Citi GPS (a research arm of Citibank) has issued a magisterial new report that is both a detailed exploration of the economics of climate change policy and an attempt to answer the perennial question of whether acting aggressively to avert climate change is "worth it."
The report, written by a diverse group of scholars and analysts, digs deep on dozens of issues, including the size of investments needed to avert 2 degrees of warming, instruments for structuring those investments, the merits of various ways of measuring renewable energy costs, the proper societal discount rate, who stands to win and who risks "stranded assets," and ... lots more. It's 122 pages of dense, wonky goodness.
I'll just summarize the top-line findings, though, because I actually want to pivot off of this report to discuss something else.
The clean path requires roughly the same total spending on energy as the status quo path
The heart of the report is a comparison of two scenarios out to 2040: inaction (meaning a business-as-usual continuation of the current energy mix) versus action ("investing more heavily in low emissions technologies such as renewables, investing less in fossil fuels, in particular coal in power and oil in transport, and investing significantly more in energy efficiency to reduce overall energy usage").
The headline findings are twofold. First, "Citi’s ‘Action’ scenario implies a total spend on energy of $190.2 trillion while our ‘Inaction’ scenario is actually marginally larger at $192 trillion." In other words, the total energy investment necessary is slightly lower in the low-carbon scenario.
This is due to three things: First, aggressive investments in energy efficiency reduce overall energy use; second, shifting away from fossil fuels yields a large ($1.8 trillion) reduction in fuel and capital costs; and third, renewables, though they currently cost more on average than fossil fuels, rapidly get cheaper.
So the action scenario envisions total energy spending rising in the short term, as investment shifts to renewables (though even at its peak, that extra spending never amounts to more than 1 percent of global GDP), but decline in the long term, as efficiency kicks in and renewables decline in cost.
This chart shows the total difference in energy spending between the action and inaction scenarios:
As you can see, the massive decline in spending on coal for power and oil for transport more than outweighs increased spending on other sources.
(Wonk note: The report acknowledges that its projections differ substantially from the International Energy Agency's because it assumes a much faster decline in renewable energy prices, more in line with historical experience and current trends. In the action scenario, renewables go from 6 percent of total global energy in 2012 to 34 percent by 2040.)
The clean path avoids potentially enormous climate damages
The second headline finding is about avoided damages. The action scenario results in about 200 gigatons fewer CO2 emissions than the inaction scenario, cumulative through 2040. Those avoided emissions mean avoided climate impacts.
Is it worth paying to avoid those impacts? Why, yes.
Acknowledging how difficult it is to predict future damages, the authors take a median estimate from recent climate science and then compare it to the extra upfront investments required to drive a rapid shift to renewables. Turns out those investments have "returns at the low point of between 1% and 4%, rising to between 3% and 10% in later years." Sounds like a pretty good deal.
(Wonky note: This is likely a lowball estimate, since many of the "co-benefits" of reducing fossil fuel use — environmental, health, and social — are difficult to quantify and generally get left out of climate integrated assessment models.)
Citi's report confirms lots of other recent analyses
So, this incredibly deep and wide-ranging research project has concluded ... more or less the same thing all the other research has concluded: "The incremental costs of following a low carbon path are in context limited and seem affordable, the 'return' on that investment is acceptable and moreover the likely avoided liabilities are enormous." In other words, we can easily afford the cost of transitioning to a low-carbon system; we cannot afford the costs of failing to do so.
As I said recently, at least directionally speaking, this is the conclusion of an increasingly huge body of research. (The rapidly falling cost of renewables has only made the case stronger.) At this point, those who claim that a clean-energy transition would harm the economy face the burden of proof.
Okay, a clean energy transition is "worth it" — now what?
For years and years, climate analysts and economists have focused on cost-benefit analysis — whether the costs of climate mitigation are justified by its benefits. This remains the overwhelming focus of most climate policy research.
At this point, though, the pile of research showing that it is worth has gotten pretty damn high. More is always welcome, of course, but at a certain point it becomes reasonable just to accept it as an established fact. Insofar as we can have confidence in the wisdom of a large-scale, coordinated global effort like this — and of course there's tons of speculation and uncertainty involved — we're pretty confident in the wisdom of this one.
So ... now what?
After reviewing the evidence, the report says this: "Given that all things being equal cleaner air has to be preferable to pollution, a very strong 'Why would you not?' argument begins to develop."
Hm. Indeed. Why would we not? More to the point, if it makes so much economic sense, why are we not? Why, when study after study has found that we ought to be acting aggressively to transition to clean energy, does actual movement in that direction remain tentative, halting, incremental, and insufficient?
The report doesn't pursue the question. Instead, Citi being Citi, it turns to "the potential solutions that financial markets can offer," including "new [investment] instruments, vehicles and markets."
And that's fine. Market analysts gonna market analyze. Financial instruments can surely help.
But actually answering the question "why would we not?" requires more than economic models and market analysis. It requires an understanding of power, of political economy.
The clean-energy transition will create winners and losers, which shapes politics
While the net public benefits of a transition to low carbon will almost certainly outweigh the private costs, those costs will not be spread evenly. There will be winners and losers. To wit:
In financial terms, we estimate that the value of unburnable [fossil fuel] reserves could amount to over $100 trillion out to 2050. The biggest loser stands to be the coal industry, where we estimate cumulative spend under our Action scenario could be $11.6 trillion less than in our Inaction scenario over the next quarter century, with renewables, wind and nuclear (as well as energy efficiency) the main beneficiaries.
As for oil and gas, the story is somewhat more mixed, as I've written before. Taking coal out of electricity will help natural gas in the short run, especially in the US. But anything that raises carbon prices at the margins will hit risky projects like liquid natural gas and non-US shale gas first, working its way down to heavy oil, oil sands, and deepwater drilling.
Point being, the costs of a clean-energy transition fall unevenly, which will in turn create pockets of intense social and political resistance. It's always worth revisiting this immortal quote from Niccolo Machiavelli:
It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them."
Wanted: a report on climate political economy as deep and detailed as Citi's report on climate economics
So here's what I'd like to see: a report as extensive as Citi's, conducted by an equally distinguished group of researchers, about the political economy of the action scenario. Which companies, industries, and governments face threats to which interests? Which industries give money to which public officials, and through what channels? Which industries do public officials gravitate to when they leave office? Which spend the most on lobbying? What domestic and international levers do industries and governments have at their disposal to impede or delay the transition?
In short, I want a report that answers "why would you not?" — a report that canvases potential winners and losers and charts their sociopolitical capacity to accelerate or delay the transition.
In my experience, popular conceptions of political economy tend to be pretty crude. "Big Oil buys politicians" — stuff like that. Not that it's necessarily wrong in spirit, but it would be helpful to both investors and social changemakers to have a more sophisticated understanding of the channels of power and influence involved in the ongoing energy transition.
I'm not sure what organization could or would take on a research project like that. Political economy is even more volatile and difficult to predict than markets. It would necessarily involve a mix of reportage and analysis, something like political scientist Theda Skocpol did for the 2009 cap-and-trade fight, only on a larger scale and in real time. (I had some issues with Skocpol's analysis, if you're into that sort of thing.)
I don't know who could pull off a comprehensive political economy analysis like that. But someone needs to do it. As I've written before, having a model scenario doesn't help much if you don't understand the sociopolitical barriers to implementing it.