317. Why the UK must not drop climate leadership

27:24I don't think even the tax argument makes much sense. Every one of these arguments, five or six that we've gone through, is essentially negligible. A tiny fraction in the direction that those, for example, in the natural gas. But in the employment, the employment story is elsewhere. And so what you've got is essentially a series of bad arguments that allege benefits from that investment, which are either small or negative. And one or two might be marginally positive, but essentially very small. And you've got to offset that against something extremely important. That's what gets lost in these arguments.

28:05Other people look at the UK and say the UK's bitter leader, the first G7 country to declare for net zero by 2050. In 2008, we put in model climate change legislation. We were a key player in getting the Paris Agreement. We've cut our emissions very substantially since 1990, whilst the economy is a lot bigger than 1990. We've cut our emissions by ballpark 50 % or more, and our economy is probably two-thirds as large. Again, adding extra two-thirds, 60-some percent since 1990. We've actually got a reasonable record on this, the UK. We've been out in front. Now, I talk a lot because I'm an economist who works on India and China and Africa and elsewhere and have done all my life.

28:54I've been involved in all the conference of the parties of the United Nations Framework Convention on Climate Change since 2006. I talk a lot to senior people in other countries about development, about sustainable development, about climate and resilience. And they say to me, look, what is your country starting to do now? Are they backing off? Should we all back off? And we only have a bit less than 1 % of the world emissions, but we have a lot more than 1 % of the world's influence in this area because of our track record. And because of that, if we back off, what other people do would be seriously affected.

29:34I don't see that in the argument. And in my view, quantitatively, given that we've gone through all the other half dozen arguments and shown themselves to be negligible, zero, at least very small, that argument is not small. So that gets lost in all this. And you have to understand, we have to understand that we're sending a signal. We are, if we develop these things, increasing world production of oil and gas. That means that world consumption of oil and gas will rise. Not by very much, but it will send that signal. And that's extremely important and it's got lost in this argument.

30:11Robert Peston:I agree with you that it's extremely important. But sadly, and you can see this in the way that even Labour Prime Minister, Keir Starmer, massively reduced the overseas aid budget. Sadly, we are living in a world where the altruism of a nation like the UK is no longer valued as much by, you know, whoever's in power as it once was. And, you know, many of us would say that's very sad that, you know, we seem to have been backing away from our global responsibility to show moral leadership. So given where we are and one of undoubtedly the biggest competitiveness problems, particularly the British manufacturers have now, manufacturing is only a relatively small share of the British economy, 10, 12 percent, but nonetheless symbolically important.

31:05Robert Peston:You talk to manufacturers, they say their biggest problem is the relatively high price of energy in this country. And the stats bear that out. You know, the price of energy in this country relative to almost all our competitors is significantly higher. how on your model of moving to green energy, and nobody can doubt that the marginal cost of wind or solar or nuclear will be, once we are there, significantly lower than essentially what we're paying for oil and gas at the moment. And so even if you exclude externalities and climate change, It's obviously a place we want to be, self-sufficient in cheap, clean energy.

31:57Robert Peston:But it is naive to say there are not costs of the transition. So how would you, as an economist, manage that transition as efficiently as possible so that we get there as fast as possible? We ran through a few things there. Let me just take what I was arguing about our influence on the world stage, that if we back off from our own commitments now, that would have serious damage in terms of how other people might interpret the transition. I don't disagree. That's not altruism. That's saying that our example, which I think is for our benefit, and we're about to go on and keep talking about that.

32:38It's saying that our example matters to what other people do, and what other people do matters to us.

32:44Robert Peston:Yeah, because of the CO2 emissions that will be higher or lower. And these are much bigger emitters than we are. Sure, sure. So you think even China takes notice of what we do, do you? I think that I was thinking particularly of countries like India and Indonesia and South Africa and, you know, big developing countries. China is, we must come back to China, but China is leading on the world stage. China will make use of what we do. I mean, if China says all these rich countries are insincere, don't listen to them, that's the kind of argument that they might well make. It might not change their behavior particularly directly, but it could change their participation in world discussion.

