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Columbia Energy Exchange

The Economics of the Energy Transition


Cameron Hepburn

Professor of Environmental Economics, University of Oxford


Jason Bordoff [00:00:06] The clean energy transition is a multi-generational challenge. It will shake up geopolitics, shift the economy and change our daily interactions with energy. We have no precedent for the scale and speed required to decarbonize the global economy. And yet there are signs that new developments in technology policy and public opinion may be turning the tide for a global response to the climate crisis. Achieving a net zero future, however, will require careful implementation, creative solutions and a whole systems approach that prioritizes prosperity and justice. What are the new economic tools we have to deliver such a transition? And what are the emerging solutions that might make this future possible? This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show, Professor Cameron Hepburn. Cameron is professor of environmental economics at the University of Oxford and director of the Smith School of Enterprise and the Environment. He also serves as the Director of the Economics of Sustainability Program, based at the Institute for New Economic Thinking at the Oxford Martin School. Cameron has over 30 peer reviewed publications spanning economics, public policy, law, engineering, philosophy and biology. I spoke with Cameron about where we are in the energy transition and where we need to go. We discuss the economics of the climate crisis, how technology developments are accelerating, the energy transition and how to scale their impact. Cameron is one of the smartest people I know in energy and climate policy and economics, and I always learn when I talk to him. And this conversation was no different. I hope you enjoy it. Cameron Hepburn. Welcome. I think for the first time to Columbia Energy Exchange. It’s good. Good to be with you. 

Cameron Hepburn [00:01:58] Great to be here, Jason. 

Jason Bordoff [00:02:00] So regular listeners of this podcast will know we often have people here for a particular reason or a particular purpose. Last week, for example, was Laura Cozzi, who writes the world and are responsible for the team that writes the World Energy Outlook going deep on that. This is a little bit different because sometimes we have people on who I just deeply respect and think are smart at lots of different things and we talk about what’s happening in the world. So the camera and that’s what we’re going to do with you. And thanks for making time to be with us. 

Cameron Hepburn [00:02:27] It’s my pleasure. It sounds like you’re describing yourself. Jason At least my my, my sense of you. 

Jason Bordoff [00:02:32] That’s very kind. Thank you. So we’re going to go in a lot of different directions. I know you’ve been thinking about lots of different things, as have I, and as we have been here at the Center on Global Energy Policy. But maybe we’ll just start with what what we were just both in Egypt were both at COP. You’re sitting in Europe on a day to day basis thinking about how Europe is going to respond with its immediate challenges in its current energy predicament with the loss of most Russian gas? And is that going to accelerate, decelerate a transition? The question we talk about quite often just how. Start with a very broad sense of where we are in the energy transition right now. And given all the factors out there geopolitically from a policy standpoint, whether it’s in Europe or the Inflation Reduction Act, what came out of COP, you know, where are we headed? Are you optimistic, pessimistic about where we’re going from here? 

Cameron Hepburn [00:03:25] It’s a nice, big, juicy question to start. I mean, I think the world is in a more fragmented place than it’s been for a long time, by which I mean different regions of the world are in strongly differing positions. I mean, that’s always been true, but I think it’s particularly true now because of the divergent impacts of both COVID and particularly the Russian invasion on different parts of the world. So to put some meat on that, you know, when I’m asked does this does this Russia’s invasion of Ukraine accelerate or retard the transition, I think you’ve got to break it down into a bunch of components. So the first is there’s a difference between the impact on Europe and say the difference and the impact on the US or on Asia, India and China. In Europe, of course, we have to rush for extra coal and extra LNG in the short term. But I think in the long term there’s no doubt this is an accelerator. That’s the other dimension. The short term, long term difference here cuts across the geographical difference, whereas I’m not sure that it necessarily does speed things up in India or China. And then there’s an upstream downstream difference to fairly obviously. I mean, if oil prices go up, then you have an incentive to go out and look for more supply, but you equally have an incentive not to start building the long live capital that uses that supply. It’s kind of fairly obvious. So you’re not going to be building big gas plants or coal plants that are going to last for 30, 40, 50 years. But you probably are going to be rushing out and trying to get extra sources of supply. So what does that all add up to? It’s quite complex, but overall, my guess is that it does accelerate things in the in the medium to longer term because of the background effects of the continued falls in the costs of renewables, notwithstanding the fact that I actually probably see a slight rise or flattening of that pretty dramatically declining cost curve because of COVID and supply chain disruptions. But that that curve just keeps on keeping on. And when you then compare those costs with the much higher prices of energy in the economy at large, certainly in Europe, it just makes renewable energy look that much more attractive. Now, there’s a lot of other things that have to go with that is, as you know better than anybody in terms of storage, in terms of grid infrastructure and so on. But I think there was the net zero review in this country in the UK is is working on as a big Royal Society report, working on storage. These are the questions that are now being tackled and I think we’re starting to see the answers emerge. 

Jason Bordoff [00:06:08] So some of these trends we’ve seen where, you know, annual cost declines year after year for EVs, for renewables are being reversed and people talk about green inflation. Now is that a temporary hiccup because of supply chain problems and the economy coming out of COVID shutdowns, or is that going to be a long term challenge because of things like the rising cost of critical minerals, the inputs and components we need as we move forward? 

Cameron Hepburn [00:06:34] Yeah, my view pretty strongly is the former that it’s a it’s a hiccup. The basis for that view is that we we’ve actually seen this before in different parts of the green economy. So the UK went from offshore wind costing £140 a. Go down, down to £40 and in the course of that process have massive supply chain bottlenecks. One point there were only four vessels that could actually take the turbines off shore. And so those vessels were making a truckload of money that was putting up prices. But of course, what capitalism does is find a bunch of new vessels to come in and they get built and with a bit of a lag, you know, the supply chain sorts itself out. So, I mean, with the we’re obviously suffering from a disruption from COVID, but I don’t think it’s a permanent one. Yes, there are minerals supply chain bottlenecks, but again, they’re just that the bottlenecks and they will be the bottleneck as they always have been in the course of the last many decades, indeed 100 years. I mean, this is kind of how capitalism works. So I think, you know, I don’t know quite how long this little piece of reflation is going to last, but the long run story is pretty clear. This is deflationary through the energy system and it’s deflationary for the economy. It’s good for the economy as a whole. 

