Category: Economics: Ch 13



Climate change is not just an environmental challenge: its socioeconomic impacts are profound and far-reaching, touching every aspect of society. From agriculture to health, from urban infrastructure to coastal communities, the effects of climate change are evident and escalating.

The far-reaching effects

In agriculture, rising temperatures, more intense and frequent heatwaves and changing precipitation patterns pose significant threats to food security.1, 2 Crop yields decline as extreme weather events become more frequent and unpredictable, leading to increased food prices and economic instability. Smallholder farmers, who often lack the resources to adapt, are particularly vulnerable, exacerbating rural poverty and food insecurity.3

Coastal communities face the dual threats of sea-level rise and more intense storms.4 Erosion and inundation damage homes, infrastructure and livelihoods, displacing populations and disrupting local economies. The loss of coastal ecosystems further compounds these challenges, reducing natural defences against storm surges and exacerbating the impacts of climate-related disasters.

Health systems strain under the burden of climate-change-induced heatwaves, air pollution and the spread of vector-borne diseases.5, 6 Heat-related illnesses increase as temperatures rise, particularly affecting vulnerable populations such as the elderly and outdoor workers. Air pollution exacerbates respiratory conditions, leading to higher healthcare costs and decreased productivity. Vector-borne diseases, such as malaria and dengue fever, expand into new regions, placing additional strain on already overburdened health systems.

Displacement due to climate-related disasters amplifies social inequalities and challenges urban planning and infrastructure.7 Vulnerable communities, often located in low-lying areas or informal settlements, bear the brunt of climate impacts, facing the loss of homes, livelihoods and community cohesion. Inadequate housing and infrastructure increase the risks associated with extreme weather events, perpetuating cycles of poverty and vulnerability.

Furthermore, climate change exacerbates existing socioeconomic disparities, disproportionately affecting marginalised and vulnerable populations. Indigenous communities, women, children and people living in poverty are often the hardest hit, lacking access to resources, information, and adaptive capacity.8

Policy responses

Addressing the socioeconomic impacts of climate change requires co-ordinated action across sectors and scales. Policy interventions, such as investment in climate-resilient infrastructure and the promotion of sustainable agriculture practices, are essential for building resilience and reducing vulnerability. Community-led initiatives that prioritise local knowledge and empower marginalised groups are also critical for fostering adaptive capacity and promoting social equity.

To address these challenges, projects like CROSSEU, the new €5 million Horizon Europe project (that I have the pleasure to be part of), play a crucial role in enhancing our understanding of these impacts and developing actionable strategies for resilience and adaptation. One of the key contributions of CROSSEU lies in its development of a Decision Support System (DSS) that integrates tools, measures, and policy options to address these risks in a cross-sectoral and cross-regional perspective. This DSS will support (and hopefully improve) decision-making processes at various levels, from local to EU-wide, and facilitate the adoption of evidence-based policies and measures to enhance resilience and mitigate the impacts of climate change.

Would you like to know more about CROSSEU? Follow our journey and be informed of our publications and events in our new webpage: https://crosseu.eu/9

Articles/References

  1. Global food security under climate change
    Proceedings of the National Academy of Sciences, Josef Schmidhuber and Francesco N Tubiello (11/12/2007)
  2. Reducing risks to food security from climate change
    Global Food Security, Bruce M Campbell et al. (2016: 11, pp.34–43)
  3. The value-add of tailored seasonal forecast information for industry decision making
    Climate, Clare Mary Goodess et al (16/10/2022)
  4. Assessing climate change impacts, sea level rise and storm surge risk in port cities: a case study on Copenhagen
    Climatic change, Stéphane Hallegatte, Nicola Ranger, Olivier Mestre, Patrice Dumas, Jan Corfee-Morlot, Celine Herweijer and Robert Muir Wood (7/12/2010)
  5. Health risks of climate change: An assessment of uncertainties and its implications for adaptation policies
    Environmental Health, J Arjan Wardekker, Arie de Jong, Leendert van Bree, Wim C Turkenburg and Jeroen P van der Sluijs (19/9/2012)
  6. Climate Change and Temperature-related Mortality: Implications for Health-related Climate Policy
    Biomedical and Environmental Sciences, Tong Shi Lu, Jorn Olsen and Patrick L Kinney (2021: 34(5) pp.379–86 )
  7. Climate Change, Inequality, and Human Migration
    IZA Discussion Paper No. 12623, Michał Burzyński, Christoph Deuster, Frédéric Docquier and Jaime de Melo (23/9/2019)
  8. The trap of climate change-induced “natural” disasters and inequality
    Global Environmental Change, Federica Cappelli, Valeria Costantini and Davide Consoli (30/7/2021)
  9. Cross-sectoral Framework for Socio-Economic Resilience to Climate Change and Extreme Events in Europe
    UEA Research Project, Nicholas Vasilakos, Katie Jenkins and Rachel Warren

