Rupert Darwall: The IMF’s Net-Zero fairy tale
With Britain, France, the European Union, and now America (soon to be under Joe Biden’s leadership) piling onto the net-zero bandwagon, you’d think that some objectivity about the economic costs and consequences about such absolutist carbon-emission policies would be in order.
Traditionally, the International Monetary Fund (IMF) could be relied upon as a source of sound economic advice. No longer. Under its previous managing director, Christine Lagarde, and now its current one, Kristalina Georgieva, the IMF has traded economic integrity for green wokery – thus giving governments license to push radical green policies in the false belief that there are few or no downsides.
Covid-19 has put what might be called green millenarianism on steroids. In July, Georgieva told an interviewer that the pandemic presents a once-in-a-lifetime opportunity to be part of a transformation necessary for human survival: “you don’t like the pandemic, you’re not going to like the climate disaster.” A characteristic of climate millenarianism is over-hyping of the potential damage of climate change while at the same time claiming that avoiding this damage will cost next to nothing. Thus in its most recent World Economic Outlook, the IMF implies that potentially catastrophic climate change can be avoided with a green fiscal stimulus amounting to 1 percent of GDP and carbon taxes of between $10 to $40 a ton in 2030.
The IMF’s analysis is riddled with errors and omissions. It correctly notes that renewable energy is more labor-intensive than generating energy from fossil fuels. As the American Enterprise Institute’s Mark Perry notes, in 2019 it took 5.2 workers in wind and an astonishing 45.8 in solar to produce the same amount of electricity as one worker in nuclear, natural gas, and coal generation. That’s more jobs in wind and solar, yes, but poorly paid ones – a critical dimension of employment that the IMF entirely neglects.
The IMF also implies that renewable energy is less capital-intensive (“reallocation of activity from high- to low-carbon sectors could therefore be more positive (less negative) for employment than investment”). This shows how little the IMF understands about the energy sector. Wind and solar are intermittent power sources, so keeping the grid stable and the lights on requires investment in parallel generating capacity. This makes renewables extremely capital-inefficient. Consider the U.K. Without renewables, the U.K. would require 22 gigawatts (GW) of new capacity to replace old coal and nuclear. With renewables, 50 GW is required – 28 GW more than without. Switching to renewables more than doubles the investment requirement.
Economic progress and rising living standards have come from capitalism’s ability to produce more from less, through constantly improving capital and labor productivity. Widespread adoption of renewables throws this process into reverse. It is the opposite of progress. President-Elect Biden’s promised 10 million new clean energy jobs can be more than met, Perry calculates, by switching to 100% solar energy – but as he points out, “those energy jobs will come at a high price in the form of higher energy costs for consumers and businesses, less dependable electric power, more blackouts, a reduction of jobs in energy-intensive sectors, reduced economic growth and an erosion of the nation’s prosperity.”
To derive its conclusion that net-zero would be the economic equivalent of a flea bite on global growth, the IMF uses general equilibrium modelling, which can be useful in understanding the effects of, say, a tax change, and mapping its effects throughout an economy. But equilibrium, a concept borrowed from Newtonian physics, implies regularity and stationarity, a system returning to a stable growth path as external forces unwind – conditions that don’t pertain when economies undergo forcible structural transformation lasting decades, and of a severity not seen outside wartime or the centrally planned economies of the Soviet era. The methodological assumptions of equilibrium are violated by the economic process that the method aims to model, thus rendering the IMF’s conclusions worthless.
The most misleading claim that the IMF has seeded into public discourse concerns fossil fuel subsidies. “Fossil fuels are now massively under-priced,” the IMF asserts, with global energy subsidies amounting to $4.7 trillion in 2015, equivalent to 6.3% of global GDP. These aren’t your grandfather’s subsidies in the form of cash payments to oil producers, which is what the green lobby would like us to believe: end the subsidies, transfer the cash to clean tech, and all will be well.