Climate
An organic transition?
Climate interests and global commitments to net zero are not just about energy transition. Green concerns also extend to physical, tangible assets – essentially, capital goods such as buildings, machinery, equipment used to produce consumer goods or services. Dhar defines older, “polluting” capital goods as those utilising traditional methods, which may have resulted in higher emissions than those created with more net zero awareness (green capital). In a net zero report in 2022 that he co-wrote, Dhar pointed out climate transition is unlikely to boost investment in green capital goods, he says. Rather transition to green will happen more organically, through replacement investment – in other words, waiting for existing polluting capital to reach the end of its economically useful life and then replacing it with cleaner, greener capital, he explains.
Replacing existing capital, even when it has fully depreciated, is likely to prove costly. There are also other factors in this equation. What if depreciation rates rise because polluting capital must be retired earlier? Or the costs of installing the replacement capital are higher? “Intuitively, if replacing capital, either early or late, involves costly installation, that raises the cost.” This, he notes, will in turn influence the component pressures on interest rates.
# 1. Will the transition involve a large rise in global netinvestment demand? "Our calculations suggest this isunlikely – the bulk of the transition will come in the form ofreplacement investment," Dhar says.#2. Will the replacement of polluting capital by greencapital be costly?#3. Will the rise in the relative price of polluting capitalstem or reverse the decline in the price of investmentgoods seen in the past few decades?
Moore's Law refers to premise that we expect the speed and capability of our computers to increase every two years, yet we will pay less for them. Moore's Law asserts too that this growth is exponential. In Dhar’s paper, Tidal Forces: Dissecting the interest rate equation, he points out the price of goods has been falling in developed countries for some time. This enables a larger amount of investment to be bought. However, in the context of the climate transition will Moore’s Law apply? In order to achieve net zero targets, the relative price of fossils fuels may rise several-fold as a way to incentivise the replacement of polluting capital with clean, Dhar adds.