Replacing coal with renewable energy would greatly benefit society, according to a new working paper from Imperial College Business School.
According to the study, the transition from coal to renewable energy would amount of the equivalent of $78 trillion in ‘social benefits’ such as people facing less damage from climate change and reduced harm to their health.
The researchers calculated the cost of replacing coal with renewable energy, and the social benefit from phasing out coal, to obtain an estimate of the net gain from this energy transition.
According to the study, co-authored by Patrick Bolton, Professor of Finance and Economics at the Centre for Climate Finance & Investment, the net gain from switching to renewable energy sources would be $77.89 trillion through to the end of this century, the equivalent to about 1.2 percent of global GDP per year during the period.
Per tonne of coal, this represents a net gain of around $125, and per tonne of avoided coal emissions, this represents a net gain of $55.
To calculate the cost of replacing coal with renewable energy, the researchers factored in the capital expenditure costs of building a renewable energy capacity that is equivalent to that from burning coal, as well as the costs of compensating coal companies for their economic loss.
"Far from finding that replacing coal with renewable energy would be too expensive, we uncover a huge economic benefit from phasing out coal, what we refer to as the great carbon arbitrage." Patrick Bolton Professor of Finance and Economics
The present value of the social benefits generated by switching to renewable energy is calculated by estimating the size of avoided emissions from phasing out coal and by applying a carbon price to those emissions.
Patrick Bolton, co-author of the study, and Professor of Finance and Economics at Imperial College Business School, says: “Far from finding that replacing coal with renewable energy would be too expensive, we uncover a huge economic benefit from phasing out coal, what we refer to as the great carbon arbitrage. This enormous social net benefit is the gain from a cheap insurance policy: by paying a premium one gains coverage for potentially very large damages.
“This clearly represents a major challenge. But our analysis shows that the social gain from these investments far exceeds the cost.”
The research was undertaken with Tobias Adrian of the International Monetary Fund (IMF) and Alissa M. Kleinnijenhuis of the Stanford Institute for Economic Policy Research and the Institute for New Economic Thinking at the University of Oxford.
Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the International Monetary Fund said: “Phasing out coal isn’t just urgent because it would help limit the global temperature increase to 1.5 degrees Celsius. The analysis shows that the economic benefits are significant enough that we should push harder for global agreements that unleash the potential power of capital markets.
"The bottom line for policy is that if compensation was built into an agreement to scrap coal, and if the promised transfers for green investments to developing countries were to be made conditional on ending the fuel’s use, the net social gains from such an agreement would be enormous.”
The researchers conclude that despite the assumed cost of switching to renewable energy, the social benefits dramatically outweigh those costs.
The working paper, The Great Carbon Arbitrage, can be accessed on the Imperial College Business School website.
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Laura Singleton
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