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Hello, Maren Talks Money listeners. It is August, which means that we are taking a short break from recording new episodes of the podcast, but we have done something else for you instead. We are bringing you one of my favorite conversations from earlier in the year. Back in March, John and I sat down with Callum Pickering, chief economist appeal Hunt to discuss the research he did looking at whether there is a trade off between net zero and UK growth. Spoiler alert, Yes there is. It's a very
interesting conversation. Everyone's talking about exactly this now on our going to for some time. Is net zero worth it? So even if you listen to when it was first published, listen again. You might find there are a few things you missed the first time around. And if you haven't listened to it yet, really definitely listen.
Welcome to the Merin Talks Money weekly round up, our debrief on the biggest stories in markets and economics. I'm Merin, Sunset, Web editor at Large for Bloomberg UK Wealth.
I'm Jointed Stapic What are the Money Distilled newsletter and senior reporter for Bloomberg.
Okay, John, there is far too much for us to talk about this week. There's so much going on when it comes to stories as volatile markets. There's war, there's defense stocks, there's crypt all over the place, all this. So what we're going to do is not talk about any of those things. We're going to do that thing where we just choose one major story, unpack it in
the conversation, And this week it's all about energy. The story is about a bit of research that's come out from PEELHNT Economics which asked the question, this is the title of the research, anyway, does the UK lack the energy for productivity growth? So it's a new look at the productivity puzzle which you and I talk about endlessly. What's the problem with UK productivity? Is it about having too much cheap labor? Is it the way our system is set up? Is it the decline in manufacturing as
a result of Chinese growth? What is it? We talk about this all the time. This report uses data from nearly two hundred countries to make the other two hundred countries.
Oh, I think two hundred and eleven or something, but yeah.
Let's be precise, one hundred and eighty nine countries yes day from one hundred and eighty nine countries to make the argument that a miserable record of productivity over the last twenty years or so is inextricably linked to the country's drive to net zero. So that's two of our favorite subjects in a one of net zero and productivity. So with us to dig into all this is the author of this report, Calum Pickering, who is the chief
economist at Peel Hunt. Callum, welcome, thank you for joining us today.
My great pleasure, thank you for having me.
Okay, Now, what I want to do is start by asking you why you sat down to do this bit of research. Because while it may be data driven come as no surprise to many, it also goes against the popular narrative and might not make you very popular. So what made you sit down and say I'm going to do this.
Let's start with extraordinary claims require extraordinary evidence. And what we hear from Chancellor Rachel Reeves at Ed Muliban, the Energy Secretary, both of course Labor government but also the previous Conservative government for many years that there's no trade off between economic growth and net zero. Now, as an economist, that sort of gets my senses tingling a little. There's this general rule, which is there are no policy solutions,
there are only policy trade offs. Now, of course there are exceptions, but it is a general rule. It's a good rule of thumb. So I thought, this is quite a big claim to make. Let me see if it's true. And after going around the dozens of government websites where all of this data is located, I've put something together, taken a look, and actually I don't see and evidence that this is true. In fact, I actually see the opposite.
I see, I think clear evidence that when we start to aggressively pursue our net zero policy, we see almost immediately the economic problems which were all familiar of slow growth, weak productivity, weak growth and living standards. They all begin.
Interesting. And you are timing this from around two thousand and five, right. A lot of people will look at the UK's productivity problem, look at your chance and go, yeah, obviously this is all about the great financial crisis it started around then. But you're taking it back a few years and saying, actually it started a bit earlier.
That's right, and we mustn't discount any of these are the factors low interest rates? What that might mean for things like risk appetite malinvestment. Also, we had to just pay a price in growth terms for a while just to fix some of the problems with the financial system that were exposed, and of course the reason for the global financial crisis. But what I look at is stually one hundred years of data on the UK and what we see is a very clear picture the available electricity
to the UK economy. That's the stuff that firms and households can tap into to consume and produce stuff. It rises precipitously through the twentieth century until it peaks in two thousand and five. Since then it's fallen by about twenty percent. If I then compare productivity measure it how you like output per work at output per hour or multi factor productivity, which is the best productivity measure which
blends all the factors of production. What we see is alongside that rising trend of available electricity, productivity is rising nicely. And then after two thousand and five, around two thousand and five two thousand and six, all of these numbers start to weaken, and as our electricity availability declines, our productivity measures and our GDP measures start to move sideways.
