The inability to generate acceptable returns is impeding the switch to renewable energy
To many environmental activists, this looks like a moral abomination, and to others a challenge for political economy to solve: how to disempower several of the world’s most successful companies.
Ibrahim Rayintakath
The inability to generate acceptable returns is impeding the switch to renewable energy
By David Wallace-Wells
Opinion Writer
In October, the International Energy Agency issued a brief flare of optimism when it suggested that global carbon emissions from fossil fuels may already have peaked.
The climate hopeful have been looking forward to this turn for years. But a peak is not only the beginning of a decline, it also marks the highest point ever reached, and in what is not exactly a coincidence, the world’s largest oil and gas companies are these days almost printing cash. In 2022, the global oil and gas industry earned nearly $4 trillion, according to the I.E.A.’s Fatih Birol — two to three times as much profit as they’d made in previous years. That revenue would make the industry, if it were a country, the world’s fifth-largest economy, putting it just a few hundred billion out of third place. For 2023, in what counted as a down year, the five largest companies are expected to sendmore than $100 billion in dividends and buybacks to shareholders.
To many environmental activists, this looks like a moral abomination, and to others a challenge for political economy to solve: how to disempower several of the world’s most successful companies. But it also illustrates a seeming paradox about the state of global decarbonization: If renewables are the energy of the future and the green transition is rapidly accelerating, then why are the fossil-fuel dinosaurs so obviously thriving?
This question is the central subject of Brett Christophers’s forthcoming book, “The Price Is Wrong,” a coolly argumentative assessment of the green transition and the public discourse that surrounds and sometimes clouds it.
Christophers is a political economist and professor in the department of human geography at Uppsala University in Sweden, whose previous book was about the rise of an “asset manager society” — a jargony neologism to describe a world largely owned by a small number of investment companies like BlackRock, which measure the sizes of their portfolios in the trillions. He’s also written books about “rentier capitalism” and “the new enclosure” of privatization in 1970s Britain.
In “The Price Is Wrong,” he argues that, for many years now, those fighting for or debating the merits of a green transition have been too fixated on the price of clean energy and not focused enough on how much profit it can be expected to yield. Consumers may like low-cost electricity, but that preference alone isn’t enough to construct a supersized clean grid or the wind and solar farms to power it. In climate corners, we’ve giddily celebrated historic price declines that have cut the cost of renewable energy dramatically in recent years and made clean tech seem like the world’s obvious future. But “price is a misleading yardstick for assessing the current and future prospects of investment in renewable energy infrastructure,” Christophers writes. “The better, more meaningful, yardstick is profit,” and more specifically expected profit, he says, which guides and governs investment decisions far more than any calculation about price. And by that yardstick, renewable energy is not winning but losing the race, with an expected rate of return much lower than those enjoyed by the oil and gas business. Christophers cites a 2023 Bain survey that found that four out of five energy executives believed the main thing slowing the transition was an inability to generate “acceptable returns.”
To Christophers, working in the left-wing tradition, the fact that anyone keeps talking about price in this context is a conceptual mistake — a basic misunderstanding of what drives economic activity and how best to direct it toward a fossil-free future.
I see it more in terms of paradigm succession — one set of conditions giving way to another. A decade or more ago, when the price of renewable energy was intimidatingly high, the green transition looked like a major political challenge: Would citizens accept higher costs as the price of a decarbonized economy? And what policy tools could be deployed (carbon prices, cap-and-trade, fee-and-dividend systems) to rebalance consumer demand otherwise inclined toward cheap and dirty energy to cleaner alternatives instead?
These price challenges haven’t entirely disappeared. Intermittence and distribution and scalability and storage all add cost, and for now, at least, the price of a marginal unit of solar or wind power is not exactly representative of the ultimate price paid by consumers. But the direction of change is clear, and when you measure marginal price you do get a very clear picture of the lay of the land. What is called the “levelized cost of electricity” for solar power is now well below the price for coal and gas. In fact, the I.E.A. has been callingsolar the “cheapest electricity in history” for several years now, and according to BloombergNEF, new renewable energy is now cheaper than new so-called dirty energy in 96 percent of the world’s electricity markets.
This is one reason it has become less common for climate skeptics to talk about how much consumers would be burdened by price spikes brought about by a green transition, or to invoke Bill Gates’s “green premium” or the “cautionary tale” of France’s yellow-vest movement, and more common to hear them ask whether the renewable industry can survive without pretty massive public subsidies. Just this past year, a spike in interest rates kneecapped construction in the nascent offshore wind-power industry, not just in the United States but around the world. If you’ve got a big enough profit buffer, you can navigate around bumps in the road like that; if you don’t, it’s a bit of a different story. Things get even harder in the poorer parts of the world, where hundreds of millions lack basic access to electricity but capital costs of new infrastructure can be prohibitively high even in the absence of supply shocks and global inflation conditions.
For Christophers, this is a challenge that implies its own solution: public ownership of the power sector. If all that stands between our bumpy “mid-transition” status quo and an abundant clean-energy future for all is an initial hurdle of investment, why strain to extract that investment from private investors who’d prefer to invest elsewhere?
This is not really the course we’re on, in the United States especially. In November, Maine voters rejected a public power ballot initiative, and though landmark legislation in New York now requires the state power authority to transition to clean sources by 2030, similar laws are few and far between in the rest of the country. In fact, as the political scientist Leah Stokes has documented, America’s public utilities, including rural co-ops, have long been among the biggest domestic obstacles to a rapid transition, not its biggest champions. Elsewhere in the world, outside China and some of the Nordic states, state-owned and state-controlled power sectors are not exactly models of hyperdecarbonization, either.
Which all makes the current state of renewable growth even more remarkable. Globally, solar and wind produced only 32 terrawatt hours of electricity in the year 2000, Christophers notes; by 2015 it was 1,000, and by 2022 it was more than 3,400. Solar in particular grew fivefold between 2011 and 2016, and then threefold from 2016 to 2021.
These additions are not yet enough to even cut into existing fossil production, only to satisfy the new demand the world energy system is adding each year, but the pace of deployment is nevertheless accelerating. Globally, investments in green energy have been higher than those in dirty sources every year since 2016, and last year 62 percent of global energy investment went into renewables; in China alone, more capacity was added in 2023 than the entire world added as recently as 2019. The I.E.A. believes that renewable energy capacity needs to triple by the end of the decade. There is still much more investment in new fossil-fuel infrastructure than is compatible with the world’s climate goals. As Martin Wolf has put it, the market is producing a green transition, just not fast enough. But even without the promise of massive profits, the world is still moving pretty rapidly.
Yes, a lot of this is the power of state intervention and “industrial policy,” which is to say, mostly, subsidies. But if you’re hung up on that, consider that in the boom year of 2022, oil and gas companies received $1.3 trillion in direct subsidies globally. According to the Watson Institute for International & Public Affairs at Brown University, European governments spent over $1 trillion on extra fossil fuel costs in 2022.
The Intergovernmental Panel on Climate Change has been calling for an end to these subsidies for years, but although it is perhaps the lowest-hanging fruit in any decarbonization agenda, there aren’t many countries in the world that have answered the call. In the meantime, let’s hope the renewable subsidies don’t run out, either.