Fossil fuel prices are too low — they don’t reflect externalities. We should raise them through a carbon tax and accelerate the transition to renewable energy. But how quickly? And at what price?
A faster transition will impose steeper economic costs; a slower transition implies more pollution and more climate risk. We should have a transparent public debate on this trade-off. Instead, the discussion is hijacked by two opposite extreme claims. Some argue that a “green economy” can never be achieved. Others suggest it can be achieved rapidly at no cost to ordinary citizens, because renewables are already cheaper than fossil fuels, and any cost can be charged to “big oil.”
The transition will happen — but it will cost us
We’ve made important progress on renewables, and innovation will keep yielding better technology at lower costs. The energy transition will happen.
But it will cost us. We often hear that on a Levelized Cost of Energy (LCOE) basis, renewables are already cheaper than fossil fuels. This is true, but we need to understand what it means. LCOE takes the discounted present value of the total cost of building and operating a power plant over its expected lifetime and divides it by energy production to obtain the cost of energy that makes the whole investment worthwhile. Fair – except that fossil fuels give you energy when you want it, and renewables give you energy when they want.
The think tank Energy for Growth Hub, in “how to best use LCOE,” recommends “Avoiding misleading uses, such as direct comparisons between highly variable sources and dispatchable or low-variability sources.” Exactly.
If we could already run our economies on renewables at cheaper prices than fossil fuels, we’d be doing it. If we increase the cost of fossil fuels, energy costs will go up.
We also need additional investment. Having canvassed existing studies, analysts at Barclays note that keeping global temperatures below the 1.5°C threshold would require investments of $100-$300 trillions between now and 2050, or 2%- 8% of global GDP every year (see here and here.)
French economist Pisani-Ferry has calculated that the energy transition will reduce economic growth, raise inflation, exacerbate inequality, and lower productivity growth by a quarter of a percentage point — and this in France, which gets 70% of its energy from nuclear.
Who’s going to tell them?
Some argue that even though most explicit subsidies go to consumers, it’s the producers who benefit, because they sell more and make more profits. Sure, but the biggest beneficiaries are consumers who need fuel, gas and electricity in their daily lives. Let me put it like this: when we hike the price of fuel, gas and electricity, who’s going to tell consumers that they should not worry because it’s producers who are getting hurt?
If you still have any doubts, take a look at what’s happening in country after country: as citizens are presented with the actual cost of the transition, they take to the streets in protest, or make their displeasure heard at the ballot box.
Net-zero understanding
The costs of a faster transition to net zero are daunting, but what about the risks of a slower path? This is where the uncertainty in climate models is crucial. Yes, man-made emissions contribute to warming; but they play a much smaller role compared to other determinants of the climate, such as variations in solar activity, volcanic activity and fluctuations in the height and density of cloud coverage; and climate models are unable to capture these other factors with sufficient precision. Hence forecasts of how the climate will change – including due to human emissions – are subject to a huge degree of uncertainty. We have close to net-zero understanding of how the climate will change for a given reduction in human emissions. 1
We got the chance, at an enormous economic cost, to glimpse “an unprecedented view of results that would take regulations years to achieve,” and these results were nothing like what scientists expected.
We shrunk the global economy and…
If only we could run a controlled experiment, halt the global economy and measure the impact… But wait, we did! During Covid, we shut down the global economy and locked people in their homes. Global GDP contracted by close to 3% in 2020. For climate scientists this was a dream experiment. As NASA’s Jet Propulsion Laboratory put it, the pandemic restrictions “drastically decreased air pollution and greenhouse gas emissions within just a few weeks. That sudden change gave scientists an unprecedented view of results that would take regulations years to achieve.”
What happened to the climate?
Nothing.
NASA’s JPL soberly notes “carbon dioxide (CO2) in the atmosphere has been increasing just the same as ever,” even though CO2 emissions fell by 5-6%. This confounded scientists, who all expected to see a decline in the growth rate of CO2 in the atmosphere. The reason? Well, there is a lot more going on in the natural processes affecting climate, including in this case a sudden unexpected decline in the oceans’ absorption of CO2.
Moreover, it turned out that the pandemic-related reduction in nitrogen oxides (NOx) actually caused an increase in the concentration on methane in the atmosphere — a bad thing for climate.
Furthermore, when global greenhouse gas emissions fell the most, by an estimated 10-30% in the spring of 2020, this was accompanied by a 20% drop in sulfur dioxide emissions. You would think this would be a good thing — except that sulfur aerosol particles reflect sunlight and help cool the planet, so their reduction actually had a warming effect.
We got the chance, at an enormous economic cost, to glimpse “an unprecedented view of results that would take regulations years to achieve,” and these results were nothing like what scientists expected. And yes, I know that if we do it differently and if we do it for longer, the results may be different. But the fact remains, we tried what scientists believed would help, and it made no difference whatsoever. That should tell us how little we understand.
Dear prudence
This lack of understanding needs to be taken into account in deciding how fast to push the energy transition. We are trading off very tangible near-term economic costs against very uncertain future benefits.
There is an argument that the uncertainty calls for ambitious measures to buy insurance against potential catastrophic outcomes. I have three objections. First, it depends on how likely the catastrophic outcome is, and we simply do not know (nobody is suggesting we spend hundreds of trillions of dollar to “buy insurance” against a catastrophic asteroid strike, for example). Second, we have no idea whether the kind of insurance that is being advocated (faster transition to net-zero) would in fact meaningfully reduce the risk of a catastrophic outcome. Third, we do have an alternative, much cheaper form of insurance: faster economic growth that can bolster our capacity for adaptation to a changing climate.
Given the huge uncertainty of climate models, I believe a slower, more gradual transition would be preferable. In any case, we should have an open and transparent debate on the uncertainty, the costs, and the trade-offs. Policymakers and most climate scientists have instead decided to force a faster transition, through a combination of scare tactics and smokescreens hiding the true costs. The result is that when ordinary people are asked to pay the price, they rebel, forcing governments to change targets and revoke announced measures. In the end, we’ll probably get a much slower transition anyway, but far costlier and less efficient than it could be.
Opening photo credit: Unsplash +
I addressed this in detail in an older post, from which I will just quote two facts that should make us think: (1) Climate models can’t explain the 1910-1940 global warming episode, which was of a similar magnitude to what we have experienced since 1970. If they can’t replicate the past, how can they predict the future? (2) In 2013, the data showed that global temperatures had remained flat over the previous 15 years. The Economist called it “among the biggest puzzles in climate science just now.” Two years later that same data were revised to show that temperatures had been rising all along. In other words, as recently as ten years ago we could not even measure global temperatures in a reliable way.
Stipulating that there is much we don't know, I think we do agree that the transition is under way and most likely a good thing. The next question, as you point out, is how much we should pay and how fast we should make the change. I still think it's wise to argue that more and faster is the answer even if you don't sign on to the most dire scenarios. Another way of looking at it is how much slower has global growth really been given the costs of transition? I would argue not much.
Dear Marco,
I wouldn’t read too much into the Covid-19 impact on climate: it was a blip in over 200 years of growing CO2 man-made emissions and it barely changed the level of concentration of CO2 in the air, which is the real driver in climate change which is a long term play. And as you point out, there are a number of other factors that influence, some under our control, others not, that interact in ways that we still don’t fully understand. If anything, that period and the subsequent jump in emissions as we came out of the pandemic have demonstrated that climate change is not linear as our models so far thought it was. And science is working on this. Moreover, and here I agree with you, policymakers need to have a holistic and comprehensive view of the impacts and consequences of any policy choice that they need to take which in most of the cases implies trade-offs between energy security, affordability and sustainability.