Jason Bordoff [00:07:56] And on that particular question of, you know, this dramatic increase we’ve seen in, say, the cost of lithium or other critical minerals, when you look at and you know it better than anyone, the the scale and magnitude of what taking goals like net zero 2050 even close to seriously mean it is such a dramatic increase. We need to build so much stuff so quickly. You’re not worried about whether supply chains in aggregate are able to scale at that speed and there’s more than enough more than enough of the minerals and other other resources we need to to make this transition happen. 

Cameron Hepburn [00:08:31] Yes, I’d say two things. The first is I’m not sitting here predicting it’s all going to be smooth. And I mean, this transition almost by definition is bumpy because you’ve it’s massive and you’ve got to scale up one set of industries at the same time as you’re scaling down another set of industries. And it’s just kind of almost impossible that humanity is going to do that beautifully in concert in synchronicity. So you’re going to have bumps, probably fossil price spikes, fossil price crashes, clean energy, price spikes, crashes, etc. That’s kind of a given. But if you look at the overall picture on the availability of the minerals necessary for the clean transition, you know, they’re there. There’s plenty of them there in the Earth’s crust. They’re accessible. The challenges are around politics, as you know, better than most and to some extent around ecosystem damage. Can we actually get them out without wiping out the biodiversity and undermining the other sustainable development goals? But but I also think those challenges are manageable, just looking at the picture overall. So and the other point to make here is that I find it slightly disingenuous the critiques of the clean energy industry that are made on the basis of minerals extraction, because if you have a look at the alternative, which is the continuation of the fossil system, we are extracting many, many, many more tons of stuff out of the earth to run a fossil system. It’s more than an order of magnitude more. So we’re talking well, well over ten x more tonnes of material being extracted to run a fossil system then need to be extracted to run a clean energy system. So yes, there are problems. Yes, it will be bumpy, but I don’t think those problems are impossible to solve. 

Jason Bordoff [00:10:24] And similarly, I think it’s fair to say roughly every 30 years since around 1859, when Colonel Drake struck oil in Pennsylvania on my birthday, random fact, you know, the world’s been worried that it is going to run out of oil. And we’ve had a scare to that effect. And then, as you said, high prices do what high prices do and incentivize people like George Mitchell to figure out how to extract resources from shale and in West Texas or other parts of the United States. And I suspect innovation will happen in clean energy components and minerals as well. 

Cameron Hepburn [00:11:04] Exactly right. I just I’m really not too worried about that side of the equation because prices do actually work. The thing I’m more worried about, the parts of the economy where we don’t have adequate prices. Sometimes we don’t have any prices at all, which is why I was mentioning the biodiversity side of things there. It would be easier, easier for us to end up in a mess on that domain, I suspect. 

Jason Bordoff [00:11:28] Talk about the broad policy toolkit that is needed to get there. You’ve referenced a few times today positively, not always how it’s referenced in climate conversations. Capitalism more, more as friend than than foe. There’s a view that that’s part of what has caused the predicament we’re in and obviously a whole movement around degrowth. You can comment on that if you want. But but how do we embrace the. What you seem to be describing as quite powerful. Free market forces to to to move in a in the right direction from the standpoint of thinking about, you know, social costs and externalities like carbon emissions or we can talk about others environmentally biodiversity. You mentioned a moment ago. 

Cameron Hepburn [00:12:07] Yeah, sure. So in my my kind of attitude for for all of your listeners and indeed many my students at Oxford who are, you know, pretty anti-capitalism sometimes is is that. Yes, of course the system we’ve got is causing the problems that we’re seeing. So you can respond in one or two ways. You can either say we need to overthrow the system, which is quite a challenge and may not even be desirable, even if you could achieve it. Or you think about how you reform the system and change the system quite radically actually, so that it works in a pro-environmental way. And so for me, I’m not sure there’s much of a choice. In any event, we just have to work with the system we’ve got. But actually it’s quite a powerful and a powerfully useful system once you can harness those incentives and in a sense, the problems that we face, the incentives screwed up. So we fix the incentives and we start to get the system working properly. Now, that’s not to say, as many economists say, we just need to fix the prices and we’ll be fine. The challenges that we have here, sadly, at this point in time, much bigger than just fixing prices. But it certainly is to say that we don’t need to kill economic growth. And for me, the the most powerful way of seeing this is, if you would, if you run the numbers on what does it cost you to take a tonne of CO2 out of the system and the various ways in which taking a tonne of CO2 out of the system costs you a negative amount of money because clean energy is in many parts of the world cheaper. And there are some areas where it costs you a bit of money. You might cost you ten bucks a tonne. And then there are ways in which in some of the hard to abate sectors, it might cost you $100 a tonne. And then if you’re doing direct capture, you know, these newer technologies that haven’t come down, they’re learning curves. It’s hundreds of dollars a tonne that feels expensive. But if you compare it to the cost of shutting down the economy per tonne, just back of the envelope numbers are probably stuff this up. But let’s in fact, let me make it really easy for myself. Let’s suppose that global GDP were 80 trillion USD, which is not about 100, but I’m making the numbers work out nicely. And let’s suppose that global emissions are 40 billion tons. Then what we’re generating is $2,000 per tonne of CO2 from the economy. So yeah, we could, we could shut down the economy to reduce emissions, but the cost of that is $2,000 a tonne compared to several hundred dollars a tonne of direct air capture or negative something dollars a tonne if we run to a smarter, cheaper energy system. So in short, degrowth isn’t the answer, I don’t think. 

Jason Bordoff [00:14:58] And you mentioned a moment ago, fixing just fixing prices is not the answer either. And, you know, many economists would say we have an externality and you figure out what that is and then you have a carbon price to adjust for it and and move on from there. So explain whether you think putting a price on carbon is desirable or or a sensible idea or not. And then if if it is, what what, why it’s not sufficient and what else we need to do. 