Questions

  1. How do the socioeconomic impacts of climate change differ between rural and urban communities? What factors contribute to these disparities, and how can policies address them effectively?
  2. In what ways do vulnerable populations, such as indigenous communities and those living in poverty, bear the brunt of climate change impacts? How can we ensure that climate adaptation strategies prioritise their needs and promote social equity?
  3. The blog mentions the importance of community-led initiatives in building resilience to climate change. What examples of successful community-based adaptation projects can you identify, and what lessons can be learned from their implementation?
  4. How can governments and organisations collaborate to address the socioeconomic impacts of climate change while also promoting economic growth and development? What role do cross-sectoral partnerships play in building resilience and fostering sustainable practices?

On 12 February, it was announced that The Body Shop UK was entering administration. With 199 shops across the country, if this leads to the collapse of the business, some 2000 jobs will be lost. The business has been struggling since 2020 and poor sales this last Christmas led the new owners, the pan-European alternative investment firm, Aurelius, to appoint administrators.

This could potentially begin an insolvency process that could result in the closure of some or all of the shops. This would spell the end of an iconic brand that, since its founding in 1976, has been associated with natural, ethically sourced and environmentally friendly products. Aurelius has already sold The Body Shop business in most of mainland Europe and in parts of Asia to an unnamed buyer. It is unclear what will happen to the approximately 2800 stores and 8000 employees in 70 countries outside the UK.

Origins of The Body Shop1

The Body Shop was founded in 1976 and shot to fame in the 1980s. It stood for environmental awareness and an ethical approach to business. But its success had as much to do with what it sold as what it stood for. It sold natural cosmetics – Raspberry Ripple Bathing Bubbles and Camomile Shampoo – products that proved immensely popular with consumers.

Its profits increased from a little over £1m in 1985 (€1.7m) to approximately £65m (€77.5m) in 2012. Although profits then slipped, falling to €65.3m in 2014 and €54.8m in 2015, its profit growth in new markets over that same period was 12.4%.

Sales revenue, meanwhile, grew even more dramatically, from £4.9m in 1985 to approximately €967.2m in 2015. By 2015, Body Shop International had over 3100 stores, operating in 61 countries.

What made this success so remarkable is that The Body Shop did virtually no advertising. Its promotion stemmed largely from the activities and environmental campaigning of its founder, Anita Roddick, and the company’s uncompromising claim that it sold only ‘green’ products and conducted its business operations with high ethical standards. It actively supported green causes such as saving whales and protecting rainforests, and it refused to allow its products to be tested on animals. Perhaps most surprising in the world of big business at the time was its high-profile initiative ‘trade not aid’, whereby it claimed to pay ‘fair’ prices for its ingredients, especially those supplied by people in developing countries who were open to exploitation by large companies.

The growth strategy of The Body Shop focused upon developing a distinctive and highly innovative product range, and at the same time identifying these products with major social issues of the day, such as the environment and animal rights.

Its initial expansion was based on a process of franchising, where individuals opened Body Shops which were then supplied by the company with its range of just 19 products. Then, in 1984 the company went public. Following its flotation, the share price rose from just 5p to a high of 370p in 1992.

In the 1990s, however, sales growth was less rapid. By 1998, earnings had collapsed by 90% and the share price fell to 117p. Shareholders forced Anita Roddick to step down as Chief Executive, but for a while she and her husband remained as co-chairs. In 2002, they stepped down as co-chairs, by which time profits had fallen to £20.4m. In 2003 she was awarded in knighthood and became Dame Anita Roddick. Sales then grew rapidly from 2004 to 2006 from €553m to €709m.

