A recent working paper by the International Monetary Fund found that the total annual cost on the global economy from fossil fuel subsidies amounts to $5.3 trillion, or 6 percent of global GDP. Even more surprisingly, poor countries dole out the largest amount of these subsidies. Subsidies and the exclusion of negative externality costs from the market price of fossil fuels artificially keep this arcane source of energy afloat. There must be a radical rethinking of the way we do business to drive us into a brighter, more sustainable future.
Taxing fossil fuels properly would no doubt be a step in the right direction. In fact, the same working paper posits that there would be no need for clean energy subsidies — which currently add up to a meager $120 billion worldwide — if fossil fuels were taxed as they should be.
Counter-intuitively, countries like Germany subsidize traditional, coal-powered utilities to meet peak demand. At regular prices, traditional utilities can no longer compete with the country’s growing wind and solar capacity, but the lack of adequate technology for energy storage keeps them alive. On costs, clean energy is a clear winner. Yet, the transition to green energy faces perhaps a greater challenge: The business model for renewables places greater stress on the consumer and, thus, makes adoption difficult.
Both renewables and fossil fuels face large upfront costs. For renewables, this includes purchasing the hardware for generation and installation costs. For fossil fuels, these are exploration costs and costs of developing extraction, refinery and delivery infrastructure.
The difference in the business model is in who bears these high upfront costs. Fossil fuel companies are almost always capable of bearing the costs of developing a new source. Easy access to financing and massive revenue streams allow these established companies to take on projects without crippling their finances. On the other hand, a family who wants to install solar panels on their rooftop is likely to face prohibitive costs. They’ll think of the large upfront investment instead of the savings that will accumulate 20 years into their future.
The business model for solar and wind energy must change. If renewable energy companies can bear the upfront costs of hardware and installations to ensure revenue streams into the future, this could drastically change the market. Some companies, such as SolarCity, are pioneering this system. Allowing payments in installations might change solar and wind powered systems from a low volume, high upfront-cost, wide margin market into a high volume, low cost, broad adoption market.
Indeed, it is a similar change in business model that the Clinton Foundation pioneered to make HIV/AIDS medication available to millions of people. The positive externalities were tremendous: Nine million people now receive affordable medication. They are more productive workers and less likely to infect those around them.
Changing the business model for renewables could lead to a similar broad adoption of beneficial technology. Further, eliminating subsidies on fossil fuels — Jim Yong Kim and Cristine Lagarde pledged to do as much in appearances at Georgetown University this past academic year — will drive up the share of renewable energy through market forces. Finally, this would allow developing economies, many of which have abundant sun and wind, to leapfrog onto renewable sources and capitalize on their competitive advantage. The benefits could be tremendous and the consequences of inaction drastic. The time for change is now.
Sebastian Nicholls is a senior in the School of Foreign Service. Forward Footprint appears every other Thursday.