A New Strategy for Climate: Make the Clean Stuff Cheap

World leaders announced a new initiative at the Glasgow COP to drive down the costs of clean energy. Done right and at scale, this strategy could transform the climate fight.

By Eric Beinhocker J. Doyne Farmer

Tagged Climate ChangeCOP26Economics

On the second day of the UN’s Glasgow climate summit (COP 26), UK Prime Minister Boris Johnson announced an initiative called the Breakthrough Agenda, under which more than 35 countries, including the United States, EU, China, and India, committed to pursuing policies aimed at driving down the costs of clean energy technologies to the point where they beat fossil fuels. As Johnson put it, “By making clean technology the most affordable, accessible, and attractive choice, the default go-to in what are currently the most polluting sectors, we can cut emissions right around the world.”

The initiative set goals for achieving this low-cost tipping point by 2030 in five priority sectors—power, road transport, hydrogen, steel, and agriculture—representing more than half of global emissions. While UN COPs have a long history of grand pledges made and not met, if enough countries pursue this initiative with real commitment, funding, and scale, it could represent a new, transformative strategy in the climate fight.

For more than 30 years, climate advocates have pursued a strategy that can be described as “make the dirty stuff expensive”—put a price on carbon to make carbon emitting technologies costlier than low and zero-carbon alternatives and catalyze a switch. But that strategy hasn’t worked, and emissions have continued to climb, reaching a crisis point. In contrast, the Breakthrough Agenda represents an explicit commitment to a strategy that can be referred to as “make the clean stuff cheap”—use policy to drive down the costs of zero-carbon technologies until they put emitting technologies out of business. Research by our group at Oxford and our collaborators shows that it just might work.

Carbon Pricing – the Textbook Solution

Ever since early 1990s, when the UN COP process was established and the IPCC began releasing its scientific reports, the climate policy community has invested significant effort and political capital into setting a price on carbon. This strategy came from a long-standing theory in economics, dating back to English economist Arthur Cecil Pigou in 1920, that viewed pollution, such as carbon emissions, as a negative “externality” where polluters pollute because they don’t directly bear the costs of their actions—instead, society does. So, the answer Pigou proposed is to “price the externality”—make polluters pay a price that reflects the costs they impose on society. In the case of climate this means putting a price on carbon emissions either through a tax or by issuing a limited number of emissions permits and then trading them in a market to establish a price (a so-called “cap-and-trade” scheme).

The theory claimed that establishing a carbon price would be more efficient than old-fashioned, heavy-handed regulation. By sending a price signal throughout the economy, policymakers could harness markets to drive changes in behaviors and create incentives to invest in and adopt zero-carbon technologies. As Treasury Secretary Janet Yellen has put it, carbon pricing is the “textbook solution” to climate change.

Economists and policymakers could also point to successful examples of pollution pricing working. In the United States, cap-and-trade markets were established in the 1990s through 2000s for sulfur dioxide (which causes acid rain) and nitrogen oxide (which causes ozone smog). The schemes were a major success, slashing emissions at a fraction of the originally estimated cost. These successes generated growing international support, and in 1997 the UN Kyoto Protocol featured a limited carbon trading market. But the big step came in 2005 when the EU launched its carbon Emissions Trading System (ETS) covering 27 countries.

Theory Meets Reality—the Dirty Stuff Fights Back

Unfortunately, Pigou’s elegant economic theory collided with ugly political reality. The dirty stuff doesn’t want to be made more expensive. It fights back. In every case where carbon pricing has been attempted, the schemes have been subject to ferocious and well-resourced lobbying efforts. And, unlike sulfur dioxide, which is produced primarily by utility emissions, carbon is produced throughout the economy—so sectors ranging from utilities to coal, oil, gas, steel, autos, cement, mining, aviation, shipping, agriculture, and the bankers who finance them, have been fighting back. The result has been that, despite decades of effort, carbon pricing has reduced very little actual carbon emission.

For example, industry lobbyists and nations like coal-dependent Poland pressured the EU to issue too many permits and riddled the ETS with loopholes, thus ensuring that the carbon price would be so low as to be ineffective. The EU carbon price has since ranged from about €5 to €35 per ton, far below what most economists calculate is needed to be effective (the so-called “social cost of carbon”). While a combination of rule tightening and post-COVID rebound has caused the price to rise recently, the net result is that after 15 years, the ETS has only reduced emissions by 3.8 percent relative to what would likely have happened without it.

