Costs or benefits? Assessing the economy-wide effects of the electricity sector's low carbon transition – The role of capital costs, divergent risk perceptions and premiums

To mitigate climate change, societies strive to transform the energy sector towards greenhouse gas emission
neutrality, a move which assessment studies often indicate incurs large macroeconomic costs. In this context the
weighted average costs of capital (WACC) are especially important, as renewables are highly capital intensive. In
particular, investors' perceptions and expectations of risks are fundamental determinants of WACC and thus
strongly influence the macroeconomic outcome of transition analyses. For the case of Europe's electricity sector
transition, we analyze this sensitivity by choosing different WACC settings, driven also by different policy settings
redirecting expectations. First, we find that when differentiating WACC across regions and technologies
more accurately than usually done in the literature, immediate and substantial macroeconomic benefits from the
transition emerge. We thereby reveal a systematic overestimation of low-carbon transition costs in the literature.
Second, we find that when pricing-in increasing trust in renewables, these benefits get significantly larger,
outweighing possible negative macroeconomic effects from the risk of stranding of fossil-based assets. We also
demonstrate that in developed regions such as Europe, de-risking renewables is an effective lever for reaching
climate targets, which indicates the relevance of green macroprudential regulation.