## How Replacing Coal With Renewable Energy Could Pay For Itself

_IMF Blog, June 8, 2022_

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## Bibliographic details
- Authors: Tobias Adrian, Patrick Bolton, Alissa M Kleinnijenhuis
- Published: June 8, 2022

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### Summary
- 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.

### Methods and assumptions
- 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.

### Key quantitative findings
- 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.

### Policy implications and recommendations
- 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.

### Broader points
- 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”*

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## References

- [working paper](https://www.imf.org/en/Publications/WP/Issues/2022/05/31/The-Great-Carbon-Arbitrage-518464)
- [externalities](https://www.imf.org/external/pubs/ft/fandd/basics/external.htm)

_Source: https://www.imf.org/en/blogs/articles/2022/06/08/how-replacing-coal-with-renewable-energy-could-pay-for-itself_