Prof. Sir Dieter Helm, University of Oxford, on the Real Costs of Climate Action

How economically grounded is the UK’s net zero commitment? Listen to Jason Mitchell discuss with Professor Sir Dieter Helm, University of Oxford, about what new forces and factors are reshaping net zero ambitions; how the UK should think about optimal climate policy; and why a realist approach is critical for navigating the political economy factors of climate action.

Recording date: 08 May 2025

Sir Dieter Helm

Sir Dieter Helm is Professor of Economic Policy at the University of Oxford and Official Fellow in Economics at New College, Oxford. Professor Helm specialises in the environment, notably in climate change, biodiversity, water, energy and agriculture. His books include The Carbon Crunch and Natural Capital: Valuing the Planet; Net Zero: How We Stop Causing Climate Change; and Legacy: How to Build the Sustainable Economy. From 2012 to 2020, he was Independent Chair of the Natural Capital Committee, providing advice to the government on the sustainable use of natural capital. Dieter has provided extensive advice to UK and European governments, including “The Cost of Energy Review” for the UK government in October 2017 and for the European Commission in preparing the Energy Roadmap 2030.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I am Jason Mitchell, Head of Responsible Investment Research at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi, everyone. Welcome back to the podcast. And I hope everyone is staying well. So there's an old quip. If you're ever asked the question, are you an optimist? Because the only real way to answer is to simply reply, "I hope so." I'm starting here because there's an increasing tendency to group people into either the climate optimist camp or the climate pessimist camp. Basically to draw a line between the two and ask readers or listeners to take a side. But this episode looks at the nuance in between the two instead. I see it more as a well-needed shot of realism and a clear-eyed reckoning about what's working and what isn't. And if you've listened to this podcast long enough, you probably know that I've got a lot of time for not only understanding the challenges of achieving net-zero, but also thinking about the mechanisms, pressure valves, and even resets that could help sustain it over the long term.

And for investors who care about net-zero, that's looking more and more like a retrenchment back to two degrees of warming from the original 1.5 C. Because let's face it, net-zero critiques and the societal trade-offs are only going to get more politicised, which is why we need more honest assessments to protect against whatever you want to call it. Maybe it's magical thinking, policy utopianism, or the Nirvana fallacy. In other words, it's got to be more than just, "I hope so."

It's why it's great to have Professor Sir Dieter Helm, one of Britain's leading authorities on energy and climate policy. On the podcast we talk about what new forces and factors are reshaping net-zero ambitions, how the UK should think about optimal climate policy and why a realist approach beyond the optimist-pessimist dichotomy is critical for navigating the political economy factors of climate action.

Dieter is Professor of Economic Policy at the University of Oxford and Official Fellow in economics at New College Oxford. He specialises in the environment, notably in climate change, biodiversity, water, energy, and agriculture. His books include The Carbon Crunch and Natural Capital: Valuing the Planet, Net Zero: How we Stop Causing Climate Change, and Legacy: How to Build the Sustainable Economy. From 2012 to 2020, dieter was independent chair of the Natural Capital Committee. He's also provided extensive advice to the UK and European governments, including the Cost of Energy Review for the UK government in October 2017 and for the European Commission in preparing the Energy Roadmap 2030.

Welcome to the podcast, Professor Sir Dieter Helm, it's great to have you here and thank you for taking the time today.

Professor Helm:

Well, thank you very much for inviting me along.

Jason Mitchell:

Excellent. I'm really looking forward to this episode. Let's start with some recent news. The Tony Blair Institute created a bit of a controversy last week with the report titled The Climate Paradox that appeared quite critical of the current approach to net-zero. It argued for one with greater emphasis on technological solutions like CCS, artificial intelligence and innovation more broadly as well as a narrower focus on the key sources of emissions rather than basically trying to do everything everywhere. The report in fact actually states the UK's decarbonization efforts are, their words, "Riven with irrationality," and that any strategy based on either phasing out fossil fuels in the short term or limiting consumption is a strategy doomed to fail. So let's start with that. What's your read on this? Is net-zero in fact costing the British public too much?

Professor Helm:

Well, there are several things to say about the Tony Blair Institute report. I mean, the first thing is that, and I don't put this as a criticism, it's always to be seen in a political context. Tony Blair is one of the great politicians of our age and he's always very conscious of when he does things, how they're timed and how they hit. And the Tony Blair Institute report lands in a context in which it's quite clear that there are serious differences within the cabinet, between the Prime Minister and the Chancellor on one side, and Ed Miliband perhaps with a little bit of Angela Rayner on the left of the party, and more excited by the 2030 net-zero electricity target. So you should see it in that way. These things don't happen by accident. They don't happen randomly. It is a cameo on where the politics of all this are.

The second thing to say is that the document is an attempt to be fairly comprehensive about the area, but actually has punctuated with lots of different bits and pieces, some of which are entirely sensible and some of which are highly questionable. So for example, should you concentrate your resources on those things which make most difference to climate change, which are the global phenomena? Yes. I completely agree about that. Is net-zero 2030 a target too tight and too short? Yes. I agree about that.