Cameron Hepburn [00:15:21] Yeah, no, it’s a totally sensible idea. And you know, I’m a card carrying economist and you would be hard pressed to find a single economist in the world who’d say otherwise, because it’s correct. Right. You put it, you put a price on carbon and it works its magic. I guess what I’m saying is two things. Firstly, we haven’t been able to put adequate prices with enough coverage on carbon around the world. So even if even if it were the perfect solution in practice, there are bunch of reasons that are now increasingly well understood why it’s not feasible to implement, but nonetheless we should do what we can. But I’m also saying a second point even if we did have kind of perfect carbon prices around the world, they take a long time to operate. And, you know, if, if, if to get to net zero, we need to redesign our cities. And as my colleague and friend and coauthor, Nick Stern likes to say, carbon prices won’t redesign a city. So there are a set of other planning and government interventions in the economy beyond prices that would be necessary even if we had perfect carbon prices simply because of the scale and the speed at which this transformation has to happen. And on top of that, we don’t have ideal carbon prices. So we need to look to other, you know, other instruments, other approaches. 

Jason Bordoff [00:16:51] You gave a stylized example where you know the GDP benefit. So say it’s $2,000 per ton. We have a new estimate from the U.S. government about what the cost to society is of emitting a ton of CO2, $190. So when you look at things you said a moment ago, some things where it might might save us money if we reduce emissions because in some cases renewables can be cheaper. In some cases it might be cheap, like $10. In some cases it could be hundreds of dollars a ton. Should we not be doing the costly things if in fact we have an estimate that the cost to society is around $190 a ton, does that tell us that some emissions are not worth stopping? And how does one think about a goal like net zero in that case? 

Cameron Hepburn [00:17:37] So if I go way back to my doctoral thesis in economics, it was on into temporal dynamic optimization question. So without being boring few lessons, this is just thinking long term. And so if you think short term, then of course you do all the cheap stuff. Now why would you do stuff that is more expensive than the social damage? That’s kind of Econ 101, but you got to think long term as well. And if, for instance, we run out of cheap stuff to do and we’ve still got to get to net zero, because until we get to net zero, you know, temperature keeps warming, then you may have to say, well, we’re going to do some of the expensive stuff now with the knowledge that is going to bring the cost down. So it’s better to think of it in the framework of long term investment and dynamic optimization rather than what we call static optimization, just making making things as cheap as possible for today. And I think that applies to some of these more costly technologies. But that doesn’t mean that you just go off and do anything, no matter how much it costs, because that wouldn’t be very sensible. You have to have a the a basis for thinking that you need to do more and that it isn’t cheaper just to tolerate some of the climate impacts. I know the environmentalists listening to your program will find it astonishing that somebody could say, well, maybe we just have to tolerate some climate impacts. But but the reality is we are already tolerating climate impacts at 1.1 or 1.2 degrees, depending on where we are. And nobody, at least that I talk to, is suggesting getting global mean temperatures back to zero immediately. So we do effectively tolerate some climate impacts. It’s about getting the balance right, but we do need also to get to net zero and that is going to require that we take CO2 out of the air and that is probably going to require some of these approaches that at the moment look uneconomic on a you know, if you had to deploy them all this year. But we don’t. So we think long term and invest. 

Jason Bordoff [00:19:42] Why does getting to net zero require removing CO2 from the air and talk about the suite of technologies, how you see them progressing and and what you’re optimistic about? What’s going to get us closer to this this goal? 

Cameron Hepburn [00:19:57] Yeah, I kind of wish that getting to net zero didn’t require us to take CO2 out of there because there’s something fundamentally stupid about burning the carbon and putting it up into the atmosphere and then spending vast amounts of energy and economic resource, taking it back down again. Like it’s kind of pretty dumb. Okay, you get the use of the energy in the meanwhile, but ideally you just don’t put it up there in the first place is the sensible thing to do. So. So why, why am I talking about taking CO2? That the answer is simply is that, you know, as I say, we’re already at 1.11.2. If we want to have a hope of stabilizing at or around 1.5, we’re going to have to put our foot completely down on reducing emissions. And we’re going to have to be taking CO2 out of the air. So it’s not a it’s not a kind of choice anymore. We just have to do both and we have to do them at full throttle. And then so how do we do that? Well, there’s a whole range of approaches. I mean, dozens of different ideas, which is great emerging all the time from universities and start ups. And actually at Oxford, we’re helping to lead the the UK’s national program on taking CO2 out of the air. So we get to see all these weird and wonderful and crazy and actually sometimes very inspiring ideas. I guess I would categorize them as falling into two buckets. There’s one around the use of biological methods and land based methods. Some of them can be considered nature based methods to others, others not. These are effectively use the fact that soils and trees and plants and peatlands and etc. these different parts of nature naturally take CO2 out of the atmosphere and into the biosphere. And what we’re looking to do is to. Protect and even accentuate or accelerate those sort of processes. The other bucket are more industrial or geological processes that look to takes you to have the atmosphere and for the most part put it back underground in the lithosphere, either criminalizing it, so combining it with rock. So it’s not going to go anywhere or pumping it into areas underground. Now, there’s a big debate in the academic community, which is super interesting, super fun. It’s getting a bit heated about the merits of these different buckets. The biological versus the geological methods. And the terms of the debate are really around the fact that the biological methods are not permanent in the sense that they might lock your carbon up out of the atmosphere in the biosphere for decades or maybe even hundreds of years. But at some point it’s going to go back up again, whereas your geological methods are permanent. And so the debate goes, well, hang on, you’re just deferring the problem for later. You’ve taken carbon out of the lithosphere, you’ve put it in the atmosphere and you’re saying you’re going to offset that by putting it in the biosphere, but you haven’t put it back where it came from. It’s not one for one, it’s not a proper offset. You know, this is dodgy, this is fake. And then the counterargument is to say, well, look, yeah, fine, it’s not permanent, but we need all the time we can get. And if you can buy 50 years, that’s super valuable. And so I’m going to buy 50 years and then we’re going to sort out what to do when the emissions go back into the atmosphere. In 50 years time, we’ll be in a much better place to do that then. And since both lines of argument are correct, it’s not permanent, but it is valuable to buy time. And then the more kind of intellectually sensible line that we’re pursuing, I think at least, is to work out what the what the appropriate exchange rate is between those different sorts of removals. 

