The clean energy paradox: Economic promise meets geopolitical hurdles

The economic promise of clean power in the U.S.

In this paper, Costas Arkolakis and Conor Walsh are attempting to assess the economic impacts of transitioning to a renewable energy-dominated electricity grid in the United States. The authors develop projections of capital costs for firmed solar power (solar backed by storage) to construct bounds on future wholesale electricity prices across the US at a fine geographic scale. They develop a theoretical model of trade, power, and production to analyze the general equilibrium effects of changes in electricity prices. In particular, they estimate the impact on local wages and production of moving to a solar-dominated grid. Finally, Arkolakis and Walsh use data from various sources, including the National Renewable Energy Laboratory (NREL), the Quarterly Census of Employment and Wages (QCEW), and input-output tables from the Bureau of Economic Analysis.

Key Findings:

1. A move to a grid dominated by firmed solar power is likely to see substantially lower wholesale electricity prices in most areas of the United States, with power costs falling between 20% and 80% depending on solar insolation and local land costs.
2. In the medium term (out to 2040), the authors find a fairly substantial increase in wages (on the order of 2-3% nationwide), with large regional heterogeneity.
3. Rural areas stand to benefit the most, owing to a greater share of electricity in the factor inputs of their industry concentration mixes.
4. Many large cities and counties in Texas and California also see average wage rises of almost 5%, due to substantial decreases in wholesale prices in these sunny areas.
5. The aggregate effect on national wages from transitioning to firmed solar power rises from 1.8% to 2.6% when considering general equilibrium effects.
6. The authors estimate that the theoretical maximum increase in production from transitioning to a clean grid (if all locations could access Arizona’s generation cost) would result in an additional increase in GDP of $245 billion annually.
7. In the longer term, the authors argue that moving to clean power represents a qualitative change in the aggregate growth process, potentially alleviating the “resource drag” that has slowed recent productivity growth in the US.

The Economic Impacts of Clean Power
Authors: Costas Arkolakis, Conor Walsh
From: Yale University, Columbia Business School

Political and geopolitical obstacles to clean energy

In this commentary, Daniel Gros argues that the economics of renewable energy are improving but political and geopolitical obstacles are hindering progress in the fight against climate change. These are:

• Local Barriers
  – NIMBY (“not in my backyard”) activism often prevents new wind-power installations and grid upgrades in advanced economies.
• Global Tensions
  – Rising tensions between the West and China pose the greatest obstacle to decarbonization.
  – Western countries are implementing green industrial policies to avoid Chinese dominance in renewable energy industries.
  – The EU and US have imposed high tariffs on Chinese EVs, increasing the cost of the green transition.
• Impact on Developing Countries
  – China’s Belt and Road Initiative (BRI) could support decarbonization efforts in poorer countries, but faces challenges:
  1)  India, now the world’s third-largest emitter, is not participating in the BRI.
  2) Governments receiving Chinese credits often prefer prestigious infrastructure projects over renewable installations.
• Market Disparities
  – EV market share has stagnated at 8% in the US and 15% in the EU, partly due to higher costs.
  – In China, EVs are close to price parity with internal combustion engine vehicles, resulting in a 36% market share in 2023.

The Improving Economics and Worsening Geopolitics of Clean Energy
By: Daniel Gros – Bocconi University