33:24So what I was describing there of our influence on the world stage was not altruism. And I want to emphasize that. It included altruism, but it wasn't as articulated. I get it. You're saying it's in our interest to lead the way. Yeah. Particularly given our past, because of our past, our credibility is very important. How do we actually make these things happen? Well, I'll go back to some of the things that I was trying to describe before. Bring down the cost of electricity quickly. We can do that.

33:59Robert Peston:But you'll be loading costs elsewhere. That's the issue. There's no free lunch here. No, you're actually saying we're going to make these investments. There'll be an interest cost to those investments. How do we spread it out in different ways? Now, pushing some of that cost into the future makes sense because a lot of the beneficiary comes in the future. If I invest to improve my house, I might reduce my consumption today, but I am actually better off because I've improved my house and I've made the investment because I see the returns on the investment. So we are better off from making that investment.

34:35Robert Peston:To be clear, the debt that you're talking about incurring will not be public sector balance sheet debt. A small amount of it would be. A lot of it would be people borrowing themselves, but the government can actually work with the inefficiencies in the capital market to help bring down the costs of the interest for poorer people, say. Because interest rates for the government at the moment are not exactly low. Oh, but they're far lower than what you or I have to have to borrow. Sure, sure. What I'm saying is, I mean, this is a moment where whatever you think the long term investment benefits are in these kind of markets, it really isn't easy for the government to borrow enormously more for these sorts of green investments.

35:19I think it's very important that the government does borrow because these are very powerful investments for the future. the bigger part of the investments will be made by industry and by ordinary people and the government can work you know through for example the national wealth fund the british business bank it can work through the development banks to help bring down that cost of capital so the we all know that capital markets are very inefficient so that helping overcome the inefficiencies of those markets in part by risk moving risk around giving guarantees and so on the government can bring down the cost of the debt for cost of the borrowing for private people.

35:56Some part of the borrowing will be on the government balance sheets. The big majority will be private investors investing to make money, private householders investing to make their life more efficient. You can help them do that in the practicalities. You can help them do that through the cost of capital. On the government side, the borrowing at reasonable rates by the government depends critically on serious, credible balancing of the current budget. And the government will really have to do that. They'll have to do that in the face of rising cost of debt. They'll have to do that in the face of rising cost of health care.

36:34That is basic economics. You can borrow at reasonable rates.

36:40Robert Peston:Yeah, but we're not there. I mean, you know, we're not having a conversation today. I wouldn't have thought about why it would make sense, you know, for the government to say it's going to reform the triple lock for pensions, which obviously it would because that would give confidence to Britain's creditors. But that's a completely different argument. No, it's not a completely different argument. We're talking about the bit that the government needs to borrow, maybe 1 % of GDP, the extra that they need to borrow, to really make the investments that are going to change our lives and make things much more efficient, give us cities where we don't kill our children through the air, where we can get around reasonably on public transport.

37:17Great benefits. But you have to, those bits will probably be public sector borrowing to make it happen.

37:23Robert Peston:But it can only do that when it's got a credible fiscal policy, which it isn't at the moment. Look, I sat there in the Treasury for three years. I've lectured on public finance all my life. The credibility of the current account is critical. This government, the Labour government, had the chance when it came in to say, oh, I mean, we made our promise about VAT and income tax and personal individual national insurance contributions. We made it in good faith. But now we've got in. We've seen where we are. They could have done it then. When the whole NATO thing started to unravel and the pressure on increasing defence, we could say we did not anticipate that.

38:03And it's understandable. Most people did not anticipate that. They could have done it then. They see inflation and interest rates rising in large measure, not entirely, but in large measure as a result of the war in Iran, which the United States went into. They could have done it then. I think this is their last chance and they should be saying we are responsible on our current account. We want to increase spending on social care. We want to increase spending on defence. We want to invest in a much cleaner future and make our cities and our land work much better. in order to do that we've got to make sure that current account balances and that will involve some increases in taxation and I think that makes absolute sense and I think this is their last chance to do it

38:55Robert Peston:Well let's see whether they find it So it's not a separate story No no it's related I just wanted to show it on this particular conversation you wanted to go there but I'm delighted we did because it is obviously central to the wider debate about you know essentially what Andy Burnham has to do to make a success of his government so this is very much part of it So I'm not remotely pushing back on any of this. I just wasn't sure you wanted to talk about it. But anyway. In order to borrow for the great things that we need to do. Sure. Including social care and including, you know, making our cities livable for ourselves.

