NEW YORK – Like most worthwhile pursuits, reducing carbon pollution comes with costs. If it didn’t, climate change wouldn’t be a problem in the first place – at least not from a narrow economic perspective. But climate change, and what it demands of us, is also a deeply political issue. Now that the direct economic costs of climate action have declined, the debate is shifting to the political and social difficulties of moving away from fossil fuels and toward a low-carbon, high-efficiency world.
On the matter of economic costs, climate action is becoming more affordable across the board. The costs of solar photovoltaic (PV) panels have plummeted by over 85% in under a decade, and by well over 99% since the first panels found their way onto people’s roofs in the early 1980s. As a result, global solar PV generation has increased rapidly, with projections pointing to a further quadrupling by the end of this decade. Solar is the fastest-growing source of electricity generation; and wind generation is not far behind.
It is clear that looking only at the costs of reducing carbon pollution is not enough; they must be compared to the costs of unmitigated climate change. Moreover, neither cost is, nor ever will be, distributed equally. Coal miners and manufacturers of internal combustion engines will necessarily bear more of the costs of climate action, whereas poor and vulnerable communities will bear the brunt of climate inaction. Overall, though, there is no comparison: the costs of inaction far outweigh the costs of cutting carbon-dioxide emissions.
To see why, it helps to think in terms of the “social cost of carbon,” which captures the lifetime cost of each ton of CO2 emitted today to the economy, the environment, and society. Calculating this figure is not simple, which is why it has been described as the “holy grail” of climate economics – the one number that captures the big picture. Two key factors in the calculation are an estimate of the actual climate damage caused by each ton of CO2, and a conversion of this estimate into present dollars using a discount rate.
Highly conservative estimates of the current social cost of carbon put it at around $50 per ton. I say “highly conservative” because this figure comes from a US government interagency working group using methods that were largely devised over a decade ago. Climate economics has advanced considerably since then, such that re-calculating the number would almost certainly produce a price well over $100 per ton. This implies that for a country like Hungary – which emits around 50 million tons of CO2 per year – the damage caused by keeping emissions at their current level amounts to well over $5 billion per year, some one-sixth of the budget in 2019.
Though there are large uncertainties about estimates of the social cost of carbon, the true costs are all but certainly higher than current estimates, implying that we need even more ambitious climate policies. At the same time, the uncertainties about the cost of cutting carbon pollution point in the opposite direction. Energy modelers perennially overestimate the costs of renewables like solar PV, and thus underestimate their rate of deployment.
The reason is that there is a crucial distinction between fossil fuels and renewables. While oil, coal, and gas are commodities with fluctuating market prices, solar, wind, and batteries are technologies whose prices can only decrease over time. Yes, solar panels and batteries, in particular, rely on scarce metal inputs that carry political risks of their own; but these scarcities will become only more manageable as a result of technological improvements.
Public policy will play a central role in these dynamics, because it affects both the demand and supply sides of low- and zero-carbon technologies, offering both carrots and sticks, domestically and internationally. Those who act early could reap massive rewards. For good reason, the green transition is viewed as a matter not just of energy but of geopolitics. We are undergoing a historic shift from petrostates to “electrostates.”
That is why China has eagerly supported the rapid expansion of its renewables industries, particularly the manufacture of solar PV panels, batteries, and wind turbines. While this state sponsorship comes with costs of its own, China’s industrial policies have undeniably enabled it to achieve global dominance over some of the key technologies of the future. The country now produces more than 70% of all solar PV panels, around 70% of lithium-ion batteries, and almost half of all wind turbines.
The European Union, meanwhile, has been more focused on demand-side measures, both by pricing and regulating CO2 and other greenhouse gases, and by subsidizing the deployment of low-carbon alternatives. These two approaches are intimately linked, with subsidies often leading to more ambitious pricing policies down the road.
The green transition comes with costs; but they are well worth it, and they pale in comparison to the costs of inaction. The ever-falling costs of renewables have not eliminated the politics of climate change. But they certainly have made our choices much easier.
Gernot Wagner is an associate professor at New York University, co-author of Climate Shock, and author of But Will the Planet Notice?
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© Project Syndicate 2021