How Replacing Coal With Renewable Energy Could Pay For Itself

IMF Blog, June 8, 2022

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New research estimates a net gain of nearly $78 trillion through the end of this century from replacing coal with renewables.
That $78 trillion is described as around four-fifths of global gross domestic product now, and equivalent to about 1.2 percent of annual global economic output during the period.
The central mechanism is a “carbon arbitrage”: invest to replace coal with renewables, avoid emissions, apply a carbon price to reduced emissions, and capture net social benefits that exceed replacement costs.

Coal production data: Uses a detailed dataset compiled by Asset Resolution on companies’ historical and projected global coal production based on aggregation of production at the plant level.
Cost estimate components:
- Capital spending for new energy generation capacity equal to what’s lost with coal.
- Compensation to coal companies for lost earnings when they are shut down.
- Does not include compensation for affected workers (noted as likely small relative to overall net gains).
Benefit valuation: Estimate reduction in emissions from phasing out coal and apply a carbon price (social cost of carbon chosen conservatively) to those emissions to compute social benefits.
Framing: Parameters, including the social cost of carbon, are chosen conservatively; the carbon arbitrage could be larger with less conservative assumptions.

Net global social gain from ending coal use: nearly $78 trillion through the end of this century.
Equivalent economic magnitude: around four-fifths of current global GDP; about 1.2 percent of annual global economic output over the period.
Present value of total financing conditional on commitments to scrap coal: around $29 trillion globally.
Annualized financing estimate: between $500 billion and $2 trillion annually.
Front-loaded investment need this decade: $3 trillion.
Estimated distribution of the global financing need of around $29 trillion by region:
- 46 percent in Asia
- 18 percent in Europe
- 13 percent in North America
- 13 percent in Australia and New Zealand
- 8 percent in Africa
- 2 percent in Latin America and the Caribbean
Indicative blended finance: public funding could be around 10 percent of total costs in blended finance arrangements.

Global agreement: World leaders should pursue a global agreement to finance the phase-out of coal as a complement to carbon pricing or equivalent measures that currently don’t fully offset emissions’ negative effects.
Financing design:
- Compensation for coal companies can be built into an agreement; additional compensation for workers could be offered if overall social benefits exceed the more comprehensive costs.
- Blended finance: Most backing can come from the private sector once risks are reduced with sufficient public funds via blended finance (public funding of around 10 percent).
- Fairness and fiscal capacity: A government financing 10 percent of its country’s total costs is broadly in its interest if that amount is less than resulting social benefits from lower climate damages; in some cases, foreign contributions may be warranted.
Policy instruments: Global carbon taxation at the social cost of carbon is viewed as a first-best solution; public-private partnerships and innovative financing packages can accelerate the transition and complement incomplete carbon pricing.
Theoretical framing: Both Pigouvian (taxation/pricing) and Coasean (bargaining/contracting) approaches are needed; under a Coasean approach, paying to replace coal with renewables is sound economic logic to reap tens of trillions of dollars in net social gains.

The benefits of ending coal include avoided physical damage to infrastructure from climate change, health benefits, support for economic growth, and innovation spillovers from renewable investments.
The transition is presented as both an urgent climate imperative (to help limit warming to 1.5 degrees Celsius) and an economically attractive policy given the large estimated net social gains.

Source: IMF blog post “How Replacing Coal With Renewable Energy Could Pay For Itself”