Is net zero good or bad for growth?
Is the pursuit of net zero carbon emissions good or bad for economic growth? This is an increasingly important argument, given our faltering progress on both decarbonisation and growth. If net zero is good for growth, that is yet another reason to do it, and one which relies on self-interest rather than on humanity solving history’s greatest collective action problem. If net zero is bad for growth, it is much easier for those who are unconcerned by climate change to denounce or deprioritise climate action.
So which is it? I’m afraid it’s not all that easy to say. The underlying facts about net zero and growth keep changing very quickly, in both directions. The proponents for each side, however, do not tend to change their minds in response. This piece is my attempt to adjudicate those facts as fairly as I can, albeit as someone who is deeply committed to tackling climate change. It is not a precise exercise — you would need to run a complicated counterfactual, and make a huge number of assumptions to try and give a quantitative answer to this question. But there is still quite a lot we can say.
Because it’s not easy, this piece will run longer than usual, and will no doubt leave out many things. Apologies for that, but I hope it is worthwhile.
A very short history of net zero and growth
It is worth starting with a recap of how the argument about net zero and growth has evolved.
Ten or so years ago, it seemed clear that decarbonising the economy would slow down economic growth. Low carbon technologies — wind turbines and solar panels, electric vehicles and heat pumps — were far more expensive, and probably less effective, than their fossil fuel equivalents. That’s if we could even agree what the best clean technologies were. Reducing carbon emissions was something that we had to do, something that would probably benefit the economy in the long run by avoiding runaway climate change, but something that we would have to accept a loss of income now to pay for.
At the start of the 2020s, that position began to shift. The cost of renewable energy — most notably solar, but also wind — began to fall dramatically, far beyond anyone’s expectations, while electric vehicles and heat pumps improved and began to catch on. Interest rates were low, and there seemed to be endless private money to direct towards clean energy. And because demand was weak, anything that meant more investment was surely a good thing.
Then the gas crisis of 2022 turbocharged the argument that net zero was good for growth. Gas became so expensive that anything which replaced gas, or used energy more efficiently, because extremely attractive. The gas crisis caused serious economic pain, to households, businesses and governments, and shifting away from gas became an obvious way to stem the pain and boost the economy. Full disclosure: I wrote a fair bit about this at the time.
Since then, the facts have drifted to a more ambiguous position. Gas prices have fallen from the extraordinary levels of 2022, although sit some way above their pre-crisis level. Interest rates, meanwhile, have risen after a decade at ultra-low levels, and seem unlikely to fall much further (I wrote about this too). That has raised the cost of some renewable energy, which is dominated by capital costs — although the impact has been far more pronounced on wind than on solar, which has continued to see prices fall.
This leaves the argument about net zero’s effect on growth in an ambiguous position. Fossil fuels are no longer cheap, but renewables aren’t guaranteed to be either. Investor appetite for large scale capital investment can no longer be taken for granted. And there is a great deal of uncertainty about the future path of both gas prices and interest rates. So it is as hard as ever to say whether net zero is good or bad for growth.
How can net zero affect the economy?
The first thing people tend to think of if you ask about net zero’s impact on the economy is jobs. Will net zero create more jobs than it destroys? The answer seems to be a pretty clear “yes”. Most estimates of net zero’s impact on the workforce suggest it will create more jobs than it destroys. This makes sense intuitively, because net zero is mainly about building things — wind turbines, upgrading homes, managing more complex systems — to replace burning things we dig out of the ground. The chart below shows a range of estimates for net job gains and losses from net zero in different sectors, compiled by the Climate Change Committee.
However, jobs are not really the thing we need to worry about right now — in many ways, it creates the question of where we will get those extra workers. What we really need to talk about here is productivity — and that means going into more detail.
When we talk about net zero over the next decade, we are mainly talking about electrification; that is, replacing the fossil fuels we use for power, transport, heating and industrial processes with clean electricity. Electrification has a crucial feature from an economic point of view: it is extremely capital intensive, but in return you get much lower running costs. This has implications for its impact on productivity.
For example, renewable energy has a close to zero marginal cost — once you’ve installed a solar panel or wind turbine, the energy is virtually free. Electric vehicles and heat pumps do not have zero marginal costs, but they are several times more energy efficient than their fossil fuel counterparts. In return for investing in net zero, we will get the biggest energy efficiency blitz we’ve ever seen.
These two forces — the high need for capital investment*, and the lower running costs in return — are at the heart of net zero’s economic impact.