Jason Bordoff [00:23:45] That’s a really good overview. I’ll oceans too. I know a lot. 

Cameron Hepburn [00:23:48] Sorry. You’re quite right. I shouldn’t have forgotten the ocean. 

Jason Bordoff [00:23:50] Oxford and here at Lamont-Doherty Earth Observatory at Columbia. How do you think about the role of nature based solutions? When we think about corporate, voluntary commitments and the whole offset market, is this a big scam full of greenwashing, or do you do you think there is benefit that can be gleaned from voluntary commitments and then going into an offset market with planting trees or not cutting them down, etc.? 

Cameron Hepburn [00:24:17] Yeah, it was a very tricky space, very controversial. The reality is that there are some really amazing, wonderful, useful additional projects out there where offsets are doing a ton of good and there is a chunk of greenwashing out there as well. And what makes this so difficult for corporates and for the public to get their heads around is it’s pretty technical and it can be very hard if you’re not an ecosystem scientist or whatever, to work out what’s real and what’s not. And the thing that makes it even harder is that there’s a whole range of different standards and verification agencies and so on, so that even the kind of middle layer that should be providing confidence doesn’t necessarily provide confidence. And we saw, as you know, at COP, another effort perhaps of perhaps a definitive change from the US government, maybe another layer to try to sort this market out. So I think I feel like it’s a little bit of a shame because the not not the US effort but the situation we’re in here is a bit of a shame because there’s a massive desire by citizens, by companies to do their bit and to be net zero, and some of them are. But then, you know, often, as I say, where we end up with the situation where either you greenwashing or at best you’re buying time rather than properly permanently offsetting your your impact on the environment. We put out a set of principles, the Oxford offsetting principles, and we’re just doing a revision of those Now that caused a bit of a bit of upset in the industry. They’re either loved or hated depending on whether the offset provider’s offsets complied with what we said should be happening. But I think what, what what is needed a clarifying principles like those principles, anybody can jump on line and download them to help people think through what should my kind of offset portfolio portfolio look like now should change over time. 

Jason Bordoff [00:26:17] And in talking about carbon removal or the social cost of carbon, you’ve referenced a few times now the the widely discussed phrase net zero, But we need to get to net zero. You wrote an interesting article recently about what net zero means. So when explain a little bit your your view of how we should think about the concept of net zero. 

Cameron Hepburn [00:26:38] Yeah. It’s a it’s a fascinating thing because it’s at once a piece of science, which is to say that roughly speaking, for every human. Created tonne of CO2 we put up in the atmosphere. We have to, as a result of human action, take a ton of CO2 back out to keep warming constant. So to keep temperatures constant and to eliminate warming. And I say, roughly speaking, because it’s not it’s not kind of a theorem in the sense that it’s not some sort of irrefutable truth that you get to net zero and the warming necessarily stops because there are feedbacks in the system that we might have crossed there, other nasties that can happen. But as a rough and ready guide on the science, it’s it’s, you know, the place to start. And obviously it’s embedded in the Paris Agreement because we we all agreed that we would balance emissions from sources with removals by things. So that’s what we signed up to at Paris. We signed up to net zero and the science behind it is pretty strong, so much of it done by Oxford Focus as well as scientists in the US then, but it goes beyond that. So it’s kind of a it’s a social construct and a business target and an accounting set of measures as well. And getting it right, as we put it in the paper, requires much more than the science requires a shared set of understanding about actions and shared principles and government responses. So it’s almost a sociological concept as well. 

Jason Bordoff [00:28:22] One thing that I’ve I’m curious your thoughts on is how you think about the role of individual companies, institutions and financial institutions with these goals and pledges of, say, net zero by 2050 or whatever the goal is, you know, any one company lives within a broader ecosystem. You can you don’t if you’re sitting within a company and you put your employees on an airplane, you don’t control how Boeing or Airbus builds those airplanes and what fuels they take and and how the steel and cement is made that for your next office building unnecessarily so. So naturally, sometimes if you’re looking at your whole footprint scope three emissions, you see companies revert to the use of offsets because there’s only so much within their direct control. How do you think about what, what, what we should do about that? What is the role of companies that want to, quote, do the responsible thing in this sector or show leadership? What does that look like for companies to engage seriously in trying to move us toward a net zero world? 

Cameron Hepburn [00:29:27] Yeah, well, I mean, dare I start with first principles and say that if we did have a lovely global carbon price that was, you know, shared across countries and so on, then you wouldn’t have to worry so much about this because every part of the value chain would be incentivized to sort itself out. But we don’t. And as you say, even if we did, some companies would want to go faster than others. And so they are left facing these conundrum. What do we put pressure on our value chain and our suppliers? Do we talk to banks and start to help finance these changes further back up? If you’re a fast moving consumer goods company with a lot of control, but, you know, if you’re an academic institution, as you say, you’re not exactly going to force Boeing to change its the style of its jets in one day, although what you can do is a lot of research that plays into the next generation of net zero aviation. And of course, many of us universities are doing that. So what are we to do? Well, one of our colleagues at Oxford, Caltech, Romano, has a paper about measuring scope three emissions and doing kind of value added accounting, as we do in other parts of accounting, Just making sure that your emissions in each part of the value chain are added and then passed on to the next corporate entity. That’s one approach. I think the companies who say, Well, we’ve got no control over this, so we’ll offset it for the moment, I think that’s a perfectly credible position. We then go back to the discussion we just had on offsetting and making sure that you’ve actually bought offsets that are going to be genuinely doing good. And that kind of good complement to that is to say, well, we should wherever possible, if there is a net zero solution in our value chain rather than just offsetting it, let’s support those players who can offer that net zero solution as part of the value chain and procure that. Now it’s easy to say, and I recognize if you’re operating in a competitive environment and your competitors aren’t doing that and it’s a big component of your final cost structure, then you can go out of business. If you’re putting your costs up dramatically and your customers are not willing to pay. So each business is going to have to work through. Who can I sell this to my customers and pass on a premium to get a premium for decarbonizing my supply chain? And if not, then, you know, it is it is difficult. So some will take leadership and then they’ll press government to force it upon the rest of their industry, knowing that having taken the leadership position, then they might even gain market share. It’s a it’s a classic competitive strategy. Do the right thing, do it early, and then force government to make everybody else do the right thing. And then you win economically. And there are various European companies that have been doing that for decades, and it can work very nicely. But, you know, it’s complicated. It’s a great question, just as complicated. There are a lot of different strategies. 