39:27Robert Peston:To actually have to go up for very large numbers of people. As you say, I think there is a separate argument about whether there is a case for a particular kind of. Take the social care again. This is an example of public sector investment giving great returns to private people, our own health, but also to the health service and the government expenditure itself. These are wise investments. And wise investments should be financed by responsible borrowing over the long term at modest rates. And that's what government can do. But they do it on the back of a credible current account expenditure and revenue.

40:06Of course. And that's what they need. and that's why these things are linked.

40:09Robert Peston:Nick, there's tons more I need to talk to you about, but let's go for a quick break first.

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42:19Robert Peston:So I do want to talk to you about China, and there are a number of aspects of this. I just want to start with an issue of why we get these sort of suboptimal outcomes because of mistrust between nations. So one of the things we can now see is that China invested more than any other country by a country mile in the green technologies of the future, whether it's electric vehicles, whether it's solar panels, whether it's storage batteries. They've driven the cost down of all of these incredibly important products, and they now dominate the global economy in those areas. Now, for years, they were criticized by many Western countries, particularly America, for the fact that they were still dependent to a large extent on coal-fired power stations.

43:19Robert Peston:And that's what the West concentrated on. And so they said, oh, God, why should any of us cut our emissions when China is increasing its emissions all the time with the use of coal? What in fact was going on in China is they were using that particular old and rather dirty technology to invest in these new technologies. And we are now seeing it not only paying off economically for them, but equally, we've probably seen, it's not clear, but we may have seen peak emissions from China or approaching peak emissions from China. But the problem with their approach and not really explaining it is it sort of led to Trump because Trump uses his main is one of his main arguments about, you know, basically stopping America from doing anything in the climate sphere is he says, why should I do it when China, you know, was such a heavy polluter?

44:13Robert Peston:You know, you know China incredibly well. Do you get the sense they have any regrets about, you know, essentially the fact that, you know, the rest of the world, maybe willfully or just accidentally totally misunderstood what was going on there? it's partly misunderstanding it's partly deliberate perversion of uh of the facts and data um sadly this area is is pervaded by the deliberate suppression if you ask kemi badenock what new science convinced you kemi that you could relax about the devastating effects of the climate change, you just get silence. It's just dismissed or ignored. China was, as you say, castigated for years for not doing anything about emissions.

45:05And now it gets castigated for apparently doing too much and bringing down... For dominating the world and dumping all this stuff on the rest of us. But you've got to... What we have to do, I'm an academic, you're a journalist. Our job, and that's, I guess, what we're doing today, is to try to get the facts out there and get the understanding out there. Why did China move in this direction? Because China saw the risks to China of being dependent on fossil fuels in the way it was. China saw how Japan attacked the United States over Pearl Harbor over essentially oil supplies. China doesn't have that much of its own fossil fuels.

45:45It's got some coal, but it doesn't have that much.

45:47Robert Peston:I went to China, I don't know how many times, over 20 years, but I mean, just, you know, 20, 30 times. And the air quality in some of these cities was awful. I've been working in China since 1988 and been quite close to policymakers. And I remember 20 years ago they sat down and we said, Nick, what is the point of all this development if we can't breathe in our own capital city? So why did China do it? China did it because it saw the devastating, potentially devastating effects on uncertainty and insecurity in the economy through being dependent on fossil fuels. China saw the consequences of really dirty cities and what it did.

46:28to its population. Big time on health. I already mentioned the figures for the UK. We kill about 35 ,000 a year from air pollution in the UK, 20 times more than road accidents. And that's, you know, and China was way, way worse. Way worse. Way worse than that. So that's the second argument. So it was insecurity, independence on the world markets. It was health. And of course it was cost. And now it's really demonstrated big time that electric vehicles are much cheaper and better than the internal combustion engine, that renewables with batteries are cheaper and better forms of electricity than fossil fuels.

