United States: Hurry Or Wait – The Pros And Cons Of Going Fast Or Slow On Climate Change

Last Updated: January 18 2016
Article by Eleanor Denny and Jürgen Weiss

Abstract: Climate change risk will likely force the de-carbonization of our electricity sector and thus involve massive investments in long-lived assets using many new and emerging technologies. Since technological progress (independent or dependent on deployment) will likely lower the future cost of those technologies, investing early and rapidly forecloses saving money by installing those technologies at a lower cost later. There are thus benefits to waiting until the costs of renewables fall further. However, there are also costs to waiting. First, given the longevity of greenhouse gases in the atmosphere, cumulative emissions matter and lowering greenhouse gas emissions earlier is beneficial. Second, there is significant uncertainty not only over the rate of change of the cost of low carbon technologies, but also over the cost of greenhouse gas emissions. The costs of waiting are complex in that the distributions themselves are unknown (and quite possibly have "fat" tails). There may also be complex timing issues such as points of no return in terms of global greenhouse gas concentrations, beyond which the costs of adapting to climate change effects become essentially infinite. Hurrying can therefore be considered an insurance policy against the unknown but perhaps increasing risk of catastrophic damage.

Keywords: climate change; electricity sector; environmental risks; fat tails; greenhouse gas emissions.

The risks associated with climate change are likely to force the de-carbonization of our electricity sector involving massive investments in long-lived assets using many new and emerging technologies. Given the rate of technological progress (independent or dependent on deployment) it is likely that the future cost of those technologies will reduce. Thus, investing early and rapidly, say by installing large amounts of solar photovoltaic (PV) today, forecloses saving money by installing lower cost PV on the same roofs later. As such, there are benefits to waiting until the costs of renewables reduce further. This is likely the case even recognizing that some portion of the decline in costs over time is related to experience gained from deploying the technology.

On the flip side, there are also costs to waiting. First, given the longevity of greenhouse gases in the atmosphere, cumulative emissions matter and lowering greenhouse gas emissions earlier is beneficial. Second, there is significant uncertainty surrounding both the rate of change of the cost of low carbon technologies, and also over the cost of greenhouse gas emissions.

The costs of waiting are complex in that the distributions themselves are unknown (and quite possibly have "fat" tails). There may also be complex timing issues such as points of no return in terms of global greenhouse gas concentrations, beyond which the costs of adapting to climate change effects become essentially infinite. Hurrying can therefore be considered an insurance policy against the unknown but perhaps increasing risk of catastrophic damage.

1 Hurry or Wait Framework

In summary, there are benefits to both waiting (option value) and hurrying (insurance value) on climate change mitigation: hurrying reduces the risks of catastrophic climate change, but could in theory be significantly more expensive than waiting.

We suggest that, given the uncertainties, it is likely preferable to err on the side of going too fast than too slow. To support that conclusion, we use a simple, back of the envelope calculation for the electricity sector in the United States to estimate how much money could be spent by hurrying, and how significant this potential outlay seems relative to the risk of waiting too long.

2 Back of the Envelope

In 2012 electricity production in the United States was a little more than 4000 TWh, of which approximately two-thirds was generated by fossil fuels, the remainder coming from nuclear, hydro and non-hydro renewables (EIA 2014a). Production is growing by about one percent per year and assuming this growth rate continues until 2040, annual production would be approximately 5400 TWh per year by 2040 (Faruqui and Shultz 2012).

Some of the existing power plants are old, others are newer, but we assume that by 2040 all of the existing capacity will need to be replaced with new plants.

For resources entering service by 2019, the Energy Information Administration (2014b) estimates the average cost of power from fossil plants to be between $64 and $147/MWh (not accounting for the cost of greenhouse gas emissions), the cost of hydro to be $85/MWh, and the cost of renewables between $80/MWh (onshore wind) and $243/MWh (solar thermal). For our calculation, we assume a constant cost of $100/MWh for fossil generation, $85/MWh for hydro power, $100/MWh for nuclear and a current cost of a mix of renewable power of $150/MWh, declining to $100/MWh by 2040. Actual costs vary significantly by location and high levels of renewable power will likely require investments in additional resources to match the variable renewable generation with demand, but our estimate of $150/MWh likely includes room for significant such "integration" investments.

We consider two scenarios, wait versus hurry. In the "wait" scenario, we replace the entire stock of assets to meet energy demand of 5400 TWh through 2040 with the same mix we have today, i.e. 68 percent from fossil fuel generation, 7 percent from hydro generation, 19 percent from nuclear and 6 percent from renewables and delay deploying carbon-free resources until they reach cost parity with fossil generation in 2040. In the "hurry" scenario, we replace the entire stock of assets with 7 percent from hydro, 19 percent from nuclear and 74 percent from other renewables today.

At a real discount rate of 3 percent and with those assumptions, the present value of the additional cost of the "hurry" relative to the "wait" scenario would be $2.9 trillion or approximately 0.8 percent of US GDP through to 2040 (assuming a 1.5 percent per year annual growth rate), or 0.5 years of real growth (Bureau of Economic Analysis 2014).

We next consider the flip side: the value of hurrying/cost of waiting.