Jason Bordoff [00:32:33] You’ve we spoke earlier about, you know, in some cases, shifting from from emitting sources of energy to carbon free sources will save money, in some cases a modest cost, in some case at least now a larger cost. But on the whole, on net, you have spoken about you’ve written in an academic work about how decarbonizing the energy system on net saves money. Explain why how we should think about that. And if that is true, why aren’t we doing that already? And if it turns out we weren’t even worried about climate change, it didn’t exist. It sounds like we would be trying to make this transition happen anyway. And I think, you know, basic economic principles, why we’re leaving $20 bills on the floor. Why why are we not using that energy system today, if that’s in fact, correct? 

Cameron Hepburn [00:33:21] Yes. Super question. I love it. And what I like about this space is that there are two highly obvious intuitive things that can’t both be true at the same time. And one is if it were so cheap, we’d be doing it already and the other is, well, you say it’s going to save money. And I’m looking at these numbers and what I can see is that clean energy does actually look like it’s cheaper than fossil energy now. And it also looks like it’s falling in cost. And the IEA has just said solar’s the cheapest electricity in history. So if this clean energy is cheaper and it’s getting cheaper, then you don’t have to be an Oxford professor to come out with some paper telling me that the energy system is going to be cheaper if we move to clean energy. So hang on. What? What’s not working is where’s the disconnect? And I think part of the answer to that. So, you know, if it’s all so cheap, why aren’t we doing it already? Is that the cost declines are kind of happening in real time. You know, you go back five years and and it wasn’t cheaper in most parts of the world. You go back a few years and it wasn’t cheaper in most parts. So so we’re just at this turning point now. And the next relevant point to make is that not every country in every space is at that point yet. So even within the US, parts of the US we’ll find clean energy could be cheaper than the fossil alternative right now and other parts of the US won’t because they don’t have the same renewables endowment. Okay. And then clean electricity to start with. But then as we move towards the broader energy system, where you’ve got to say, okay, if we’re going to have a full energy system run off clean electricity, then we’re saying electric vehicles are cheaper than their fossil alternatives. Is that plausible? Well, actually, yeah, it is in due course because many fewer moving parts. Okay. The batteries are a big chunk of the costs, but batteries have been falling in cost, etc.. So it’s a it’s a it’s a totally plausible in fact, the opposite case is implausible that it will be cheaper to run an EV than a fossil vehicle in five or ten years time if it isn’t already in some part of the world. But then you’ve got to make sure that the grid functions and that you can use that grid to electrify heat and to manage your industry. And that means you’ve got to have a storage system. It means grid upgrades. These are all additional costs. So it’s one thing to say per electron produced from your solar panel, it’s cheaper than the electron produced from a coal fired power station. But inherent in that coal fired power station is a truckload of storage and inertia and a bunch of other things that helps the grid to operate. So you’ve got to kind of price all of those bits up and compensate for all of those bits. And what I’m saying is, once you have compensated for all of those bits and you’ve got your storage and you’ve got your grid working properly, it still looks like it’s going to be cheaper to run a clean energy system. Now I use the word it still looks like it will be cheaper, no phrase. And that’s because in many parts the world isn’t cheaper right now, but because of the learning dynamics, you know, we’ve got 140 years worth of data on coal, oil and gas. And roughly speaking, there’s been no cost reduction over time. You’re you’re you’re. Barrel of oil or your tonne of coal, producing a certain amount of electricity is roughly what it was 100 years ago, whereas we’re just killing it on these clean technologies which keep coming down in cost. So it’s it’s a matter of time. I mean, I certainly wouldn’t want to bet on fossil fuels over a 20 year horizon at this point in time. Yes, there’s a lot of other pieces of the puzzle to be sorted out. Some of those pieces are really meaty and juicy, like how you run the UK economy one in four, the one in 50 year event when there’s no wind for two weeks and there’s no sun in winter and you’ve got peak demand. Now how much does that costs to balance and to have a functioning energy system in those sorts of conditions? We’re just finishing that report in the UK for the Royal Society. But those numbers are being run and it still looks cheaper. That’s the bottom. 

Jason Bordoff [00:37:45] Line. And I asked about clean electricity versus clean energy. We can electrify many things, as you said, heat cars. But when you think about aviation and ships and fertilizer and steel and cement, etc., how much of a decarbonized world do you think is electrified? And what that does, you’re finding that it is cheaper hold for the things that can’t be electrified. 

Cameron Hepburn [00:38:08] Yeah. So our finding is and overall, so for your listeners, you can look this up it’s a paper by Rupert way at out in Joule which is a journal. It’s got a sexy title. Not that I’m sure there’ll be a link to it. So that paper finds a 12 trillion total cost reduction from going faster on a net zero transition. Obviously, you don’t want to go too fast or else you can go too fast. And believe it or not, but when you when you optimize things and go very fast around a 1.5 ish degree scenario, you save a truckload of money because by going fast now you bring the costs down now and you save money going into assets that are only going to be stranded later. Now, that paper, to answer your question, looks at the energy system only. So it’s not looking at agriculture, at food, at a bunch of other transformations that are that are probably. Well, who knows that we think of at the moment as being net costly rather than net negative cost. This is just looking at the energy system, but it does look at all of the energy systems. So in that paper are cost estimates of the declining cost of electrolysis which are expected. Now that’s harder to bound. So what I mean by that is we’ve got so much data now on wind and solar, we can be fairly confident of the price forecast into the future, which is not to say we know what they’re going to be, but we can draw confidence intervals and ranges around future costs where the 95% confidence interval is is relatively tight for electrolysis. We don’t have quite so much data. So those confidence intervals are a much wider and how we end up doing on electrolysis. So this is the conversion of electricity into hydrogen and oxygen. How we end up doing on that is a strong driver of the overall cost and our paper says so. The mean estimates it could be the case that a slow transition is cheaper than a fast transition. But in terms of our estimates, given what we know, given how things have moved in the past, it will be cheaper to go faster. And a lot of that rides upon just how cheap can we produce hydrogen from electricity. So for me, that’s one of the key drivers or lynch sensitive intervention points, as we like to say in this transition. How fast going to cost of electrolysis? 

