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.
References and Further Reading
Bureau of Economic Analysis 2014. “National Income and Product Accounts Gross Domestic Product, Third Quarter 2014 (Advance Estimate).” http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.Search in Google Scholar
Energy Information Authority. “Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014.” Accessed November 2014b. http://www.eia.gov/forecasts/aeo/electricity_generation.cfm.Search in Google Scholar
Faruqui, A., and E. Shultz. 2012. “Demand Growth and the New Normal.” Public utilities fortnightly, December 2012.Search in Google Scholar
Wagner, G., and M. Weitzman. 2015. “Climate Shock: The Economic Consequences of a Hotter Planet.” Princeton University Press, 2015. http://gwagner.com/books/climate-shock/.10.1515/9781400865475Search in Google Scholar
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