Energy investments

Energy (ENE) Program researchers found that mitigating climate change will require substantial new investment in low-carbon energy and energy efficiency over the coming decades and that if policymakers are slow to respond to this challenge in the next few years, they risk “locking in” fossil-based energy infrastructure that will likely need to be shut down before the end of its useful life.

These potentialities were quantified in two studies carried out within the framework of the LIMITS and AMPERE model inter-comparison projects, in which IIASA’s ENE Program played a major role. The studies led by ENE researchers David McCollum and Nils Johnson fed directly into the recent Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) and were featured at workshops organized for decision makers in Brussels.

The first study [1] finds that to limit climate change to 2°C, global investment in low-carbon energy and energy efficiency options will need to rise to about US$1200 billion a year globally from now to mid-century. That amount represents a nearly five-fold increase from the present level of about $250 billion per year and a three-fold increase from the US$400 billion per year in low-carbon investments that are projected to be needed under the current suite of climate policies throughout the world. Offsetting these increased levels of investment in low-carbon energy and energy efficiency would be large-scale reductions in fossil energy investment, which would temper the growth in total energy investments.

However, as pointed out in [2], limiting climate change to 2°C is likely to result in not only less investment in fossil energy, but could also lead to the “stranding” of any existing investments in fossil assets, such as coal-fired power plants, as they become uncompetitive under high carbon prices. The study finds that as much as 37% of global investment in coal power plants could be stranded over the next 40 years, with China and India bearing most of these costs. Several strategies for reducing stranded investments are explored in the analysis, including avoiding the construction of new coal plants, grandfathering existing plants so that they are exempt from future climate policies, and retrofitting these plants with carbon capture and storage (CCS) at a later stage.

Ultimately, the most reliable strategy for minimizing stranded investments in a 2°C scenario is simply to stop building new coal power plants as soon as possible.

References

[1] McCollum D, Nagai Y, Riahi K, Marangoni G, Calvin K, Pietzcker R, Van Vliet J, van der Zwaaan B. (2014). Energy investments under climate policy: a comparison of global models. Climate Change Economics Vol. 04, No. 04. DOI: 10.1142/S2010007813400101.

[2] Johnson N, Krey V, McCollum DL, Rao S, Riahi K, Rogelj J (2015). Stranded on a low-carbon planet: Implications of climate policy for the phase-out of coal-based power plants. Technological Forecasting and Social Change, 90(Part.A):89-102 (January 2015) (Published online 29 March 2014).

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Last edited: 04 May 2015