But when it comes to suggesting that there's no possibility of it affecting people's standard of living and success, well, that's really saying, "There's no chance of really dealing with climate change." I mean, either we the polluters must pay and we must change our ways to incorporate pollution costs into what we do, or it's just a free ride. And if it's just a free ride, then, well why do anything at all, really? So I don't buy that. And there are lots and lots of other details, some of which again, as I indicated are sensible and some of which are highly questionable. So see it primarily as another political intervention into what is already a very heated political debate.

Jason Mitchell:

Yeah. It's interesting. I was actually going to ask you about what was behind Tony Blair's intervention here? Do you recognise him as a climate realist like you yourself? Or is this about something else? Specifically I think where you are headed criticising Keir Starmer's Clean Power 2030 ambition.

Professor Helm:

Well, I don't really like these labels, optimist, pessimist, and then shades of grey in between. Maybe there are 50 shades of views on climate change going forward. I mean, it's all too serious for these kinds of labels. So different people have different contributions to make to this debate. The future is of course there to be made up. We don't know what the future is going to be. We don't know what the technological options in the future might be, and we do have choices to make. And people have different views about how those choices should be directed.

What the problem in the debate is that the moment you say anything which is questioning of, for example, a 2030 target, you are immediately treated by one camp as if you are some kind of climate denier or sceptic or whatever. And on the other side, the moment you have a thorough commitment to doing the climate change, well, you are called an evangelical, et cetera, on the other. And I think a plague on all their houses. This is a complex problem which has multiple dimensions and the current framework of policy is nearly two decades old in the UK and globally it's 35 years old. Would you be surprised if with all that experience we've now got that people have different views about how we might take these policies forward?

Jason Mitchell:

Yeah. I'm incredibly sympathetic about the labels and I do want to come back with some questions a little bit later. But I think it's interesting because the report again asks the question, which previous governments have tried to answer, but which I guess remains open. In other words, how should a small country like the UK, which is obviously no longer in the EU, think about optimal climate policy? In particular given its limited influence in the global system, how should the UK balance adaptation and mitigation and where should we focus mitigation efforts? I know that's a big question. But again, is it an open question in your view still?

Professor Helm:

I think it's an extremely important high-level question, which is regularly ducked. I mean, in British policy and in the British establishment, et cetera, there is this ridiculous idea that we still have some kind of empire, that we are one of the great powers of the world. And as Boris Johnson put it actually in one of his documents on climate change, an official government document, he thought that the leaders of China and Russia will be looking to the UK to find out how to do it. And we have all this pretension to be a clean energy superpower. Were also going to be an AI superpower too. And this is all just nonsense.

I mean, we are a medium-sized country with a substantive history. Of course the UK has some influence but not much. Climate change won't be decided by what Keir Starmer or Ed Miliband think or say. Nobody takes much notice. No criticism of them, but we're just one in many. It's much more important to know what the leaders of China, Russia, and the United States think, and also incredibly important to understand what the leaders of Indonesia, Nigeria, Brazil, and India think about these topics.

And I think it's not the right expression, but in a way we want to grow up and stop being completely obsessed with our history and our importance, accept a bit of humiliation and work out how best we can contribute to helping global warming be addressed. Because it isn't English warming or Oxford warming, it is global warming. And the future of climate in this world will not be determined in the UK. It's going to be determined in those huge countries in the future. Yeah, Indonesia and Nigeria are really critical. Nigeria will have more people than the whole of Europe, the EU, by 2050. These are huge numbers. Half a billion people in Nigeria. Indonesia, huge power in this area for coal, for China, also nickel, lots of damage to the et cetera to get this nickel out and then the pollution for the nickel refinery. This is what really counts. Or Brazil which wants to be one of the top 10 oil producers as one of its primary ambitions. And it wants to be green as well.

So we need to get over our history and realise, like most other middle-size economies do, one player amongst many. You don't hear a German leader stand up and say, "We are going to lead the world and they're all going to listen to us as to how to do these things." And you certainly wouldn't hear a prime minister of Sweden say that. Why do you want to take so seriously what a politician in the UK says? So focus on that. And then I have strong views about how we could contribute to addressing global warming but that's not the same as pretending to be a clean energy superpower and thinking you can do net-zero territorial emissions in 58 months for electricity.

Jason Mitchell:

Up until COP 26 in Glasgow, the energy trilemma served as I think a pretty useful paradigm. Back then it pointed to decarbonization and sort of the real emergence broad emergence of net zero emissions. Then it shifted to price affordability during the energy crisis and obviously the Ukraine-Russia war as well as energy security. And I guess my question is, because you seem like the ideal person to provide an answer, how do policymakers balance and prioritise these three objectives in the short and medium term?

One conclusion of the trilemma seems to be that policymakers frankly either can't or aren't really good at prioritising all of these three simultaneously. I guess it's like the Mundell-Fleming model in central banking. But if the cost of truly solving climate change is politically unacceptable, should we stop pretending we can have both cheap energy and deep decarbonization?

