The Banking Executive, Issue 155, November 2021

Climate vs. Capitalism? tensive suburban dwellings are un- likely to pass the carbon-neutrality test, they could end up as stranded assets. That will be a problem for households whose main asset is their current home equity. Similarly, the deep transformation of meat-inten- sive diets will disrupt millennia-old agricultural and food traditions. Growth skeptics therefore have a point when they say that technology is no magic bullet. While it is non- sense to think that de-growth will solve the climate problem, it does make sense psychologically to warn people that behavioral changes will be needed. The second caveat is that even if green technologies turn out to be less costly than traditional ones, the tran- sition costs will be substantial. Hav- ing procrastinated for so long, we are now confronted with a sudden, abrupt changeover. Put simply, a sig- nificant share of the existing capital stock – buildings, machines, and ve- hicles – will need to be discarded and replaced before it reaches the end of its economic life. Whether this phase-out is triggered by carbon pricing or by tighter emission regula- tions is immaterial. Either way, greater investment will be needed to maintain the same level of output. Economists call sudden obsoles- cence of capital stock a negative sup- ply shock, because its main economic effect is to reduce poten- tial output (at least temporarily). The expression was coined in the 1970s to make sense of the sudden rise in oil prices. A back-of-the-envelope calculation suggests that the shock awaiting us in the coming decade will be roughly the same order of magnitude. The combination of reduced poten- tial output and greater investment – amounting to 2% of GDP, according to several estimates – implies that consumer welfare will take a hit. More precisely, it will be diminished in the short term and improved in the long term, as when a country under- takes a military build-up to preserve its security. Also, jobs will be lost in traditional carbon-intensive sectors; but other jobs will be created in car- bon-neutral industries. Again, this will involve significant transition costs: foundry workers will not in- stantaneously be transformed into building-insulation experts. the BANKING EXECUTIVE 26 ISSUE 155 NOVEMBER 2021