Last year, three facts about climate change became clear: Achieving a low-carbon economy is essential; new technologies make that goal attainable at an acceptable cost; but technological progress alone is insufficient without strong public policies.
Extreme weather last month — big floods in South America, the US and the UK, and very little snow in the Alps — partly reflected this year’s strong El Nino, caused by warmer Pacific Ocean water off Ecuador and Peru, but the planet’s rising surface temperature increases the probability and severity of such weather patterns, and last year — the warmest year on record — confirmed that human greenhouse-gas emissions are driving significant climate change. Earth’s average land surface temperature is now about 1oC above pre-industrial levels.
Faced with that reality, the climate agreement reached in Paris last month represents a valuable, but still insufficient response. All major economies are now committed to reducing emissions below business-as-usual levels: However, the combination of national commitments would likely result in warming of almost 3oC above pre-industrial levels — a terrifying prospect, given the adverse consequences already apparent from a 1oC rise.
To cap the global increase in temperature at 2oC — the target endorsed in Paris — let alone to limit global warming to 1.5°C, would require that emissions in the year 2030 be about 20 percent lower than the combined national commitments envisage. In addition, it demands further reductions beyond 2030 that ensure subsequent progress toward net-zero carbon emissions by the second-half of this century.
However, last year also provided further evidence that we can achieve a low — or even zero — carbon global economy without sacrificing the growth still needed to pull many people out of poverty. Wind energy is now cost-competitive in many locations and the costs of solar energy continue to plummet — down about 7 percent since 2008. Rapid cost reductions are also being achieved in battery and other energy-storage technologies, bringing electric cars closer to economic viability and enabling flexible electricity supply even where a large percentage of power comes from intermittent sources.
These and other technologies would enable the transition to low-carbon economies to be carried out at a manageable cost. Estimates from the International Energy Agency (IEA) suggest that in a “new policies” scenario that is broadly comparable with national commitments enshrined in the Paris agreement, the world would need to invest US$68.3 trillion in energy-related systems between now and 2040.
In contrast, in a scenario compatible with limiting warming to about 2oC, the required investment would be US$74.6 trillion. Given annual global GDP of US$74 trillion, the incremental US$6 trillion of investment over 25 years represents only a small economic burden.
However, while the absolute increase in required investment is moderate, the IEA’s low-carbon scenario entails a dramatic change in the pattern of investment. An additional US$14 trillion should be allocated to renewable or nuclear energy, or to buildings and transport systems to deliver improvements in energy efficiency, offset by a decline of more than US$6 trillion in investment in oil, gas and coal production.
Reducing investment in fossil fuels reflects the reality that if the world is serious about its maximum 2oC target, two-thirds of known reserves must be left permanently in the ground. In addition, lower investment would be matched by a decline in cumulative fossil-fuel revenues amounting to as much as US$34 trillion more than under the IEA’s “new policies” scenario, owing not only to lower volumes of oil, gas and coal consumed, but also to significantly lower prices.
Therein lies the problem. Lower oil, coal and gas prices would reduce incentives to develop and deploy renewable energy technologies, or to improve energy efficiency.
With technological progress continuing to reduce extraction costs, fossil fuels might, at times over the next several decades, still look cheap relative to low-carbon alternatives. We certainly would be able to produce low-carbon energy cheaply enough to support sustained economic growth and prosperity; what is much less certain is whether it would be cheaper than fossil fuels soon enough to avoid climate disaster.
Nor is it likely that free-market competition between fossil fuels and low-carbon energy would develop in a smooth and predictable fashion. In the past six years, global crude oil prices rose from US$77 per barrel in January 2010 to more than US$100 during 2011 to 2014, before collapsing to below US$40 in the face of overcapacity — created partly by the investment spurred by high prices. Gas and coal prices have followed a similar pattern. That boom-and-bust pattern might well continue.
Indeed, we enter this year with cheaper gasoline, which weakens the incentive to purchase fuel-efficient automobiles and lower heating costs, which weakens the incentive to insulate homes. A purely free-market approach to the required energy transition would produce insufficient progress on emissions reductions and leave behind large stranded assets, representing trillions of dollars of wasted investment.
Strong public-policy interventions are thus essential to support an adequately fast energy transition that is as cost efficient as possible. Increased public support for research and development in crucial technologies — particularly energy storage — is needed to prevent short-term movements in fossil-fuel prices from undermining the transition’s momentum.
The Mission Innovation initiative, announced in Paris, which commits 20 major nations to doubling clean-energy research and development, is a vital step forward in this respect, but a clear commitment by policymakers to achieve a steadily rising carbon price — ideally one that increases more rapidly whenever fossil-fuel prices are at a cyclical low — is also required.
Technological progress makes it possible to build a low-carbon economy; but without support from strong public policies, the extreme weather events of last month might look trivial compared to the harm that climate change could subsequently bring.
Adair Turner, a former chairman of the UK’s Financial Services Authority and a former member of its Financial Policy Committee, is chairman of the Institute for New Economic Thinking.
Copyright: Project Syndicate
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