Green Premiums from different perspectives

Bill Gates’s new book, “How to avoid a climate disaster,” introduces the concept of Green Premiums. Green Premiums are essentially an objective way to understand how much more costly is the greener alternative as compared to the currently used option. As mentioned, there can be several levers to reduce green premiums. I believe that there are two perspectives on Green Premiums that can help define the roadmap for their reduction even better.

Green Premium on Assets (GPA) and Green Premium on Expense (GPE)

The first bifurcation is whether the green premium is on the upfront cost or the recurring cost. It is important to differentiate between the Green Premiums of assets (GPA) and the Green Premium of Expenses (GPE). Further, the relationship between these green premiums may give an idea of the best path to follow. For everything being compared, we can define GP(Green Premium Asset, Green Premium Expense)

For example, in the Electric Vehicle (EV) case, the green premium on assets (the upfront cost of buying an EV) is positive. However, the green premium on expense (the cost of using the EV) is negative since the running cost per kilometer of an EV is lesser than that of an Internal Combustion Engine (ICE). Hence for an EV, we have a GP (Positive, Negative). This implies it is costlier to buy an EV but cheaper to operate it.

Similar to the example above, there can be GP defined for various other solutions. In some cases, the concept of GPA may be irrelevant. For example, in the case of plant-based meat, it is the only GPE that is valid for consumers. So for plant-based meat, we can say GP (Neutral, Positive).

We can plot a graph with GPA on the Y-axis and GPE on the X-axis for all solutions. We will end up getting four different types of solutions, namely, GP (Positive, Positive), GP (Positive, Negative), GP (Negative, Positive), GP (Negative, Negative). The ideal goal is to get all the technologies to GP (Negative, Negative). Technological innovation would be one of the main drivers to achieve this; however, there can be other levers to decrease GP’s.

GP (Positive, Negative) is a solution like the electric car. There can be viable financial incentives across the value chain (from suppliers, manufacturers, and customers) to make the purchase more attractive. A lower interest rate on the car loan can help nudge the consumers in this direction. Similar incentives for buying more energy-efficient appliances can be thought of. A partnership between Impact Funds and mainstream Financial Institutions could lower the cost of capital for the financial institutions, which can be passed on to the consumers.

GP (Positive, Positive)’s example is to capture Carbon Dioxide from the air or flue gas. An asset needs to build, and there is further running of the asset as well. Here the role of governments would increase, and the GP can majorly be lowered by regulations or an efficient way of providing the right incentives or costs depending on whether the industry is capturing or releasing Carbon into the atmosphere. Further accelerated depreciation on the asset being built may help bring down the GPA. From a consumer standpoint, this would be the most difficult solution to adopt.

GP (negative,negative). In an ideal world, such a solution would be a mature technology. Hence the target for such a solution should be worldwide adoption and nothing less. To achieve worldwide adoption, some important levers to pull would be awareness and accommodating regulation. Graphene-enhanced concrete is such an example. The upfront cost would be lower, and so would be the maintenance cost, however, regulation may be a bottleneck. The role of the media in terms of lower expectations from advertising revenues for such technologies would be important to increase mass awareness and adoption.

GP (negative/neutral, positive) is quite a tricky one. The role of technology will be the most crucial for technologies in this quadrant. Consumers who can also afford to buy such solutions should do it. Hence awareness, as well as activism, would play an important role. Access to being able to buy costlier solutions should also be increased. Early adoption of such solutions would need to be done by developed countries. For example, a person can pay extra for the flight ticket to use alternative fuels, like the Eco Skies initiative by United Airlines. Such a model can be across different solutions.

GP Splitting between Technology-Driven Costs and Scale-Driven Costs

Both GPA and GPE need to be split in terms of the different cost heads. This split will help identify which intervention can have the biggest impact. There can be two broad split categories, technology-driven costs, and scale-driven costs.

Scale-driven costs can reduce drastically when a certain scale is achieved, and there is no fundamental technology challenge. For solutions that have high scale-driven costs in the GP, the demand side plays an important role. Hence the role of consumers would be central in helping build the demand to ensure manufacturers build scale and lower costs.

Technology-driven would require technology breakthroughs to be solved. Higher spending on R&D on these solutions will be needed to achieve reductions in Green premiums. It would be further insightful to split the technological breakthroughs into two parts, core technology, and energy/electricity costs.

Why is this split important? Energy will be a significant cost factor in most, if not all, technologies. Hence the reduction of energy (green) prices would be beneficial for reducing lots of GP’s. This split helps understand how much effort is required to get the specific technology to eliminate the GP. In some cases, the technological-driven GP may be high, but if most of the cost is on account of energy, then the strategy for reduction of GP may be different. For example, such technology may already be viable in places where energy prices are low. However, in cases where the GP is high on account of core-technology cost, further research may be the only solution. E.g., to produce Green Hydrogen, improving the catalyst will help increase the yields; this is an example of solution-specific research. The reduction of energy prices will also make Green hydrogen more competitive.

Since energy is so fundamental across various technologies, it would be important to understand the trends in GPs as a function of reducing energy costs. The trend will help in identifying energy cost targets at which the number of GPs reduces significantly. These targets are important for the R&D efforts of various clean energy-producing companies. In some cases, the GP may be independent of the energy cost since both the current and green solutions may have similar energy costs. In such cases, a different approach may be needed.

In summary, seeing the Green Premiums from different lenses will help establish the roadmap for their reduction.

• Mirik Gogri