The need for capital investment is, broadly, a drag on economic growth (although that depends slightly on wider economic conditions, as I’ll explain soon). Investing capital in net zero has an opportunity cost — it could be invested in something else that grows the economy. And this isn’t just an abstract concept — capital investment means putting people and materials towards building wind turbines or installing heat pumps rather than, say, more new homes or luxury goods.
But lower running costs and higher energy efficiency are good for growth. The definition of productivity growth — which is the key to long term economic growth — is that you produce more outputs with the same inputs. Or — same thing — you produce the same outputs with fewer inputs. If net zero means lower running costs, that means you get the same energy, heat, transport or whatever for less.
But the higher capital costs and lower operating costs of net zero still meet each other in energy bills. This gives us a nice way to roughly appraise the effects of net zero. That’s because the costs of capital investment have to be paid back, and they are mostly paid back via our bills. In a fossil fuel system, most of our energy bills go towards operating costs — mostly buying oil and gas. In a net zero system, most of the bill will go towards repaying capital costs. The actual energy, once you’ve built the system, will be almost free.
The most important place to look for the economic impact of net zero, then, is in what it does to energy, heating, transport and industrial bills. If household bills are lower overall, households get the same energy for less, and they have more money to spend on other things; the economy will therefore be bigger. If industrial energy bills are lower, companies will make the same outputs for less, and may be more internationally competitive. If energy bills end up higher, the opposite will be true — the impact on economic growth will be negative.
There are a few caveats worth adding to this analysis though. The first is about imports and exports. If fossil fuel prices rise and you are a net fossil fuel exporter, like the UK was in the 1980s, that is likely to be good news overall for your economy (though it may be painful for consumers without some redistribution). If this happens and you are a net importer of fossil fuels (as the UK is now), this hurts your economy, because the extra revenue from higher prices is flowing out of the economy. Net zero breaks this cycle somewhat, because most clean energy tends to be home grown (notwithstanding the question of where the capital comes from). So for a net importer of energy like the UK, reducing energy imports can be an economic benefit from net zero. Less so for fossil fuel exporters.
The second caveat is that net zero is not all about electrification. Fully decarbonising the economy will require different kinds of action in areas like food and aviation. On current technology trajectories, it looks likely that decarbonising food and aviation will require some reductions in demand — eating less meat and flying less, in particular. That is probably bad for economic growth — it means people can buy and sell less of things they like. But these net zero actions are likely to bite further into the future, and it is also possible they will lead to other effects that boost economic growth (such as better health), so I’ve focused much less on them here. That is not to deny that these challenges exist, and will be hard to deal with, but they are not the most immediate ones.
The third point — and this will take a bit longer — is about whether the economy is demand- or supply-constrained. When the economy is demand-constrained — as it was during the period of ultra-low interest rates from 2010 to 2021 — bringing more jobs and investment, as net zero does, is probably a good thing. When your economy is short of investment and demand, and has spare capacity to absorb more of it, then making the investments that net zero requires is likely to boost the economy, on both the supply and demand side.
When the economy is supply-constrained — as it was from 2022 to 2024, and may still be — more jobs and more investment are not necessarily good things. The extra investment competes with other investments, and may crowd them out — higher interest rates are a signal that there is more competition for capital. Adding extra jobs to an economy already short of labour generally leads to higher inflation, not lower unemployment. This might not be true in some more economically depressed places, where a boost to demand, jobs and investment is far more welcome, but it is likely true for the economy as a whole. When politicians talk about net zero in terms of creating jobs and securing investment — which it undoubtedly does — they are focusing on the wrong things for our current situation. What the economy needs right now, crudely, is to produce more stuff with the same inputs. It doesn’t need more inputs.
This is a sobering note to strike: the economic case for net zero was a lot stronger during the previous decade, when we put too little emphasis on it. That said, there is every chance the economy may return to being demand-constrained in future, and if it does, investing more in net zero would be a good response.
* For this reason, I also think growth is good for net zero, in the short term at least. If you need to make massive capital investments — and we do — having a stronger, larger economy makes that much easier. There is an argument, though, that you could suppress consumption and increase savings to make that borrowing cheaper and free up more capacity to do it. Whether that economic policy would succeed in a democratic system, though, is open to debate.
Charting the changing facts
So, I’ve crudely simplified our question to: does net zero make energy, and all the things we use energy for, cheaper or more expensive? Many people think the answer to this is obvious, in either direction. It is not obvious, and it keeps changing.
