’d argue, to the level of the greenhouse-emitting sectors, that becomes much more tractable. Talk about how to shift from coal to clean power, talk about how to shift to electric vehicles in road transport, or to end deforestation — each of those is completely different problems from the others, with different sets of solutions, different actors that matter. So you have to break it down to that level before diplomacy can be really effective.
The second thing is who’s around the table in each of these discussions? And in the process that we’ve had for the last 30 years, there’s been universal participation. All of the countries in the world engaged in one process of negotiation. Now obviously that’s going to get you the lowest common denominator. It’s incredibly hard to agree on anything between 196 countries. The best you can do is agree on some big goals. Those are important. It’s important to have this global consensus, and the Paris Agreement is a good achievement in that sense. But clearly we need more than that. And if we’re going to agree on some stronger action, we’ll have to break it down into smaller groups of participants.
Now when you look at the emitting sectors, you find in each one the ten largest countries in the world, which are different in each sector, but the ten main countries tend to have about three-quarters of global production or consumption of the relevant goods. So actually you can have a small number of countries around the table and do nearly all of what you need to do, and make it easier for the rest of the world.
The third thing is timing. We’ve spent all of this time focused on long-term targets, that’s been the overwhelming focus of diplomacy. But there are two problems with that. One is that countries have no confidence about what they can do over the long-term. So most emerging economies, developing countries, they have their emissions targets that point up, not down. And that’s because they have very little confidence about what they can achieve over that time scale. But if you talk to them about what can you do now, they have much more confidence, and they can actually do stronger things.
Look at China, for example. China’s actions on renewable power have been many, many times stronger than its targets implied that they would be. And the targets have had to keep moving just to catch up with reality. So in all three of those ways, we need to refocus diplomacy, to set the focus, small groups, focus on actions instead of targets. And if we do that, build on the consensus we’ve already achieved, but go further now and have some really focused, practical cooperation, then we can start changing big chunks of the global economy more quickly, in ways that countries can’t do on their own.
Stone: A final point here on the issue of diplomacy. You point out that diplomacy focuses, among many things, on building trust between countries, that countries will go into agreements, and everybody will do their part. You won’t have free riders, et cetera. But you point out that a big barrier to diplomacy isn’t really always the trust between countries. It’s domestic politics itself. And I think the United States is a fantastic example of the role of domestic politics and its impact on global negotiations and diplomacy. I wonder if you could just finish up giving us a little bit more development on that thought.
Sharpe: There’s a great paper on this subject called “Prisoners of the Wrong Dilemma.” And it makes exactly the point that you just did, that it’s wrong to think of countries in these binary terms as just a country having a single set of interests, that actually in the domestic policy decisions, every single one is a battle. You’ve got interests for and interests against. The useful way of thinking about diplomacy is how can you work together between countries so that those of you who want the transitions to happen as strengthening each other’s hands in other countries?
So as one example of this, when I was working on COP26, and we had a campaign on the power sector, we were really pushing for countries to cancel plans to build so many new coal power plants. And we weren’t just shouting at them and lobbying them. We were also offering support, and we were saying, “Look, if you agree that you’re going to cut your new coal power plants, we’ll come in as the international community with really significant financial and technical assistance, and we will help you do that, and we’ll help you integrate the renewables and bring down the cost of power much more quickly than you would do otherwise.”
And when you’re offering that kind of help, then the guys in that other country are having a debate about the future of the energy system. The balance of that debate changes, and the guy who was arguing for more coal power, his argument is weakened, and the guy who was arguing for more renewables, his argument is strengthened. So that’s the kind of dynamic that you want. And it plays out differently in every sector, but in each case it’s more effective to be working on that level than it is simply to turn up and say, “You have an economy-wide target, and we think it’s weak. Can’t you have a better one, please?”
Stone: Simon, a last question for you here. Are you hopeful, given all that we’ve talked about, the book that you’ve written, the challenges you’ve identified in communicating and understanding risk and in overcoming barriers to effective diplomacy. Do you see changes taking place that make you hopeful that action to address climate change will accelerate, and this “five times faster” will become the new fact?
Sharpe: I am hopeful. I’m worried, and I’m hopeful. You can’t not be worried when you look at the science. It’s deeply, deeply worrying. But I am hopeful for a few reasons. One is the evidence that when we do take the right policy actions, change is much faster than we expect. I’ve mentioned a few examples of that.
Second is I think we’re all learning from what does work. We’re not at the beginning anymore, and we can see what has worked incredibly well in the past and what’s working very well in road transport. We can learn lessons from that and apply it to all the other sectors, as well. So collectively, we’re learning much more about how to do transitions and how to make them happen quickly.
And then on the international side, I think the diplomacy really is starting to shift its focus. I think all countries in the world have agreed on net-zero as the goal, and they can turn their attention increasingly to how they work together in practical ways to get there faster. In the business world, I think you see the focus of competition shifting from competing for a share of fossil fuel, fossil technology markets, towards competing for shares of clean technology markets. So that is all shifting, too.
I don’t take any of this for granted. We’ve still got to go much faster, and if we can make these structural changes I’m talking about in the ideas and institutions of the science and the economics and the diplomacy, then I think we can help ourselves go much faster. But of course, like all of us would say, we can’t be complacent. We need to give this all the help we can possibly give it.
Stone: Simon, thanks for talking.
Sharpe: Thanks very much.
Stone: Today’s guest has been Simon Sharpe, Director of Economics for the UNFCCC Climate Champions and author of the just released book Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change.
Simon Sharpe
