Who Will Pay for Green Transition?

"In the past few years, Washington and Wall Street started fantasizing that the transition to net zero carbon emissions could be an economic bonanza. "When I think climate change, I think jobs," President Biden said. When Wall Street heard green energy, it saw profits. As Ford Motor launched an electric Mustang and pickup truck, its market value topped $100 billion for the first time.

This year the fantasy ended. With electric-vehicle demand falling short of expectations, manufacturers are dialing back production plans. Offshore wind developers have canceled projects. The S&P Global Clean Energy Index has fallen 30% this year. Ford's market cap is down to $42 billion.

This doesn't mean the transition to net zero is over. Officials meeting this week at the United Nations climate conference are just as worried about climate change. Renewable energy continues to expand.

But the economics of getting to net zero remain, fundamentally, dismal: someone has to pay for it, and shareholders and consumers decided this year it wouldn't be them.

Technological transformations are positive supply shocks: a new, more efficient technology comes along, and investment naturally gravitates toward this new technology because it is profitable.

By contrast, the green transition is driven by public policy. It is "a negative supply shock, with an accompanying need to finance investments whose profitability cannot be taken for granted," French economist Jean Pisani-Ferry wrote in a report commissioned by the French prime minister and released in English in November. "By putting a price -- financial or implicit -- on a free resource (the climate), the transition increases production costs, with no guarantee that the reduction in energy costs will eventually offset them, while the investments it calls for do not increase productive capacity but must nevertheless be financed."

Pisani-Ferry, who is affiliated with the Bruegel think tank in Europe and the Peterson Institute for International Economics in Washington, is an uncommonly clear thinker on this issue.

"It would take an incredible act of blindness to fail to recognize that climate change is happening, that it is -- and will increasingly become -- severely damaging," he writes. "It would also be incredibly flippant to claim that this urgent and imperative action will have no economic cost by 2030."

The most efficient way to redirect consumption and investment from fossil fuels to zero-emissions energy is a carbon tax, or a cap-and-trade system. Europe has adopted such a system plus ever more stringent goals, especially after sanctions on Russia cut off natural Russia's gas supplies following 2022 events in Ukraine. But as the cost has grown, so has public discontent, from France's "yellow vest" protests in 2018 to last week's first-place finish in Dutch elections by the far-right Freedom Party, which wants to ditch all climate regulations.

U.S. leaders have rejected any federal tax or fee on carbon. Biden's solution is to not ask consumers to pay for the green transition; his Inflation Reduction Act pours, by some estimates, roughly $1 trillion into electric vehicles, renewable energy, hydrogen and other zero-emissions technology.

Subsidies can play a vital role by giving green energy time to scale up and innovate until it is competitive with fossil fuels. 

But the IRA has been undermined by extraneous conditions such as made-in-America requirements, and by green tech inflation -- a byproduct of the IRA itself, which helped fuel demand.

Finally, Biden's investment agenda was designed for the prepandemic era when low interest rates flattered the financial profile of renewable energy investment and federal budget deficits were less likely to crowd out private investment. Those assumptions no longer apply.

For years, the cost of wind and solar plummeted, but since 2021 they have risen, according to investment bank Lazard.

Many developers can no longer economically supply power at the rates previously agreed to. Denmark's Orsted, the world's largest wind developer, took a $4 billion charge in early November for pulling out of two projects off New Jersey. The company today is worth 75% less than in early 2021.

ClearView Energy Partners estimates about 30% of state-contracted offshore wind capacity has been canceled, and another 25% may be rebid.

The financial appeal of EVs has similarly faded. Tesla proved making them can be profitable, but so far it looks like an outlier. Tesla captured the lion's share of early adopters -- drivers willing to put up with the cost and recharging hassle of an EV in return for performance and green credentials. 

For most drivers, the trade off still doesn't work -- even with subsidies.

True, the IRA has spurred a boom in EV and battery factories. But a successful green transition requires that those factories be profitable, and Detroit's automakers are still losing money on every EV they sell.

EVs should eventually require less labor and thus be cheaper to build than gasoline-powered vehicles. But auto workers are no more willing to pay for the green transition than consumers or investors. In its recent strike, the United Auto Workers extracted commitments that make it even harder for Detroit to make money on EVs.

In a sobering report this week, Morgan Stanley auto analysts estimated the average nonfinancial company in the S&P 500 spends its market cap in capital expenditure and research and development in about 50 years. GM and Ford spend theirs in 1.9 and 2.6 years, respectively. "This cannot continue, in our view."

The green transition remains critical, but its path will be fraught until someone agrees to pay for it." [1]

Come to Lithuania. Lithuanian conservatives and liberals have united and are doing what they want, twisting the ropes from Lithuanians, so we would pay you for everything.

1. U.S. News -- Capital Account: Who Will Pay for Green Transition? Ip, Greg.  Wall Street Journal, Eastern edition; New York, N.Y.. 30 Nov 2023: A.2.