...I have been pointing out for a while that following the steep decline in the cost of wind and solar energy, an energy transition is a free lunch. It’s a simple calculation.
Citibank are just the latest team of experts to confirm the “no or negligible net cost” conclusion. (Pdf report page 23; press coverage.) They make the total world outlays on energy to 2040 in a fossil-heavy BAU at $192 trillion, those in an energy transition at $190.2 trillion, net saving $1.8 trillion. The last number is well within the error range, and should not be taken too seriously. The less precise “next to nothing” conclusion is solid. I stress that is the consensus expert position: the IPCC WG3 (pdf, page 15) say the same thing, as do Fraunhofer IWES in Kassel for Germany. Can any reader cite a credible study suggesting the contrary? In case you are worried, these professional scenarios do include the costs of grid integration for variable wind and solar energy, it’s not back to candles.
Net cash cost of energy transition to 2040 ≈ $0.
Fossil fuels are also responsible for huge amounts of local and regional air pollution. This contributes to a steadily lengthening list of health problems and premature deaths. UNEP gives the world total of premature deaths from all air pollution at 3.5 million a year. The OECD has estimated the annual health costs (basis 2010) attributable to outdoor air pollution in its member states plus India and China at $3.5 trillion a year (pdf, page 2). Half of this is due to road transport. This estimate (endnote) excludes a good number of countries including Brazil and Indonesia, plus the effects of indoor air pollution from wood fires and kerosene stoves. It is almost certainly a major underestimate. A full energy transition eliminates all of these costs in time. There will be a few deaths from solar and wind installers falling from heights, and electrocutions from electric vehicles. More significantly, air pollution has improved in OECD countries since 2010, but not enough to change the overall picture.
A complete energy transition would eliminate these health costs gradually, and in the end completely. Using a straight-line reduction from $3.5 trn a year in 2015 to zero in 2060, we get a total saving of $25.3 trillion.
Health saving to 2040 from energy transition ≈ $25 trillion.
So the net undiscounted cost to 2040 of the energy transition (cash for energy plus health) is minus $25 trillion. That’s a $3,500 bonus for every man, woman and child alive today.
I have not included anything for avoided GDP costs from extreme weather, hotter summers, and sea-level rise. Citi guesstimate these at $44 trn to 2060 (pdf, page 8). Here’s a higher estimate. On top of that, there are avoided burdens in loss of biodiversity and the risk of catastrophic disaster. These impacts are all real but methodologically difficult. It’s not downplaying these to leave them aside as superfluous to the proof. Discounting (what rate?) would also add a layer of technical difficulties and does not affect the conclusion.
We are faced with the greatest free lunch in the history of humankind.
Turning it down
One objection is that if it’s so, why haven’t we tucked in already? Replies:
Cultural, economic and political inertia
The world’s energy system is enormous. The trillions in physical and financial assets and the millions of workers are supported by a whole ideosphere of professionals who have spent their lives thinking and writing about fossil fuels. One example among many: the energy statisticians at the EIA do a good job on fossil fuels in the USA, but their forecasts on wind and solar have been laughable. The IEA in Paris have been almost as bad. There is something wrong when the best forecasters on global solar pv installation have been at Greenpeace.
Vested interests in fossil fuels
The Kochs and others have been fighting with desperation and complete lack of scruple for their businesses to survive. It’s already too late for several large coal companies. Curiously, the industry has not yet mobilised to stop the electric car threat. Possibly because Big Oil is still living in a dreamworld where oil and gas continue to grow to 2035 and carbon emissions don’t fall at all. If they ever wake up, they will be up against the electric utilities and a good part of the car industry.
But don’t underestimate their past work. The Cloud of Unknowing created in the English-speaking world by Exxon and the Kochs on climate change must count as one of the great achievements of agitprop. The denialists still show up in dozens on Joe Romm’s blog and others, and it’s not likely they are all paid: many are Willi Münzenberg’s “useful idiots”. The denialist control of the Republicans in Congress is partly venal, but partly also convinced. It’s not like the political protection of Florida sugar barons from cheap imports, which everybody accepts as purely mercenary, and has no ideologues.