Okay, now, let's just go back a little bit and talk about how extraordinary it is to see a decline in available electricity or energy of any kind, in that this is not the first energy transition in the history of mankind, right. There have been several others in the past, but every other time the new energy source has been
additive rather than transformative. We don't use less wood than we used to as a globe, we don't use less coal than we used to as a globe, we don't use less oil, etc. So this is the first time a transition has been attempted that is not additive. In our UK electricity supply, you see the closing down of various parts of the energy infrastructure that are then not replaced.
That's exactly right, and again it's a policy choice to reduce the available electricity to the UK economy. What we have done is we've decommissioned what one might consider to be dirty forms of energy coal, oil, some gas, oddly nuclear, which is which is clean and it has huge potential. But as we've decommissioned these parts of the energy output infrastructure, we have not replaced them quickly enough with renewable energy. Whether that's solar wind, and the net result has been
this decrease in energy availability. Now, one obvious pushback would be white bulbs give out less heat, soda machines, computers. As the world to become more efficient, do we just not need less energy. There's a quick check there, which is, let's look at prices, how a price is behaving. That if I know roughly what I think supply is doing, and I can see how prices are behaving, I can make some judgments about the demand side of this equation.
And what you see is, up until two thousand and five, not just for electricity, but consumer energy prices across all types. Producer electricity energy prices across all types are actually fairly stable, not just stable, but falling relative to general prices. And then in two thousand and five we start to see this steady rise which accelerates over time in prices of
all types of energy. Something, of course else happened in the early two thousands, which is we became a net importer of hydrocarbons, oil and gas, which has meant that when prices rise now we suffer negative terms of trade shocks instead of positive terms of trade shocks. It's bad
for our producers and bad for our consumers. And so when you put all of this together, the staggering rise in prices, this fall in supply, even if you make the case that yes, demand has probably come down a little bit for any given activity demand for energy, because we see prices rise as supply falls, we can say with quite a bit of confidence I think that the supply effect is larger than the demand effect.
Okay, so one of the things that has happened is that we have not seen our living standards rise as a result of that. One of the things that you much of your report compares the UK to the US, and we'll talk about that in a minute about whether
we should more realistically be looking at Europe. But one of the statistics that you put in back in two thousand and five, which is when our UK electricity suppliers you peaked, UK energy per capita was fifty percent of the US level and our living standards were around seventy nine percent of the US level. By twenty twenty two, and these numbers will have definitely changed since, and not
in our favor, I'm afraid. By twenty twenty two, UK per capita energy consumption had declined to around thirty eight percent of the US level, and per capita GDP had fallen to seventy four percent. I think it is a little below that then, So you see that very clearly in the numbers, a very different approach. They have been growing their living standards, keeping per capita energy consumption around
the same. So using efficiency like that, we've been holding our living standards that roughly the same level, possibly now falling given the rise in population, while actually cutting our per capita use. That's the difference, right.
That's exactly right. Implicitly we have made a different policy choice. The reason where now moving on to GDP per capita is because productivity is the thing that drives GDP per capita over time. It's just how efficiently can you use your factors of production. And what we should keep in mind here is energy is a very critical factor of production in a very fundamental sense. Productivity is capital over labor, and because capital requires energy, the more energy you have,
the more productivity you can generate. I want it to broaden this study because you get oddities if you just look at an individual country sample. So when I look at one hundred and eighty nine countries, the data we go from nineteen ninety to twenty twenty two, you see this very strong positive correlation between per capita GDP SO living standards and per capital energy consumption. Rich countries consume
more energy on a per person basis. And actually, the one thing you can say about the UK is that almost no actually no country for its size, has a higher standard of living for such a little amount of energy consumption per person. When you look at the UK versus the US, where you see a very big difference. And of course I like comparing the UK to the US.
