THE OLD GROWTH
Fossil fuels have powered economies for over a century
Energy plays a central role in the global economy, and for more than a century one of the cheapest and most prevalent sources of energy has been fossil fuels — coal, oil, natural gas, and the power generated from these fossil fuels. Unfortunately, fossil fuels have also been a major source of carbon emissions. In 2010, fossil fuels contributed nearly two-thirds of greenhouse gas emissions from human activity.
A NEW ECONOMY
Low-carbon energy can free up trillions for investment
Some worry that a switch away from fossil fuels could have a significant cost to the global economy and undermine the financial system. CPI analysis demonstrates that a transition to a low-carbon energy system could free up trillions of dollars over the next 20 years to invest in better economic growth.
MOVING TO A LOW-CARBON ECONOMY
A Global Transition to Low-Carbon Energy
Energy is critical to economic growth and to fighting climate change

To keep economies growing and avoid dangerous climate change, the world will need to transition to a low-carbon energy system. The question on the minds of many is: will this transition hurt the economy and the financial system? Analysis shows that this does not have to be the case.

The net cost or benefit of a low-carbon energy transition will depend on governments

Governments own over half of global fossil fuel production and control as much as 70% of oil and gas production through companies that are wholly or majority owned by governments.

Because governments control much of the policy that may lead to stranding, they can limit the impact of asset stranding and, in many cases, create financial benefits.

What it Costs Depends on How it's Done

There are two transitions within the energy sector that are important: The transition to low-carbon electricity and the transition to low-carbon transport. Let's take a look at the transition to low-carbon electricity first.

The Transition to Low-Carbon Electricity Frees up as Much as $1.8 Trillion of Investment Capacity

Renewables cost far less to operate…
… though renewables cost more to build, they are still cheaper in total…
…once we account for stranded fossil fuel assets.
A
OPERATING COSTS
B
DEPRECIATION & AMORTIZATION
C
FINANCING COSTS
D
STRANDED ASSETS
waterfall-renewable Created with Sketch. 1.1T D $1.8 TRILLION ADDITIONAL INVESTMENT CAPACITY 2.8T B C 3.3T 1.7T B C 2.7T 0 0 5.5T A 0.9T A CONTINUED USE OF FOSSIL FUEL GENERATION RENEWABLE ENERGY REPLACES SOME FOSSIL FUEL GENERATION
Costs over a 20 year period (Trillions, USD)

Renewable energy has significantly lower operational costs compared to the high ongoing expenses of coal and gas extraction and transportation. Though capital costs are higher for renewables, the net result is still up to $1.8 trillion in increased investment capacity, creating opportunities for growth and lower costs that could reverberate across the economy.

The Transition to Low-Carbon Transport Can Also Benefit the Economy, with the Right Policies

Low-carbon transport costs less to operate…
…capital and financing costs are higher…
…the net impact of the transition depends on the impact of stranded assets.
A
OPERATING COSTS
B
DEPRECIATION & AMORTIZATION
C
FINANCING COSTS
D
STRANDED ASSETS
waterfall-transport Created with Sketch. 0 0 0 ADDITIONAL INVESTMENT CAPACITY ADDED COST $3.5 TRILLION $2.5 TRILLION D 1.8T -4.2T D B 6.0T B 6.0T B 3.0T 1.5 C C 2.0T C 2.0T SCENARIO 2: TAXATION POLICY (Impact of Stranded Asset: NET COST) CONTINUED USE OF OIL IN TRANSPORT SCENARIO 1: INNOVATION PATH (Impact of Stranded Assets: NET BENEFIT) 2.6T A 5.4T A 2.6T A
Costs over a 20 year period (Trillions, USD)

The same policy affects producers, consumers, and governments differently. The net effect on global investment capacity could be positive or negative.

Taxation Scenario
Stakeholder
Producers
Consumers
Governments
All Combined
Impact
How it Works
Oil producers have reduced income with lower prices and less demand.
Oil consumers pay more in taxes.
Governments receive tax revenue that can be given back to taxpayers.

For example, in the transition to low-carbon transport, relying only on tax-based, demand reduction policies could result in a net decrease in global investment capacity.

Innovation Scenario
Stakeholder
Producers
Consumers
Governments
All Combined
Impact
How it Works
Oil producers countries have reduced income with lower prices and less demand.
Oil consumers save money on energy.
Innovation has no direct effect on government revenue.

…while relying on innovation could result in a net increase in global investment capacity.

Since relying only on innovation is uncertain, a combination of demand-reduction and innovation policies provides the most promising approach to achieve a net financial benefit.

Governments Can Benefit Even If They Act Alone

" Country Name "
NET BENEFIT TO
REGION Select a Region: U.S. +0.3 EU-28 +1.4 China +1.3 Japan +0.7 India +0.5
Stakeholder
Producers
Consumers
Governments
All Combined
Impact
How it Works
Oil producers have reduced income with lower prices and less demand.
Oil consumers pay more in taxes.
Governments receive tax revenue that can be given back to taxpayers.

Regions that consume more oil than they produce can act independently of net oil producers and still enjoy almost all of the benefits of the transition to low-carbon transport. For example, if the U.S., Europe, China, India, and other oil importers were all to institute policies to reduce demand for oil, these countries could still achieve 80% of the target reduction in oil usage to keep from dangerous global warming, and receive 95% of the financial benefit they could see with global action. If these net consumers acted, net oil producing countries would benefit from reducing their consumption as well. Innovation would have an equally important cross-border impact.

