Does the world economy need fossil fuels?

With just days left to go, 2014 seems certain to be the warmest year on record, or at least the runner-up. International agreement on robust action to limit global warming remains inadequate: the just-completed Lima climate-change conference delivered some progress, but no major breakthrough. Away from the diplomatic circuit, however, technological advances make it certain that we can build low-carbon economies at minimal cost and great benefit to human welfare.

Solar energy reaching the earth’s surface provides 5,000 times humanity’s energy needs. The technology to capture it cost effectively and cleanly is available. Indeed, photovoltaic module prices have fallen 80% since 2008 and the best utility-scale solar projects can now produce electricity for less than $0.10 per kilowatt-hour. Optimists say that solar energy will become economical without subsidies later this decade, while pessimists put the break-even point in the 2020s. The question is when – not whether – this will occur.

Of course, the precise pace of progress is uncertain. But a future in which carbon-free transport is possible is assured. And our cities will be cleaner, quieter, and more pleasant places to live as a result.

Progress on other technologies is also essential. Hydrogen or biofuels will probably be needed to power those applications – particularly aviation – that require high energy-to-weight ratios. And building a low-carbon economy will entail huge investments in power capacity and transmission, energy-efficient buildings, mass-transit systems, and electrical charging networks.

The New Climate Economy report, launched by the United Nations in September, estimates that the investment required over the next 15 years will total $14 trillion. But the incremental capital costs relative to a high-carbon economy are a smaller $4 trillion, less than a third of 1% of global GDP over that period. And the maximum sacrifice of future income per capita will be no more than 1-4% of global GDP. That means that the world might have to wait, say, until December 2051 to reach the income and prosperity level that it would otherwise have achieved the preceding January.

So we do not need fossil fuels to support prosperous economies. If some extra-terrestrial thief came in the night and stole two-thirds of the planet’s coal, gas, and oil reserves, all of humanity could still enjoy the household appliances, information-technology products and services, heating, lighting, and mobility that define the modern world.

But no such thief exists, and we are cursed with fossil fuels in dangerous abundance. Some environmentalists claim that we will soon reach “peak fossil fuels,” making green energy essential not only for the climate, but also for continued growth. Sadly, that is not the case.

Total gas and coal reserves could support current demand for more than a hundred years, and technological progress – for example, hydraulic fracturing, which has unlocked shale energy – makes an ever growing share of these reserves economically attractive. Oil production may peak within the next few decades, but gasoline equivalents can be synthesized from gas or coal.

As 2014 draws to an end, falling oil, gas, and coal prices threaten to undermine investment in green energy and stimulate wasteful consumption. In the United States, sport and crossover utility vehicles – the largest of which are five meters long and weigh 2.6 tons – are the automobile market’s fastest growing sector.

The human-welfare benefit of these behemoths is unclear to those who, like me recently, are allocated one for a trip to the airport from midtown Manhattan. The legroom is no longer, the headroom no taller, and the seats no more comfortable than in a mid-size saloon car. One and a half tons of unnecessary steel are simply hitching a ride. The biggest threat to a prosperous low-carbon future is not a lack of technological options, but the waste that low fossil-fuel prices encourage.

To believers in rational economic choice, of course, there is no waste. If people choose to drive enormous cars, they must derive some benefit from it; and if switching to green energy makes that choice uneconomic, human welfare must suffer.

But economic theory based on real-world experience tells us that consumer preferences are neither given nor absolute. Rather, they are stimulated in a self-reinforcing fashion by group norms, trends, and advertising, and some increases in consumption deliver no permanent increase in life satisfaction. A world in which 2.6-ton vehicles were prohibitively expensive for single-passenger use would entail no sacrifice of human welfare.

When Roman Catholic bishops called earlier this month for an end to fossil-fuel use, their intervention was criticized for being out of touch with economic realities. But the bishops’ economics is impeccable. Committing to phase out fossil fuels would strengthen incentives for technological innovation; and if consumer preferences are socially determined, even unsaintly consumers would lose nothing in the long term.

Sadly, the bishops have less influence over divine action than over economics: Whatever deity might have put fossil fuels on earth has shown no willingness to take them back. Maybe this holiday season we should wish for a miracle. Absent that, we should commit to leaving most fossil fuels forever in the ground.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Adair Turner, a former chairman of the United Kingdom’s Financial Services Authority and former member of the UK’s Financial Policy Committee, is a senior fellow at the Institute for New Economic Thinking and at the Center for Financial Studies in Frankfurt.

Image: The sun is seen behind smoke billowing from a chimney of a heating plant in Taiyuan, Shanxi province December 9, 2013. REUTERS.