What are the biggest economic obstacles to the needed rapid transition in energy supplies and the challenges of deforestation driven by climate change? Leon Clarke, director of decarbonization pathways at the Bezos Earth Fund, provided a brief philanthropic perspective on that question in a talk about energy policy at the Harvard Kennedy School during the last week of November. Founded in 2020 with $10 billion, the Earth Fund, Clarke said, is the largest philanthropy focusing on climate and nature. But not for long—the Fund aims to spend down that entire sum within 10 years and has already disbursed $2 billion.
Clarke, formerly research director for the University of Maryland’s Center for Global Sustainability, began by pointing out that “The transition to a low-carbon energy system” is already underway. The principal reason for the rapid shift to clean energy is obvious, he observed: in many parts of the world, wind and solar energy is now cheaper than fossil fuel-based production. The paradigm that once dominated environmental economics—that clean (low-carbon) energy would be costly, but bring other benefits—is no longer true. Putting aside the problem of periodic lack of sun or wind “The rhetoric around this,” Clarke said, “is moving into this space of economic opportunity.” And capital is following, by flowing to investments that produce energy less expensively. The private sector has already taken note by investing in clean energy, and now countries have also begun thinking about the clean energy transition as a potential economic opportunity.
Clarke therefore thinks about the shifts in the energy system less in terms of carbon mitigation—the kinds of issues (such as control of methane, a powerful greenhouse gas) that are the focus of the international COP 28 climate meeting scheduled to convene in Dubai on November 30—and more in terms of overcoming obstacles to economic transformation. That, he said, is where the greatest challenges and needs lie. Because changing the sources of energy production from fossil fuels to wind and solar will impact trade, industry, government finance, and the labor force, “climate policy is not just environmental policy” any more. The energy transition will lead to wide-ranging transformations across economies. “Those are the issues that are important now,” and they have implications for the field of economics as well, he argued, as the need for policy expertise in these areas has grown faster than the profession can move to meet the demand.
The “challenges we face now are how to rapidly evolve our economies, because this is not just about mitigation. It’s about economic transformation… and that is not easy.”
The cost of the energy transformation just in emerging and developing economies has been estimated at $1.3 trillion to $1.7 trillion annually. “If you think about all of the funding that’s needed for climate” change response, including resilience and adaptation measures, and preserving forests, the cost rises to perhaps $3 trillion to $4 trillion a year. These sums dwarf the scale of climate philanthropy, Clarke said, which totals less than $13 billion.
Therefore, “A lot of the work…in philanthropy now is trying to figure out how to incentivize private investment in a much more effective way,” he continued, “particularly in emerging and developing economies.” One of the Earth Fund’s investments has been in Allied Climate Partners, an $825 million philanthropic investment platform that aims to increase the number of climate-related projects and businesses in emerging economies by providing development capital and expertise to regional investment managers in Southeast Asia, Africa, India, the Caribbean, and Central America. The investors take an equity share in the early financing phase of projects, Clarke explained, and then sell that off as the projects advance in order to fund new projects in what they hope will be a self-sustaining cycle.
Another area of focus has been the especially difficult problem of political economy that arises from transitioning away from the old, fossil-fuel based regime. When clean energy is cheaper, Clarke pointed out, there is “a sense of let’s just build this” and the older infrastructure will “go away.” But that is not true. Abandoning fossil fuel-fired power plants, for example, will have large impacts on industry, trade, government revenue, and the labor force, for instance. (See “Preparing for the Energy Transition,” November-December 2023, page 11.)
These “stranded assets” are a major problem. Around 200 gigawatts of fossil fuel-based electricity-generating capacity will need to be retired prematurely—and someone will have to pay for that. “If you limit warming to two degrees, the discounted economic impacts of stranded assets, including unburned fossil reserves, could be as high as $1 trillion to $4 trillion from 2015 through 2050,” he said. “And about 40 percent of that is unburned fossil assets.” To address this aspect of the energy transition, the Earth Fund has partnered with the U.S. State Department and the Rockefeller Foundation to create the Energy Transition Accelerator (ETA), which will develop tradable carbon permits to facilitate early retirement of operating capital stock, such as coal plants, in a way that makes economic sense. Expected to be announced at COP 28, the ETA will issue carbon credits for greenhouse gas emissions reductions that can then be purchased by government and private-sector buyers.
Another major impact of the energy transition will be on public revenue. India’s national government, for example, derives 18 percent of its revenue from fossil fuels. “How do you replace that? This is not just a justice or a political economy issue,” Clarke pointed out. “This is a fiscal issue.” In Brazil, China, Indonesia, Russia, and South Africa, fossil fuels provide from about 5 percent (China) to 34 percent (Russia) of government revenues.
And there are other spillover effects. In India, for example, which has one of the world’s largest railway systems, nearly half of the government-run railroad’s revenue comes from the transport of coal. “Now you’ve got a large entity critical to the operation of the country and the government,” that employs a lot of people, he said, that could face serious future financial trouble. Given such risks, “The questions no longer come exclusively from energy and environmental ministries.” Clarke said. “Now it’s central banks, finance ministries, economic ministries, who are asking the questions, because it’s serious now.”
Clarke also spoke briefly about the Earth Fund’s investments in preventing deforestation. In Indonesia, the Amazon, and the Congo Basin, vast tropical forests support climate stability and tremendous biodiversity. But these places are also rife with poverty and joblessness. “What’s the economic model that allows you to maintain the forests going forward?” he asks. “Is it the bioeconomy—that you’re producing acai from the forests?” Or would making the nearby cities wealthier enhance their ability to focus more on the environment? “What is the economic development strategy?” Rather than prescribe solutions, Clarke said the Earth Fund is seeding many smaller ideas to figure out what works. In the Amazon, for example, it is investing in a university and in research in the Amazonian states to support local decision making, “to try and figure out what are the economic solutions.” He anticipates investments in the regional bioeconomy as well: “What’s the big idea that will make a change?”
Having begun by making the point that clean energy surprised almost everyone when it became cheaper than fossil sources, Clarke concluded by suggesting another paradigm shift: that the status quo is increasingly risky. Companies and countries shifting to less expensive green production enjoy a competitive advantage in both the consumer market and in attracting capital, but “Staying invested in a fossil economy potentially has risks.”