There are two main variables that underpin this question: the price of gas; and the cost of building renewable energy, which is sensitive to interest rates. When gas gets more expensive, the economic case for renewable energy generally gets stronger; when gas gets cheaper, it gets weaker (although as I’ll explain later, gas still holds a damaging sway over electricity prices). Likewise, when renewable energy gets cheaper to build, the case gets stronger. When interest rates rise, renewables tend to get more expensive to build, and the economic case for net zero gets weaker.
The chart below shows how wholesale gas prices paid by households in Britain have changed since 2017. Because the actual price paid for wholesale gas is hard to estimate (most gas is not bought on the spot market), I have used the allowance Ofgem make for wholesale costs in its price cap. Although wholesale gas prices have fallen from their awful peaks in 2022 and 2023, they have settled at a level more than twice what they were before the crisis. This is the key reason why energy bills for a typical home in Britain are around £700 a year higher than they were before the energy crisis, a change which has damaged the economy.
This rise in gas prices, as well as being bad for people who use gas directly (i.e., most British households), has also raised the price of electricity. The next chart shows exactly the same thing as the last, but for wholesale electricity prices.
Electricity prices in Britain — and in most other countries that regularly use gas power — move in tandem with the price of gas, because it usually provides the marginal unit of electricity (more on that soon). Together, these two charts show us something very clear: the gas-based energy system has become an awful lot more expensive recently, and that has very obviously harmed the economy.
But how do renewables fare in comparison to gas? The next chart shows the strike prices for offshore wind in Britain’s Contract for Difference (CfD) auctions, from the first auction in 2015 to the most recent in 2024. I’ve included the headline figure, quoted in constant 2012 prices, as well as updating them to 2024 prices.
Offshore wind underwent a dramatic fall in price between 2015 and 2019, reflecting breakthroughs in the size, efficiency and construction of offshore wind farms. However, as interest rates rose after 2021, the cost of these huge capital investment also rose. The 2023 auction for offshore wind failed altogether — the government strike price was set too low to attract any bids — while the 2024 auction saw a significantly higher price than in 2022.
These prices will be locked in for a long time — CfDs last for 15 years, effectively giving a guaranteed price per megawatt hour of energy produced. It is worth noting, though, that offshore wind farms generally last longer than 15 years — so we may get a period of cheaper electricity from them later on — and that CfDs don’t pay out during prolonged periods of negative prices, where energy is extremely abundant.
Now if we try to put these two parts — the gas-powered and renewable-powered parts of our electricity system — together, we start to get a sense of the scale of changes. The final chart below compares the current wholesale price of electricity in Britain (in the Ofgem price cap) to the CfD prices at AR4 and AR6. While wholesale electricity prices — driven by the price of gas-fired power — have risen by 75% since before the energy crisis, renewables strike prices have risen by 45% from their lows in 2022. Both, of course, may change again in the future.
This analysis alone does not prove that renewables are cheaper overall than gas-fired electricity; there are other variables besides strike prices to take into account. There are additional system costs associated with using renewable energy, particularly the need to store energy for periods of low renewable output, or to have dispatchable power (possibly gas power plants) on standby.
This will further increase the capital costs needed for a net zero system — although these costs are sometimes overstated. The capital cost of keeping a fleet of gas power plants on standby is not trivial, but it is actually not that great in the scheme of things. Gas is very expensive to burn, but gas power plants are relatively cheap to build. Battery costs are significant, but have been falling dramatically. The other widely cited cost — of expanding the electricity grid for all the extra power we need — may not be as big a problem as we think. If we double or triple the amount of electricity we use — as we will have to in reaching net zero — then doubling or tripling our spending on the grid should not increase bills.
There is also a major benefit of a renewables-led system that is hard to capture in analysis like this: you get many periods of very cheap electricity. While peak time electricity prices are usually very high, Britain now often has long periods where electricity is much cheaper, due to lower demand and excess renewable output. Households can already benefit from these cheap periods, especially if they can use electricity flexibly, and there is scope for this to become more widespread as the grid shifts further towards renewables.
Weighing up the relative costs of a fossil fuel versus a renewable energy system is difficult. The more mainstream estimates that try to factor in system costs have generally concluded that renewables are cheaper, but these results are sensitive to change, particularly changes in gas prices. But what we can say is that gas prices, and gas-fired electricity, has risen in price more than renewable energy recently. That might change, and it will probably keep changing, but at this point renewables look to be the more likely bet for cheap energy.