Professor Helm:

Well, one of the ways in which politicians deal with the trilemma, which is quite a neat way of thinking about things, is to pretend that the solution that they would like to have solves all three simultaneously. So we have the baloney about renewables are nine times cheaper than fossil fuels. At least we have that baloney in the UK. So therefore there's no trade off between affordability and addressing climate change. So it's win-win.

And then of course we have the nonsense that the defence and security are best dealt with by, "homegrown energy". Goodness knows what that means, but so suddenly the nine times cheaper renewables are not only the cheapest way of producing energy, but they're also the most secure way of doing it. And so therefore there is no trilemma. And repeatedly politicians pretend that there are no tradeoffs. Now, there are tradeoffs. And events change the balance of those tradeoffs.

First of all, it's just not true that affordability is correlated by how much renewables you have. It is true that affordability is also influenced by the gas price. When the gas price is high, everyone says, "Well, renewables are better because they address affordability." When the gas price is low as it is now, well, that doesn't quite add up. We're supposed to do renewables because they're going to get us out of high and volatile gas prices. Well, the gas price is is back in Europe to the 10-year average in nominal terms. In real terms it's well below and oil price is not $100 a barrel, it's 60-something dollars a barrel. And again, in real terms, even back to the last decade, it's about 50. So events change the perception of the balance of these things.

And the event, of course, which is most pertinent to this is Ukraine and Russia and the cyber attacks, the attacks on the interconnectors, et cetera, et cetera, and suddenly the world looks really rather different. Now, everyone says, "Well, there what you need is a lot of wind farms." I'm in favour of having lots of wind farms, but how this works on defence basis I'm not sure because wouldn't you send a swarm of drones over and just take out a few of them? What about cutting some of the cables which now need to balance up the intermittent power in the UK? Or interrupt the gas, which of course is absolutely essential to back up the intermittency?

The NESO, the system operator suggests that if we were to achieve the 2030 net-zero electricity target, we'd need 35 gigawatts of gas. It would only burn 5% of the time but you'd need that gas instantly. Well, 30% of the gas comes with one pipeline from Norway. One little bang underneath it, as went under the Nord Stream pipelines and you have chaos. And there's no doubt whatsoever that energy infrastructure is number one target in hybrid war, phoney wars, the kind of wars we have all over Europe all the time now, either via taking out the cyber systems or directly hitting the infrastructure. And you can see the chaos that results. And in that respect, the Iberian Peninsula episode just recently, whatever its causes, demonstrates that if you don't have security supply of your energy system, your economy basically stops. Everything stops. And of course that wasn't true 10, 15 years ago, and it wasn't a priority, and we didn't have the Russians all over Ukraine then. Now we do.

And so the balance between these three will always shift. If you are in a boom, people are getting richer all the time, then affordability doesn't really matter so much. If you are in a stagnant economy like we are in the UK, then it becomes a zero-sum game and people are serious about it. But right now, security supply and defence are by far the most important of the three and the most immediate threat. Whereas climate change is a slow burn, long-term problem out ahead. And affordability, you can see it in the voting patterns, if people who are many of them well able to pay are almost apoplectic about the idea that winter fuel allowance might be withdrawn from some pensioners you get a feel of how the affordability bit bites. And in that respect, what Blair is doing on the standard of living affordability side in the recent Blair report is apposite for the times. As Macmillan once said as Prime minister of Britain when asked about how politics was going, he said, "Events, dear boy. Events, dear boy. And the future is uncertain," and that's what's going on now.

Jason Mitchell:

I want to push you a little bit more on the prices comments. As an economist, how do you read the politics of energy prices? And that old adage in energy markets, which goes, "The cure to high prices is high prices." Do you think that decarbonization is possible without higher energy prices? Do you think higher energy prices are an obstacle for decarbonization? In other words, do high prices cut both ways?

Professor Helm:

Okay, so the first thing to say, and it's very important, is that for all the claims that we were on to a nirvana of cheap clean power as a clean power superpower, the two countries that have pushed hardest in this territory, Germany and the UK, have amongst the most expensive industrial prices in the developed world and very high domestic prices too. So we're in a position where the absolute opposite of what we were told was going to happen has happened.

Now, there's no doubt that those prices do stunning damage on the industrial side, and I've separately suggested how we should adjust industrial prices to the competitive challenges outside and reallocate the costs accordingly.

Now, the politics of this depend quite a lot on why you think those prices are currently high on what you think's going to happen. There is a story which says these prices are temporarily high.

It's a short-term problem because we have to invest in lots of infrastructure, et cetera, but then the sunny uplands of cheap prices are going to materialise later on. Well then it's the politics of a one-off shock almost. It's a bit like COVID. We're going to have to bear a burden, let's borrow loads of money to get over the hurdle, but in the medium-longer term, everyone's going to be better off, everything's going to be cheaper. It's a temporary problem.

Now, if you take my view that it's anything but a temporary problem, my view is that we are going to have to pay more for the energy we require and that is essential because that's necessary to address climate change. And I challenge anyone to think that they're more serious about climate change than I am.

