A $10 trillion annual climate change economic stimulus — equal to almost 13% of the global economy — is slowly getting underway.
Properly handled, it will increase global prosperity by mid-century and solve a host of other world problems.
Fixing climate change represents an economic reform that will spur large-scale wealth for everyone. Even the losers will benefit from the tough love it will impose.
The multi-decade economic boom created by climate change solutions will come primarily from reforming economic markets and removing perverse incentives.
That will free up resources needed to build new infrastructure and develop more efficient energy markets. And that, in turn, will increase economic efficiency and reduce the health costs of climate change.
The benefits: lower energy prices, faster economic growth, less risk of war over finite resources, and more solvent government retirement systems.
Roughly $10 trillion a year — or 10-15% of the world economy — will come from progressively eliminating fossil fuel subsides over the next 15 years and raising carbon prices 15-fold over the next 35 years.
This will eliminate the huge health costs climate now imposes, while making markets more efficient and encouraging technological innovation instead of discouraging it.
The centerpiece of the plan lies in raising carbon prices from their current weighted average of around three dollars per tonne to $40-50 per tonne by 2030.
This isn’t controversial: even the energy industry is calling for transparent carbon pricing to enable better planning. Many big energy companies already assume long-term carbon prices of $50 per tonne in their internal budgeting.
The second biggest part of the plan is the elimination of fossil fuels subsidies. These now total $500 billion a year. Elimination of such subsidies by 2025 is now the official policy of the Group of Seven largest economies.
Together, these two economic reforms will create an increasing pool of investment money that can be redeployed into clean energy generation and new infrastructure.
As this occurs, new and more efficient marketplaces will spring up. These will provide greater transparency regarding long term energy price expectations that in turn determine investment decisions. This will enable companies to better hedge risk, injecting flexibility into the system.
The absence of such sophisticated markets has in part led to the economic disaster of the Liquid Natural Gas (LNG) industry. LNG’s unpriced carbon emissions, distorted pricing, long-term contracts and restrictive resale terms (particularly in Asia) has led to gross overinvestment in an environmentally-dirty industry.
Much of this overinvestment will be prematurely written off as proper reforms are instituted.
With price, subsidy and market reform, money will be freed up for new and better investment in infrastructure, energy delivery and technological innovation. Within a decade or two, these reforms will throw increasing economic surpluses. Those, in turn, can be applied to meeting the bulging and underfunded government retirement outlays needed to serve an aging global population.
The world’s looming climate change and retirement crises are linked: a solution to one provides the solution to the other. Everyone wins.
The sooner it all happens, the better for everyone –including the fossil fuel industry. It must now completely reinvent itself. Eliminating fossil fuel subsidies and unpriced carbon will make the energy industry and society stronger.
As the amount of money liberated from deadweight fossil fuel investments rises, investments will flow into raising the efficiency of low emission energy sources like sun and wind, building the energy transport networks of tomorrow like power lines and gas/hydrogen pipelines and the markets needed to balance markets, offer hedging opportunities and provide price signals for innovation investment.
Such reforms will encourage deeper interconnection of national energy economies. Increasing cross energy border flows will encourage more stable pricing, reward expansion of downstream storage mechanisms that can offset short-term local shortages and encourage more fluid energy substitution based upon price.
The natural outcome of this will be an energy dispatch order providing vital price signals missing from today’s sclerotic, fatty system dominated by cosseted incumbents protected by regulatory capture.
Just as the thirty year economic boom of the early 1980s started with the conquest of 1970s-era pernicious inflation — the new boom will sprout from today’s economic stagnation.
This new energy boom, however, will be bigger than the 1982-2008 one. The new boom will encompass more people, create higher living standards and spur creation and expansion of profitable new industries.
Bad energy policy is currently sapping the vitality of the world economy. The best recipe for reinvigorating economic growth lies in reforming and unleashing energy markets to engage in a clean energy revolution.