Until recently, it appeared that the transition to clean energy would come at a net economic cost, to a large extent because renewable energy systems, including their needs for energy storage, do and will continue to cost somewhat more to build and operate than fossil-based systems.
The Intergovernmental Panel on Climate Change (IPCC), for example, has projected that it would reduce economic growth by about 0.04% annually.
- To put this into perspective, someone earning CHF 100’000 would earn CHF 102,000 next year under 2% economic growth, but only CHF 101,960 with a strong climate policy. A study recently released by the Swiss Federal Office of Energy reached a similar conclusion.
- To justify a transition to clean energy on economic grounds, one would need to consider the economic benefits of averting a climate catastrophe.
Transition to clean energy
Some people have reasons to believe, however, that the transition to clean energy could benefit us economically, even without taking averted climate change impacts into account.
The integrated assessment models (IAMs) that the IPCC and many others have relied on to project the economic costs of climate protection assume that people will always invest in the least expensive energy supply choice at any point in time, and that the primary policy that the government will use to direct an ever-increasing share of investment towards low-carbon technologies is a rising carbon tax.
IAMs project
IAMs project very little investment into rather expensive renewable technologies
With these assumptions, the IAMs project very little investment into rather expensive renewable technologies – previously this was solar and wind power, today it is things like carbon-neutral aviation fuel – until the carbon tax had risen high enough to create the needed incentive.
These models also project the carbon tax needing to be quite high to incentivize investments into these more expensive technologies; this can lead consumer prices in the affected sector to rise substantially, dampening economic activity and growth.
Empirically grounded cost forecasts
But reality has been very different. Investment into solar and wind have been far higher than previous IAMs have predicted, and the associated cost reductions much larger.
Moreover, the climate policies driving these changes have not been primarily carbon taxes, but rather subsidies and regulations.
These tend to have a smaller impact on consumer energy prices, potentially causing less of a distortionary effect. What would the economic effects be if we assumed these trends to continue?