So why do I think that the prices are going to be behind the future? Well, climate change problem is a problem that in our activities we do polluting things. We burn carbon. 75% of UK energy is oil, gas and coal derived. And for the world it's 84%. Plastics, all the stuff you use every day, construct your carbon diary and you'll realise just how absolutely soaked in carbon your activities are. And you don't pay for the pollution that causes. And so a simple bit of economics says, "Well, you ought to pay, the polluter ought to pay. And if you did pay, the price would be significantly higher." Now, where the politics comes in is we don't want to pay for the pollution we cause. We want to live beyond our environmental means. And the great challenge for the environmental narrative, if you like, is to explain to people that if you want to go on living beyond your environmental means, i.e. continuing in an unsustainable fashion, well, just remember it won't be sustained. That's the logical consequence. You can't have an exponential unsustainable approach to the world going forward and expect there are no consequences.

But the issue is really: do you want to land the next generation with the consequences of you living beyond your means? And that's a dialogue we don't have and we ought to have. Instead, we have a silly dialogue saying, "You can decarbonize. It ain't going to cost you anything." Well, if that's true, if renewables are nine times cheaper than fossil fuels, then it would follow that we don't need any policy. I mean, I don't need a policy to get me to go and buy an iPhone compared with a fixed phone. It's just better. It offers many more services and therefore it takes over. I don't have a fixed phone anymore. Many people don't, right? There's no policy to do that. I would have a heat pump and I have solar panels and stuff anyway, but I would have all this stuff if it was cheaper, right? I do, but most people don't. And that's where we go.

A classic is arms aviation. I mean there are some people who believe there's something called sustainable aviation fuel. But the truth is, if you wish to fly all over the world and do so repeatedly, you are going to be responsible for a lot of pollution. And not just the carbon, by the way, just think of the pollution in the airport and everywhere else. Well, if you ask people, "You should pay for it. Your air tickets should be a lot higher. You should pay for the consequences of what goes on in an airport." They'll say, "No, no, no, no, we're not going to do that. We're not going to vote for that." And that just tells you we like being unsustainable.

Jason Mitchell:

I want to pick up on the point that you talked about in terms of producer pays. I'm pretty familiar with Myles Allen and some of the work that he's done around EPR, the extended producer responsibility kind of work. It always surprises me, though, that this idea lives in the small world of academia, I'd say. I mean Myles, you, you're both at Oxford. Just in the world of finance I don't hear a lot of people talking about extended producer responsibility or producer pays. Despite the fact that, I mean, there are precedents, the electronic industry certainly has to take care of its electronic waste. But why hasn't this policy emerged in kind of a bigger way?

Professor Helm:

Okay, so the first thing to say is that whereas the direction of travel I suspect Myles and I agree about, the producer responsibility is basically a disguised way of having a carbon tax. You can't have a carbon tax because the voters turned against it. And interestingly, Carney's even turned against it in Canada despite all his advocacy about climate change in the past. People don't want in their face to be confronted with the cost of pollution. So what we do is we use indirect ways of doing it. So you don't see that you will pay a carbon tax when you buy something in plastic packaging in a supermarket but you are. It's just that the supermarket is told that it has to meet producer responsibility, up go its costs, and therefore up go the prices to you. I think it's an inefficient way of having a carbon tax and I think the reaction to it is a muted version of the reaction to carbon taxes.

Now, the fundamental fact of life is the vast bulk of electors, voters, the public do not want to pay for the pollution they cause. That's the fundamental difficulty in addressing any of the environmental challenges we have today. Now, what I think is deceitful amongst politicians is to tell people they don't have to because it's cheaper anyway. And if that was true, as I keep coming back to, well, fine, we haven't got a problem. We can go and study something else. But we do have a problem, a really serious problem. The concentration of carbon in the atmosphere goes up two parts per million every single year since 1990. I think last year it was three. The proportion of energy globally that's coming from the fossil fuels is stuck at about 84, 85%. And this is all in a context, by the way, in which there has never been an energy transition in the history of the world, certainly for the last three or 400 years.

When we went from wood to coal, the wood burn went up. When we went from coal to oil, the coal burn went up. When we went from oil to gas, the oil burn goes up. What renewables are doing, and a bit of nuclear at the moment is coping with the increase in the demand for energy. They're not coping with the transition from the fossil fuels. There is no transition. And at the moment we have no policies in place which are actually going to create an energy transition. What they're going to create is a world in which renewables and nukes take up some of the additional demand for energy which is coming thick and fast.

And these are realities which is almost completely absent from the discussions about climate change, the campaigns, the Just Stop Oil and all that stuff. And in some sense it's very immature as a debate and it leads people to the notions like, for example, produce responsibility leads to price increases, therefore bad idea. Paying for pollution through carbon tax, bad idea, because that puts up prices and that has an impact on living standards so we can't do that. Well, the outcome is exactly the outcome we've got, which is nothing's happening on climate change in the sense of we're still adding two parts per million every single year into the future.