47:08So we did it for security, health and cost. All of those arguments apply to us. So we should learn that lesson. Now, what do we do about the monopoly over some parts of the production story? That's extremely important and there are a number of things that we should do. One of them now is to allow some Chinese investment in UK and in Europe. And in that process, we should learn to do it better. When I first went to China in 1988, they had, I've been going more or less every year since, they had a lot of internal investment. And they did it, you know, because they wanted the investment, but they also did it because they wanted to learn.

47:52Now they know much more than we do about these things. So their inward investment would help us. And our participation with China in helping invest in Africa and so on would be very good for the whole world.

48:06Robert Peston:And the security concerns about increased Chinese investment in the UK, you know, in battery manufacturing or whatever, that you hear from, you know, the likes of, you know, the Tory foreign affairs spokesman Tom Tugendhat or Ian Duncan Smith. What would you say to them? You have to look what you're doing. The solar panels that I've got in my home, I don't think make me particularly dependent on Chinese spies or switches or anything. You've got to look more closely. I think if you looked at the Chinese domination of our telecoms equipment, that's a different kind of story. But all these things, you've got to be specific.

48:51and the different parts of foreign, I think in Chinese investment in cars in the UK, I would be quite relaxed about that. Indeed, more than relaxed because it would be giving us cheaper cars. That would be a positive thing. So that part of the story, I think, is very important. But there are other parts of that story which are also very important. And this is where coordinated international industrial policy matters. When we talk about industrial policy, You must have had endless podcasts on industrial policy. It's usually about creating new comparative advantages for the UK. In what might we be good?

49:28How can we promote those things in order to bring down the costs?

49:31Robert Peston:There are also these days, as you know, arguments about security of supply as well, which is sort of a newer aspect of it. Exactly what I'm going on to. So how do we try to create a world economy which is not dominated in key areas by one or two suppliers, whether it's chip manufacture in Taiwan or electric vehicles and solar panels and batteries in China and so on. I think a coordinated industrial policy, including the UK and Europe, but also perhaps with some of the larger developing countries, where in each of these key areas, solar panels, batteries, electric vehicles, chips, some of the so-called rare earths and minerals, probably five six areas i think coordinated industrial policies across some nations so that we build up these alternative sources of supply we can't do it all in the uk you can't do it all in france you can't do it all in indonesia but together you could do that in these key areas and that is what i think uh and i've discussed it a bit uh directly indirectly with mark carney in relation to his idea of the middle powers getting together.

50:46That's part of that story. It's coalitions in order to do things differently. What things? Well, increasing the supplies and bringing down the costs in some of these key areas were a big part of the story. And that would help bring the world together. So there are a number of things we can do, but we're going to have to deal with China. And why would you cut yourself off from the biggest economy in the world? I work in a university. Our Chinese students are absolutely first class. Let them come. They're learning a lot. Not just about the economics which you teach us, but about our society. And they take that back.

51:22And that's friendship and contacts. Now, people in, I've been teaching for a long time now. Some of my students in the 80s and 90s are in very senior positions in China. Talk to a whole slew of academics. They'll tell you the same thing. And those are relationships of understanding, of cooperation and so on. So I spoke first about inward investment and then about international industrial policy. But the services side of the story, in particular education, is another way.

51:57Robert Peston:So we're almost out of time, but there is therefore one other related question I want to put to you. We are in an age where many politicians, you know, not just Trump, but actually across the political spectrum, including in this country, now broadly characterise China as a hostile state. And whether you agree with that or not, climate change is not the only issue that can only be solved by global cooperation. So as we speak, we're at another peak of anxiety. Artificial intelligence is going to do us humanity terrible damage, including potentially wiping us out. And nobody believes that without global cooperation and particular without cooperation between the two leaders in AI, America and China, we will be able to grapple properly with these risks.

53:02Robert Peston:And, you know, there is a very interesting and important paper that's just been written by the head of Anthropic called Dario Amadei. And he has three strands, three recommendations for trying to reduce these so-called existential risks from AI. And one of them is that there has to be global cooperation, particularly between America and China. And he says that and in the same breath says, but by the way, China is an enemy. We have to contain China. We've got to stop selling them the kind of chips that allows them to develop these large language models. And he sort of wants his cake and eat it on the one hand.