Acquisition of The Body Shop by L’Oréal

A dramatic event, however, occurred in 2006 when The Body Shop was sold to the French cosmetics giant, L’Oréal, which was 26% owned by Nestlé, The event resulted in the magazine Ethical Consumer downgrading The Body Shop’s ethical rating from 11 out of 20 to a mere 2.5 and calling for a boycott of the company. Three weeks after the sale, the daily BrandIndex recorded an 11 point drop in The Body Shop’s consumer satisfaction rating from 25 to 14.

There were several reasons for this. L’Oréal’s animal-testing policies conflicted with those of The Body Shop and L’Oréal was accused of being involved in price-fixing with other French perfume houses. L’Oréal’s part-owner, Nestlé, was also subject to various criticisms for ethical misconduct, including promoting formula milk rather than breast milk to mothers with babies in developing countries and using slave labour in cocoa farms in West Africa.

Anita Roddick, however, believed that, by taking over The Body Shop, L’Oréal would develop a more ethical approach to business. Indeed, it did publicly recognise that it needed to develop its ethical and environmental policies.

L’Oréal adopted a new Code of Business Ethics in 2007 and gained some external accreditation for its approach to sustainability and ethics. It was ranked as one of the world’s 100 most ethical companies by Ethisphere in 2007 and, in 2016, it was again part of this list for the seventh time.

L’Oréal set itself three targets as part of its environmental strategy (2005–15), including a 50% reduction in greenhouse gas emissions, water consumption and waste per finished product unit. It made a donation of $1.2m to the US Environment Protection Agency to help bring an end to animal testing and, in March 2013, it announced a ‘total ban on the sale in Europe of any cosmetic product that was tested on animals or containing an ingredient that was tested on animals after this date.’ It also promised that ‘By 2020, we will innovate so that 100% of products have an environmental or social benefit.’

Sadly, Anita Roddick died in 2007 and so was not able to witness these changes.

L’Oréal also looked to inject greater finance into the company aimed at improving the marketing of products. In autumn 2006 a transactional website was launched and there have been larger press marketing campaigns. Profits continued to rise in 2006 and 2007, but fell back quite dramatically from €64m in 2007 to €36m in 2008 as recession hit the high streets. They fell by a further 8% in 2009, but significant growth was seen in the following three years: 2010, up 20.3% to €65.3m; 2011, up 4.3% to €68.1m; 2012, up 13.8% to €77.5m.

From L’Oréal to Natura to Aurelius to ?

From 2013, the financial performance of The Body Shop deteriorated. Profits fell by 38% in 2016 to just €34m, with sales falling by 5%. In June 2017, L’Oréal announced that it had agreed to sell The Body Shop for €1bn (£877m) to Natura Cosmeticos, the largest Brazilian cosmetics business. Natura was awarded ‘B Corp’ status in 2014 as it met certain standards for environmental performance, accountability and transparency. In 2019, The Body Shop was separately certified as a B Corp.

Initial indications for The Body Shop under its new owners seemed good, with net revenue rising by 36% in 2018 and 6.3% in 2019. 2020 saw strong growth in sales, with a rise in online sales more than offsetting the effect of store closures during the pandemic. Its market share peaked in 2020 at 1.4%. However, with the cost-of-living crisis following the pandemic and the Russian invasion of Ukraine, many consumers switched to cheaper brands and cheaper outlets, such as Boots and Superdrug, sacrificing environmental and ethical concerns in favour of value for money. As a result, The Body Shop’s market share fell, dropping to 0.8% in 2022 and not picking up in 2023.

This prompted Natura to sell the business to Aurelius. Aurelius hoped to revitalise The Body Shop by promoting its core values and through partnerships or concessions with major retailers, such as John Lewis or Next. However, as we saw above, after a poor Christmas and a weaker capital base and higher cost commitments than initially thought by Aurelius, the new owner filed to put The Body Shop into administration.

What will come of the administration process remains to be seen. Perhaps some of the more profitable stores will be saved; perhaps there will be an expansion of the online business; perhaps partnerships will be sought with major retailers. We shall see.

1 Some of this section is based on Case Study 9.3 from Economics (11th edition).

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Articles

Questions

  1. What assumptions did The Body Shop made about the ‘rational consumer’?
  2. How would you describe the aims of The Body Shop (a) in the early days under Anita Roddick; (b) under L’Oréal; (c) under Aurelius?
  3. How has The Body Shop’s economic performance been affected by its attitudes towards ethical issues?
  4. What has Lush done right that The Body Shop has not?
  5. What will the administrators seek to do?
  6. Find out what has happened to The Body Shop outlets in mainland Europe?