Now, linked to your finance question, the really important point is that climate change is slow burn. So if I do a financial analysis and I use a discount rate of 5%, who cares about the future? There's nothing in a financial transaction at any reasonable cost of capital rate or return discount rate which makes climate change of any significance almost whatsoever to the investment decisions that people make on the basis of those discount rates. And that's the generational point. In finance, the future is less attractive than the present. But in climate change and environmental terms the next generation is important and we need to take them into account even though at any notional discount rate, two, three, four, 5%, they don't matter at all.

Jason Mitchell:

Yeah. You're absolutely right. And I think this is precisely why so many portfolios tend to discount the impact of let's say a hot house scenario by 2030 or 2050 because of those discount rates and the academic argument around what the right one is.

But before we talk about what the right policies look like, I want to go back for a second to some of the lessons maybe we've learned from the energy crisis. Because I often think about this question that Daniel Juergen posed, and this is back in 2022 when the energy crisis really erupted. And he asked in an article, "Is this energy shock a one-off resulting from a unique conjunction of circumstances? Or is it the first of what will be several crises resulting from straining too hard to bring 2050 carbon reduction goals rapidly forward, potentially prematurely choking off investment in hydrocarbons, thus triggering future shocks?" What's your read on this? I mean, do we all need to be much more realistic, recognise the fragility of net-zero, and effectively recalibrate its ambitions over a longer timescale?

Professor Helm:

Well, I never get excited by people who predict crises all around every corner and it's different this time. There are always volatility in energy markets. There have been for the last 200 years. And I remember, it helps to have some grey hair, the energy crisis of the '70s, how it's all different now. And the world's completely different and people believed in the seventies that peak oil was around the corner. In fact, they believed that peak oil was still inevitable and just around the corner in 2014 when the oil price went up.

So people have this almost innate psychological desire to see the world as threatening crises that are all going to multiply together and the past is a foreign country and the world and the future is all going to be different. Well, it's kind of true and it's not true. As a result of the energy shock in the 1970s, the French decided that the oil price was going to go up dramatically, $100 plus, on it was going to go, and they built 52 nuclear reactors.

Now, actually it was probably a good idea that they built 52 nuclear reactors now we know that climate change is a problem. But they didn't think that at the time. They thought they were buying a hedge against oil. It was an absolutely awful hedge against oil but it had other advantages.

This time around we've had all this nonsense about high and volatile energy prices just because we have a two-year spike as a result of Russia, the major supplier of gas, or 40% to Europe basically being cut off in the Ukrainian conflict, and oil markets being somewhat disrupted as a result. And everyone therefore says, "Well, now we know that the gas price is going to be high and volatile forever and the oil price is going to go up to $100 and beyond." Usually it's something like Goldman Sachs who comes out with a forecast like this. There's been a series of them. I mean, why? Why do you think that? I mean, we're not short of oil. There's never been a peak oil problem. There's so much oil, gas and coal we could fry the planet many times over. It's just we don't bother to look for it until we need it. There's no shortage whatsoever.

And markets work in the following sense. If you have high energy prices, people invest in substitutes. So in the '80s when people fundamentally misunderstood the oil price was about to collapse as opposed to go on up ever upwards, we had all the nuclear power stations, Mrs. Thatcher was going to build 10 nuclear power stations in Britain, this time around we have it justifies wind farms and solar panels and so on, and maybe even nuclear. Well, there are good reasons for doing solar, there are good reasons for doing wind, and there are very good reasons for doing nuclear but it isn't a higher volatile gas price.

Let me put it the other way around. In real terms, the gas price in Europe us now at or below the five and 10-year average looking back. And this is in a context in which the EU is proposing to completely cut off its energy reliance on Russia by 2027. I doubt they will but it's out there. And the proportions are much more. And even in those circumstances the price is down. So I think that the hysteria of short-term politics, the belief that what's happening today and tomorrow is new and different is almost in the human psyche. But it's a ridiculous way to think about energy policy.

Jason Mitchell:

I was reading something you wrote back in January this year where you talked about the fact that if the UK wants to take economic growth seriously it needs to focus on competitiveness, which is why exports lag, imports grow and production is so expensive in the UK. This almost feels a little bit like the EU's own focus over the last six to 12 months on competitiveness, strategic autonomy and, you said it earlier, defence and the subsequent deprioritization of its green strategy under particularly the new commission. I mean, do you think the UK's economic pressures are becoming so great that this could be an inevitability here? I guess what I'm asking is how do you see net-zero making energy more competitive?

Professor Helm:

Okay. So The Draghi Report, which I had a little bit to do with, it's got all sorts of stuff about national champions and encouraging mergers and all that kind of stuff. But it just highlights a fundamental point which people seem to have either pretended wasn't true or ignored, which is that energy in Europe is about four times more expensive than the US and it's much more expensive than China. China's got loads of cheap coal, that's the main driver of energy in China. And America's blessed with self-sufficiency in oil, huge quantities of gas, lots of coal, though it doesn't need it anymore because it's got the gas, and also it's got lots of locations for solar and other stuff as well.

