Three Professors from the University of Bristol have published an article examining the environmental costs caused by the fall of the pound, following the announcement of Kwasi Kwarteng’s mini-budget.
Professor of Economics Education, Alvin Birdi, Senior Lecturer in Climate Justice, Alix Dietzel and Lecturer in Climate, Politics and Society, Katharina Richter detailed three reasons why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.
1. The low-carbon economy just became a lot more expensive
The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind, as well as carbon storage, insulation and electric cars.
The loss in investor confidence threatens to derail these investments, as firms may be unwilling to commit the finances required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies are imported. As the value of the pound drops, the relative cost of these imports increases.
2. High-interest rates may rule out large investment
To control the economic situation, interest rates are expected to rise further. Pandemic-related spending and Russia’s war on Ukraine are causing rising consumer prices, fuel and food poverty, financial hardship and the collapse of businesses.
While the anticipated increase in interest rates could ease the cost of living crisis, it also increases the cost of government borrowing at a time when mass low-carbon investment is needed to hit net zero by 2050.
The Climate Change Committee (CCC) estimates that an additional public spending of between £4 billion and £6 billion per year will be needed by 2030 in order to fulfil the commitments made as part of the Paris Agreement. The committee, established under the Climate Change Act 2008 is tasked with advising and reporting to the UK Government on all matters related to climate change.
Some of this money should be raised through carbon taxes, but for as long as the cost of living crisis is ongoing, the government will have to borrow. Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.
3. Imports will become pricier
In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers, likely to affect prices for food, clothing and manufactured goods.
At the consumer level, this will immediately lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year. Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste.
This also creates problems with the adoption of low-carbon technologies, including electric vehicles, solar & battery solutions, and low-carbon heating solutions such as heat pumps, which the government plans to grow to 600,000 installations per year by 2028.
Some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who tend to fly more, have multiple cars and bigger homes to heat will benefit the most from the mini-budget tax cuts, despite Kwarteng’s abolition of the 45p rate of Tax.
One estimate says that the combined cost to the government of the new tax cuts and higher cost of borrowing is around £250 billion. This massively reduces the budget available for climate change mitigation and improvements to infrastructure.
Therefore, the lectures’ state “rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.”
