A Coasian approach to phasing out coal
In this paper Adrian et al. provide a quantitative estimate of the social surplus that can be attained from avoiding emissions and in particular from phasing out coal. In their estimates they assume a social cost of carbon of 75 dollars per ton of CO2. To determine the size and opportunity costs of avoided emissions they rely on a detailed dataset, put together by the Asset Resolution (AR), on companies’ historical and projected global coal production based on the aggregation of production at the plant level, as well as financial data from Orbis. To calculate investment costs for different types of renewable energy investments needed to replace coal they use data from “Renewable power generation costs in 2021” report by the International Renewable Energy Agency.
They examine what a Coasian approach to internalizing negative externalities would imply for reducing carbon emissions. More explicitly, under a Coasian bargain coal companies would be compensated for losses they incur from ceasing their operations, and the social benefits from avoided emissions would be assessed net of both opportunity costs of phasing out coal and capital expenditures required to install the replacement renewable energy capacity. They conclude:
We estimate that the net gain to the world of phasing out coal is very large indeed. By comparing the present value of benefits of avoided carbon emissions from phasing out coal, starting in 2024 on a phase-out schedule in line with the Net Zero 2050 scenario of the Network for Greening the Financial System (NGFS), to the present value of costs of ending coal plus costs of replacing it with renewable energy, our baseline estimate is that the world could realize a net total gain of 77.89 trillion US dollars. This represents an increase of around 1.2% of current world GDP every year until 2100. 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.
The Great Carbon Arbitrage
Authors: Tobias Adrian, Patrick Bolton, Alissa M. Kleinnijenhuis
From: International Monetary Fund, Columbia University, Stanford University
Renewables and economic growth
In this paper, Adao et al. investigate the optimal transition from a primarily fossil-fueled world economy to a renewable-energy-fueled world economy. They use a dynamic general equilibrium integrated assessment model (IAM) to characterize the optimal transition to a renewable energy-fueled economy. The novelty of their model is the inclusion of additional costs associated with the adoption of renewables technology. These are costs associated with decommissioning, scrapping, or recycling old equipment; adjustment costs resulting from the switch; and legal and transaction costs associated with financing, selling, purchasing, and installing new equipment. Their findings include:
- Costs associated with new technology adoption are of quantitative importance along the energy transition;
- When spillover externalities are internalized, renewable firms take on capital at a smaller scale, as they need to replace more of their capital in order to adopt newer technologies faster. This is due to the crucial assumption that the cost of technology adoption is proportional to the firm’s capital stock.
- There are complementarities between carbon taxes and internalizing spillovers, with sizable welfare gains only in the case when both policies are present. This complementarity exists because the optimal Pigouvian tax reduces the initial negative effect from the optimal renewable adoption policy.
Renewable Technology Adoption Costs and Economic Growth
Authors: Bernardino Adao, Borghan Narajabad, Ted Temzelides
From: Federal Reserve Board