Walking through the valley of the shadow of death
But there is another, much more pessimistic way of looking at this problem. Britain currently has some of the most expensive electricity prices in Europe, and this is becoming an increasingly frequent complaint among businesses. This is a problem — expensive electricity is bad for industry and bad for economic growth. But it is one of the most widely misdiagnosed problems in British policy, and many people who should know better keep getting it infuriatingly wrong.
British electricity is expensive for two major reasons. One, it still relies heavily on gas-fired power, and gas is very expensive in Europe. According to Nesta’s analysis (disclosure: my boss wrote this), gas set the price of electricity 97% of the time in Britain in 2022. Two, Britain adds a series of taxes to its electricity while adding very few taxes to gas. These taxes largely derive from the push towards net zero. So it is both net zero and fossil fuels that make our electricity prices so high at the moment. We are currently caught in the worst of both worlds, with our energy system dominated by the high price of gas, but also making the large capital investments in renewables.
Let’s unpack this further. Our electricity markets are, unfortunately, not well designed for the new capital-intensive, low marginal cost renewable energy we are developing. Our wholesale electricity market works on the basis of marginal cost (in fairness, most markets do). This has created a problem, because gas-fired power is usually the marginal unit, the last bit of power we need. Gas power plants are relatively cheap to build, but burning gas to make electricity is relatively expensive (and it needs a lot of gas, because you lose energy in the process).
In our electricity market, even if we have a windy, sunny day and gas only makes up a small fraction of the grid, if we need any gas at all, it will set the marginal price. Renewables can be as cheap as you like, but it is still gas — the thing that has got so much more expensive — setting prices.
The only way to fix this gas pricing problem, short of complex reforms to the energy market, is to produce enough energy from other sources — renewables, nuclear, imports — to drive gas out of the electricity grid most of the time. That is where the UK plans to be by 2030, and some European countries have already arrived. In 2024, 26% of Britain’s electricity came from gas, and that figure is declining as we build more renewable energy. But until it gets close to zero, we are caught in a worst of all worlds situation: investing heavily in renewables and upgrades to the electricity system, but not yet benefitting much from the cheaper electricity we are developing.
This also has a knock-on effect for heat pumps and industrial electrification, because it means electricity is still expensive. Heat pumps are far more energy efficient than the gas boilers they need to replace — they use around four times less energy to produce the same heat. But electricity is around four times more expensive than gas, and even when gas prices go astronomical, electricity prices tend to follow too. For heat pumps, which have higher capital costs, this is a particular problem — the lower running costs they should have haven’t materialised yet, while the capital costs still need to be paid back. It is the bit of the electrification bargain that just doesn’t work yet.
This problem is compounded by a major policy failure from the UK government. A lot of the costs that were incurred in pump-priming the renewable energy market — pretty successfullly — are still loaded on to electricity bills. Added to this, the UK also applies carbon pricing to gas-fired power plants (the thing that mostly sets the electricity price) but not to gas used in home heating and cooking. So electricity customers are not just paying higher wholesale prices because of our reliance on gas, they are also paying significant levies to cover the industrial policy of the past. Somehow, Britain has ended up with the opposite of a carbon tax: the clean option, electricity, is taxed far more than the dirty option.
This current trap — with gas-level wholesale prices and renewable-level capital investment and taxes — has obvious economic consequences. The capital investment is biting in a higher interest rate environment, but energy bills are not falling in return. In the short term, this mixed, part-net zero, part-fossil fuel economy is clearly bad for economic growth. It seems clear that, one way or the other, we need to step out of the shadow of the valley of death as soon as we can.
The prospect of long term benefits
For all the pain our current energy system is causing us, there are plenty of reasons for optimism in the long term. And the long term might come as soon as 2030 in Britain, if the government’s Clean Power 2030 plan (which involves 95% of all electricity coming from low carbon sources) is successful.
First, and most obviously, dropping gas from the electricity system — and, in time, from our home heating and industrial processes — will unchain electricity and gas prices. Assuming gas prices don’t undergo a major, sustained fall, this should help to lower electricity prices, certainly from their current levels.
Second, an energy system unhooked from oil and gas should face far less volatility. Fossil fuel prices are subject to regional or global supply and demand, to weather and supply chain disruptions, and above all to geopolitical shocks. This volatility has serious economic consequences — the OBR, for example, estimated that having another three 2022-style gas price shocks between now and 2050 would raise UK government debt by 13% of GDP. Renewables, by contrast, are more likely to be funded by long term contracts — such as Contracts for Difference — that cover capital costs and set steady, predictable costs. Renewables may be variable over periods over days or occasionally weeks, but they should be far more stable over years.
