😎 The negative cost of Net Zero
A new paper inverts the costs of a clean energy system
There is a widely held view that the cost of getting to Net Zero is going to be high. We are told that the sums of money required for the new kit (solar panels, batteries, wind turbines, small modular reactors, high-voltage direct current interconnects, microgrids and the like) will be larger than a typical oligarch’s Loro Piana budget. Certainly, running into the trillions of dollars.
But is this really a large number in a sense of being either unaffordable or poor value for money? Yes, trillions are trillions. But global GDP is $85 trillion dollars. The US military costs about $2 trillion every three years. So in the context of military spending or the global economy, is trillions really a huge number?
Yet that notion that the energy transition will be expensive or unaffordable keeps rattling around. That either investment in renewables is not sound (in the sense that they might not pay back more than you put in). Perhaps, the cost of a net zero transition is higher than the cost of just bearing with climate change. Take, for example, Bjorn Lomborg bemoaning the cost of Biden’s carbon reduction plans: “the economic damage these policies would do is much greater than what most voters would tolerate, while the climate benefits are smaller than many would imagine.” Or Matt Ridley; “eliminating carbon dioxide from the energy sector has hardly begun, yet the cost is already huge.”
Even for those groups committed to the net zero transition at a pace, the dialogue is sombre rather than celebratory. A “flagship report” from IEA and IRENA, reported in the Financial Times1 suggests an investment of $1 trillion per year in renewables and $130bn in hydrogen is required from now until 2030 to hit interim Net Zero targets. A McKinsey report from earlier this year suggests spending on physical assets for the transition would top $275 trillion by 2050, or $9.2 trillion per annum, roughly 7% of global household spending. That is meaningful. Even in the best of times, we would feel the pinch. (Six months earlier, the UN High-Level Climate Champions, rocked up with the number of $125 trillion, another big number. But what is $150 trillion between friends?)
Exponential, not linear
The problem with all these forecasts, these doomsayers, these backward Pollyannas, is that they are wrong. And the reason they are wrong is that they fail to grapple with the exponential nature of the key technologies. This cluster of lovelies — solar, wind, batteries, and electrolysers — will be the engine behind the Net Zero transition. The exponential nature means the cost of these technologies de facto declines by double-digit percentages every year, a stunning deflation in our inflationary contemporary.