Shift to Low-Carbon Economy Could Free Up $1.8 Trillion, Study Says

A pair of new studies are part of a growing international effort to assess the costs and benefits of moving on from burning fossil fuels to clean energy.

The two solar power stations seen here are owned by Abengoa Solar and operate in Anadalusia, Spain. A new study finds that decarbonizing the electricity system worldwide would save $1.8 trillion over the coming two decades by avoiding the high operating costs of using fossil fuels. Credit: Wikimedia Commons

As governments, businesses and investors ponder a future in which the world moves away from fossil fuels to avert a climate crisis, the implications for the global economy are getting high-profile attention.

The issue dominated the agenda at the UN climate summit, and is being reprised in Washington this week at an annual meeting of the World Bank and the International Monetary Fund, where this year CEOs will join talks about how to deal with global warming.

The heightened efforts come amid studies describing the costs and benefits of the shift away from carbon-based energy.

The latest come from the Climate Policy Initiative, which on Oct. 9 published two reports indicating there will be significant financial benefits if the world adopts "the right policies" as it transitions to a low-carbon economy consistent with the safe 2-degrees Celsius target.

One report finds that ridding our electricity and transportation systems of carbon could free up trillions of dollars for investment in green energy.

Decarbonizing the electricity system, it finds, would save $1.8 trillion over the coming two decades by avoiding the high operating costs of using fossil fuels—coal and natural gas—to generate power. The lower operating costs of wind and solar electricity would offset the higher financing costs of renewables, as well as the write-offs of existing assets like coal plants that would have to be shut down.

The picture isn't as clear in the case of shifting from an oil-dominated transportation market to clean fuels, the report said. Here it found that the impact might range from a net negative effect of $2.5 trillion to a net positive effect of $3.5 trillion. Just as in the electricity sector, operating costs for transport would go down—because, for example, electric cars cost less to run than gasoline ones. But shifting into low-carbon gear means investing trillions of dollars in expensive vehicles and widespread mass transit, requiring a level of financing that would only be partially offset by reducing investment in petroleum supplies.

The second report looks more closely at who loses when fossil-fuel assets are left stranded by the shift to carbon-free energy.

One of its main conclusions is that governments and taxpayers, not private investors and corporations, face the biggest risks from stranded assets. After all, in most of the world, it is governments that own the fossil fuel resources and collect royalties on them. This is the case, for example, in the big petro-states. The drop in value of these assets if the world abandons fossil-fuel burning in favor of a low-carbon transition could be $25 trillion— and governments would bear 80 percent of the losses.

Oil reserves—which are expensive to produce, but very profitable—would carry most of the risk, the reports.

But it is coal—dirtier, cheaper and less profitable—that holds the largest potential to cut emissions of carbon dioxide, the main greenhouse gas. And so, to minimize the hurt of shifting away from fossil fuels, policymakers "could do well to first focus on reducing coal," the study finds.

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