Jason Bordoff [00:40:40] Don’t talk about what’s needed to make things like that happen from a policy standpoint. In particular, I’m interested to go a little deeper on you’re sitting in Europe, as you have noted a few times. You’re also working and Oxford is working with the UK government. The policy response to this current energy crisis high natural gas prices, high electricity prices in Europe, Repower EU fit for 55. What what do you what makes good sense there? What are you excited about? What do you see? What are you concerned about in the policy response? 

Cameron Hepburn [00:41:14] Yes, good question. I mean, so I think some of the you know, as an economist, I kind of feel a bit sad when when I see price incentives being blunted. So, you know, when you’ve got high fossil prices, yes, people need to be helped. But the way you do that matters enormously. And the way to do it isn’t to reduce prices at the margin. It’s to give people lump sum amounts of cash so that they have the incentive to continue to conserve energy, but they can pay for it at the same time. It’s kind of econ 1 to 1. It’s tragic when you don’t see. 

Jason Bordoff [00:41:49] That referring to the fact that many. European governments are capping energy prices so people don’t face higher prices because because we’re worried about regressive effects. We’re worried about the impact on on households. 

Cameron Hepburn [00:42:01] Correct. So the worry is fair. The need for response is there, but it’s about how to respond. And, you know, you want in the U.K., for instance, we’ve just seen the chancellor of the day, dare I put it that way, has sensibly said actually, for the next round of support, it’s going to be much more means tested. So, you know, money isn’t just going out the door to rich people. And by the same token, money is the money isn’t being used to blunt the incentive to actually conserve energy. So that’s a good thing. I mean, I think another sensible thing to do here, you know, when even my friends in the oil companies are saying, yeah, maybe a windfall tax is a legitimate move here, I think you don’t want to be too quick to jump to a windfall tax because you want to have credible investment regimes and companies think about what they’re going do and what sort of profits they’re going to make. When they think about the capital they’re going to put in place. But if it is genuinely a an unanticipated shock that was in nobody’s model, as this has been, this war has been, then it is a legitimate target, I think, for windfall taxation. Now, of course, any economist or Treasury person, finance ministry will say you shouldn’t take the money and then you use it for general public purposes. But I think there’s a case here for hypothecated, at least some of that money and using it to sort out the transition at a much more accelerated rate given the geopolitical context. So using it to better insulate homes so that we’re not using so much energy and using it to build out much faster the sort of renewable transition that we that we are going through. I mean, we just have a discussion with with a key person from the UK government this morning about the planning regime and how that can be reformed to accelerate the deployment of wind and solar. So these sorts of interventions are a very welcome. I mean, I guess there’s a lot more to be done and this winter could be pretty messy. 

Jason Bordoff [00:44:14] You’ve noted the Econ 1 to 1 benefits of a carbon price. We’ve had a historic bill, climate law, passed in the United States, by far the largest investment in clean energy, nearly $400 billion. And for a variety of reasons, including politics, not not putting a price on carbon, but but government subsidies, government tax credits. What are your thoughts about the Inflation Reduction Act? And is that a model you would like to see followed in Europe? 

Cameron Hepburn [00:44:46] Well, look, it’s obviously a big deal. It’s not just a big deal in the States. It’s a big deal over here, too. And for two reasons. One is that when you have that kind of capital moving into these spaces, you know, those cost reductions are going to come and accelerate and that changes the economics around the world. So we had one of your associates and an ex Oxford man, two veterans of our own with us at COP, pointing out that in a sense this is not just good for America, but it’s a kind of great gift to the world, and it almost could be considered a form of foreign aid. Of course you would say that, but an extent he’s right because it will pull the costs down for everybody. But the other way in which it affects us is we’re looking at which technologies the UK and Europe more broadly can have a competitive advantage in. And the landscape just shifted technologies we thought we were going to dominate. The Americans are now going to give us a run for our money and we’re not sure we like that very much. I mean, it is good for the climate overall, but for instance, on many of the carbon removal technologies, the 45 Q was already that legislation that paid you to take CO2 out of the air or already was, you know, tipping the balance between certain firms locating in the states versus in Europe. And I think that equation has just got harder actually, for Europe. So there’s a sense that perhaps we’ll need to catch up now. And I mean, it’s probably a good thing globally that this is now being seen as a race to capture these spaces. The Indians are slightly annoyed, I dare say that. Well, that’s what they tell me, that the Chinese have captured the value chain in solar and wind and regretting that they hadn’t moved a bit more fast. A bit more. Quickly over the last decade in these spaces. So the Inflation Reduction Act is big. It’s a big deal over here, but I think it’s a big deal politically as well. As you say, it doesn’t have a carbon price. It’s a set of subsidies. It’s perhaps not what an economist would love to see, but it is a political winner, obviously, as what we what we’ve observed. Only just. But but but but it is because it it plays into what industry want and what consumers want. And it’s maybe that is the right role for government. 

Jason Bordoff [00:47:23] Yeah. I mean, I can see it evolving in one of two directions or maybe a little of both. And one is what you described, which is this kind of virtuous cycle of competition where people say, well, a $3 per kilogram tax credit in the US is really big. We want to make sure we don’t lose industry. We’re going to help our industry, too. And there’s this race that’s good for climate because you drive down the cost of green hydrogen or whatever you’re talking about. The other response could be you just said the phrase a moment ago, capture the value chain, and that can lead to a direction in which policymakers say, we want to make sure everything is done here. We don’t want to just do one small piece of the value chain and then have have it have it have much of the value of clean energy captured elsewhere. Or we might we might try to prevent our industry from relocating to capture a $3 per kilogram tax credit with our own domestic content, our own protectionist barriers. And there have been concerns raised by European officials, Frans Timmermans, others about some of the elements of the Inflation Reduction Act that require activity to be done in the US or neighboring countries or a free trade agreement. Countries talk about the dynamics between climate policy and trade, the broad general trend you started this conversation with toward fragmentation. And, you know, it seems to me the scale and speed of what’s needed to achieve a clean energy transition in the timeframes we need is so large, we’re going to need so much global connectivity and we’re going to need more, not less, trade in clean energy. But there is a desire for economic and political reasons for countries to want to own own. Most of the value chain themselves. Is that does that help us move faster? Is that going to be that going to be a headwind in trying to move faster? 

