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Economic Aspects of the Energy Transition

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Abstract

I make three points relating to the transition from fossil fuels to non-carbon energy. One is that the economic cost of moving from fossil fuels to renewable energy in electricity generation is very low, and probably lower than many estimates of the economic benefits from this change—at least for the U.S. The second is that, if it were to be successful in moving the economy away from fossil fuels and from oil in particular, a carbon tax would have to be much great than generally believed, in the range of $400 per ton \(CO_{2}\) or above. Finally, decarbonization of the economy implies electrification, the replacement of fossil fuels by electricity in transportation, space heating and many other fields. Currently electricity is far too expensive for this to be politically realistic: this is because its price does not reflect its marginal cost but this plus a wide range of fixed costs that are recovered in the per kilowatt hour charge. If we are to electrify the economy then the price of electricity will need to be nearer to its marginal cost, which raises questions about the business models of utilities.

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Notes

  1. See https://www.mjbradley.com/sites/default/files/MJBAcoalretirementissuebrief.pdf and https://en.wikipedia.org/wiki/Energy_in_the_United_Kingdom.

  2. Data from https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable_energy_statistics.

    #Share_of_renewable_energy_more_than_doubled_between_2004_and_2019.

  3. For a clear statement of the massive decrease in the costs of renewables see Lazard’s data on the levelized cost of electricity, at https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf.

  4. https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf.

  5. Coal and gas produce 61% of total annual mWh, and total annual mWh are about 4 billion.

  6. The EIA figure for the cost of solar capacity is $1.9/W: industry sources that I talk with suggest that it is out-of-date and far too high. Many sources cite actual costs of close to $1/W—see for example https://news.energysage.com/solar-farms-start-one/ and https://www.seia.org/research-resources/solar-market-insight.

  7. https://www.eia.gov/outlooks/aeo/assumptions/pdf/table_8.2.pdf and https://www.energy.gov/eere/wind/downloads/2017-wind-technologies-market-report, presentation, slide 38.

  8. https://geoffreyheal.com/publications/publications-on-climate-change/.

  9. Roughly $50bn annually.

  10. A similar issue arises with the U.S.’s nuclear power stations, which provide about 20% of the megawatt hours generated annually in the U.S. All but two or three will also be well beyond their usable lives by 2050, and will have to be replaced. I am implicitly assuming here that they are replaced by non-fossil, non-renewable power (nuclear, hydro, geothermal, etc.), as replacing them by renewables would probably increase the need for storage and or grid enhancements.

  11. U.S. data from Lazard LCOE data, https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf. U.K. data from U.K. Department of Business, Energy and Industrial Strategy, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/911817/electricity-generation-cost-report-2020.pdf.

  12. See U.S. Energy Information Agency, https://www.eia.gov/tools/faqs/faq.php?id=74&t=11.

  13. For the $600 figure see Llavador et al. (2015)

  14. The statement “A tax on the carbon content of fuels would be a less expensive way to reduce carbon-dioxide emissions than would a collection of policies such as corporate average fuel economy requirements for automobiles” was agreed to by 92.5% of economists, while only 22.5% of the general public agreed, as measured by the Chicago Booth Kellogg School Financial Trust Index survey. Suport for a carbon tax is growing among various policy circles. The New York Times reported that “Republican Group Calls for Carbon Tax” (2/7/17), and the Financial Times noted that “Leading Corporations Support US Carbon Tax” (6/20/17). The Carbon Pricing Leadership Coalition (www.carbonpricingleadership.org) is a coalition of international and national organizations and corporations dedicated to promoting a carbon tax.

  15. See https://www.ny-engineers.com/blog/can-electric-heating-have-a-lower-cost-than-gas-heating for details.

  16. Though possibly not above the marginal social cost of power from coal.

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  1. Columbia University, New York, NY, USA

    Geoffrey Heal

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I am grateful to Christian Gollier and three referees for their extremely valuable comments.

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Heal, G. Economic Aspects of the Energy Transition. Environ Resource Econ 83, 5–21 (2022). https://doi.org/10.1007/s10640-022-00647-4

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