A happy New Year for 2024. Let’s hope that the coming year brings some good news amidst all the the gloom of war, squeezed living standards, the effects of climate change and the rise of authoritarian regimes.

One piece of good news is the growth in environmental debt swaps in developing countries. These are known as debt-for-nature swaps (or debt-for-environment swaps or green debt swaps). As Case Study 26.16 in Economics (11th edition) and Case Study 15.19 in Essentials of Economics (9th edition) explain:

A debt-for-nature swap is where debts are cancelled in return for investment in environmental projects, including protecting biodiversity, reducing carbon emissions and mitigating the effect of climate change. There are two types of scheme: bilateral and commercial.

In a bilateral swap, a creditor country agrees to cancel debt in return for the debtor country investing a proportion of the amount in environmental projects. In a commercial swap, the debt owed to banks is sold to an international environmental agency at a substantial discount (or sometimes even given away); the agency then agrees to cancel this debt in return for the country funding the agency to carry out various environmental projects.

The first debt-for-nature swap was made as far back as 1987, when environmental NGO, Conservation International, arranged for Bolivia to be forgiven $650 000 of its debt in exchange for the establishment of three conservation areas bordering the Beni Reserve (see either of the above case studies). In the 1990s and 2000s, debt-for nature swaps became popular with creditors and by 2010, the total debt cancelled through debt-for-nature swaps was just over $1 billion.

However, the popularity waned in the 2010s and with COVID, many developing countries were diverting resources from long-term sustainability and mitigating the effects of climate change to emergency healthcare and relief.

More recently, debt-for-for nature swaps have become popular again.

In May 2023, Ecuador benefited from the biggest debt swap to that point. The agreement saw $1.6bn of its commercial debt refinanced at a discount in exchange for large-scale conservation in and around the Galápagos Islands. At least $12m per year of the money saved will be channelled into conservation in the archipelago, with its unique flora and fauna.

Such projects are set to increase, with potentially significant beneficial effects for biodiversity, climate and the environment generally. At the COP28 summit in December 2023, a task force was set up by a group of multilateral development banks to promote an increase in the size and number of debt-for-nature swaps.

According to the Organisation for Economic Co-operation and Development (OECD), developing economies will need an annual $2.4 trillion of investment in climate action in the coming years. So far, the market for debt-for-nature swaps is set to rise to around $800bn. If they are to make a significant contribution to tackling climate change and loss of biodiversity, they need to be scaled up massively, especially as the cost of servicing debt has risen with higher global interest rates.

Nevertheless, as part of a portfolio of measures to tackle debt, climate change, loss of biodiversity and damage to the environment more generally, they are making an important contribution – a contribution that is set to rise.

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Articles

Questions

  1. Identify other types of debt swap and discuss their importance.
  2. Why are debt-for-nature debt swaps in the interests of debtor countries, creditors and the world generally?
  3. What is ‘green washing’? How may debt-for-nature swaps be assessed to prevent such green washing?
  4. Why are many developing countries’ debt burdens skyrocketing?
  5. Why may a developing country’s solution to its growing debt be detrimental to the environment?
  6. Assess the Belize debt-swap deal in tackling both its debt and conservation.


Politicians, business leaders, climate scientists, interest groups and journalists from across the world have been meeting in Dubai at the COP28 climate summit (the 28th annual meeting of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC)). The meeting comes at a time when various climate tipping points are being reached or approached – some bad, but some good. Understanding these tipping points and their implications for society and policy requires understanding not only the science, but also the various economic incentives affecting individuals, businesses, politicians and societies.

Tipping points

A recent report (see first reference in articles section below) identified various climate tipping points. These are when global temperatures rise to a point where various domino effects occur. These are adverse changes to the environment that gather pace and have major effects on ecosystems and the ability to grow food and support populations. These, in turn, will have large effects on economies, migration and political stability.

According to the report, five tipping points are imminent with the current degree of global warming (1.2oC). These are:

  • Melting of the Greenland ice sheet;
  • Melting of the West Antarctic ice sheet;
  • Death of warm-water coral reefs;
  • Collapse of the North Atlantic Subpolar Gyre circulation, which helps to drive the warm current that benefits Western Europe;
  • Widespread rapid thawing of permafrost, where tundra without snow cover rapidly absorbs heat and releases methane (a much more powerful source of global warming than CO2).

With global warming of 1.5oC, three more tipping points are likely: the destruction of seagrass meadows, mangrove swamps and the southern part of the boreal forests that cover much of northern Eurasia. As the temperature warms further, other tipping points can interact in ways that drive one another, resulting in tipping ‘cascades’.

But the report also strikes an optimistic note, arguing that positive tipping points are also possible, which will help to slow global warming in the near future and possibly reverse it further in the future.


The most obvious one is in renewable energy. Renewable power generation in many countries is now cheaper than generation from fossil fuels. Indeed, in 2022, over 80% of new electricity generation was from solar and wind. And as it becomes cheaper, so this will drive investment in new renewable plants, including in small-scale production suitable for use in developing countries in parts not connected to a grid. In the vehicle sector, improved battery technology, the growth in charging infrastructure and cheaper renewable sources of electricity are creating a tipping point in EV take-up.

Positive tipping points can take place as a result of changing attitudes, such as moving away from a meat-intensive diet, avoiding food waste, greater use of recycling and a growth in second-hand markets.

But these positive tipping points are so far not strong enough or quick enough. Part of the problem is with economic incentives in market systems and part is with political systems.

Market failures

Economic decisions around the world of both individuals and firms are made largely within a market environment. But the market fails to take into account the full climate costs and benefits of such decisions. There are various reasons why.

Externalities. Both the production and consumption of many goods, especially energy and transport, but also much of agriculture and manufacturing, involve the production of CO2. But the costs of the resulting global warming are not born directly by the producer or consumer. Instead they are external costs born by society worldwide – with some countries and individuals bearing a higher cost than others. The result is an overproduction or consumption of such goods from the point of view of the world.

The environment as a common resource. The air, the seas and many other parts of the environment are not privately owned. They are a global ‘commons’. As such, it is extremely difficult to exclude non-payers from consuming the benefits they provide. Because of this property of ‘non-excludability’, it is often possible to consume the benefits of the environment at a zero price. If the price of any good or service to the user is zero, there is no incentive to economise on its use. In the case of the atmosphere as a ‘dump’ for greenhouse gases, this results in its overuse. Many parts of the environment, however, including the atmosphere, are scarce: there is rivalry in their use. As people increase their use of the atmosphere as a dump for carbon, so the resulting global warming adversely affects the lives of others. This is an example of the tragedy of the commons – where a free resource (such as common land) is overused.

Inter-generational problems. The effect of the growth in carbon emissions is long term, whereas the benefits are immediate. Thus consumers and firms are frequently prepared to continue with various practices, such as driving, flying and using fossil fuels for production, and leave future generations to worry about their environmental consequences. The problem, then, is a reflection of the importance that people attach to the present relative to the future.

Ignorance. People may be contributing to global warming without realising it. They may be unaware of which of the goods they buy involve the release of carbon in their production or how much carbon they release when consumed.

Political failures

Governments, whether democratic or dictatorships, face incentives not to reduce carbon emissions – or to minimise their reduction, especially if they are oil producing countries. Reducing carbon involves short-term costs to consumers and this can make them unpopular. It could cost them the next election or, in the case of dictatorships, make them vulnerable to overthrow. What is more, the oil, coal and gas industries have a vested interest in continuing the use of fossil fuels. Such industries wield considerable political power.

Even if governments want the world to reduce carbon emissions, they would rather that the cost of doing so is born less by their own country and more by other countries. This creates a prisoner’s dilemma, where the optimum may be for a large global reduction in carbon emissions, but the optimum is not achieved because countries individually are only prepared to reduce a little, expecting other countries to reduce more. Getting a deal that is deemed ‘fair’ by all countries is very difficult. An example is where developing countries, may feel that it is fair that the bulk of any cuts, if not all of them, should be made by developed countries, while developed countries feel that fixed percentage cuts should be made by all countries.

Policy options

If the goal is to tackle climate change, then the means is to reduce the amount of carbon in the atmosphere (or at the least to stop its increase – the net zero target). There are two possibilities here. The first is to reduce the amount of carbon emissions. The second is to use carbon capture and storage or carbon sequestration (e.g. through increased forestation).

