3.5.7.4 Economic Incentives to Meet Emissions Targets
The potential profits in generating green energy can constitute economic incentives to meet emissions targets, if steered by governments
As described earlier (3.5.7.1), it is essential that the world acts quickly to reach ‘net zero’: the point at which it is no longer adding to the greenhouse gases in the atmosphere. The quicker this transition happens, the lower will be the cost of adaptation to climate change.
Although this is a global issue, there will be economic competition in facilitating the transition. Developed and developing economies can benefit from moving quickly:
● Renewable sources of energy are already cheaper than burning fossil fuels in many cases, and they are becoming cheaper with innovations and increased take-up. Countries which move slowly will become uncompetitive.
● Renewables avoid costly imports and give increased energy security.
● The transition to renewable sources will be require major investment, creating well-paid jobs.
● Those who develop the necessary technologies quickly will be able to export to other countries.
● The reduction of energy requirements, with better insulation for example, is also a good investment. It will create jobs and economic growth in the short term, and it will have a payback in reduced costs in the longer term.
Poorer countries are producing less carbon emissions than wealthy countries, but they may want to industrialise. They would be able to use cleaner technologies if these become available in time to meet their needs.
The world’s three largest economies have recognised the benefit of moving quickly:
● In America, the Biden-Harris Administration Launches Historic $20 Billion Competition to Catalyze Investment in Clean Energy Projects and Tackle the Climate Crisis “lowering energy costs for families and creating good-paying jobs”.
● China widens renewable energy supply lead with wind power push. It has “widened its lead over international rivals”. Its economy is benefiting from being a major exporter of wind turbines, solar panels, batteries and electric cars – all of which are important in reaching ‘net zero’. (It is still increasing its use of coal, though).
● In Europe, Commission proposes Strategic Technologies for Europe Platform (STEP) to support European leadership on critical technologies to “help companies seize the opportunities”.
These technology providers will reap the benefits of well-paid jobs and the associated economic growth. Their governments are making investments in innovation, taking a long-term view of their cost effectiveness. Several such programmes are already underway, as described below (3.5.7.6). Other countries will benefit from lower costs by implementing the technologies, but will not make the profits associated with providing them.
The renewable energy market size “will reach over two trillion U.S. dollars by 2030”, according to the Group Next Move Strategy Consulting. This is an enormous, and potentially profitable, business opportunity. It won’t materialise of its own accord, however, because existing businesses will be tempted to continue the use of fossil fuels. Government economic incentives, regulations, and funded research projects can help to persuade and direct individuals and companies to adjust their behaviour, and to install the necessary technology, to meet the carbon emission targets described above (3.5.7.2).
An International Monetary Fund (IMF) study in 2019 recommended introduction of a carbon tax as one of the possible economic incentives to meet emissions targets. It suggested that a “global agreement to make fossil fuel burning more expensive is urgent and the most efficient way of fighting climate change” – as reported in an Independent article: Huge global carbon tax hike needed in next 10 years to head off climate disaster, says IMF. The study examined the impact on energy prices and how to gain consumer acceptance “by routeing the money raised straight back to citizens”. Other taxes could be reduced correspondingly, to avoid squeezing people’s living standards. The energy industry would then be incentivised to use the available alternatives to fossil fuels, as described in the next sub-section (3.5.7.5).
An alternative to taxation is the so-called ‘cap and trade’ system, where each country has carbon allowances which can be distributed to organisations that produce carbon emissions. The ability to trade these permits means that those who are best placed to make big reductions in emissions would be incentivised to do so – but an Economist article, Green market forces, pointed to the risk of estimating errors and deliberate abuses.
Governments need to provide the economic incentives to meet emissions targets, but the choice of technologies should not be left to politicians. An Economist article on alternative energy technologies, Green dreams, argued that there is a risk of getting sub-optimum results if technologies are mandated:
“Governments that try to pick winners often choose losers. Subsidies distort investment: since the German government fixed the price for solar power at munificent levels, the country has been sucking in huge numbers of solar panels that could be put to better use in sunnier climes. A global carbon tax would be a more efficient way to close the price gap between fossil and alternative fuels.”
A high carbon tax would incentivise changes in behaviour, by encouraging people to make different choices. If energy were more expensive, people would be encouraged to use less of it. They have several options, without spending more money than they otherwise would have needed to:
● They can switch to electric cars when their existing vehicles become due for replacement.
● Car-sharing is economical. People can increasingly find someone to share with through Internet social media.
● People can cut down on travel. Working from home is becoming easier with advances in electronic communication.
● People can be less wasteful in their use of domestic energy, by turning down heating or air-conditioning.
● When their boilers become due for replacement, they can install newer technology.
These options all make immediate savings for those who adopt them, as well as helping to meet global targets.
Governments can also encourage energy savings, by introducing economic regulations. They can insist that new buildings have high standards of insulation for example, which reduce energy costs for the building’s lifetime. Regulations to mandate environmentally-friendly new heating systems and new cars are already in place in many countries.
As discussed later (6.7.5), politics provides the negotiating forum for agreeing the way forward. Governments play a leading role in providing or imposing most of the above economic incentives to meet emissions targets. The transition to net zero will be costly, but it is also an economic opportunity that brings most benefit to those who move quickly.
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition04/3574c.htm