So if we look at the world economy going forward, nobody owes the British a living and nobody owes the Europeans a living. The question is not, "We will charge whatever energy costs." It's, "Well, we will charge a price for energy which enables our economy to thrive and participate in the world economy." And you can see this in the nonsense about the idea that, "Well, we were on the road to a cheap energy, clean energy superpower in which presumably the world's energy-intensive industries would flock to somewhere like John O'Groats in Scotland to get close to cheap intermittent offshore wind."

Now, there are two problems in energy. It is both the fact that the new industries all require firm power 24/7, whereas the renewables are intermittent, and the prices are very, very high. And there's no getting around that. So the people say, "Well, it doesn't really matter in the UK because we don't manufacture very much." There isn't any leakage or much leakage of companies leaving the UK because there aren't many companies here anyway doing stuff. They've all left already.

Well, put some of the silliness of that aside. The really important thing to recognise about the UK is no energy-intensive companies have been coming here. Indeed, if you look across Europe, there are very few energy-intensive new companies and industries choosing Europe as a location. They've been choosing the US or China for at least a couple of decades. And just now we're losing Grangemouth and the petrochemicals, turn it an import facility, Port Talbot's blast furnace has gone, effectively Scunthorpe British Steel is in serious trouble, the car industry's back to producing the same number as cars as I think it did in the 1950s, the fertiliser industry is closed. And you can say, "Well, who cares? These are all nasty polluting industries. We are trying to do net-zero." Great, but you are importing all the stuff instead. And what's more, you're importing the stuff in a context where you don't have much else to balance the balance of payments. We've always relied on capital inflows to offset the current account deficit, but it's really serious.

And when we look to the future industries of AI, data centres, quantum computing, et cetera, we have to understand these are really energy-intensive industries. Ireland, which has been very successful at attracting international business, there's a moratorium on more data centres. They just don't have the electricity to provide for it. Data centres want to be down the M4 corridor from London to Swansea. Where's the grid? Where's the power generation to give firm power? If you want to build an energy-intensive industry in Britain now, you probably have to build your own standby power stations to make sure you can keep the lights on. And there's a real boom in standby power across the UK as there were in the 1970s, by the way. It's incredibly inefficient, very polluting, but that's the cost and price that's involved here.

And can you go on like that? Well, you might think you are still a great empire and the world owes you a living. But as this government and the previous government discovered, that's not true. And in the end sounds very home economics almost, you have to pay your way. We spent 100 years not paying our way and devaluing the currency to lower our standard of living as a consequence right back from the 1930s, devaluation, devaluation, devaluation. We have to have an interest rate premium of 2% to the continent, particularly Germany, and that's historic too, in order to hold the value of the pound at any particular level. And in order to pay for living beyond our means in a country like the UK, which energy is a very important part, basically if you look at the net-zero energy industries, these are now almost entirely foreign-owned companies and they are lent money by foreigners to do the investment required because the savings in the UK net of capital depreciation is approximately zero.

We don't want to save to invest, we want to borrow from others, we don't want to balance our balance of payments, so we have to have capital inflows. So we've been flogging off the family silver pretty systematically for the last 10, 15 years and then we arrive at where we are today and still think we're a superpower out in the world. I mean, you couldn't make it up but that's our economic predicament we're in at the moment. And we can choose to have competitive energy prices and then work out who's then going to pay, taxpayers, consumers. Or we can decide to dump all the costs across the piece and have energy-intensive industries that are priced out the market and then wonder why we're not an AI superpower and nobody wants to build UK as the great future industrial base going forward.

Jason Mitchell:

I want to pick up on this point around data centres, and particularly AI given how opaque in some ways understanding the true demand from those areas could be. There are some anecdotes. I noticed that Eric Schmidt, the former CEO of Google, recently told Congress that AI could eventually use 99% of the world's electricity, which is up from 3% today. I think a few weeks ago Sam Altman mentioned that simply saying thank you costs OpenAI tens of millions of dollars of running costs. In other words, AI and maybe more broadly it, which are now 20 to 30% of power demand versus low-single digits 20 years ago seem to be developing much, much faster than we can build new power plants.

Now that we've lapped the low-hanging energy efficiency gains, it seems like power demand growth even in developed countries could be running at one and a half, two, 3%. How should we think about this as its own exponential pressure on net-zero ambitions?

Professor Helm:

Okay. So remember first of all that there's a huge amount of energy demand that's indirect. If you buy a lump of steel from China, it's basically energy. In fact, nearly anything you do is basically energy. And I always jokingly say if Marx had talked about the energy theory of valley rather than the economic theory of value, he'd have got it right.