The EU’s experience is not unusual. In fact it has happened in virtually every carbon pricing scheme created. Even super-green Sweden, which has the highest carbon price in the world ($126 per ton), has enough loopholes in its system that it only covers about 40 percent of national emissions. Today there are 61 countries and regions that either have or are implementing carbon pricing schemes. However, in its latest analysis, the World Bank estimated that less than 4 percent of the emissions covered by these schemes are priced at a level consistent with the Paris Agreement. And given that only about a fifth of global emissions are subject to any carbon price at all, this means that the payoff of three decades of effort is that roughly 0.8 percent of global emissions are subject to any effective carbon price.

And it’s not just fossil fuel lobbyists who ensure that carbon prices stay low. The voting public doesn’t like carbon prices much either, particularly when they come in the form of taxes and when trust in the political system is low. The most vivid expression of this was the massive “gilet jaunes” (yellow vest) protests that paralyzed France in 2018 and 2019 when President Emmanuel Macron tried to raise taxes on fuel to cut emissions and fund climate initiatives. This was despite the fact that over 78 percent of the French public see the environment as a major concern, support that cuts across political parties with virtually no climate-denial in the country. Imagine what the protests to such a tax would look like in the United States.

The fossil fuel industry understands all of this, which is why the American Petroleum Institute recently endorsed the idea of a carbon price. They know they can fill any trading scheme with loopholes, and any carbon tax would be politically divisive and unpopular. An Exxon Mobil lobbyist was caught on a hidden camera this spring saying, “Carbon tax is not gonna happen” but admitting that the company cynically supported one to appear green and distract from policies that might actually work.

The Clean Stuff Is Getting Cheaper—and Better

While all this effort was going into carbon pricing, something else was happening that went virtually unnoticed. The price of clean energy was plummeting. In the past ten years alone the cost of solar photovoltaic energy dropped 85 percent, the cost of wind 47 percent, and batteries for electric vehicles and energy storage 65 percent. If human civilization is eventually saved from the worst ravages of climate change, it won’t be because world leaders suddenly woke up one day, found previously undiscovered reservoirs of political courage, and united the world in implementing a global carbon tax. It will be because the key technologies of the zero-carbon economy got so much cheaper and so much better that they wiped out and replaced the fossil fuel economy.

This isn’t wishful thinking or technological utopianism. It is already happening. Over the past five years, our research group in Oxford has compiled data showing that for the past several decades, clean energy technologies have been undergoing exponential cost declines, very similar to the Moore’s Law cost declines that have enabled computing use to explode, with clean energy costs dropping on average about 10 percent per year. Solar has been on this path the longest, becoming 2,000 times cheaper since its first commercial use in 1958.

Our team’s work further shows that, once established, these cost decline paths are highly predictable. They are “experience curves,” a phenomenon well known in economics where the more of something that is cumulatively produced, the cheaper and better it gets. The cost declines don’t necessarily come from technological breakthroughs, but more typically from the accumulation of lots of incremental engineering and efficiency gains as producers learn from experience and competition. Furthermore, many key clean energy technologies have benefitted from gains in larger technological ecosystems; for example, semiconductor advances spilling over into solar cells, aerospace technologies making wind turbines more efficient, and battery technologies from consumer gadgets being utilized in electric vehicles.

Nuclear power is also a zero-carbon technology, but it has been on a reverse experience curve with its costs rising since its first commercial use in 1957. There are many possible reasons for this, but it means that while continuing to operate existing plants makes sense, building new nuclear is currently not cost competitive with renewables plus storage. A new generation of smaller, modular reactors could possibly change this in the future, but it is not where we would invest scarce resources given that cheap renewables are available here and now.

As we move to net-zero electricity grids powered primarily by renewables, questions of reliability and storage when the sun isn’t shining and the wind isn’t blowing begin to take center stage. While few would claim this problem has been completely cracked, again experience curves are driving exponential cost declines in the key technologies. Utility-scale battery storage is operating in places from California to the UK and Australia, and its costs are plummeting. Renewable energy can also be stored in gases such as hydrogen or in liquid fuels, and the costs of such “Power-to-X” solutions are dropping fast too. Further help is coming from “smart grid” technologies that enable utilities to better manage demand and more easily move power from renewables and storage to where it is needed. While there is no silver bullet answer, many utilities and grid operators (e.g., California and Britain) now have detailed net-zero roadmaps that use a combination of existing and new technologies. And while nuclear and fossil fuels with carbon capture and storage (CSS) are currently expensive, they will likely be part of the solution for certain systems.

Figure 1

While renewable energy technologies have been on these exponential cost declines, fossil fuel energy costs have not (figure 1). Our group’s research further finds that, over the very long-term, fossil fuel costs are highly volatile: They go up and down a lot (including spiking up recently as the world recovers from COVID), but over the past 140 years there has been no long-term trend. For example, on an inflation-adjusted basis, coal costs roughly the same today as in the late nineteenth century (based on “useful energy costs,” a measure enabling apples-to-apples comparison of energy costs). While there have been numerous advances in fossil fuel technologies (e.g., highly automated coal mining, deep sea oil platforms, gas fracking), those advances have mainly allowed the industry to replace finite resources as they’ve been depleted and to keep up with rising demand rather than deliver long-term costs savings to consumers.

Tipping Points Approaching, but Government Action Needed

While this decline in renewable energy costs versus fossil energy costs has been going on for decades, most economists and policymakers have, until recently, largely missed this critical fact. The International Energy Agency (IEA), for example, has systematically underestimated solar cost declines in its forecasts every year for 20 years (see Figure 2), and our group has found that solar costs dropped on average six times faster than the forecasts produced by the models used by many governments and by the IPCC. This forecast bias against clean energy has, in turn, fed an increasingly false narrative that the zero-carbon future will inevitably be more expensive than the fossil fuel present, which fossil fuel interests in turn have used to fight against ambitious action.

Figure 2

But if we correct these models to account for clean energy experience curves, a very different picture emerges. We are rapidly approaching a series of tipping points where the clean energy future will be cheaper than the fossil fuel present. This is already starting to happen; in places ranging from Colorado to Chile, China, Dubai, the UK, and Germany, there have been examples of new-build solar and wind coming in cheaper than coal, oil, and gas. Bloomberg New Energy Finance estimates that it is currently cheaper to build and operate new large-scale wind or solar plants in nearly half the world than running existing fossil fuel plants. And our group’s forecasts show this could spread to most of the world in the 2030s.

While all this is certainly good news there are four big issues to overcome:

First, it is not happening nearly fast enough. While clean energy supplies will continue to grow and costs continue to fall, without major policy action, fossil fuels will still be a significant part of the energy mix until well after 2050, the point at which the world needs to achieve net-zero in order to have a chance at containing warming to the Paris target of 1.5-2ºC.

Second, it is not happening globally enough. Most of the dramatic rise in clean energy investment has happened in the developed world and China. Many developing countries simply don’t have the capital to invest and, without financial support, will be saddled with uneconomic fossil infrastructure—and the world will be saddled with their emissions.

Third, governments need to address a variety of barriers to clean energy deployment: major investments are needed in smart grids and electric vehicle charging points, and governments need to sort out a thicket of regulatory issues as well as stop subsidizing fossil fuels—currently, governments spend about $447 billion “making the dirty stuff cheap” versus $128 billion in subsidies for renewables.

And fourth, while existing technologies will get us a very long way toward net-zero, they won’t get us all the way. Advances will still be needed in hard-to-abate sectors such as air transport, shipping, steel, and cement. Global clean energy R&D by governments currently stands at a paltry $30 billion annually—below levels in 1980—and needs to be radically ramped up. Furthermore, technology is not a panacea—consumers will still need to change their habits, particularly in food consumption, and dramatic action is needed to preserve the world’s carbon absorbing forests, stop methane emissions, and many other things.

So, the bottom line is that, while market competition and Moore’s Law-like experience curves are already doing a lot, they won’t be nearly enough on their own. Both markets and Moore need help from policy.

Making the Clean Stuff Cheap—a Policy Agenda

The good news is smart policies can drive us to the tipping points faster and more globally. The evidence for this comes from the experience of several countries that, over the past decades, have implemented policies that boosted clean energy demand, drove up production volumes, and saw costs plummet—even though in most cases the cost declines were an accidental, unexpected side effect of the policies.

Two examples are Germany and China. In 2004, Germany introduced a scheme that allowed solar owners to feed power back into the grid at a favorable rate (a “feed-in-tariff”). The scheme proved very popular, and between 2004 and 2010, with less than 1 percent of the world’s population, Germany accounted for more than half of the solar PV installed globally, multiplying its capacity by over 13 times. Likewise, China significantly expanded its renewable targets in its 12th and 13th Five Year Plans and went from a negligible 300 MW of solar in 2008 to the world’s largest producer with 205 GW in 2020, a roughly 680-fold expansion in just over a decade. These two policy-driven expansions in demand coincided with a 22-fold drop in solar PV module costs during the same period, as German, Chinese, and other factories cranked out solar panels to meet this huge uptick in demand. While correlation is not necessarily causation, other historical cases strongly suggest that policies that expand markets can accelerate cost declines down the experience curve—for example policies boosting aircraft production during World War II caused costs to plummet, and Cold War defense purchasing kick-started Moore’s Law in semiconductors.

