Towards a green economy

Further, as opposed to several studies that only provide information on “net costs” additional investments),10

(or required disaggregated capital

costs and savings (or avoided costs) are used in T21- World. This approach is useful because as capital costs are an immediate expenditure, as opposed to operational savings – that are accumulated over the lifetime of capital – it allows the model to calculate the actual capital formation that corresponds to the additional investment simulated in the green and BAU1, 2 scenarios.

As indicated above, the calculation of required capital investment and operational costs includes a detailed assessment of costs associated with various technologies (capital) and their required inputs (e.g. energy). For instance, we account for the capital and O&M cost of a wind turbine, which, on a per MW basis, is often similar to the cost of a coal-fired plant. On the other hand, wind does not require fuel inputs and does not generate emissions, but it is an intermittent source of energy with a relatively low capacity factor when compared to coal. All these factors are considered in our analysis to break down as much as possible the costs and savings related to green investments.

Determining both the gross and net cost of moving toward a green economy has various purposes. These include the need to estimate (and disaggregate) present costs and future benefits for the key actors involved, both in economic terms and expressed as preservation of natural resource stocks. Also, it supports the further evaluation of the impact of policy options in light of the associated opportunities and risks. For instance, if a government has set an environmental goal (e.g. reducing emissions below 1990 levels) and decides to rely considerably on incentives (e.g. tax breaks or discounts) to support the shift from old to new capital and/or to more sustainable consumption, the buy-in of households and the private sector will be a key factor defining the success or failure of the policy. In this case, the government risks missing the targets and goals for emissions reduction; at the same time, if the private sector does not participate as expected, the economic expenses of the government (and the private sector) would be also be less. This policy option normally targets negotiated goals to mitigate the economic burden on households and the private sector. As an alternative case, when governments set mandates, the buy-in of households and private sector is assured by law, and the economic cost is either shared (if incentives are put into place) or fully sustained by

10. When considering the cost of purchasing, for instance, a more efficient refrigerator, the net cost is calculated as capital expenditure minus savings occurred in the operation of the refrigeration (i.e. savings originating from the reduced energy consumption). This is the case of McKinsey Cost Curves (for water see McKinsey 2009).

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households and the private sector. In this case emphasis is put on reaching the policy target (through mandates) and costs can be more easily estimated knowing that both economic actors

(public or private, in

different ways) will have to sustain the costs associated with the full implementation of the mandate.

This study serves primarily to quantify the impacts of investments, identify opportunities and avoid dead ends. Given that similar policies will be more or less successful in different countries, the global study is focused on the value of allocating funds to greener investments, providing a broad range of information to national policy makers, as presented in the following sections. Additional information on funding options and enabling conditions (i.e. required policy frameworks) are available in the respective chapters.