Now, if you look at the energy intensity of production across the world, what you'll observe is that there was the assumption that energy demand and economic growth had decoupled. It was nonsense. They never did globally. Some countries claim to have decoupled like the UK, but basically because they were closing down their energy-intensive industries. So going forward, we're going to have a continuation of energy-intensive industries. And the point about anything to do with cyber computing, digitalization, et cetera, et cetera, is that it is not only fabulously energy intensive and pervasive the whole economy, but it has to be 24/7, 24/7, 24/7. Indeed, every second of the day. Otherwise you end up where the Iberian Peninsula ended up with this power cut. Everything goes. And this will become much more important going forward.

Now, the tech industry is renowned for hype. 99% of the world's energy, et cetera. I mean, what the hell does this mean except just to create a headline? And, if you like, make a forceful point, which social media can get excited about. But it's really important to understand that. And this is where you get back to the idea of a transition. The amount of energy more and more and more, as Fresno wrote in his recent book, the amount of energy we're going to end up using by mid-century is huge. And if you do that calculation, I mean, even if it's 3% or 2% growth per annum, it means we'll use twice as much energy in 2050 as we do today. The idea that renewables are even going to keep pace with the increase in demand for energy, let alone displacing all that fossil fuel at 85% from the existing economy, it's just nonsense. That's not going to happen. And that's what we have to have going forward.

Now if you take the intermittency point into account and you take the way ESG and so on has pressurised companies, you see that we're now having disputes about who should have large energy supplies. And as have been seen in Scandinavia, if you have a first-come, first-served basis, you will end up with arguments between electrifying oil and gas terminals versus providing electricity for TikTok or others. It's going to have to be rationed. And the answer to that is sadly it will be rationed by price. And that comes back to realising that the cost of the renewables is not the marginal cost of a solar panel and it's getting cheaper. It's great. It's not the marginal cost of a wind turbine. It's the system cost of having this stuff on the system which demands much more firm power, much more 24/7 supplies, and a huge amount of backup because these systems are fantastically vulnerable in defence and security terms to attack.

Put all that lot together and you have a picture in which we will do very well to manage to cope with that extra demand without adding even more carbon to the atmosphere and going on the plus two.

And just to put it in a final context, electricity demand in the UK between about '45, '46, 1945, '46 and mid-'70s grew at 7% per annum. So these aren't unprecedented numbers either.

Jason Mitchell:

You make some really interesting points that I want to dig into a little bit. There's this argument that building electrotech, as some have called it, which includes solar, onshore wind batteries, heat pumps, EVs, et cetera, is better than burning fossil fuels. And generally speaking, it's quicker to build and cheaper. And I guess as you were saying in your last comment, I was thinking about that picture of the levelized cost of energy, which cleanly shows the costs, everything from gas to onshore wind, offshore wind, et cetera. And it does seem to reinforce that point. For instance, $100 million invest in solar gives the same energy as investing, let's say, a $100 million into buying gas feedstock. But the advantage with the solar is you get that for the next 20 to 30 years while that gas is bought and consumed for one year. But I guess your point about the system costs is making me rethink this because you don't find that system cost and the vulnerability you speak to of reflected in the LCOE analysis.

Professor Helm:

Absolutely. I mean, if you know what the answer is you want to get, which is you want to prove that renewables are cheaper than gas, then choose a measure which produces that answer. But the levelized cost is not the cost, the system cost of the energy. If it was we'd all be nirvana and you have to think about it. So you build a gas power station, it's 500 megawatts, it's half a gigawatt. If you put up a solar panel, it isn't a gigawatt, it's tiny and it's geographically dispersed and it's intermittent. And it requires batteries, storage, interconnectors, voluntary power cuts, active demand manager, all those things are needed in order for that to be the case. If you just exclude all those costs, good luck to you.

I mean, look at the Iberian example. We don't know. We haven't been told what caused it. I mean, how extraordinary you can lose the power system of an entire peninsula, so two countries, and you don't know what happened or you won't tell people what happened. That's just extraordinary.

But if it turns out that this issue about idling, which is a service that a gas power stations provide but wind turbines and solar panels don't, and if it turns out that's really important to the system stability. And if it turns out that's part of the reason why things happen so quickly and badly as they did, well, then part of the cost of renewables is to pay for that additional idling capacity. It's another cost, right? You can't have a set of batteries which will cope with an entire country going down. And nobody's yet worked how to make the sun come out in winter in northern climes, right? All of these things are part of the system cost before you get to the transition costs of getting from one system to another.

So I think in one sense it's just not correct. Another, it's spin. And we should be very careful about that because what's at stake is not who wins a political or economic argument. It's the stake. What's at stake is the future of the next generation. So if you tell me that it's cheaper to build wind and solar than it is to build coal or gas, why around the world is everyone building more coal and more gas? They must be stupid. And they're not stupid. China is not stupid economically when it sets about building another 100 gigawatts of coal. India is not stupid when it sets about expanding its coal industry and its coal burn. They're not destroying their economies.

And the irony about the fossil fuel argument is if you really believe that this stuff was so much cheaper, then you must be selling everything you've got to do with the United States because in the United States it's going to be an economic disaster because it's going to be hooked to these incredibly expensive fossil fuels of gas and oil. Well, the truth is it isn't. It's got abundant fossil fuels. Too much of the stuff at stunningly low prices, particularly in respect of gas, which gives it an enormous competitive advantage which makes industries go to it. Now, none of that fits with the narrative that the levelized cost of solar and wind is cheaper than gas. Just doesn't fit in the same narrative. Sadly, because I wish it was true.