Current US fossil power plant CO2 emissions are approximately 2 billion metric tons (about 0.5 tons per MWh of consumption). Assuming linear growth to 5400 TWh by 2040, average avoided GHG emissions under the hurry versus wait scenario would be 2.4 billion metric tons of CO2 per year.

Estimates of the social cost of carbon (SCC), although complex and hence not uncontroversial, allow valuation of the economic cost of CO2 emissions. Estimates of the SCC vary widely and are highly sensitive to the chosen discount rate and year. The US Interagency Working Group on the Social Cost of Carbon estimate SCC ranges from $22 to $92 per ton (in 2011 dollars) between now and 2040, corresponding to discount rates from 5 to 2.5 percent, respectively, with others (such as the Stern report) suggesting significantly higher values. These estimates imply a present value of the costs of waiting due to higher CO2 emissions in the period 2015 – 2040 between $0.5 trillion to $5.7 trillion depending on the chosen discount rate, with $2.1 trillion using the medium discount rate of 3%.

Since both the rate of decline in renewables costs and the true social cost of carbon are highly uncertain, this back-of-the envelope analysis suggests that the costs ($2.9 trillion) and benefits ($2.1 trillion) of hurrying versus waiting are broadly comparable and that, based on the factors considered so far, society wouldn't make a very costly mistake either way.

3 Uncertainties and Fat Tails

The analysis so far makes one crucial assumption, namely that the expected impact of greenhouse gas emissions on our climate is a good guide for decision making. There is however significant evidence that this may not be the case. In particular, as discussed by Weitzman and others, the distribution of forecast temperature changes in response to increasing GHG emissions has "fat tails" (Weitzman 2009, 2011; Wagner and Weitzman 2015).

Concretely, while the expected effect of doubling CO2 emission from about 350 PPM to 700 PPM is an increase in mean global temperatures of the order of 1.5–2.5 degrees Celsius, there is more than a ten percent chance that it will result in temperature increases in excess of 6C.

There are no realistic estimates of the economic impacts of global temperature increases of 6C or more over a geologically very short time period, but they would likely be catastrophic. The range of estimates of the social cost of carbon does not account for this "fat tails" risk.

In theory, a non-trivial risk of infinitely costly consequences of climate change would of course suggest that reducing greenhouse gas emissions now at any cost would be optimal, no matter how those future (infinite) costs are discounted to the present. In practice, it suggests that if the costs and benefits of hurrying and waiting are broadly comparable before considering fat tail risk, the fat tail risk is likely orders of magnitude different and would thus provide a strong rationale for hurrying.

4 Bringing it all Together

As we have discussed, the types of uncertainty associated with hurrying or waiting are quite different. Uncertainty about the rates with which the cost of new technologies will decline can be estimated with reasonable confidence using empirical data, even though each technology is different and estimated cost declines only apply to existing technologies (and hence ignore the possibility of revolutionary new inventions). At any rate, while uncertain, these costs are bounded from above by the cost of currently available technology and below by zero.

In fact our simple analysis likely overstates the cost of hurrying, since we assume that the switch to a carbon free electricity sector would occur overnight.

In reality, supply chains for renewable energy and the necessary complementary investments in infrastructure (not to speak of regulatory rules, etc.) take time, so that a more realistic version of the "hurry" scenario would be to ramp up the transition over some time, perhaps along a path similar to those pursued by some of the more aggressive countries such as Germany. The German experience shows that it is indeed possible to pay significantly more for renewable energy by deploying early. However, it also shows that the cost of transitioning to a renewable electricity system declines over time, at least partially helped by the commitment to rapid deployment itself.

The second area of uncertainty concerns the costs of greenhouse gas emissions and the chosen discount rate. There is much debate surrounding the appropriate level of discount rate and whether it should be constant or decreasing into the future. As the analysis above shows, the difference in capital costs between the wait and hurry scenarios is $2.9 trillion before any carbon costs are considered. Thus, in the absence of any cost of carbon, this uncertainty surrounding discount rates and greenhouse gas emissions costs could also be considered as bounded from above by $2.9 trillion (representing a highly conservative carbon cost of zero).

The third area of uncertainty is related to fat-tails. Our simple analysis shows that the costs of deploying renewable energy as quickly as we can are comparable to the benefits of lowering greenhouse gas emissions more rapidly, assuming that our expectations about the change in temperature in response to increasing greenhouse gas emissions are correct. However, there is a chance that those expectations are incorrect and that actual temperature increases will be far more serious, with a ten percent or higher risk of catastrophic economic effects. This third uncertainty, unbounded and with non-trivial probability, significantly tips the balance in favor of hurrying.

We therefore conclude that even though policy makers should be well aware of the trade-off between going fast and going slow, the benefits of waiting are likely insufficient to justify delaying rapid de-carbonization, in light of the significant risks associated with waiting. If the extra cost of deploying renewables early is seen as insurance against the unknown, but considerable risk of climate change being a much more severe or urgent problem, the associated premium seems reasonable if not cheap. Borrowing a recently used analogy, if you knew that passing a car in a bend without visibility will save you 5 seconds to get to your destination, would you pass if you knew there was a 10% chance of being killed by facing an unexpected oncoming car?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions