By Jo Wrighton and Jamie Willett on Nov 29, 2019
Why did you choose a career as an economist?
I grew up in a small town in the Appalachian hills of Pennsylvania, USA, in the 1970s. We were a typical, middle-class family.
But my grandparents had lived in very different times. They lost their livelihoods — a local store — and life savings in the Great Depression of the 1930s. Almost overnight, they faced real hardships and insecurities.
I saw how this trauma undercut their sense of security and place in the community, how it shaped their characters even decades later. My parents too were affected. They were truly determined to make sure the same thing could not happen to them.
These family stories sparked my interest in economics. It was also a time of sharp contrasts across America, of deep poverty amid a prospering middle class. I wanted to understand why my family’s experiences could be so vastly different over a few decades, and why there were such economic divides at the time.
What is the role of chief economist?
I joined Shell as Chief Economist from the European Bank for Reconstruction and Development in 2006 and my first task was to take part in a review of the company’s activities in Russia. My steer, based on much experience in the region, was to invest with caution because of the challenging business environment.
The Stern Review on the Economics of Climate Change, a UK government report on how global warming could affect the world economy, was also published in 2006. I took a strong interest in how policies designed to cut carbon emissions would affect energy markets.
After five years, I left Shell for the UK government to serve as Chief Economist for the Department of Energy and Climate Change. I worked on the government’s reform of the UK electricity market, the most dramatic restructuring of that market for decades. I also worked on the strategy for meeting UK carbon budgets, which legally limit the emissions of the UK across five-year periods. These efforts focused strongly on investment in low-carbon electricity and energy efficiency.
I returned to Shell in 2016, once again as Chief Economist. Today, I focus on understanding two areas that are crucial for our company: the global economy and the transition to cleaner energy technologies.
My work feeds into Shell’s strategy and informs our energy scenarios, which look at plausible visions of the future. For example, our Sky scenario sets out a technically possible, but challenging pathway for society to achieve the goals of the Paris Agreement. We are now taking a close look at how broader economic and political developments could open societal pathways towards achieving these goals.
“It was a time of sharp contrasts across America, of deep poverty amid a prospering middle class”
How does Shell’s view of the economic outlook feed into its strategy?
The strength of the global economy has important implications for oil and gas prices, and for energy demand more generally.
For example, during the 2008 global financial crisis, we developed recession and recovery scenarios. They gave Shell’s Executive Committee confidence in judging its response, neither overreacting to the crisis nor underreacting. There were adjustments to Shell’s investments and operations, but they were designed to support business growth in a recovery.
My team is doing something similar today. We are developing macroeconomic scenarios, including different types of recessions and recoveries, to help Shell think about responses and opportunities in a downturn, if one happens.
Do you share some people’s views that the world is heading into a downturn?
Shell sees the global economy continuing to grow, albeit slowly. But many economies are now at a stall speed, where there is a higher risk of falling into a recession. And there are clear cyclical slowdowns in the USA, Europe and China.
The trade conflict between China and the USA is a real headwind for the global economy. At the same time, China’s economy is slowing for domestic reasons. The government is changing the structure of the economy away from investment and manufactured exports towards services. But China has high domestic debts and, as growth slows, they can become more difficult to manage.
In emerging economies there are pockets of weakness and stress, especially in Latin America. In Europe, we are also keeping a close eye on Brexit in the UK and the high level of government debt in Italy. A lack of clear political consensus on the way forward is making it harder for both the UK and Italy to achieve growth.
In short, we see economic vulnerabilities. Handled well, they can be resolved in ways that renew growth and avoid recession. But such difficult issues handled poorly will have the opposite effect.
You are writing a book about the policy changes needed for the world to meet the climate goals of the Paris Agreement. What prompted you to write the book?
For a long time, the dominant narrative in economics was that a price on carbon emissions, combined with support for research and development, was the way to make the transition to lower-carbon energy happen. But this approach is not working, at least not fast enough.?
In fact, the challenge of introducing low-carbon solutions is more complex than many economists originally thought.
Take the power sector in the UK. The government has played a more direct role in supporting renewable technologies, including feed-in tariffs, or payments to households and businesses generating their own renewable electricity, with positive results. The UK now has the largest offshore wind capacity in the world, and the costs of offshore wind are falling sharply.?
A similar process is emerging with battery electric vehicles. Several countries, especially those with car industries, are supporting customers when they purchase electric vehicles and their costs are falling significantly.
In my book, I explore some of the issues raised by these successes for low-carbon technologies. We know that car manufacturers, for example, influence the attractiveness of the product through design, brand and marketing. How much can we expect of the private sector in delivering affordable low-carbon solutions, through strategies like these? And in areas like renewables and electricity, where the product is less differentiated, does the government need to play a larger role? What needs to be done to bring forward the full range of low-carbon technologies required to achieve the goals of the Paris Agreement?
We have discussed the role of governments and businesses. What about the role of individuals in combating climate change?
Like many economists, I believe that supporting markets and individual choice is a good approach, but one that needs the right policies backing it up. There are now examples of choices that are good for both individuals and the climate, but not enough.
Take a simple example. LED lights are now superior to incandescent lights in terms of energy efficiency and cost. Today, most people buy them without thinking twice, though 10 years ago buying different light bulbs was a big deal.
Today, not many can afford an electric car, so I think it is also important to focus on energy efficiency. I drive a Mini, one of the more energy-efficient petrol cars, for example.
And I have made my home more efficient. I have cut my family’s gas and electricity use by about one-fifth by installing a much better boiler, heating controls and insulation, and the right lighting.
But the bottom line is that to achieve the goals of the Paris Agreement, we will all have to change many of the common technologies we use today, from the type of car we drive to the way we heat our homes.
The challenge for society is to ensure that these technologies are good choices for most people. Some will be better than those today, others more expensive. On balance, the experience of the energy transition so far shows that this is potentially within our collective grasp. But there remains much to do, at a much faster pace.