Jason Mitchell:

It is true. Let me finish with one last question because I guess I keep thinking through our conversation and just wondering what is ... And I know you resist labels in this sort of dichotomy of pessimist versus optimist, which is why I've maybe kind of adopted realist. But what is the role of the climate realist? There's a group of people, I'd include Tom Gosling, LSE, within the world of finance who have I would say bravely called out the inconsistencies in net-zero efforts. And recent history seems to show that they and you are more right than wrong. But at the same time, the reality is that climate action is hard and net-zero is incredibly fragile when it comes to exogenous shocks like Ukraine, the energy crisis and even electoral cycles. The US is a great example there.

So pulling back, you definitely deserve a lot of points for the anti-consensus critique. But where do we go post the net-zero critique? It sometimes feels like it's too easy to sit on the sidelines and throw stones. And I'm not saying that about you. But I guess it feels a little bit too easy to pick apart the net zero argument now. Perhaps not one or two years ago. Does it end up doing more harm than good? And how should we think about building the mechanisms and pressure valves to adapt net-zero to these problems?

Professor Helm:

Okay. So, I mean, I don't like any of these labels in the sense of put people in boxes. I'm not in any box. The reason I use the word realist is because that's the world that we live in it. People live in all sorts of fantasy lands. There are a load of people, what I call the ostrich group, who live in the fantasy land, that climate change is a hoax. There are optimists who think that just around the corner the prices of renewables are going to collapse and it's all going to work and that people are all going to jump up and down to do this because they're not going to have to pay any for it. I think this is really dangerous stuff. So I like to have my feet on the ground with the world as it is and with people as they are.

Now, the challenge is to do two things. One is to point out silly or incredibly expensive and inefficient policies that people are pursuing. Not least because if they are incredibly inefficient and expensive and you end up with the highest electricity prices, you will get a result from that which people will rebel. But what I do think is important is to set out what we should do to address climate change. And in my Net-Zero book and my Legacy book, I do exactly that. So I think net-zero carbon territorial production is the wrong target. It should be carbon consumption. I think it's absurd that a country like the UK can exclude the emissions of Drax from its accounting as if we've not got one of the most polluting power stations in Europe on our doorstep. And I think it's absolutely silly to say that our carbon emissions have gone down because we're closing Grangemouth and turning it into an import facility for exactly the products that it was producing before.

So I know what target we ought to have, and I spell out what that is and I think we should account for that basis. I think it's really important to create coalitions bottom up of countries unilaterally willing to address these questions. But you have to follow the carbon consumption route, therefore you have to have CBAMs, and therefore you have to exclude other countries from paying the CBAM if they have their own carbon price. And I've set out how you can proliferate a regime like that rather than having another wasteful 29 COPS, which will probably achieve less than the last 29 COPS have achieved so far.

I've set out what we should do in regard to expanding nuclear very substantially. I'm a bit agnostic about nuclear, I have my doubts, but either we do it properly or we don't do it at all. I wrote the paper on how to design regulatory asset basis for nuclear. I'm practically engaged in many of the things that we have to do. I did the Cost of Energy review for the government and I set out how we should do equivalent firm power auctions.

I don't think it's fair to accuse me of being negative only. I want to call out policy mistakes. And when I call out, for example, the 2030 net-zero electricity, a target in the UK, I call it out because it's incredibly expensive to do this stuff in a very short period of time, it's about the most inefficient way to do it, and it won't be achieved and I'm pretty certain about that. And that will further set back future faith in targets going forward. But I have a huge set of positive policy proposals in what we should do. Some of them are successful, some of them are less.

But that's the role. It's to say, how could we do this in an efficient way which meets the constraints of the real world we live in? Not some happy-clappy world that at least some people imagine. Or not a stupid world, like a world where people think we could just stop oil and it will all be fine. That would be hell because we'd have revolution, violence, war, and all sorts of things. You can't get out of 85% of your energy overnight, or indeed even in 10, 15 years. And one has to face up that reality and call out the expectations that people create. You go on demonstrations and that really is going to make a great difference.

Jason Mitchell:

Got it. Good way to end. So it's been fascinating to talk about what new forces and factors are reshaping net-zero ambitions, how the UK should think about optimal climate policy, and why a realist approach beyond the optimist-pessimist dichotomy is critical for navigating the political economy factors of climate action.

So I'd really like to thank you for your time and insights. I'm Jason Mitchell, Head of Responsible Investment Research at Man Group, here today with Professor Sir Dieter Helm at University of Oxford. Many thanks for joining us on A Sustainable Future and I hope you'll join us on our next podcast episode. Dieter, thanks so much for your time today. This has been great.

Professor Helm:

Well, thank you very much for having me along.

Jason Mitchell:

I'm Jason Mitchell. Thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.