There is no need for markets to be geared towards clean energy

Martin Wolf (Opinion, July 3) downplays his thesis that “market forces alone will not be enough to stop climate change.” There are at least five reasons why global energy markets are burdened by the lack of action. He highlights two: that the damage from greenhouse gas emissions is underpriced (if at all) by markets, and “the failure of capital markets to properly price the future.” Accelerating global action to address the crisis must also address three others.

First, most international fossil fuel transactions, both investments and sales, are in dollars: they are therefore not exposed to exchange rate risk. Most renewable energy investments, by contrast, generate electricity, sold in local currency. Developing countries, which need foreign investment the most, therefore face a premium on the cost of international capital to account for exchange rate risk for renewable energy, but not for fossil fuels.

Second, many power systems have moved from long-term contracts to markets in which the “marginal” generator—the most expensive one needed to meet demand, based on existing supplies—sets the price for everyone. This means that fossil-fuel plants, inevitably more expensive to operate than wind or solar, are largely “self-insured”—the wholesale market reflects their input costs (and would, indeed, pass on the cost of carbon emissions). But pure market-based renewable investments would ironically bear all the price uncertainty that comes with volatile fossil-fuel prices, again driving up their cost of capital.

Third, investments in new technologies typically yield greater innovation than spending on old technologies. The technological advances resulting from clean energy investments over the past 15 years have been truly extraordinary, with radical and transformative breakthroughs. But these benefits are economy-wide and ultimately global; individual investors can capture only a small fraction of the benefits.

In economic terms, the economic benefits of innovation for clean energy investments are much greater than for fossil fuels, but markets alone cannot deliver them. But smart public policy can—and must.

Michael Grubb
Professor of Energy and Climate Change and Deputy Director of the Sustainable Resources Institute, University College London, London WC1, UK