New study finds transition to green energy creates new risks and rewards

AMHERST, Mass. – As the world switches from fossil fuels to renewable energy, new research by an international team including University of Massachusetts Amherst economist Gregor Semieniuk has found that different countries face different risks and opportunities in the face of this green transition.

Because green policies have traditionally been seen as costly to countries who implement them, many nations have instead chosen to do nothing and “free-ride” on the actions of those more committed to change, thereby leading to overall global inaction on the climate crisis. However, in a new paper published in the journal Nature Energy, Semieniuk and his co-authors say that given the economic implications of the ongoing energy transformation, the framing of climate policy as economically detrimental to those pursuing it is a poor description of strategic incentives.

Instead, they say the transition is already happening and, for many countries, embracing it is the best strategy to reduce costs. Free-riding as the world economy transforms may now be the risky approach – not only environmentally, but also economically. Fossil fuel importers are better off decarbonizing, competitive fossil fuel exporters are better off flooding markets and uncompetitive fossil fuel producers – rather than benefitting from free-riding – will suffer from their exposure to stranded assets and lack of investment in decarbonization technologies.

According to the new study, the risks and opportunities vary dramatically between countries, depending on their degree of competitiveness in fossil fuel markets. The researchers believe that the rapid replacement of fossil fuels with renewables will cause a “profound reorganization of industry value chains, international trade and geopolitics.” They explain that countries currently fall into one of three categories, each with different incentives driven by the green transition:

  • Large importers including the E.U., U.K., China, India and Japan are in a win-win scenario, in which they can shed their dependence on foreign fuels and create jobs as they spend that money domestically instead and develop new technology at home. These countries are already rapidly transitioning, the researchers say.
  • Economic conditions may lead large competitive exporters, including some OPEC nations, to flood fossil fuel markets to avoid declining export volumes as the demand peaks and declines.
  • Large uncompetitive exporters, such as the U.S., Canada, Russia and possibly some South American nations, including Brazil, would be unable to compete on price in this flooded market, suffering a double blow from declining demand and low oil and gas prices. However, unlike major importers, the fossil fuel industry is much more important for their economic activity and jobs – reducing economic incentives or creating political barriers for them to decarbonize in the short run. Free-riding would mean exposing these sectors to structural change without a clear exit strategy, the researchers explain. They say that countries in this situation should consider carefully how to reduce their exposure to stranded assets, and how to reap benefits from the transition which can be used to shield exposed workers.

However, Semieniuk and his colleagues write that the nations at the losing end can head off these impacts by diversifying their economies away from fossil fuels towards new technology sectors, including low-carbon exports.

“Developing countries face the largest challenges to insert themselves into the low-carbon technology supply chain,” Semieniuk, an assistant research professor in the Political Economy Research Institute and the department of economics at UMass Amherst, says. “Richer countries with high-cost fossil fuel supply but a diversified economy actually have the choice to participate fully in the low-carbon economy with appropriate industrial policy. They only have to manage to make that choice.”

“The costs and benefits of decarbonisation and related politics have been misunderstood and misrepresented for some time,” says Jean-Francois Mercure, senior lecturer at the University of Exeter Global Systems Institute and lead author of the study. “In fact, the green transition is well under way, whether people realise it or not, and those politics are already at play. Decarbonising is traditionally seen as expensive, but it really depends on how much high-carbon industry each country has to lose, versus how much can be gained in new technological sectors.”

The researchers suggest that unless this new geopolitical game is recognized and addressed, the world could become stuck in a deadlock in which some countries embrace the new technological wave, while others could become trapped in a vicious cycle of declining and obsolete fossil fuel-related industry, and ultimately, post-industrial decline. Innovation in new sectors and economic diversification remains the solution to industrial decline, they explain.

They stress that they are not advocating for or against particular climate policies, but merely identifying the new global geopolitical situation ahead of the COP26 UN Climate Change Conference in Glasgow.

The research – funded by the U.K. Natural Environment Research Council – was carried out by the University of Exeter, Cambridge Econometrics, the Open University, the University of Cambridge Institute for Sustainability Leadership, the Cambridge Centre for Environment, Energy and Natural Resource Governance, UMass Amherst and the University of Macau. The researchers involved in the paper are part of the Economics of Energy Innovation and System Transition project, led by the University of Exeter and funded by the U.K. Department for Business, Energy and Industrial Strategy.

The new paper, “Reframing incentives for climate policy action,” is available online from Nature Energy.