Although the UK is smaller, the makeup of its economy is actually very similar, services and consumer oriented, has a big financial system, it's credit driven, So you can't just say US is just oriented towards heavy industry or something like that. It's a very similar economy, just a different scale. And the point you make is exactly right. Implicitly, we
have made a very different policy choice. We have used energy efficiency progress towards using less energy for any given thing that we do to stabilize our living standards but reduce our energy consumption. What America has done is stabilize its energy consumption but become richer over time. This is
implicitly a very different policy choice. And essentially this artificial scarcity that we've imposed upon our economy, which means actually we now have the highest energy price in the advanced world, we are excluding so many types of economic activity that would just be profitable if we had lower cost of energy and the energy available to produce them.
Now, a lot of people who listen to this will be confused because one of the things that they hear constantly is that UK energy prices are only high because of the gas price, and we share that problem with the rest of Europe.
Price is important, but what matters more here is just supply. Let me just step back from this study and just think about a question that we often ask ourselves in markets. We will say, the old price has gone up, or the gas price has gone up. What does this mean for economic activity? Actually, I can't tell you anything about what that means for economic activity if you just tell me the price. What I care about is have we
had an upside surprise in global economic activity? In other words, has demand for this stuff gone up and therefore the price has gone up? In which case, just be happy that the economy is stronger. We don't need to worry
about negative effects. But if you tell me that actually we've less supply in the world because something has happened somewhere, We've had a geopolitical accident or the like, Actually we need to think about price, yes, But actually I'm asking what can't we now do because we don't have the gas that we did yesterday, And that's where the economic
losses actually come from. And so actually this is a really practical question, which is, if you're a company in the UK, you probably just cannot access the electricity that you need. And because demand exceeds our supply potential when it comes to electricity, we're rationing through prices. That's essentially why prices are so high. So even if you strip out all of the levees and all of these other things,
we would still have abnormally high energy prices. And the thing that stands out is we have taken a very different implicit choice when it comes to our energy supply. We've reduced hours more than other countries, certainly on a per person basis.
That is stigerant. It blows my mind. The actual availables ply of energy has fallen by twenty percent over twenty years. I'd no real idea about that it's so negative for growth. The point is that ultimately we need energy abundance to do all the things we want to do, and the fact is we've been rowing against that for twenty years and that is shocking. And it's actually one question now
we'd have in the movie. Should get back to is later, But it's like, it's more, okay, there's policy choices, but there's also a lot of this just seems to be people not making hard decisions at the time. It's not an explicit policy choice. It's more or let's put this off until someone else's problem.
That's right, it's an implicit policy choice, which I think gets more cover than is justified because we have somewhat of a mantra that there's no trade off between zero and economic growth. It's fine, seems to become in more efficient energy wise, and so actually if we just reduce our energy capacity, it's probably not a big effect. Actually, what you find is, in a very simple sense, you
have some critical factors of production that you need. You need land, you need labor, you need capital, and you need energy. We know where a land constrained economy that's we consider that when we think about growth. We're all considering what the demographic effects of an aging and drinking population might be for the world. Okay, capital availability is fairly good. There's still plenty of stuff in the ground we can dig out, so we're not worried about that.
