Journal article Open Access

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

Bachner, Gabriel; Mayer, Jakob; Steininger, Karl


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    <subfield code="a">Climate change mitigation; Electricity; Europe; Risk; Capital costs</subfield>
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    <subfield code="c">2019-11-01</subfield>
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    <subfield code="a">Bachner, Gabriel</subfield>
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    <subfield code="a">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</subfield>
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    <subfield code="c">642260</subfield>
    <subfield code="a">Transitions pathways and risk analysis for climate change mitigation and adaption strategies</subfield>
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    <subfield code="c">776479</subfield>
    <subfield code="a">CO-designing the Assessment of Climate CHange costs</subfield>
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    <subfield code="a">&lt;p&gt;To mitigate climate change, societies strive to transform the energy sector towards greenhouse gas emission&lt;br&gt;
neutrality, a move which assessment studies often indicate incurs large macroeconomic costs. In this context the&lt;br&gt;
weighted average costs of capital (WACC) are especially important, as renewables are highly capital intensive. In&lt;br&gt;
particular, investors&amp;#39; perceptions and expectations of risks are fundamental determinants of WACC and thus&lt;br&gt;
strongly influence the macroeconomic outcome of transition analyses. For the case of Europe&amp;#39;s electricity sector&lt;br&gt;
transition, we analyze this sensitivity by choosing different WACC settings, driven also by different policy settings&lt;br&gt;
redirecting expectations. First, we find that when differentiating WACC across regions and technologies&lt;br&gt;
more accurately than usually done in the literature, immediate and substantial macroeconomic benefits from the&lt;br&gt;
transition emerge. We thereby reveal a systematic overestimation of low-carbon transition costs in the literature.&lt;br&gt;
Second, we find that when pricing-in increasing trust in renewables, these benefits get significantly larger,&lt;br&gt;
outweighing possible negative macroeconomic effects from the risk of stranding of fossil-based assets. We also&lt;br&gt;
demonstrate that in developed regions such as Europe, de-risking renewables is an effective lever for reaching&lt;br&gt;
climate targets, which indicates the relevance of green macroprudential regulation.&lt;/p&gt;</subfield>
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    <subfield code="a">10.1016/j.esr.2019.100373</subfield>
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