Why No One Wants to Pay for the Green Transition

Investors and consumers balk at costs of replacing fossil fuels with renewable energy, highlighting painful economics of climate mitigation

By Greg Ip. Excerpts:

"With electric vehicle demand falling short of expectations, manufacturers are dialing back production and buying back stock instead. Offshore wind developers have canceled projects. The S&P Global Clean Energy Index has fallen 30% this year."

"the economics of getting to net zero remain, fundamentally, dismal: Someone has to pay for it, and shareholders and consumers decided this year it wouldn’t be them."

"the green transition is driven by public policy. It is “a negative supply shock, with an accompanying need to finance investments whose profitability cannot be taken for granted,” French economist Jean Pisani-Ferry wrote in a report commissioned by the French prime minister and released in English in November. “By putting a price—financial or implicit—on a free resource (the climate), the transition increases production costs, with no guarantee that the reduction in energy costs will eventually offset them, while the investments it calls for do not increase productive capacity but must nevertheless be financed.”"

"as the cost has grown, so has public discontent, from France’s “yellow vest” protests in 2018 to last week’s first-place finish in Dutch elections by the far-right Freedom Party, which wants to ditch all climate regulations."

"Biden’s . . . Inflation Reduction Act pours, by some estimates, roughly $1 trillion into electric vehicles, renewable energy, hydrogen and other zero-emissions technology."

"the IRA has been undermined by extraneous conditions such as made-in-America requirements, and by green tech inflation—a byproduct of the IRA itself, which helped fuel demand."

"Biden’s investment agenda was designed for the prepandemic era when low interest rates flattered the financial profile of renewable energy investment and federal budget deficits were less likely to crowd out private investment."

"For years, the cost of wind and solar plummeted, but since 2021 they have risen, according to investment bank Lazard. Interest rates are an important factor, which

Lazard

estimates affect offshore wind and solar more than natural gas.

Many developers can no longer economically supply power at the rates previously agreed to. Denmark’s Orsted, the world’s largest wind developer, took a $4 billion charge in early November for pulling out of two projects off New Jersey. The company today is worth 75% less than in early 2021."

"Tesla proved making them [EVs] can be profitable, but so far it looks like an outlier. Tesla captured the lion’s share of early adopters—drivers willing to put up with the cost and recharging hassle of an EV in return for performance and green credentials. For most drivers, the trade off still doesn’t work—even with subsidies."

"Detroit’s automakers are still losing money on every EV they sell."