But energy is just as important as these these other three these are the three things. A couple of other things that should just be taken out of this. I think one is that if you look at the government's own projections, previous governments, current governments, UK electricity availability will rise over time towards the middle of the century and will exceed by a significant amount our all time peak, which was in two thousand and five. And perhaps I
just give just give some rough numbers. In two thousand and five we had a round about three hundred and eighty terra watts available to the whole economy. About now it's two hundred and eighty. If the government builds out renewables and some gas, because of course you need some firm power to account for the intermittency when the sun isn't shining, the wind doesn't blow, we'll get to four
hundred and fifty terra what hours. And the central problem is we can decommission on time, that's we're fairly good at that, but can we actually build out on time? So things like planning, permission and regulations and all this other stuff really really matters. And I think the reason why we just need to take a cold, hard look at this kind of evidence is because we face two really difficult choices at the moment. How do we get
ahead with AI? It has huge potential for productivity gains, but it's very energy intensive in a sense, it's an industrial revolution as much as a tech revolution. But then second, we will need to raise our military spend as a percent of GDP. And again, to be frank, if you want to be a serious military power and defend yourself, you have to be able to keep your own lights on over winter. And therefore we need to have energy security and we need to be able to meet our
own needs under any given circumstances. And so I think the worm is probably turning on a lot of this stuff. But the key point for me is just look at the very basic economics. The more supply you have, the
BIGGI your economy is. If you reduce that supply somewhere, you will see some negative consequences and we have here a very clear relationship between our economic problems, which start before the financial crisis, probably amplified by the financial crisis, and this precipitous for in our electricity availability, which has
been an explicit policy choice. When we look around the world, we see evidence that when economies haven't made this policy choice, like America or South Korea or even Poland, very different things happen.
Callums, go back to what you were saying about the rise in electricty capacity by the middle of this century. Back in two thousand and five, we're at three eighty and you say that under the current government plans we get four fifty. Given the rise in our population and the demand there's going to be, that seems not very much in terms of a rise from three eighty to
four fifty. That seems like a very small amount of electricity For a country that is attempting to use more and more electricity in switch vehicles and all this kind of thing, and lots of factories over to using electricity rather than using diesel oil petrol, and an economy that we want to really participate in the Ai revolution. That doesn't seem like anywhere near enough to me.
It's hard to say at this stage. It's probably better to be on the safe side and say let's have more energy than we'll need mm hmm, and see if you can sult to someone. We'll benefit through our trade balance on exports, So that's quite right. What I would say is, if you take the official population protections, what you do see is if the government can meet its plans for raising electricity availability, you will start to see an improvement in per person energy availability, which which just came.
And so the way to think about this is we should be gradually removing a headwind to economic growth. And one of the things you should say is if you make a claim like I make in what would be true if I'm right, which is if the government actually builds out and we start to see in the numbers more and more electricity made available to the UK economy, we probably should start to see some upside surprises to things like per capita GDP and productivity. And it's really
as simple as that. But of course I can't look at a quarterly data series for the next year and say whether this is right. This will be a five or a ten year think. But what I've done is I've started by asking the opposite, which is, if what the government says is true, which is there's no trade off between net zero and economic growth, what would I
expect to see. Well, it would be no difference between the economic performance of the UK, which has introduced this artificial scarty on the energy side, and other economies that haven't. And actually what we do is we see very big differences.
It seems that there's a case that you're making very well for a slightly more pragmatic approach from the UK towards net zero and approach say something along the lines of Norway's, which is continued to develop oil and gas and continue to use hydrocarbons in the same way and not necessarily expected a fall in the use of hydrocarbons, but it is nonetheless working towards towards the transition at the same time. So maybe there's a case for us to be a little more pragmatic.
Yes, I think you can probably see if you have plans for decommissioning of hydrocarbons and nuclear whether you can keep that aline. I'm encouraged by the government's intention to allow the build out of modern the nuclear reactors, hopefully anywhere in the country.
Although's some rather depressing press on that earlier in the week, suggesting that was one of the things that Rachel wads we was planning to grow back from.
Let's see one thing I would just say here, which is really the unfortunate point in all of this. The UK is on its own a big economy. We're not a small economy by any stretch, but our carbon emissions are less than one percent of global emissions, and global emissions have been rising dramatically over the past twenty years. We've almost half hours territorial emissions. There's a slight nuance there. We judge our success in reducing emissions with territorial emissions,
which is what comes out of the UK economy. But of course, if what you do is you de industrialize in you'll our production to move elsewhere. If that production involves lots of hydro carbon use and pollution and then you import that, that doesn't count in this territorial emission.
