The Economics of Decarbonizing Electricity Production

IMF Working Papers, October 4, 2024

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Electricity production is the sector with the largest share of global emissions.
Identifying the lowest cost option for achieving decarbonization (and full reliability) is a complex optimization problem at the intersection of economics and engineering.
Key determinants include:
- the cost of individual technologies,
- the geographical potential,
- the complementarities between energy sources,
- supporting infrastructure like electricity grids and energy storage.
The paper reviews the literature and draws high-level conclusions from specialized analyses.

Energy-economy models have strongly changed projections of the optimal electricity mix in recent years.
While models differ in detail, models project that:
- the share of renewable energy, mostly solar and wind power, increases steadily in a “below 2°C” scenario,
- renewable energy becomes the dominant source of energy by 2050.
An electricity system based on solar and wind power can use flexibility options as a complement instead of baseload energy.
Models vary by the degree to which renewable energy is supported by carbon capture and storage, bioenergy, and nuclear energy.

Subject: Commodities, Economic sectors, Electricity, Environment, Natural gas sector, Non-renewable resources, Renewable energy, Technology
Keywords: climate policy, Electricity, electricity production, energy economy modeling, energy system, energy transition, energy-economy model, flexibility option, Global, Natural gas sector, Non-renewable resources, Renewable energy

IMF Working Paper — Gregor Schwerhoff, “The Economics of Decarbonizing Electricity Production”, October 4, 2024.