Energy transition? Cheaper than you think

We hear a lot in the media about the European (and global) transition to "greener" and more sustainable energy. Unfortunately, it often involves throwing around not very accurate numbers about how much it will all cost, while the benefits are rarely discussed. However, according to a recent study in The Economist, the costs might not be nearly as daunting as they are made out to be...

The study points out that people who want to do more to combat climate change and those who want to do less usually agree on one thing: decarbonizing the global economy will be extremely expensive. However, according to a comprehensive analysis conducted by The Economist, it will cost much less than both groups imagine. Estimates of the global costs of the "energy transition" to a net-zero emissions world, based on projections from economists, consultants, and other researchers, range from roughly $3 trillion per year to nearly $12 trillion per year. However, the British weekly notes that these assumptions are flawed in four key ways.

1. Too much, too quickly, means too expensive.

Cost calculation scenarios often involve rapid and expensive emission reductions, leading to unrealistic outcomes. Limiting warming to 1.5°C is nearly impossible, as at the current emission rate, this threshold will be reached in six years. Achieving it would require an immediate reduction of emissions to zero.

Keeping warming below 2°C is more likely. According to the Global Carbon Budget (GCB), at the current emission pace, this would take 27 years, allowing for a slower and more affordable transition. The cost of emission reductions could be less than $1 trillion per year, which is under 1% of the global GDP.

Even this estimate is likely overinflated, as it doesn’t account for slower economic growth, cheaper technologies, and more modest targets, all of which could further reduce costs.

2. Energy consumption is not expected to grow explosively

According to The Economist, published estimates have been unrealistic regarding the pace of population and economic growth, leading to overly high expectations for energy consumption. Matt Burgess and his colleagues from the University of Wyoming point out that IPCC projections overestimate economic growth in both wealthy and developing countries. The lowest estimate of economic growth among the "Shared Socioeconomic Pathways" (SSPs) is likely the highest realistic scenario.

Source: „Multidecadal dynamics project slow 21st-century economic growth and income convergence,“ author: M. Burgess et al., 2023

American scientists predict GDP per capita based on the historical relationship between its level and growth rate, leading to lower projections than SSP2 under IPCC, which is considered the "middle scenario." Just as relaxing the temperature target reduces costs, slower economic growth lowers energy demand.

3. Evaluation of new technologies misses the mark

   
   

Thirdly, standard models significantly underestimate the speed at which costs for key low-carbon technologies, such as solar energy, will decrease. Economic forecasters also poorly predict other technological advancements. They overestimate the adoption of certain technologies, like carbon capture and storage (CCS), while greatly underestimating the declining costs of others, particularly solar panels and lithium batteries.

Source: IEA

4. Investments in energy are inevitable, regardless of the scenario.

Current models often fail to account for the fact that the world will need to invest substantial funds in expanding energy production, whether clean or fossil-based. Wood Mackenzie developed a "delayed transition" scenario, where trade tensions and geopolitical conflicts delay the shift to carbon-free energy. This scenario would result in a 3°C temperature rise and energy investments of $52 trillion by 2050.

The estimated cost of limiting warming to 2°C is $65 trillion. The additional $13 trillion over 25 years represents approximately 0.5% of today’s global GDP annually, and even less when factoring in the growth of the global economy.

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What's next?

The Economist acknowledges that even its models contain several uncertainties (such as limited access to modern agricultural technologies, the frequent irrationality of politics, varying levels of motivation to combat climate change, and differing availability of capital). However, the situation is far less dire than many prophets of doom for the global and European economies would have us believe.

It would therefore be highly advisable for us to focus on how the transition to modern technologies can strengthen the economy and enhance its competitiveness.

We have more than enough opportunities to achieve this.