So you have this very unfortunate situation where the UK seems to have paid a very heavy price in terms of economic growth, in terms of productivity, but critically living standards, and you think about all of the political challenges that we've faced over the last few years that are linked to the real indignities that come from stagnant living standards, without question, and the result is, because we contribute such a small amount to global emissions, we have not changed
the dial. We have not changed the global overall emissions story. We've just generated low economic growth, weak productivity, de industrialization, and all of this doesn't actually change the fundamental story when it comes to the global carbon picture. And so we need to ask a very serious question whether or not this has been remains and would be a sensible policy choice for us to make.
Yeah, And the point of it is that that's not saying abandon It was just saying that during the transition period where we don't have nuclear fusion and we don't have batteries and we still haven't built enough nuclear power stations, we should maybe be keeping things like natural gas more aggressively online because we still need to grow and we
still need to find solutions. And I suppose the other problem is if we've get economic stagnation, then we're also not generating any innovation, and innovation is one of the things we need to make this actual speitch to net zero actually work.
That's exactly right. The richest economies in the world, which are essentially the most productive economies in the world, use energy most efficiently, and so becoming richer is a good and obvious way to become more energy efficient. There are another couple of things just to throw in here, which is that the state of the world has changed. We're much more vulnerable than we once were to external geopolitical shocks, and at present we're a net hydrocarbon import oil and gas.
We have not huge, but significant reserves of this. We could make a choice to say, since we're still using this stuff, why not protect ourselves against some of these choices by exploring some of our own supply potential. That's one think, But also keep in mind that, of course renewables have fantastic potential. The marginal cost is extremely low.
The wind always blows the sun. We have this giant nuclear reactor in the sky that's just giving off energy, and this is very sensible to try and tap this stuff. But a lot of this technology requires critical minerals which we don't have in the UK. We're going to have
to import these minerals, and of course they're expensive. Because everyone's trying to do this all at the same time, which means what we should keep in mind is even as we transition towards majority renewables with a baseline of something like gas, to resolve these intimiscienity issues, we should consider the fact that in this world where geo political shocks are common, that we may still suffer these external supply shocks, not necessarily directly through the energy that comes
through trade, but actually through some of the critical minerals and some of the capital goods that are required to maintain and build out this stock. So we just need to take a cold, hard look at some of these choices.
Yeah, this is another one of the Another one of the conflicts that is little discussed is that we talk about how important it is to have a shift towards renewables for our energy security, but of course it's not actually a secure form of energy if we cannot continue to have access to the wear earth metals that we
might need. So China, for example, at the moment, is sixty percent of global rare earth mining, ninety percent of the processing, but then in context, the US is only nine percent of the mining, and in the UK, I think is an egibile number. I'm not even sure we mind anywhere else at all?
Do we do?
Think so?
So with that in mind, there is no energy security in using only renewables or making a major shift to renewables.
One might make it an even broader point just to say that if you want Britain to be more secure in future, pick the economic path that has the maximum probability of making you as rich as possible, and that may involve just completely throwing open the doors on some of our energy because if America, China some of the other big consumers of hydrocarbons say actually, no, we are going to continue to use this stuff, We're going to
continue to pollute. Really, what is the use of the UK going in the opposite direction, given that we actually can't change the circumstances in the world all that much. That's an unfortunate policy choice to have to make. It wouldn't please me if we had to make that policy choice. But one of the key things when it comes to economic policy is you have to just take the world as it is, not how you would like it to be.
And of course it would be nice just looping back to the start if there was no trade off between economic growth and zero but suppose that there is Suppose there is actually a trade off between say net zero and military security. Suppose there's a trade off between net zero and funding our growing pensions liabilities, military spend, pensions liabilities. All of this requires economic growth. And if the choice by pursuing net zero is we don't achieve any economic
growth or at least growth, that's not satisfactory. We need to decide which cost we're willing to take. And actually, the thing to point out is, because our net zero policy doesn't really influence the world picture when it comes to carbon the choice may actually be fairly straightforward for us. If we said, actually we should pursue at zero, we should accept the lower economic growth, and we might want to pay a choice in living standards. People choose to
do that. That's absolutely fine. I'm an economist. It's not for me to say which I think is the right way to go. It's just to say, if you do, this will happen. That's the best I can do. But people should be made aware that if you make that choice, you might not actually get what you want, which is the clean air and the limited rise in the global temperature.
