Sticker shock? The hidden costs threatening the energy transition

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Input costs for raw materials like lithium, nickel, and cobalt saw staggering price spikes of 100-700% from 2020-2022, according to IRENA data. Photo of Marc Ostwald, Chief Economist at ADM Investor Services.

It might be time to ask whether we severely underestimated the economic toll of going green.

The world has set ambitious goals for expansion of renewable power and low-carbon technologies to fight climate change. From the International Energy Agency's Net Zero by 2050 roadmap calling for renewables to reach nearly 90% of global electricity, to the EU's target of cutting emissions by 55% this decade – nations are racing to reshape their energy systems. However, concerns are mounting that the costs of this massive transition are proving much higher than anticipated just a few years ago. Did policymakers, businesses, and consumers grossly underestimate the hidden costs?

Estimates for just how much the green transition will cost vary greatly. They range from a total of 100 trillion dollars to 300 trillion dollars between now and 2050, according to a study by analysts at Barclays Plc. “To put it in context, current annual global gross domestic product is about 100 trillion dollars,” the analysts noted.

Miami-based economist Marco Annunziata, co-founder of Annunziata + Desai Advisors, believes "the key question of what economic cost we are willing to pay" for the transition "is seldom addressed."

Annunziata, a former chief economist at General Electric Company, argues that the public embraced the transition without transparency on the true price tag.

"Even if policymakers are convinced that we'd face an existential threat, then you think they should have been from the beginning more explicit, with all of us on how much of this is going to cost,” he said. “Instead, the message they have given has been, don't worry, because renewables are actually cheaper. So we can get there faster, and at almost no cost and… that is clearly untrue."

"I am not so sure that I would describe these as 'hidden costs', they are perhaps 'hiding in plain sight'," says Marc Ostwald, Chief Economist at the London-based ADM Investor Services. He points to numerous escalating expenses already being realised.

Input costs for raw materials like lithium, nickel, and cobalt saw staggering price spikes of 100-700% from 2020-2022, according to IRENA data. Energy costs for European industry rose over 60% in that span. Significant infrastructure costs from retrofitting plants to installing EV charging networks and LNG import terminals have strained budgets.

Labor costs are climbing, with wage growth in the renewable sector averaging over 5% globally last year, according to estimates by the Bruegel Institute. Government subsidies to keep consumer energy bills affordable amid the price shocks added billions of dollars to the public debt of nations around Europe and the rest of the world. Meanwhile, the levelised cost of battery storage systems spiked due to metal price inflation.

Even as renewable electricity costs have plummeted, enabling strong capacity growth, analysts agree that the world must significantly boost investments in clean energy to meet climate goals.

Ostwald suggests the costs of the transition now face fierce public resistance after the price of almost everything rose across most major economies. "The fact is consumers want to be 'green', but are now even less willing to bear the costs after inflation has eroded household budgets," he says. Evidence of this pushback includes protests over soaring renewable fuel costs in the United States, as well as European nations extending operations of nuclear and coal plants in the face of the energy crisis.

It’s about technology

Annunziata offers an alternative, more measured transition: "There is an answer that says, well, let's have a reasonable trade-off. And let's move on slowly. And as the technology improves, the transition costs will be reduced. And so we can get to a greener economy more slowly but at a lower cost." The costs of moving too rapidly, he argues, could mean "slower economic growth, high inflation, more poverty, more inequality."

He advocates a technology-agnostic policy approach. There are cases in which government intervention to support this specific technology pays off, he says. Still, the risk, on the other hand, is that if you incentivise one technology, then by definition, you're diverting resources that could be going somewhere else. 

“So if everybody jumps on something that benefits from government subsidies, you have less chance of somebody coming up with something different,” says the economist. "If we think the problem is fossil fuels, because they hurt the climate, create pollution, raise the price – let's put in a carbon tax. And then the market, scientists, innovators will figure out something else rather than deciding at the government level what technology needs a push."

To mitigate costs, the International Energy Agency recommends greater global policy coordination. New financing models like tax credits, green bonds, and redirecting fossil fuel subsidies could provide a key boost, though technological breakthroughs improving storage density, mineral recycling and alternative battery chemistries are also needed.

Some innovative steps are being taken, like the US Inflation Reduction Act, but as Annunziata stresses, "an open public discussion on the acceptable economic tradeoffs is required" for lasting policy support.”

An honest reckoning 

If the true extent of costs was severely underestimated, it risks derailing the entire energy transition. "The bigger question is whether consumers will be willing to bear the increased costs," Ostwald notes. Tracking metrics like the percentage of GDP spent annually on the transition could provide guardrails for policymakers to evaluate what levels remain economically viable. Because if the costs prove too burdensome for companies, consumers, and national economies, the blazing pace of renewable growth and climate progress could grind to a halt, he said.

The transition's success may hinge on recalculating the full economic sacrifice required and assessing what modern societies can truly afford. As Annunziata cautions: "When the rubber hits the road, when you have to persuade people to pay, that's where you encounter the real resistance. Have we misjudged what costs they'll accept for going green?"

"Fundamentally the nub of the problem is that in the transitions from wood to coal, and from coal to oil, the new source displaced because it was cheaper and more efficient, for the time being, that is not the case," concludes Ostwald.


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