Cameron Hepburn [00:49:13] Well, I think it’s on balance, I’m afraid it’s a headwind. I think it’s a little bit of both. They’re both factors. The competition, the competitive element in a sense is welcome. It would be ideal if it were competitive within a globalized system. And actually the competition was happening between corporates who were making the most of every country’s capabilities so that we were getting the gains from trade and getting the gains from competition at the same time. But I think that’s not where we are. Where we are is that we’re seeing competition. So we’re discussing, as you pointed out, between countries and the clean energy value chain is a longer value chain than the fossil value chain. So I think this this trend towards globalization actually hurts clean energy probably more than it hurts the fossil system, I suspect. And so it is a headwind, but it’s not all bad because the the competitive dynamics, as you know, as we mentioned, sometimes you can have a situation where there’s inefficient duplication. But what looks like inefficient duplication actually also allows innovation and creativity and many thousands of flowers to bloom. And people keep asking just on a random sidenote, people keep asking me, Oxford seems so disorganized and so chaotic. How do you guys keep coming? Number one in the world in all of these university rankings? And I’m not saying it’s because of the disorganization, but but it is a very entrepreneurial, decentralized landscape where there is perhaps inefficient duplication, lots of new initiatives, lots of this that many other many of them are dying. But you’ve got this kind of schumpeterian competition. So so perhaps the best that could be said of the globalized world we’re going into is that we might have a little bit more of that schumpeterian competition. But but I’m a realist. I think on balance, it’s not a great thing. The the the other kind of silver lining, though, is I think domestically in the US, for instance, the politics of globalization probably helps you to think about the trade and climate nexus in new ways that I think we should have been thinking about for a long time. So the border carbon adjustment, for instance, that is being what’s on the table firmly in Europe cbam carbon border adjustment mechanism and is being pondered in the US. Looks like it. As a degree of political line alignment that it didn’t have several years ago. And while I understand the very deep concerns of developing and poorer countries about what border carbon prices could do to their economies, equally the potential domino effect of putting in place these sorts of prices, triggering prices in other countries, carbon prices in other countries to spread. So you get these kind of carbon clubs could be incredibly beneficial. So. So it isn’t an interesting new world we’re moving into. And I know the new director general, relatively new director general of the World Trade Organization, is far more interested in these issues now than we’ve had in the past. And that’s got to be a valuable thing too. 

Jason Bordoff [00:52:42] Yeah. So you’re that’s interesting. You’re sort of favorably disposed to carbon border adjustments. And I guess, again, classic econ 1 to 1, you would think about it as leveling the playing field. If you’re going to impose a price on your own carbon intensive industry or others, you want to make sure imports bear the same price. And alternatively, if you’re exporting to places without climate policy, you might not impose that carbon price on on exports. But you’re thinking about it beyond that, which is it is also in some sense a coercive measure. It is should we think about it as penalties for inadequate climate policy. And that’s going to sort of encourage countries to up their game. 

Cameron Hepburn [00:53:20] I wouldn’t perhaps present it that way. I think your explanation of it is beautifully clear that it is about leveling the playing field. And, you know, it’s not a protectionist measure when done properly. It’s it’s a pro-trade measure because it’s ensuring that everybody gets to compete with the carbon costs built in to their production processes at the same rate, which is fair for trade. But you’re right that it does have these rather nice strategic political incentive properties that once one country has got a carbon price at the border, why would you? So if you’re China exporting to the US and the Americans are collecting, you know, let’s say 100 bucks a tonne on the carbon that’s embodied in your goods while the Americans take your cash, you’re much better off putting in 100 bucks a tonne price on the goods in China, collecting the money in China, and then the Americans have no right to take it from you as the goods enter the states. So I think once the Americans have got that kind of price in place, then lo and behold the Chinese are going to have a carbon price and lo and behold, are they? So it’s a kind of domino. It’s got these you know, in Oxford, we have this program on sensitive intervention points. We’re constantly looking for interventions that have feedback effects. Where it leads to be leads to more of a, leads to more of B and, and border carbon adjustments have that sort of domino type property that makes it very appealing. Now the worry is that until the dominos will fall and you’ve got rich countries collecting money from poorer countries and it’s all very unfair. I think the way around that personally is for, you know, for Europe or the States too, to take the money that they collect and then to recycle, to send it back in the form of, you know, some of these jet PE sort of deals that are just energy transition partnership kind of deals to help decarbonize those other economies. So that so that, you know, effectively it’s not a not a net cash transfer. It’s just putting prices on carbon and sending the cash back to to where it came from. So then you have a kind of double or triple when. 

Jason Bordoff [00:55:38] You’re talking a lot about competition. The Inflation Reduction Act is going to spur other people to compete to keep industries in the value chain at home. Carbon border adjustment might, might, you know, cause other countries to up their game because we’re just coming out of COP, which is based on 27 of them now on the premise of cooperation in order to make progress on this problem, we we all need to come together and work together and agree to do more. And every couple of years will come together and verify that we’ve all done the same because of the free rider problems with a global a global issue like carbon pollution. Should we be rebalancing How much of what we need moving forward is is actually competition and how much do we still benefit from trying to all work together in these UN cops? 

