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Blog

08 September 2023

Transition towards decarbonization. Challenge and opportunity

The transition towards a decarbonized economy, which makes the well-being of society sustainable from an environmental point of view, is the greatest global challenge. The environmental challenge will be resolved if public policies are aligned so that the private sector can invest and multiply its positive impact, turning the challenge into an opportunity through economic profitability.

Decouple greenhouse gases (GHG) and human activity. Scientific evidence indicates that the extraordinary increase in the concentration of particles in the atmosphere coincides with that of GHG emissions caused by human activity, which leads to increases in temperature much higher than those that would have resulted exclusively from natural causes. The challenge is to improve the economic well-being of society by decoupling it from the increase in emissions and the consequent environmental deterioration, something possible with the available technologies.

Faced with this challenge, degrowth is not the answer. Economic and technological development contribute to mitigating climate change. For low levels of GDP per capita, its increase is positively correlated with a higher intensity of emissions into the atmosphere. Only at high levels of development is it possible to reduce the intensity of emissions into the atmosphere. In particular, the transformation into a digitalized society has, among other advantages, the capacity to increase energy efficiency and facilitate the production and storage of renewable energy, with the consequent effect on the reduction of emissions.

Decarbonisation policies: internalisation of global, redistributive and predictable carbon costs, together with investments in new technologies. The correction of the negative economic externality of GHGs, the social cost of carbon, must have a global scope, be the result of collaboration with commercial openness, and not be restricted for reasons of geopolitical competition (which obtain less efficient results in decarbonisation ) [1]. In any case, climate change mitigation policies, whether global or domestic, must be stable, oriented to the long term, and predictable so that economic agents can make their spending, saving, investment or financing decisions with the least possible uncertainty. and with the capacity to redistribute the unequal impacts on the population of both climate change and the regressive effects of carbon pricing policies, around which they must be built.

It is estimated that Spain will have to dedicate only 6.2% of its annual GDP to green investments until 2050 , almost twice the GDP of 2022, which will require a huge volume of private investment. For this, the design of a regulatory and institutional framework that encourages it is key, with regulatory, fiscal and legal certainty. Due to its natural resources, Spain can become a leader in low-cost renewable energy and a competitive economy in industrial terms. Conditions must be favourable so that it is more efficient to move energy-intensive industrial production from central and northern Europe to Spain than to export only renewable energy from Spain.

Reducing the risk premium of decarbonisation projects (“ derisking ”) is key to triggering the positive impact of the private sector. A reduction in risk that allows the potential of sustainable finance to be triggered requires the participation of public and regulatory policies, the definition of taxonomies, the alignment of relative prices that make everything "brown" more expensive, also including subsidies for technologies in the initial stage of development. [2]Increasing the participation of the private sector in decarbonisation intensifies the deployment of innovative technologies, as has been observed, for example, in the transition to renewables in the electricity sector, which has facilitated falls in generation costs that have exceeded expectations.

 

Julian Cubero

Lead Economist Economics of Climate Change BBVA Research

 

[1]For example, through the establishment of a climate club , the idea of the Nobel Prize in Economics and the BBVA Foundation Frontiers of Knowledge Prize. W. Nordhaus. It is proposed that a large group of countries organize to cut GHG emissions through an agreement that entails benefits for those who comply and costs for those who do not comply, especially if they are not members of the club. These penalties can be implemented in various ways, with border adjustment mechanisms for the carbon content of imports, or directly with a global environmental tariff.

[2]Regarding the role of financial flows, even with the increasing participation of alternative (and patient) private investors, the market tends to allocate more capital to mature companies and technologies, with the drawback of financial limitations to innovative (and higher risk) businesses.

Transition towards decarbonization. Challenge and opportunity
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