Governments would do well to focus on the transition away from coal, which is the most cost-effective path to a low-carbon economy.

Stranding only 12% of the asset value at risk…
…could achieve 78% of emissions reductions

The global community can achieve approximately 80% of necessary carbon reductions by transitioning away from coal for 12% of global economic value at risk. In the power sector, the U.S. and EU are already on track for a transition with minimal economic value loss; China and India need alternatives to new coal plants to minimize the cost of transition to a low-carbon economy.

In the U.S. and EU, by Retiring Plants on Schedule, and Halting New Development, Future Losses Will Be Minimal.

Reducing Coal-Fired Electricity Generation Gigawatts of Capacity retirement-US Created with Sketch. 0 100 200 300 2012 2015 2020 2025 2030 2035 MATS RETIREMENTS 60 YEAR RETIREMENTS LOAD REDUCTIONS 40 YEAR RETIREMENTS SUSTAINED CAPACITY REDUCTIONS CAPACITY REMAINING IN OPERATION PLANNED RETIREMENTS LOAD REDUCTIONS SUSTAINED CAPACITY REDUCTIONS CAPACITY REMAINING IN OPERATION CAPACITY LEVEL REQUIRED FOR 450 PPM TARGET 330 GIGAWATTS CAPACITY IN 2012 retirement-EU Created with Sketch. 0 40 80 120 160 200 2012 2015 2020 2025 2030 2035 60 YEAR RETIREMENTS LOAD REDUCTIONS LCPD & 40 YEAR RETIREMENTS SUSTAINED CAPACITY REDUCTIONS CAPACITY REMAINING IN OPERATION SUSTAINED CAPACITY REDUCTIONS PLANNED RETIREMENTS LOAD REDUCTIONS CAPACITY REMAINING IN OPERATION SUSTAINED CAPACITY REDUCTIONS CAPACITY LEVEL REQUIRED FOR 450 PPM TARGET 182 GIGAWATTS CAPACITY IN 2012

The U.S. and EU can reduce their coal consumption with minimal loss in asset value, simply by letting their 40 and 60-year-old power plants retire at the end of their natural lives rather than refurbishing them and reducing annual hours of operation for existing plants. With the right market design (one that places a higher value on flexible power), existing plants can remain just as profitable.

Delaying Policy Action Can Markedly Increase Stranding Costs

To stay below a 450 ppm limit on CO2 emissions, many developing countries need to meet their growing energy needs without building additional coal-fired power plants. Additional coal development will result in loss of asset value. Finding an alternative to coal-fired power generation for developing countries must be a priority.

construction-unit-after0 Created with Sketch. INDIA CHINA SOUTH AFRICA AUSTRALIA SOUTH KOREA INDONESIA EU-28 LOW CHANCE OF STRANDED ASSETS UKRAINE JAPAN RUSSIA UNDER CONSTRUCTION PLANNED (1 GIGAWATT) (1 GIGAWATT) UNITED STATES HIGH CHANCE OF STRANDED ASSETS

Our analysis is based on assets and investments in operation as of 2014. Delaying policy action or continuing with uncertain policy creates the risk that more investments will be made, increasing potential asset value loss in the future. Clear signals will ensure that the right investments continue at a reasonable cost while investments that are at risk of value loss are avoided.

Policies and financial innovation can help ensure the benefits of transition by reducing financing costs of low-carbon energy.

Inefficient financing methods add to the cost of renewable energy in both developed and emerging economies. There is a huge opportunity for policy to reduce financing costs and thereby reduce the costs of renewable energy.

In Emerging Economies, Achieving Low-Cost, Longer-Term Loans Will Have a Large Impact

In emerging economies with high debt costs, concessional, long-tenor debt could provide significant support for renewable energy projects at 30% less cost to governments.

12%
savings
Interest Subsidy
In India, the Federal government could service a portion of a project's interest payments - lowering the amount a developer must pay for a commercial loan. For example, if a government were looking to reduce the cost of a 10-year loan, it would pay the bank 3% of the interest for 10 years, leaving the remaining 10% and the principal for the developer to pay.
20%
savings
Reduced Cost Debt
In a reduced cost loan, the government lends directly to project developers at lower rates than are available on the commercial market.
30%
savings
Extended-Tenor Debt
Extended tenor debt are direct loans at the prevailing commercial rate, but over a longer term. Many commercial loans are 10 years or fewer, while a government loan could exceed 20 years. The longer maturation period means lower payments per year.

In the U.S. and EU, Improving Financing with Business Model Innovation and New Financial Instruments Can Lower the Cost of Renewable Projects by Close to 20%

-
baseline COST
Project Finance
Renewable energy projects are typically financed as standalone companies with high capital costs.
2-6%
savings
Balance Sheet
Utilities often keep projects on their balance sheets and finance them at the utility's cost of capital.
18-19%
savings
New Financing Models
YieldCos, municipal finance, and other models can channel low-cost institutional investment into many projects at once.

In the U.S. and EU, investment vehicles such as YieldCos that can efficiently channel low-cost institutional investment into low-carbon energy infrastructure have the potential to reduce the cost of low-carbon power by 20%.

ABOUT CLIMATE POLICY INITIATIVE

Climate Policy Initiative works to improve the most important energy and land use policies around the world, with a particular focus on finance. Our analysts and advisors support decision makers through in-depth analysis on what works and what does not. We work in places that provide the most potential for policy impact, including Brazil, China, Europe, India, Indonesia, and the United States.