53:44Robert Peston:He wants somehow a deal with China or the other. And he's also saying there's a war here with with China as somebody who has worked in China for years, who has seen China's involvement, for example, in these COP summits every year. How best do we in the West or in the democracies get a relationship with China on, for example, this risk, which some say is the equivalent, for example, of the nuclear risk that required very delicate negotiations between Russia and America all those years ago. How do we get something like that between America and China for AI today? I want to set it in a broader context because I think it's critical, but I'm going to answer the question directly.

54:34And I should say I've worked and lived in China. I've worked and lived in the United States. I've worked and lived in France and India and other places. And I think those international collaborations across, as I said, China, India, Europe, United States and elsewhere are enormously important. And they have to take place over a number of dimensions. So you've got, we talked about investment. We've touched on finance, but the UK helped establish the Asian Infrastructure Investment Bank, which is located in Beijing. That was an example of a collaboration. The United States refused to do that. The UK did it, and it's benefited a lot from that.

55:18We have to collaborate around climate. We have to collaborate around AI. But the first point to make is that it's not just United States and China, and it's not just AI. And you can collaborate better in one area if you're working together more constructively in others. So that is a very important part of the story. We cannot isolate from China. We've already, you know, four dimensions or however many we've just said. So think about the collaboration across all those areas and each one of them will be easier as a result. Now, AI, how can we collaborate with China on AI? You know, we're probably a distant number three in the UK.

56:07it would be the US and China. One thing you can do, like we did with climate, is sit down and discuss the dangers. What really are the dangers? Be a bit analytical about what you're talking about. At the moment, a lot of the discussion is, oh, this is frightfully dangerous. It might run riot, you know, and cover us all. You tell it to make paperclips and it ends up sinking the world under a pile of paperclips because you didn't tell it where to stop, you know. So these stories are a bit ad hoc. What we need to do is to sit down like we did with climate, like we did with nuclear weapons. The detail matters.

56:47How can it go wrong? How can we understand together how it can go wrong? I would begin with that discussion. In other words, make it a bit technical at the beginning so that people can see more clearly what you're talking about. Indicate that you're not just talking about AI. If we're talking about finance for electricity in Africa, maybe United States and China could work together around that. If you're talking about how you get more production in the world of rare earths and so on. So first, make it more technical and detailed. Second, broaden it out to these other dimensions. Anybody who's been, I mean, one way or another, I've been involved in that kind of diplomacy much of my life, even though I've been a technical economist.

57:37And it's the combination of the technical, in my case, economics, in this case, AI, the technical parts of the discussion together with the diplomacy and a broad picture that allow you to get somewhere. Let me give you another example. How are we going to get the world's cities to work better? Now, these are not large language models. These are about using AI and all the data of how people move around in cities and how they consume and where they consume and how they heat their homes. No, sure, obviously we're seeing some of that already,

58:09Robert Peston:but the potential benefit of that could be huge. The Asia Infrastructure Investment Bank, of which the UK is a part, I wish the US had been a part, could work with various partners around the world to help with the huge process of urbanisation that's taking place. So that it's more efficient and less dirty. And I've had with some of my collaborators, we published a paper in Nature last summer showing just 14 or so months ago, showing the tremendous returns from the application of AI to these kinds of systemic problems. They use a lot of data, but nowhere near as much data as a large language module, which scrape everything written in every language at every point in the path.

58:55So it's much more efficient. So we could collaborate on that kind of thing. So get more technical, spread out to more countries and spread out to more areas. You've got a chance.

59:04Robert Peston:Now, unfortunately, something slightly flippant came into my head because you were talking about the paperclip, the extreme case of AI wiping. The story that people usually tell, as you know, which is probably a completely inappropriate place to end, is, you know, you ask a godlike AI to solve climate change. And obviously the rational thing at that point is to wipe out humanity. Yeah, there's a difference between people and the planet. And our job is to help look after and create a planet in which people can prosper. That's it. We're up to it. Nick, as always, very good to see you. Thanks for joining us today on The Rest is Money.

59:42Robert Peston:But that is it for this week. See you soon.

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