In terms of reducing carbon emissions, the key is reducing the consumption of carbon-producing activities and products that involve emissions in their production. This can be achieved through taxes on such products and/or subsidies on green alternatives (see the blog ‘Are carbon taxes a solution to the climate emergency?‘). Alternatively carbon-intensive consumption can be banned or phased out by law. For example, the purchase of new petrol or diesel cars cold be banned beyond a certain date. Or some combination of taxation and regulation can be used, such as in a cap-and-trade system – for example, the EU Emissions Trading System (EU ETS) (see the blog ‘Carbon pricing in the UK‘). Then there is government investment in zero carbon technologies and infrastructure (e.g. electrifying railways). In practice, a range of policy instruments are needed (see the blog ‘Tackling climate change: “Everything, everywhere, all at once”‘).

With carbon capture, again, solutions can involve a mixture of market mechanisms and regulation. Market mechanisms include subsidies for using carbon capture systems or for afforestation. Regulation includes policies such as requiring filters to be installed on chimneys or banning the felling of forests for grazing land.

The main issue with such policies is persuading governments to adopt them. As we saw above, governments may be unwilling to bear the short-term costs to consumers and the resulting loss in popularity. Winning the next election or simple political survival may be their number-one priority.

COP28

The COP28 summit concluded with a draft agreement which called for the:

transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science.

This was the first COP summit that called on all nations to transition away from fossil fuels for energy generation. It was thus hailed as the biggest step forward on tackling climate change since the 2015 Paris agreement. However, there was no explicit commitment to phase out or even ‘phase down’ fossil fuels. Many scientists, climate interest groups and even governments had called for such a commitment. What is more, there was no agreement to transition away from fossil fuels for transport, agriculture or the production of plastics.

If the agreement is to be anything more than words, the commitment must now be translated into specific policy actions by governments. This is where the real test will come. It’s easy to make commitments; it’s much harder to put them into practice with policy measures that are bound to impose costs on various groups of people. What is more, there are powerful lobbies, such as the oil, coal and steel industries, which want to slow any transition away from fossil fuels – and many governments of oil producing countries which gain substantial revenues from oil production.

One test will come in two years’ time at the COP30 summit in the Amazonian city of Belém, Brazil. At that summit, countries must present new nationally determined commitments that are economy-wide, cover all greenhouse gases and are fully aligned with the 1.5°C temperature limit. This will require specific targets to be announced and the measures required to achieve them. Also, it is hoped that by then there will be an agreement to phase out fossil fuels and not just to ‘transition away’ from them.

Reasons for hope

Despite the unwillingness of many countries, especially the oil and coal producing countries, to phase out fossil fuels, there are reasons for hope that global warming may be halted and eventually even reversed. Damage will have been done and some tipping points may have been reached, but further tipping points may be averted.

The first reason is technological advance. Research, development and investment in zero carbon technologies is advancing rapidly. As we have seen, power generation from wind and solar is now cheaper than from fossil fuels. And this cost difference is likely to grow as technology advances further. This positive tipping point is becoming more rapid. Other technological advances in transport and industry will further the shift towards renewables and other advances will economise on the use of power.

The second is changing attitudes. With the environment being increasingly included in educational syllabuses around the world and with greater stress on the problems of climate change in the media, with frequent items in the news and with programmes such as the three series of Planet Earth, people are becoming more aware of the implications of climate change and how their actions contribute towards the problem. People are likely to put increasing pressure on businesses and governments to take action. Growing awareness of the environmental impact of their actions is also affecting people’s choices. The negative externalities are thus being reduced and may even become positive ones.

Articles

Questions

  1. Use a diagram to demonstrate the effects of negative externalities in production on the level of output and how this differs from the optimum level.
  2. Use another diagram to demonstrate the effects of negative externalities in consumption on the level of consumption and how this differs from the optimum level.
  3. What was agreed at COP28?
  4. What incentives were included in the agreement to ensure countries stick to the agreement? Were they likely to be sufficient?
  5. What can governments do to encourage positive environmental tipping points?
  6. How may carbon taxes be used to tackle global warming? Are they an efficient policy instrument?
  7. What can be done to change people’s attitudes towards their own carbon emissions?

