It seems that nearly every time someone brings up the topic of replacing coal with renewable energy, the immediate reaction is, “It will cost too much.”
Surprisingly, though, new research shows that the economic benefits of replacing coal with renewables would far outweigh the costs. In fact, ending coal use shouldn’t be seen as too costly because it provides economic benefits from reduced carbon emissions.
What’s the problem? International negotiators can’t agree on how to phase out coal. There’s a good deal of resistance to carbon taxes. Yet the economic and health benefits of saying goodbye to coal are significant enough that power brokers should be pushing harder for global agreements that unleash the potential power of capital markets.
How much money could be saved by replacing coal with renewable energy? The world may gain an estimated $78 trillion over coming decades by making this energy transition. That’s around four-fifths of global gross domestic product now and would be equivalent to about 1.2% of annual global economic output moving forward. Investments in renewable energy also support economic growth and offer additional attendant benefits from innovation.
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What’s the back story to this claim? The authors of a working paper titled “The Great Carbon Arbitrage” calculated the cost of replacing coal with renewables as well as the social benefits of such a transition.
What’s an “arbitrage?” Arbitrage is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate a profit.
Why is it important to phase out coal? Phasing out coal would help limit the global temperature increase to 1.5 degrees Celsius.
What methods did the authors use to get to this finding? To determine both the size of the avoided emissions, as well as any potential losses from their prevention, the authors use a detailed dataset compiled by Asset Resolution on companies’ historical and projected global coal production based on the aggregation of production at the plant level.
How did the estimates about the economic gain come about? The authors calculated values by estimating the reduction in emissions from phasing out coal and by applying a carbon price to those discharges. The difference between the value of the social benefits versus costs of replacement and compensation for missed coal revenues forms our baseline estimate of world’s net gain from finally ending our reliance on the fuel.
I need more data. Tell me the numbers in more detail. The authors measured the gains from phasing out coal as the social cost of carbon times the quantity of avoided emissions. By comparing the present value of avoided carbon emissions to the present value of the costs of ending coal plus the costs of replacing it with renewable energy, their baseline estimate is that the world could realize a net total gain of $77.89 trillion. This represents around 1.2% of current world GDP every year until 2100. The net benefits from ending coal are so large that renewed efforts, carbon pricing, and other financing policies should be pursued, the authors argue.
Where did the primary gains emerge? The benefits from ending coal use come from avoiding damage from climate change and harm to people’s health. There are also other gains, such as avoiding physical damage to infrastructure caused by climate change.
What does the cost estimate include? The cost estimate for adopting renewable sources includes capital spending for new energy generation capacity equal to what’s lost with coal plus compensation to coal companies for lost earnings when they are shut down.
What doesn’t the cost estimate include? The cost estimate does not include compensation for affected workers, but this is likely to be small relative to the overall net gains from the transition.
Won’t this be too much of a funding challenge? Well, it is a major funding challenge. But despite arguments that no government can afford such investments and that the private sector should steer its funding to renewable energy, most of the backing can, indeed, come from the private sector. It can take place once risks are reduced by sufficient public funds via so-called blended finance, which could mean public funding of around 10%.
What’s the regional breakout of the numbers? The present value of total financing that’s conditional on commitments to scrap coal is around $29 trillion globally, in line with what other studies estimate. That works out to between $500 billion and $2 trillion annually, with a front-loaded $3 trillion investment this decade. Of the global financing need of around $29 trillion, the authors estimate that 46% is in Asia, 18% in Europe, 13% in North America, 13% in Australia and New Zealand, 8% in Africa, and 2% in Latin America and the Caribbean.
What’s needed from the policymakers? The bottom line for policy is that, if compensation was built into an agreement to scrap coal, and, if innovative financing packages could incentivize advanced, emerging, and developing economies alike to end the fuel’s use, the net social gains from such an agreement would be enormous.
Are concessions likely? It’s in the interest of a government to finance 10% of its country’s total costs to replace coal with renewables if this amount is less than its resulting social benefits in terms of lower climate damages. A back-of-the-envelope calculation suggests this holds true for nearly all countries. Considerations of fairness, a country’s fiscal position, or both, may in certain cases call for foreign contributions to finance 10% of a country’s costs to phase out coal.
How strongly do the authors feel about the results? The authors say that the potential gains are so sizeable that world leaders should pursue a global agreement to finance the phase-out of coal as a complement to carbon pricing or equivalent measures that currently don’t fully offset the negative effects of the emissions.
What’s the best case scenario? The authors say they have chosen all parameters, including the social cost of carbon, in a conservative way. The carbon arbitrage could, in fact. be bigger still for less conservative estimates.
What’s the takeaway? The authors view global carbon taxation at the social cost of carbon as a first-best solution. Public-private partnerships to finance the replacement of coal with renewables could accelerate the green transition and complement incomplete carbon pricing by helping to achieve the Paris Agreement’s aim of making finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.