Cameron Hepburn [00:56:25] Yeah, look, I mean, I understand obviously, I understand the framing free rider problem. If we don’t collaborate, we’ll be at the crappy Nash equilibrium where everybody loses and so we’re all better off sitting around holding hands in a circle and singing Kumbaya. But I’m just trying to be a realist about the way the world works, too. So as you say, we’ve had 27 cops. I’m not sure we’ve had that moment of clarity. Where we all decide to collaborate wonderfully with each other. I wish. We wish we didn’t. I personally am a huge fan of collaboration. Try and be very collaborative in my own life and with our own institutions. But it’s hard for people and for institutions and for countries to do so. Our approach to thinking about the problem is not to not to of avoid the concept of cooperation or to ignore ignore it. I mean, we need to make the most of it. And as you say, we do. We’ll go much faster. We’ll work much more effectively when we are cooperating and we have some of these breakthrough agenda items that were agreed at Glasgow. The last cop that I feel were very helpful in a cooperative way, but by the same token, the things that are most likely to work here are things that I think you want policies, interventions that are robust to self-interest, that actually work with the grain of competition. So yeah, I mean, I would say I’d direct the Smith School of Enterprise and the Environment at Oxford. We think that the private sector has a big role to play and the private sector competes with each other in order to capture customers and market share and so on. And as citizens vote for the democracies that can choose to collaborate with one another, but they also choose how to purchase, what to purchase, where to invest their money and the rest of it. The two things do need to go in tandem, but I think we have underestimated the power of competition here in the past. 

Jason Bordoff [00:58:32] I want to conclude by asking about your role as director of the Smith School and and asked for your advice in a sense, too, for what we’re doing here at Columbia. I think you and I have both thought a lot about how academic research can have impact with the policy world or with the private sector in other ways. My friend Katharine Hayhoe, who has been an academic for many years now, chief scientist at the Nature Conservancy, spoke at the event that we did. One of the events we did at Coppin, she sort of said, Yes, of course we need more research, but we know a lot of what we need to know about the problem of climate change. What we need is change. We need activism. We need political change. Do we? How do you view the work you do day to day? What is the role of academia and how can academic work help to move the needle? 

Cameron Hepburn [00:59:19] I think academic work remains very important. So I wouldn’t disagree with you that we know that we’ve got a big problem on us on a scientific level. It’s not to say we know all of the impacts and not to say we know where all the tipping points are, etc. There’s still work to be done there, but we know we’ve got a big problem. We know quite a lot of where the solutions are to be found. But again, there are new solutions emerging and sadly, I think some of the some of the work on public acceptability remains relatively. We need a lot more of that work to be done on what’s going to fly. It’s one thing for economists to say, well, in principle here’s your right answer, but actually in practice we need answers that work in practice and actually research can help us work out what answers work in practice. The other thing that academics can be really useful for is the monitoring, reporting, verification, holding to account. It’s easy to forget that if everybody did what they’d promised they would do in terms of their net zero pledges. We are under two degrees at this point in time. So one way of thinking about the problem is simply making sure that everybody is held to account, that the satellites are being used to observe that data is being collected. The drones are your every form of data collection and then transparency over these promises and the delivery and now is being exposed. We have had a Twitter bot and not sure if has been shut down now by Elon Musk and the new regime, which was automatically tweeting about companies. When they’d say something about Earth, they’d come out with a net zero check and evaluating them on their on the quality of their net zero commitments. So is that sort of piece is very important. There’s big areas of research that need pursuing in in taking CO2 out of the air as well. And Katherine, as you mentioned, is is a wonderful science communicator. I had her to dinner in Oxford not that long ago, and that sort of communication with mass audience is still required. I might draw your attention to and your listeners attention to a nice piece of work that the OECD released a couple of months ago looking at views of 40,000 people. Correctly in 20 countries about climate policies. And what was interesting was that. Teaching them more about how damaging climate was going to be didn’t really move the needle. And a bunch of other things. It didn’t really move the needle. The thing that moved the needle was educating them about why different policies were going to work. And if people thought across the political spectrum, I feel like people accept there’s an issue, they accept we need to do something about it. And what they’re interested in is, is this policy actually going to work? And so research on whether policies are going to work or not in practice, and then great communication and education about why those policies work. That’s a hugely important role for institutions like yours and mine going forwards. 

Jason Bordoff [01:02:49] Cameron Hepburn, I know how busy your schedule is and thanks for making so much time to be with us this morning and educate me and our listeners and all the time you’ve made to make me smarter on these issues over many years. It was great to have the time to talk with you this morning. 

Cameron Hepburn [01:03:04] It’s my pleasure. Jason. Honestly, I feel the same way. Thanks for everything you’re doing. 

Jason Bordoff [01:03:12] Thank you again, Cameron Hepburn. Thanks to all of you, our listeners, for joining us on this episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs. The show is hosted by me, Jason Bordoff, and by Bill Loveless. The show is produced by Aaron Harnick, Delvin Aboyeji, Stephen Lacy and Cecily Mazer Martinez from Post Script Media. Additional support from Daniel Prop, Natalie Volk and Kyu Lee. Greg, Will Frank engineered the show. For more information about the podcast or the Center on Global Energy Policy, visit us online at Energy Policy, Columbia Dot edu or follow us on social media at Columbia View Energy. And please, if you feel inclined, give us a rating on Apple Podcasts. It really helps us out. Thanks again for listening. We’ll see you next week. 

The clean energy transition is a multi-generational challenge. It will shake up geopolitics, shift the economy, and change our daily interactions with energy. We have no precedent for the scale and speed required to decarbonize the global economy.

Yet there are signs that new developments in technology, policy, and public opinion are turning the tide for a global response to the climate crisis. Achieving a net-zero future, however, will require careful implementation, creative solutions, and a whole-systems approach that prioritizes prosperity and justice.

What are the economic tools we have to deliver such a transition? And what are the emerging solutions that might make this future possible?

This week host Jason Bordoff talks with Cameron Hepburn.

Cameron is a professor of environmental economics at the University of Oxford and director of the Smith School of Enterprise and the Environment. He also serves as the director of the Economics of Sustainability Programme based at the Institute for New Economic Thinking at the Oxford Martin School. Cameron has more than 30 peer-reviewed publications spanning economics, public policy, law, engineering, philosophy, and biology.

Jason and Cameron talk  about where we are in the energy transition – and where we need to go. They discuss the economics of the climate crisis, how technology developments are accelerating the energy transition, and how to scale their impact.

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