Understanding the Green Premium
Why do we talk about money when we talk about climate change? Isn’t it worth any cost to save humanity? The truth is that governments, businesses, and individuals have limited resources. We must, therefore, make choices about which policies and products we adopt, and yes, those choices are primarily driven by one thing: money. For more than two centuries, we’ve developed systems and policies to keep fossil fuels as low-cost as possible. Cheap energy has been good for global economic growth, but it has come at a great cost. It has led to dangerous global warming, caused by the emission, or release, of greenhouse gases when fossil fuels are burned. Greenhouse gases build up in the Earth’s upper atmosphere, where they trap heat. Over time, this causes average global temperatures to rise. We need to move away from using fossil fuels, but this will sometimes mean moving to more expensive sources of energy, at least in the short term. That added cost is the green premium.
Hamburgers are a great example for understanding the concept of the green premium. If a pound of ground beef costs $3.79 and plant-based grounds cost $5.04, the green premium of making your own burgers with low-greenhouse gas meat is RichTextPlaceholder ssa__rte-embed ssa__rte-embed--right.25. Courtesy of Breakthrough Energy.
Why does the green premium matter? As we work to reduce carbon emissions, we need to ensure that zero-carbon options are available to everyone. That way, no country has to choose between development and keeping emissions low. To ensure the fastest and fairest transition to net-zero emissions, low-carbon technologies need to be the cheapest technologies.
Calculating green premiums accurately is tricky. The prices of different goods and services can go up or down over time and vary from place to place. Still, the green premium can be helpful when evaluating climate solutions, helping us to decide where to focus our efforts. If a low- or zero-carbon solution’s green premium is small, we can use that solution now. If it is large, we will need to develop it further to lower its cost. Sometimes, a solution is not widely used despite having a small green premium. We need to make more people aware of this solution.
Let’s explore what we can do to lower the green premium.
Let’s explore what we can do to lower the green premiums and increase the accessibility of climate solutions.
Reducing the green premium
We need to reduce the green premium so that zero-carbon solutions are as cheap or cheaper than their traditional counterparts. Closing that gap is more challenging for some products. For example, zero-carbon electricity costs about 15 percent more than what most people in the United States now pay. However, substituting zero-carbon biofuel for traditional jet fuel would raise the cost of jet fuel by 140 percent.
The green premium is often higher because the products cost more to make. Fossil fuels have a 200-year head start on most zero-carbon technologies. It takes a long time to develop new products and lower their production costs. But we don’t have a long time. We need to develop these products as quickly as possible.
Historically, it takes a long time to transition to new energy sources. But to lower the green premium for carbon-neutral technologies such as modern renewables, as shown in this graph, we need to speed up the pace of innovation, development, and adoption. From How to Avoid a Climate Disaster, by Bill Gates.
Governments, businesses, and individuals can help drive development.
Governments
Governments must help pay for research and development. Governments can take on risks that private companies are unwilling to take for fear of losing money. Once new products are developed, governments can buy them in large quantities. For example, they can announce that they will only buy carbon-negative cement for all new government building projects. This helps to create a market for the cement and lower prices.
This chart demonstrates the way that technologies become cheaper with increasing production in a positive feedback cycle. By Our World in Data, CC-BY.
Governments can support low- or zero-carbon solutions by reducing production costs. A private company may be unable to make a carbon-neutral product cheap enough to be affordable for consumers. Governments can help pay the company’s production costs, enabling the company to charge less for the product. Governments can also make a difference through their policy choices. They can pass laws that require minimum standards for low-carbon technology use. For example, they can require a certain amount of electricity to be generated in a certain way.
Business
Businesses can work more quickly than governments can, making them important drivers of research and development. By focusing on producing a product as cheaply as possible and in large quantities, businesses can lower a product’s green premium.
Like governments, businesses can use their buying power to drive demand for low-carbon products. When companies use a clean technology product, they help build a market for it, driving down costs and making the product more affordable for everyone.
Individuals
Individuals can help create markets for zero-carbon products. Increasingly, consumers are showing they’re willing to pay more for climate-friendly products. Demand for products like energy-efficient appliances and electric vehicles is increasing despite the green premium they often carry. A recent study found that buying carbon-neutral soap would cost a consumer an additional 8 to 9 percent. The same study also found that more people are willing to pay that premium. Not all consumers can choose the more expensive option. Those who can are increasingly deciding it’s worth spending more to support products with a lower carbon impact. This shows businesses that there’s demand for these products. Increased demand encourages increased production and more research, which can lower costs for everyone.
Conclusion
Moving toward net-zero emissions will be hard, and it will be expensive. Societies have limited resources, which are distributed unequally. But, for the sake of our health, our environment, and our jobs, we need to find new ways to overcome the barriers presented by the green premium. Companies, individuals, and governments all have a role to play. Together, they must ensure that the costs of climate change are distributed fairly and efficiently.
Trevor Getz
Trevor Getz is a content editor for the Climate Project and a Professor of African and World History and affiliated with the Education program at San Francisco State University. His work centers on history and social studies as a vehicle for helping students understand contemporary issues such as climate change.
Credit: “Understanding the Green Premium”, Trevor Getz / OER Project, https://www.oerproject.com/
Image credits
This work is licensed under CC BY 4.0 except for the following:
Cover image: The green premium—the additional cost of choosing a clean technology over one that emits more greenhouse gases—can help inform decisions when it comes to climate action. Courtesy of The Gates Notes https://www.gatesnotes.com/Lowering-Green-Premiums.
Hamburgers are a great example to help understand the concept of the green premium. If a pound of ground beef costs $3.79 and plant-based grounds cost $5.04, the green premium of making your own burgers with low-greenhouse gas meat is $1.25. Courtesy of Breakthrough Energy. https://breakthroughenergy.org/our-approach/the-green-premium/
Historically, it takes a really long time to transition to new energy sources. But to lower the green premium for carbon-neutral technologies, like modern renewables shown in this graph, we need to speed up the pace of innovation, development, and adoption. From How to Avoid a Climate Disaster, by Bill Gates.
This chart demonstrates the way that technologies become cheaper with increasing production in a positive feedback cycle. By Our World in Data, CC-BY. https://ourworldindata.org/cheap-renewables-growth
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