Costs of climate change: solving the paradox?

Our lowest cost route to an energy transition was spelled out in December-2020 (note below), looking across 90 prior research reports and 270 data-files. It is fully possible to reach ‘net zero’ by 2050. The economic costs ratchet up to $3trn per annum.

However, based on the latest disclosures from the IPCC, we estimate that the unmitigated costs of climate change are only $1.5trn per year. So paradoxically, the energy transition appears to cost 2x more than climate change itself (note below).

What implications? The note above spells out our own solutions to the paradox. However, we also undertook a survey, to understand broader perspectives among decision makers. The results are tabulated below…

(1) Does energy transition matter? 68% of those who participated in our survey agreed or strongly agreed that the energy transition matters. Conversely, 23% disagreed or strongly disagreed. It is interesting to note that support for targeting an energy transition is strong but not universal.

(2) Do economics matter in the energy transition? 90% agreed that economics should be a material consideration in targeting an energy transition. 77% strongly agreed, the most strongly held view in the entire survey. This would suggest there is great importance in understanding which transition technologies will ultimately be economic. We expected a more polarized view here, although there could be some sampling bias at play.

(3) The paradox identified in our recent research is that the $3trn per year costs of achieving net zero appear to exceed the $1.5trn per year costs of unmitigated climate change. 65% agreed that this paradox might seem to challenge the rationale for targeting an energy transition. 23% disagreed. This is a similar split as on question (1).

(4) Could energy transition therefore be becoming a bubble? 74% agreed with this statement. 48% strongly agreed. Only 9% disagreed or strongly disagreed. This is interesting, albeit frightning support for our own thesis below.

(5) A higher cost of climate change was one solution that we proposed to resolve our paradox above. It is possible, the argument goes, that the costs of climate change are much higher than the $1.5trn per year that we estimated. 42% agreed or strongly agreed that the costs of climate change would likely be higher than we had estimated. 32% disagreed. There is no clear consensus on the unmitigated costs of climate change.

(6) A lower cost of achieving a transition was another solution that we proposed to the paradox. 35% agreed or strongly agreed that the costs of climate change would likely be lower than we had estimated. Again, there is no clear consensus on the cost of delivering the energy transition. Questions (5) and (6) had the highest portion of ‘neutral’ responses of any categories in our survey.

(7) The insurance argument is that it may still be rational to target an energy transition, even if the most likely costs of the transition exceed the most likely costs of unmitigated climate change, because climate change creates tail-risks of very large, catastrophic problems. 48% agreed or strongly agreed with this argument, making it the second most popular resolution to the paradox.

(8) The affordability argument is that it may still be rational to target an energy transition, even if the costs exceed the costs of climate change, because the costs of the former will be borne by wealthier populations in the developed world, while the costs of the latter would be incurred by poorer populations in the emerging world. Only 29% agreed with this argument, making it the least popular argument in the survey.

(9) The optimization argument is that targeting 2C of warming may not be the optimal balance, as the costs appear to outweigh the benefits. But there could be alternative timings, or alternative ceilings on global warming (e.g., 2.5C, 3C, 3.5C ?) where the costs do outweigh the benefits. 58% agreed or strongly agreed with this argument, making it the most popular argument in the survey. It may be interesting to consider how markets would react if a re-optimization of global climate targets ever came onto the political agenda.

(10) The moral argument is that it is morally ‘wrong’ to change the world’s climate, so it does not matter whether the energy transition is economically rational. 35% agreed or strongly agreed with this statement, making it the second least popular argument in the survey.


Notable perspectives and feedback

Notable perspectives were also shared by those taking part in the survey. In order to help understand others’ perspectives, some of the most cogent examples are noted below.

“The climate has always changed and humans have adapted in the past. Low cost adaption plus nature based solutions could go a long way to address the issue. Additionally, we really do not know if the 1.5-2.0 degrees is the tipping point. It was just a number conveniently picked. Reduce carbon and emissions yes, but not to the extent it wrecks the global economy.” — investor

“Difficult to see where rationality will come from, as what began as a worthy goal has become an uber-ideology that will cut any politician who stands in the way to shreds. I don’t think humanity has seen such a pervasive injection of zeal since the Christianization of the Roman Empires.” — investor

“I think the missing piece is the much higher likelihood of war(s) in an adverse climate change scenario. Judging purely by the costs incurred in a (relatively) small conflict like Iraq ($1tn per year), such costs would likely quickly exceed the $1.5tn total estimate. There are further risks to democracies and government stability if climate change results in mass migrations, epidemics, additional wealth inequality, etc. Such risks would also easily “cost” meaningfully more than the $1.5tn estimate implies.” — investor

“Ideally, the energy transition would be guided by the optimal low cost solution. this is unlikely to occur because the politicians will not support it. Furthermore, current politicians who set goals for decades in the future will not be around to enforce the painful restrictions required to achieve the targets”. — energy company strategist

“Paradoxically, we must be as economically rational as possible in execution of something that may be economically irrational! Thus, I find your comparisons of various costs of ton of captured to be extremely powerful” — investor

“Climate change will cost lives while energy transition will save it. Covid has shown that cost should not be the only factor driving policy decisions. So even if the transition is expensive (though I don’t agree with the thesis), it is worth pursuing.” — individual

“There should be a Pareto optimal solution analysis of the costs of mitigation and adaption (the latter of which tends to be ignored) relative to the costs of climate change itself.” — strategy consultant


Energy Transition Paradox Survey

The survey is still open, below, and we welcome additional perspectives…


Transitioning the world to 'net zero' is a crucial objective that should be pursued by decision-makers.
Economics matter to the energy transition. Lower-cost transition pathways are preferable to higher-cost transition pathways.
The costs of transitioning the energy system to 'net zero' by 2050 will likely reach $3trn per year. However, the ultimate costs of unmitigated climate change are likely only $1.5trn per year. If these numbers are correct, then they would challenge the rationale for targeting 'net zero' by 2050?
If achieving 'net zero' by 2050 is economically irrational, then this is another reason to fear many new energy technologies may be becoming bubbles?
Targeting an energy transition is still economically rational, because the costs of climate change will most likely be materially higher than the $1.5trn per annum that Thunder Said Energy has estimated.
Targeting an energy transition is still economically rational, because new technologies are likely to deflate the costs of achieving 'net zero' far below the $3trn per annum that Thunder Said Energy has estimated.
Targeting an energy transition is still economically rational, if this lowers the chances of catastrophic tail risks. Even though these tail risks are unlikely, they could have materially larger impacts than Thunder Said Energy's base case cost estimate of $1.5trn per annum.
Targeting an energy transition is still economically rational, because the $3trn per year costs of energy transition will mostly be borne in wealthier countries (which can more readily afford them), while the $1.5trn per year costs of climate change would mostly be borne in less wealthy countries (which can less readily afford them).
If the costs of achieving the Paris Climate goals, limiting warming to 2C, and reaching 'net zero' by 2050 outweigh the benefits, then this suggests the need to re-optimize climate targets. There could be alternative timings, or alternative ceilings on global warming (e.g., 2.5C, 3C, 3.5C ?) where the costs do outweigh the benefits. Better-optimized climate targets should therefore be explored.
It is morally 'wrong' to change the world's climate. So it does not matter whether the energy transition is economically rational.
We will share the results of the survey with you, when we have gathered enough responses. We will not disclose your email address to anyone else.