There is a view that none of this mattered, and that the UK should be a global leader in the energy transition and in the race to net zero racist because no one else seems you're running, that we should be a global leader regardless of what anyone else is doing. Now, I suppose the obvious answer to that is, if no one's following you, are you leading? Well.
I don't think I could put it much better than that. The one thing that I think we should keep in mind is that in most parts of the world, living standards are much lower than they are in the UK, and security is much lower. And if you want to set the right example, a really straightforward way to do that is to have a fast growing, dynamic economy. And so when you think about global influence, typically the economies that influence the world are the ones that have the
most dynamic economies. Because the thing that people really need and really want and should want is to become richer and safer and better fed. And therefore, I think it will be difficult to convince people that we're leading you down a path that won't improve your living standards and won't make you safer, and won't improve your food security and all these other things. But in the end, it's the right way to go. For all these other reasons,
I don't find that very compelling. And now, of course this is a political point, but the UK is gradually becoming less important on the international stage. Twenty to twenty five years ago, the UK mattered much more. We also had a much stronger economy, We were a bigger share
of global GDP, we had genuinely dynamic industries. And as our economic dynamism has weakened and other fast growing economies have moved ahead, they have naturally taken our place, and they shape global trends and they influence other economies more than we do.
Coming back to the other problem is if your economy doesn't grow, then you don't enervate and you don't come to a solution for that. I think that's because I don't want to be able to come away from this thinking that all right, So it's a choice between a dirty world that's growing and a clean world that isn't.
It's the things that if you don't have economic growth, then, for example, we would never have come up with AI, and EI might require energy, but AI might also who knows, solve nuclear fusion in the next ten years, Maybe who knows it's always next ten years. But the point is that if you don't have the innovation driven by inexpensive energy and the ability to use more and more of it, then we're right to be looking at collapse.
Really eventually, let me just make clear what I am signing in the report and what I'm not saying in the report. I'm not suggesting that we should abandon zero. That's in fact, I'm not really making any policy recommendations at all. What I'm doing is taking at face value what our net zero policy has produced so far, which is a reduction in energy availableity through decommissioning of dirty forms of energy, which is not being offset sufficiently by
renewable capacity. I have again, this is not a policy prescription. If the quickest way to rapidly increase the available energy to the UK economy is through rollout of wind and solar, that's probably the policy choice to make. If it's nuclear, that's the policy choice to make. If it's gas, maybe that's the policy choice to make. It's really not to have a preference in all of this, but I fully agree to your point. Look to the US as the example of a country where energy costs a low availability
is extremely high. It's the most innovative, dynamic, major economy in the world and UK tech companies startups, we're great at that, but then they have to make a choice where can we scale? And what you need for a company that wants to scale is cheap, reliable energy that's not vulnerable to global gyrations. And we can't provide that, but America can, which is why companies migrate to America.
During twenty twenty two, when Europe was throttled by gas supply shortages following the Russian invasion of Ukraine, America continued to grow. If you're a company deciding in this unfortunately more risky world where you might want to spend the next ten years trying to grow your economy, and if you're a highly productive company that requires lots of cheap energy, the choices to go to the US.
I think that you've given everyone a lot to think about here, and I hope that Ed Milivan will listen to this and have a little thing. Maybe not, we'll see, because you'd like to come on and discuss anyway. Callum, thank you so much for joining us today. We really appreciate it.
That was my great pleasure. Thank you so much.
Thanks for listening to this week's Marin Talks Money Debrief. If you like us, show, rate, review, and subscribe wherever you listen to podcasts. Also, if you should have followed me John on Exord, Twitter at marinas w and John Underscore Steppek. This episode was produced by Somesadi Production Sport and sound designed by Moses and