It seems that almost every time someone takes up the subject of replacing coal with renewable energy, the immediate reaction is: “It will cost too much.”
Surprisingly, however, new research shows that the economic benefits of replacing coal with renewable energy would far outweigh the costs. In fact, stopping coal consumption should not be seen as too expensive because it provides economic benefits from reduced carbon emissions.
What’s the problem? International traders can not agree on how to phase out coal. There is a good deal of opposition to carbon taxes. Yet the economic and health benefits of saying goodbye to coal are significant enough that power brokers should push harder for global deals that unleash the potential power of capital markets.
How much money can be saved by replacing coal with renewable energy? The world can gain an estimated $ 78 trillion over the coming decades by making this energy transition. That is about four-fifths of the global gross domestic product now and would correspond to about 1.2% of the annual global economic output in the future. Investment in renewable energy also supports economic growth and offers additional benefits through innovation.
What is the background story to this claim? The authors of a working paper entitled “The Great Carbon Arbitrage” calculated the cost of replacing coal with renewable energy as well as the social benefits of such a transition.
What is an “arbitrage?” Arbitrage is an investment strategy where 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 will help limit global temperature rise to 1.5 degrees Celsius.
What methods did the authors use to arrive at this finding? To determine both the magnitude of the emissions avoided, as well as any potential losses from their prevention, the authors use a detailed data set prepared by Asset Resolution on companies’ historical and expected global coal production based on the aggregation of production at plant level.
How did the estimates of the financial gain come about? The authors calculated values by estimating the reduction in emissions from the phasing out of coal and by applying a carbon price to these emissions. The difference between the value of social benefits versus the cost of replacement and compensation for lost coal revenue forms our base estimate of the world’s net gain by finally stopping our dependence on fuel.
I need more data. Tell me the numbers in more detail. The authors measured the benefits of phasing out coal as the social cost of carbon times the amount of emissions avoided. By comparing the present value of avoided carbon emissions with the present value of the cost of stopping coal plus the cost of replacing it with renewable energy, their basic estimate is that the world could realize a total net profit of $ 77.89 trillion. This represents about 1.2% of current world GDP each year until 2100. The net benefits of stopping coal are so great that renewed efforts, CO2 pricing and other financing policies should be pursued, the authors argue.
Where did the primary gains occur? The benefits of stopping coal consumption come from avoiding damage from climate change and damage to people’s health. There are also other benefits, such as avoiding physical damage to infrastructure caused by climate change.
What does the cost estimate include? The cost estimate for the adoption of renewable energy sources includes capital expenditures for new energy production capacity corresponding to what is lost with coal plus compensation to coal companies for lost earnings when they are closed.
What does the cost estimate not contain? The cost estimate does not include compensation for affected workers, but this is likely to be small in relation to the total net gains on the transition.
Will this not be too great a financing challenge? Make it is a major funding challenge. But despite arguments that no government can afford such investments and that the private sector should direct its funding to renewable energy, most of the support may actually come from the private sector. This can happen when risks are reduced with sufficient public funds through so-called mixed financing, which can mean public financing of around 10%.
What is the regional breakdown of the figures? The present value of the total funding, which is contingent on commitments to scrap coal, is around $ 29 trillion globally, according to what other studies estimate. That equates to between $ 500 billion and $ 2 trillion annually, with a frontloaded $ 3 trillion investment this decade. Of the global funding needs of around $ 29 trillion, the authors estimate that 46% are 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 is needed from politicians? The bottom line of policy is that if compensation were built into an agreement to scrap coal, and if innovative financing packages could encourage advanced, emerging economies and developing economies to stop using the fuel, the net social benefits of such an agreement would be enormous. .
Are concessions likely? It is in the interest of a government to finance 10% of the country’s total cost of replacing coal with renewable energy if this amount is less than the resulting social benefits in the form of lower climate damage. A reverse calculation suggests that this applies to almost all countries. Justice, a country’s fiscal position or both may in some cases require foreign contributions to finance 10% of a country’s cost of phasing out coal.
How strongly do the authors feel about the results? The authors say the potential gains are so great that world leaders should pursue a global agreement to fund the phasing out of coal as a supplement to carbon prices or similar measures that currently do not fully offset the negative effects of emissions.
What is 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 actually. be even greater for less conservative estimates.
What is takeaway? The authors consider global carbon taxation to the social cost of carbon as the first best solution. Public-private partnerships to finance the replacement of coal with renewable energy can accelerate the green transition and complement incomplete carbon pricing by helping to achieve the Paris Agreement’s goal of making financing flows consistent with a path towards low greenhouse gas emissions and climate-resistant development.
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