The Green Premium chimera

Bill Gates' latest article argues that there are three tough truths about climate that everyone at COP30 needs to know: 1) climate change is a serious problem, but it will not be the end of civilisation, 2) temperature is not the best way to measure our progress on climate, and 3) health and prosperity are the best defence against climate change.

It's clear that you can't reboot the planet if you crash it, as one riposte to Gates' article put it last week, but tackling climate change using the 'everything, everywhere, all at once' approach misses the point that resources are scarce and subject to competing demands. Whatever your view, what's important in my mind is the recognition that everything, including the options available for climate mitigation, involves trade-offs, and we need to be really clear about what we're actually trying to solve for.

For COP30 and beyond, Gates sees two priorities that he hopes the climate community will embrace if, as he suggests, we put human welfare at the centre of climate strategies: rigorous impact measurement, and driving the Green Premium to zero. It's this second priority that we focus on in this article.

At each COP, governments take turns announcing commitments to lower their emissions. Unfortunately, this process doesn’t tell us which technologies are needed to meet those commitments, whether we have them yet, or what it will take to get them.

This is why, in addition to country-by-country commitments, every COP should have high-level discussions and commitments based on the five sectors [electricity, manufacturing, agriculture, transportation, and buildings]. Policies and innovations in each sector need to get more visibility. Representatives from each of the five sectors should report on progress toward affordable and practical zero-carbon innovations, using the Green Premium as their yardstick.

Gates defines the Green Premium as the difference in cost between a product that involves emitting carbon, and an alternative that doesn’t. Although Gates recognises that it is an imperfect measure, he believes that understanding the Green Premium is key to making progress on climate change:

For one thing, they help us measure our progress toward eliminating carbon emissions. The bigger a Green Premium is—especially for lower-income countries like India and Nigeria whose energy needs are growing—the further we are from a zero-carbon future.

They also serve as a guide to action. In cases where the Green Premiums are big, we know we need innovations that will close the price gap. In cases where they’re small—or where clean products are actually cheaper than the polluting version—it suggests that something other than the cost is keeping zero-carbon products from being deployed, and we need to understand why.

Carbon prices raise the cost of carbon intensive products, increasing the incentive to invest in decarbonisation and bridge the Green Premium. However, carbon pricing signals alone are often insufficient (and sometimes too volatile) to build the case to invest in new low-carbon production processes.

Strong lead market measures, including public procurement, demand-side support mechanisms (i.e., subsidies, grants, and tax credits), and product uptake mandates - alongside a strong carbon pricing signal - provide a bankable, long-term revenue stream to investors, increasing their confidence to support supply-side investments.

However, as this article hopes to demonstrate, another trade-off exists, one that wasn't so prominent when renewable energy's Green Premium was first being tackled.

You can begin to close the Green Premium by simply sourcing the cheapest green material inputs, irrespective of where they are produced. That strategy helped China to develop the manufacturing capability necessary to mass produce solar PV cells and eliminate the renewable energy Green Premium.

But it also left other nations such as those in Europe, unable to compete in the production of the latest clean technologies, leaving them dependent on Chinese imports. In a change from the past Europe now hopes to achieve both strategic autonomy, building up its domestic green manufacturing capabilities, while also driving down the Green Premium for low-carbon industrial inputs.

Can it achieve two objectives simultaneously? The omens are not good.