There are other losers more deserving of our sympathy, like coal-miners and roustabouts. The benefits of the transition would allow generous compensation, retraining and community regeneration policies, but on past experience these are sadly unlikely.
Front-loading of the spending
In the early years of the transition, spending is higher than under BAU. Renewable energies and electric vehicles are nearly all upfront capital expenditure, with very low operating costs. In their infancy, they also need subsidies to get them along the learning curve to cost parity. Fraunhofer’s scenario of the costs of the Energiewende in Germany shows the problem.
The problem should not be exaggerated. The infant subsidies to wind and solar are largely past history, or embedded legacies like FIT guarantees that don’t affect future investment decisions. Brazil and Chile are installing wind and solar without subsidy. Electric vehicles are still dependent on subsidies, but the learning curve on batteries is so steep that the subsidies may go in five years. In any case, OECD countries are operating well below full employment, so the opportunity cost of additional public and private investment will be negligible for some time to come.
As Mike O’Hare has stressed, climate change is the problem from hell because it’s all about externalities: the harm to other people and the biosphere caused by actions that look beneficial to individuals and organisations like companies. It is therefore an issue of collective action, and the solution goes through government. The dominant ideology of today, free-market liberalism, is instinctively opposed to such solutions and therefore minimizes the problems. Combined with the front-loading, we are facing some combination of carbon taxes, costly emissions regulations, subsidies to clean technologies, and direct public spending say on railways and buses. Merkel and Cameron, fearful of the impact of household electricity surcharges, have already backtracked on solar subsidies.
The world may get lucky on some of this. The subsidies to wind and solar energy are largely history (Danke, Tak, Arigatō). Those to electric cars – up to €10,000 a pop in France – won’t need to last long. Electric buses are competitive on a lifelong cost of ownership basis. Green technologies may win in power generation, transport and heating/cooling without any externality pricing. I don’t though see a transition happening in aviation, shipping, steel and cement, or large-scale reforestation, without the heavy hand of government. Large scale carbon sequestration, if we find it necessary (and James Hansen is usually right), cannot be a commercial proposition without carbon pricing or equivalent regulation.
The imaginary free rider problem
The international free rider problem was a major obstacle to a global agreement when it was assumed that the net costs of climate mitigation were large. The benefits of action in one country would mainly accrue to foreigners, so you needed an impossible global deal before anybody got started. With the falling costs of renewable energies, and the realization of the local costs of air pollution, the problem has disappeared in fact. A rational policymaker in most countries will find that national climate action has net benefits in isolation, though these are much higher if everybody else joins in. This has made possible the turnaround in the prospects of climate negotiations, seized on by Christiana Figueres, and then by Barack Obama and Xi Jinping. However, not all policymakers are rational, and the free rider fallacy still grips many in the US Republican Party and elsewhere.
The Dwarfs’ banquet?
The free lunch explains why politicians as different as Barack Obama, Xi Jinping, Narendra Modi, Angela Merkel, Dilma Rousseff and David Cameron are all now backing the energy transition. It doesn’t cost an arm and a leg, and on balance their voters or subjects will not punish them for the policy. They and other nervous leaders are reassured by the examples of California, Denmark and Germany, whose aggressive climate policies are plainly no obstacle to prosperity. After decades of flaffing around, a decent climate agreement in Paris next month is now odds-on.
The obstacles to taking up the offer explain the hesitations, delays, ambiguities, and backtracks of these same leaders. The five reasons for inaction are incoherent in logic, but psychologically and politically they add up to a formidable constellation of nay-saying forces. Only a handful of countries have adopted a hard zero-carbon target, and they don’t include Germany. What politician has had the courage to tell the coal and oil industries that they must go out of business well before 2050?
The banquet is not quite like Aslan’s. The dwarfs are behaving more like terrified and hungry savages, darting in to seize a pie from the table, then running off to consume it in safety. There must be a catch. We won’t let go of our fears of joy and plenty.
Humankind may still fail. The rejection of the $25 trillion free lunch, if it continues, will be the greatest ever failure of public policy, worse than August 1914: since this time, all our grandchildren will be in the trenches at Verdun