Third, a renewables-led energy system has far more upside than a fossil fuel one in the long term. Fossil fuel output globally is limited one way or another, whereas there are few limits — beyond our willingness to invest capital — to how much renewable energy we can produce. It seems far-fetched in our current energy crunch, but it is not implausible that renewables could be a route to far more abundant energy over the coming decades. And if there is one thing that is definitely good for economic growth, it is abundant energy.
There are other points which are also worth highlighting. Even if you conclude that moving towards net zero itself is not good for economic growth, reducing the impact of climate change certainly is. A recent study by the Potsdam Institute for Climate Impact Research suggested that, even if we meet the 2C target set by the Paris Agreement, we face a 19% hit to GDP between now and 2050. According to this work, the costs of climate change outweigh the cost of reducing emissions by six times. More seriously, if the world experiences runaway climate change, the hit to GDP could exceed 60% by 2100. Of course, avoiding this outcome requires global action, and cannot be achieved by one country acting alone. But it is a serious misunderstanding of international climate diplomacy to think that a country like Britain — with its history of emissions — can row back on its climate commitments without damaging global climate action.
It is also worth asking those who would row back on net zero, or take a very different course, what they would do instead, and why it would be better for the economy. It is easy to criticise past decisions — such as not building more nuclear power in the 1980s, or focusing on renewables in the 2010s, but it is not relevant to the choices we make in 2025. As much as British energy policy is in a difficult place now, it is not clear how abandoning net zero would make it any better. Fossil fuels are still expensive, and there is no obvious route to making them cheaper. Opening further oil and gas fields on the British continental shelf might provide an export and windfall tax sugar rush, but it won’t be cheap — we’ve exhausted most of our easy to reach reserves — and it won’t happen quickly either. As for fracking: it’s not going to happen in Britain, and that is not a policy choice. At the same time, the investments we have made in various net zero technologies would make enormous sunk costs if we abandoned them, and that would be doubly unfortunate given they look like investments that will pay off.
Advocating that Britain ditches renewables and switches to nuclear energy — as an increasing number of people seem to be doing — is a similarly baffling strategy. Nuclear faces the same equation as renewables — high capital costs with low marginal costs — except that the capital costs are much higher. And nuclear power plants take a long time to build — even an exemplary new British nuclear programme is unlikely to make serious headway until the 2040s. Nuclear power is an important part of a net zero electricity system, and we should build more of it in my view — but as a complement to, not a replacement for renewables.
There is one other brutal reality about net zero. It is still happening, and countries that don’t move with it will likely be locked out of parts of the global economy. The European Union, Britain’s biggest trade partner, plans to implement a Carbon Border Adjustment Mechanism that will penalise high carbon goods. The USA may or may not abandon its (not exactly impressive) efforts on climate change, but it may find itself alone in that endeavour if it does. The likelihood that there are many markets to sell internal combustion cars, or gas boilers, or high carbon industrial goods to in future is limited. If you want to play a part in the global economy of the future — and Britain must — you need to keep up on net zero.
Short term pain, but a way forward
The answer to my question is now, I hope, somewhat clearer. In the short term — for roughly the next five years — net zero will probably keep hurting our economic growth. It is a lesser culprit than high gas prices, but it is a factor, and I don’t think it is helpful to deny that. But that does not mean we should turn our backs on net zero — if anything, we should try to do it more quickly. Net zero — via renewables and electrification — offers the only plausible route out of the economic pain that gas prices are inflicting on us. That could change again, if gas prices fall or interest rates spike, but things can always get worse as well as better. The alternatives all look far worse, and the longer term pay off should be significant. And that’s before you get into the more important arguments about why we have to tackle climate change anyway.
This gives us, I think, a fairly clear policy prescription. One: politicians need to hold their nerve on net zero. If you’re going through a valley of death, keep going. Two: fix the levies on electricity bills. If you’re going to put a big chunk of the capital costs of net zero on to energy bills, they should not fall mainly on the clean source of energy you’re trying to encourage. This may cause some minor pain in the short term, but it is far less bad than the pain it could help us escape from. Three: lower the cost of capital for net zero wherever you can. The government should use its balance sheet to lower costs, provide certainty and stability to investors, and remove barriers wherever possible. Four: in the short term, support households, especially the most vulnerable, with their energy bills as much as you can, via targeted government spending, bill redistribution or both.
We shouldn’t be pretending net zero is economically painless, but it is still, on every level, the right thing to do. Investing now for benefits in the future is, at it’s core, what economic growth is all about. Net zero is an archetypal example of that – besides being essential for the future of our planet.