HS2 has been cancelled north of Birmingham. The prime minister, Rishi Sunak, announced this at the Conservative Party conference on 4 October, some 13 years after the plan was adopted by the Labour government to build a new high-speed railway from London to Birmingham, which then would branch into two legs – one to Manchester and one to Leeds. The initial budget for this was £15.8bn to £17.4bn. When it came to power, the Conservative-Liberal coalition government ordered a review of the plan. In light of this, the government gave the green light in January 2012 for the full Y-shaped project to go ahead. The London–Birmingham leg was planned to open in 2026 and the two northern legs from 2033.

The project was divided into two phases: Phase 1 to Birmingham and Phase 2 to Manchester and Leeds. The Phase 1 parliamentary bill became law in February 2017 and soon after that, various construction contracts were signed. After some delays, preparation for construction work began in June 2019. There was growing doubt, however, about the viability of the northern legs.

On becoming prime minister in 2019, Boris Johnson ordered an independent review of the project after estimates that the costs of the full project would be some £88bn. The review, chaired by Douglas Oakervee, was published in December 2019 (for a link, see list of reports below). It found that costs (in 2015 prices) were likely to be between £62bn and £69bn. Nevertheless, it concluded that the project should proceed: that the original rationale for HS2 still held; that there were:

no shovel-ready alternative investments in the existing network that were available: if HS2 were to be cancelled, many years of planning work would be required to identify, design and develop new proposals; that the upgrading of existing lines would also come at a high passenger cost with significant disruption; that there would be serious consequences for the supply chain, the fragile UK construction industry and confidence in UK infrastructure planning if HS2 were to be cancelled at this late stage.

In February 2020, the prime minister announced that HS2 would go ahead, including the legs to Manchester and Leeds. The Department for Transport published a document (see source line to the following table) giving the full business case for Phase 1 and the outline case for Phase 2. The document itemised the costs and benefits as estimated at the time.

Source: Full Business Case: High Speed Two, Table 2.9, Department for Transport (April 2020)

Box 12.6 in Economics (eleventh edition) and Case study 8.16 on the Essentials of Economics (ninth edition) student website looks at these costs and benefits. The above table is taken from the box/case study. Net transport benefits (present value at 2015 prices) were estimated to be £74.2bn. These include benefits to passengers from shorter journey times, greater reliability, greater connectivity and less crowding, and reduced congestion on roads. They also include other benefits, such as a reduction in carbon emissions and a reduction in road accidents. Net benefits also include the wider benefits from greater connectivity between firms (resulting in increased specialism, trade and investment), greater competition and greater labour mobility. These wider benefits were estimated to be £20.5bn, giving total net benefits of £94.7bn.

Total costs to the government were estimated to be £108.9bn and revenues from fares to be £45.4bn, giving total net costs of £63.5bn. This gave a benefit/cost ratio of 1.5 (£94.7bn/£63.5bn). In the light of these findings, the government announced in September 2020 that the main work on the London to Birmingham leg would begin, despite the Public Accounts Committee’s finding that the project was badly off course and lacking in transparency.

Concern was expressed over whether the Leeds leg would go ahead, but in May 2021, the transport secretary, Grant Shapps, confirmed that it would be completed. However, with the publication of the Integrated Rail Plan in November 2021 (for a link, see list of reports below), the government decided that the eastern leg of HS2 would no longer reach Leeds but instead end in the East Midlands. Then in June 2022, the link between the HS2 line near Manchester and the West Coast Main Line was scrapped. This would have allowed HS2 trains to reach Scotland.

In early 2023, it was announced that the building of the terminus at Euston was being put on hold. Many interpreted this as meaning that it was being scrapped, with trains terminating at Old Oak Common, some six miles from Central London.

Finally, as we have seen, HS2 north of Birmingham has now been scrapped and the government is seeking private-sector funding to build the terminus at Euston and complete the line from Old Oak Common.

Arguments for scrapping the northern legs

The main argument given by the government was that projected costs have risen substantially above original estimates and that by cancelling the Manchester and east Midlands legs, the money saved could be better used elsewhere. The argument is one of opportunity cost. The cost of going ahead would mean not going ahead with better-value alternatives.