Very similar stories can be told about onshore wind energy in the EU and Brazil, offshore wind in the UK, and energy efficient lighting in India. In the United States, while ambitious federal action on climate has been stalled for decades, states such as California that have mandated a rising share of renewables in their energy mix have seen renewable capacities grow and costs drop. Corporations can also play a critical role in boosting clean energy demand, for example, contracting with utilities for zero-carbon power, shifting their vehicle fleets to electric, and driving zero-carbon requirements throughout their supply chains.

The key thing these policies all have in common is that they create large, growing, and reliable demand for zero-carbon technologies. Producers are then able to respond to that demand, attract capital, create economies of scale, and learn from experience to make their products cheaper and better. New entrants are also attracted into the market, bringing innovations and intensifying market competition. And if the policies expand demand for clean energy solutions broadly, then government bureaucrats don’t have to pick winners, and markets can determine which technologies are most effective. Thus, carbon prices are not the only way to catalyze market forces—policies that expand clean energy demand do too.

So, while deliberately setting a target of “making the clean stuff cheap” may be a new strategy, the policies to do it are not. They include clean energy requirements for utilities, vehicle standards, tax incentives, energy efficiency standards, industrial process emissions regulations, building codes, government purchasing requirements, and public investments in grids and vehicle charging infrastructure. In fact, unlike carbon pricing, these policies all have track records of actually abating carbon.

Better Politics

The policies that “make the clean stuff cheap” also have far better politics than carbon pricing. Over 70 percent of Americans, for example, support policies that promote renewables, restrict power plant emissions, and boost automobile fuel efficiency. Also, as the clean stuff becomes cheaper and a bigger part of the economy, the political clout of clean energy interests will start to rival that of the fossil fuel lobby. Clean energy jobs in the United States already outnumber fossil fuel jobs by about 3 to 1. Republican Senate Minority Leader Mitch McConnell is unlikely to ever support a carbon tax, but he has recently been working hard to expand electric vehicle production in his home state of Kentucky.

Making the clean stuff cheap also flips a core political narrative of the climate fight—that low carbon is expensive, will cost growth and jobs, and so we should go slow and minimize the shocks to the economy. This new logic says the opposite—we should go big and fast, bringing forward the low cost, clean energy future, and creating new jobs and new technologies. Our modeling work shows that not only would such a “decisive transition” give us hope of meeting the Paris targets but would also result in savings of over $27 trillion in energy costs for the world versus continuing with our current fossil economy.

We can also create a positive political dynamic between making the clean stuff cheap and national ambitions for achieving net-zero emissions. In Glasgow, the United States, EU, UK, China, India, and other countries have made pledges to achieve net-zero within various timeframes. My colleague Thomas Hale and the Net Zero Tracker team calculate that such pledges now cover 88 percent of global emissions. But despite this progress, most of the pledges are too vague and too late to contain warming to the 1.5ºC scientists now say is necessary to avoid disaster. But as zero carbon technologies become cheaper and more ubiquitous, the political space opens for more ambition and firmer commitments. For example, Denmark’s success with renewables has given it the confidence to enshrine its net-zero commitment in national law, and improvements in electric vehicles have given Britain the courage to ban fossil car sales after 2030.

We shouldn’t give up, however, on trying to make the dirty stuff expensive. We should do it every chance we get. But after 30 years of trying, we should also be realistic about how effective that strategy has been. It is time to open this second front in the battle to save our planet—as the activist Bill McKibben has put it, “We’re finally catching a break in the climate fight.” Glasgow has clearly not been the turning point that many had hoped for, but we are beginning to see what really works and what doesn’t. The initiative Johnson announced is just a start and must urgently be built on and expanded. It is time to make the clean stuff cheap and the dirty stuff obsolete.

Read more about Climate ChangeCOP26Economics

Eric Beinhocker is a Professor of Public Policy Practice at the Blavatnik School of Government, University of Oxford, the Executive Director of the Institute for New Economic Thinking at the Oxford Martin School, and an External Professor at the Santa Fe Institute.

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J. Doyne Farmer is a Professor at the Mathematical Institute, University of Oxford, Director of Complexity Economics at the Institute for New Economic Thinking at the Oxford Martin School, and an External Professor at the Santa Fe Institute.

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