Financial knowledge

Dieter Helm: "A sustainable legacy - and future growth - are both possible"

Economist and environmentalist Dieter Helm believes that legacy and sustainability are inextricably linked. Each generation has a responsibility to pass on a world that's at least as good as, or a little better than, it inherited. And he's clear that our current way of life is unsustainable. 

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Ellen Sheng, guest author
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6 minutes
A man in a tie, jacket and glasses smiles friendly into the camera, a historic building in the background
Human nature makes us care about our own children, our own family, our own location. We should focus on what we can achieve pragmatically, says Dieter Helm of Oxford University.

What does a sustainable economy look like? 

Dieter Helm: A sustainable economy is one where the various systems and infrastructures, including transport, education, electric power, health, and natural assets, are in good shape and kept properly maintained. We need to make sure that every citizen can participate fully in society, that the economy functions, productivity can increase, and the next generation can choose how they want to live their lives.

What we're doing isn't sustainable. When you consume natural capital, you can't avoid the consequences. If we destroy the rainforests, it's not going to be the same planet. 

One of your ideas is that the polluter pays. Can you explain what this means?  

I like approaches like carbon taxes. It's capitalism working within the constraints of appropriate pricing. Markets don't exist in a vacuum, but within a policy framework. We need to incentivise investors and companies to "do the right thing." And we'll only get them to do the right thing if they have to pay the full costs of their polluting activities. The 'polluter pays' principle is a very capitalist idea. And it's important that investors understand that when they're not covering the full costs of their actions, someone else is. 

We should face up to the true cost of our activities.

Dieter Helm, Professor at Oxford University

A couple of months ago, I was invited to speak at a conference on climate change in Bali. I wrote to them and said, "Don't you think it's quite ironic that you want me to fly all the way to Bali and back in order to spend just 30 minutes on a panel talking about climate change?"

There are some things we're doing that are artificially cheap, such as air travel. If we paid the full price, which includes the cost of the pollution we cause, we might still do it, but we'd think twice because it would be a lot more expensive. This is just sensible economics. We should face up to the true cost of our activities. 

Have you seen any progress on this so far?

A man is sitting and talking, with a large library, desk and globe in the background
People are upset about a carbon tax, but why not tax pollution?, asks Professor Dieter Helm © Yale University Press London

The EU has set up a Carbon Border Adjustment Mechanism (CBAM) for Europe, which puts a price on the carbon emitted during the production of carbon-intensive goods coming into the EU, and encourages cleaner industrial production in non-EU countries. It's a good thing, and it should pay for our carbon consumption goals. 

People get upset about a carbon tax. But at the moment, we do silly things like taxing labour. What about taxing bad things? We've taxed tobacco, why not tax pollution? We should be setting taxes in a way that improves the performance of the economy, not inhibits it. If you have a carbon tax, and this really would raise lots of money, you could spend it on good things like supporting the transition to sustainable energy. It's sensible economics. 

What can investors do to reframe conversations they have with companies they're investing in?

When you look at a business to assess if it's consistent with a sustainable economy, most people ask if it has a net zero target. Look a bit harder. I would ask: what assets has it got? And are they being properly maintained? What does the balance sheet look like? If ESG was properly defined, which it isn't, it would identify whether the assets people invest in are being maintained so they'll still be there in the future. 

Instead of ignoring the facts, you can engage with the company you're investing in.

Dieter Helm, Professor at Oxford University

Most companies are using coal, oil, and gas as primary inputs, because the world economy is 80 per cent dependent on carbon-based fuels. Instead of ignoring this fact, you can engage with the company you're investing in. You have to be clear about what you want. Know what pathway they're following, how they're making their asset base sustainable, and if they are properly maintaining these assets for the future. You want to look at their accounting practices, and the direction of change. 

You've emphasized the importance of accounting in a sustainable economy. How does this work? 

Nearly all companies currently use historic cost accounting. That means that what goes into the accounts is what people paid for assets in the past, and they depreciate these assets. If you're in a business that makes chocolate bars, you have assets like chocolate-making machines that are replaced and upgraded over a short time-horizon, so it's appropriate to get your capital back through the depreciation charge. 

A man sits and talks, many books in the background
We're currently living beyond our environmental means, so we need to adjust to a sustainable level of consumption, says Dieter Helm. © Yale University Press London

But if you are an electricity transmission business, whose service is required in perpetuity, and whose assets like wires and pylons have very long asset lives, the key economic task is to maintain them. This capital maintenance is an operating cost, not an investment cost. You should not be depreciating the assets, and should not use depreciation to support your dividends. You should be maintaining your assets for the long term. 

Does accounting go beyond the balance sheet?

Yes. It's a bit technical but think about what the balance sheet should represent. You have to look at any business in an appropriate framework: not just the factories and employees, but the supply chain. Let me give you an example. If you plan to buy an EV car to lower your carbon emissions, think about the battery supply chain. The cobalt comes from a mine in the middle of the Congo jungle. 

New technologies in quantum computing, genetics and synthetic biology are opening up huge opportunities. 

Dieter Helm, Professor at Oxford University

The nickel comes from cleared rainforest in Indonesia, then it's refined in Russia, and the waste is spewed into the Arctic Ocean. As for the copper and lithium, take a look on Google Earth at copper or lithium mines in Chile and see how environmentally sound they are. To pretend that an electric car is zero emissions is to fail to understand the supply chain. 

Living more sustainably sounds like a massive step backwards in terms of our standard of living. You've said that technological progress plays a large role in sustaining the quality of life. Can you say more about this?  

We're currently living beyond our environmental means, so we need to adjust to a sustainable level of consumption. Either we'll be forced to do so in future, or we can do it now. But it means paying for the pollution through carbon taxes and regulations that push companies to limit pollution and consumption. 

A man is sitting and talking, with a large library, desk and globe in the background
If we can leave the next generation a natural environment that is at least as good as what we have inherited, and if we can limit the temperature rise to one or two degrees, that would be fantastic. © Yale University Press London

Where I differ from almost all environmentalists is that I think there's nothing to stop substantial economic growth in the future, with people better off, once we've adjusted to a sustainable level of consumption. Why? Because economic growth is caused by technological change. New technologies are opening up enormous possibilities. Think of quantum computing, and what genetics and synthetic biology have achieved. Think of AI. And the digitalization of virtually everything. 

How do you see the future?

If we can leave the next generation a natural environment at least as good as what we inherited, and if we can keep temperature increases to one or two degrees, that would be fantastic. Human nature makes us care about our own children, our own family, our own location. We should focus on what we can achieve pragmatically, do less damage to the world we leave to the next generation, and use technology to help us achieve this.

About Dieter Helm

Sir Dieter Helm is a professor of economic policy at the University of Oxford and a fellow in economics at New College, Oxford. He has been researching what a sustainable economy would look like for decades. He is the author of several books, including Net Zero, Green and Prosperous Land, Natural Capital, The Carbon Crunch, and most recently, Legacy: How to Build the Sustainable Economy. Dieter Helm provides expert advice to UK and European governments, regulators, and companies on energy, climate, and the environment. 

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