The government claims that £36bn will be saved and that this will be diverted to rail, road and other transport projects, primarily (although not exclusively) in the north of England. The money would be spent between 2029 and 2040. Projects include spending additional money on the planned upgrading of the rail link between Manchester and Liverpool, Sheffield, Leeds and Hull; building a new station at Bradford; developing a mass transit system for Leeds and its surroundings; a £2.5bn fund for improved transport for smaller cities, towns and the countryside in the north of England; extra funding for transport in the east and west Midlands, including funding a Midlands Rail Hub. Out of the £36bn, £6.5bn would be for projects elsewhere, including road improvement.

In order to judge whether the diversion of funds represents a better use of money, a full analysis of costs and benefits of the various projects would need to be conducted and compared with an updated cost–benefit analysis of continuing with the legs to Manchester and the east Midlands and possibly reinstating the Leeds leg too.

One possible benefit for the government is a political one. It hopes that promising more local projects rather than HS2 will appeal to the electorate in large parts of the north of England who are suffering from poor and unreliable transport links. However, most of these projects will be started well beyond the next election and this political gain may turn out to be small. Indeed, cancelling HS2 may breed cynicism, with people wondering whether any promised new projects will actually be delivered.

Arguments against scrapping the northern leg(s)

The benefits originally identified from HS2 will now be lost. It is not just that the northern legs of HS2 would have provided faster travel to Manchester and Leeds, but the new lines would have reduced congestion for slower trains and freight on existing lines. This has been the experience in countries such as Japan and Spain, which have invested heavily in new, separate high-speed lines.

When the line is completed to Birmingham, the HS2 trains will be able to continue north of Birmingham on existing lines. But these lines are heavily congested, which will limit the number of HS2 trains that can use them. Also they will be restricted to 110 mph on these lines as they have no tilting mechanism. Also they will have a maximum capacity of only 550 seats (a single train set) as the platforms at Manchester Piccadilly cannot accommodate double-set trains. The existing Pendalino trains on the West Coast mainline can travel at 125 mph as they do have the tilting mechanism and they have a higher capacity of 607 seats.

Then there are the signals that cancellation sends to industry about whether governments can be trusted to follow through on public-sector projects. Many business had expanded or relocated to places near the HS2 routes. Many others will wonder whether the promised new projects will go ahead. Indeed, shortly after giving a list of the projects (some of which had already been built or were being built), the list was removed from the government website. There is already a mood of scepticism amongst the electorate. Polling following the initial announcement showed that a majority believed that it was unlikely that the Conservatives would deliver the other projects if they won the next election.

The opportunity cost argument that the money would be better spent on alternative transport projects is predicated on various assumptions. One is that the money will actually be spent, which, as we have seen, people consider doubtful. Another is that the only choice is either spending a fixed pot of money on the northern leg(s) of HS2 or spending it on the alternative projects announced by the prime minister. It could be argued that the government should proceed with both the full HS2 and these other projects, and fund it by extra taxation. Investment as a percentage of GDP is low in the UK compared with other countries. Over the past 10 years, it has averaged 17.8% in the UK. This compares with 21.0% in the USA, 21.5% in Germany, 23.7% in France and 25.4% in Japan. Also, public-sector investment is low in the UK compared with that in other countries.

Assessing the arguments

Many of the costs and benefits of long-term projects, such as HS2, occur many years hence. There is, therefore, a great deal of uncertainty over their magnitude. This makes it extremely difficult to reach a clear conclusion over the desirability of cancelling HS2 north of Birmingham or continuing with it. Under such circumstances, politics tends to dominate decision making.

Articles

Government Press Release

Reports

Questions

  1. Why have the costs of HS2 (in real terms) risen substantially since the first estimates in 2012?
  2. Identify the types of environmental costs and benefits of the full Y-shaped HS2 project. Why might such costs and benefits be difficult to measure?
  3. Is the opportunity of cost of proceeding with the full Y-shaped HS2 a range of other transport projects? Explain.
  4. Find out the level of public-sector investment expenditure as a percentage of (a) total government expenditure and (b) GDP in some other developed countries and compare them with the UK. Comment on your findings.
  5. Should the decision whether or not to go ahead with the Manchester and east Midlands legs have been delayed until a new updated cost–benefit analysis had been conducted?
  6. If most of the benefits from the originally planned HS2 will be now be lost with the line ending at Birmingham, should this leg to Birmingham also be cancelled, even though many of the costs have already been incurred? Explain your reasoning.