Martin Wolf (Opinion, July 3) underplays his case that “market forces are not enough to halt climate change”. There are at least five reasons why global energy markets are loaded against adequate action. He highlights two: that the damage from greenhouse gas emissions is inadequately (if at all) priced in markets, and the “failure of capital markets to price the future appropriately”. Accelerating global action to tackle the crisis needs to acknowledge three others as well.
First is that most international fossil fuel transactions, both investments and sales, are in dollars: thus they face no exchange rate risks. Most renewable energy investments, in contrast, generate electricity, sold in local currency. The developing countries that most need foreign investment thus face a premium on cost of international capital to account for currency risk on renewables, but not for fossil fuels.
Second, many electricity systems have moved from long-term contracts to markets in which the “marginal” generator — the most expensive one needed to meet demand, based on the existing stock — sets the price for all. This means that fossil fuel plants, inevitably more expensive to run than wind or solar, are largely “self-hedged” — the wholesale market reflects their input costs (and indeed, they would pass on carbon costs). Purely market-based investment in renewables, however, would ironically bear all the price uncertainties arising from fossil fuel price volatility, again driving up their cost of capital.
Third is that investment in newer technologies typically brings greater innovation than expenditure on incumbents. The technological progress from investment in clean energy over the past 15 years has indeed been extraordinary, with radical and transformative breakthroughs. But these benefits are economy-wide, and ultimately global; individual investors can only capture a small fraction of the benefits.
In economic terms, the innovation-related economic returns to clean energy investment are much bigger than from fossil fuels, but markets alone cannot deliver them. However, smart public policy can — and must.
Michael Grubb
Professor of Energy and Climate Change & Deputy Director, Institute for Sustainable Resources, University College London, London WC1, UK
