Market Forces

The Power of Electricity Modeling in the U.S. Clean Energy Transition

The journey toward a clean energy economy is complex and filled with technical, economic, and social challenges. Electricity models are key tools for driving this transformation, providing precision and insight into the potential outcomes of energy policies and technological shifts. At the Environmental Defense Fund (EDF), we are working to make these tools more accessible through the U.S. Model Intercomparison Project (MIP), which brings together leading developers of open-source planning models to help steer the nation toward a sustainable energy future.  Read More »

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How insurance innovation can drive decarbonization

This blog was authored by Talley Burley, Manager, Climate Risk & Insurance; Carolyn Kousky, Associate Vice President for Economics and Policy; and Leslie Labruto, Managing Director, Sustainable Finance. 

This is the first in a multi-part series on how insurers can support the energy transition. The series will explore opportunities and challenges and highlight emerging insurance innovations. This will help us build a greater understanding about how the insurance industry, long overlooked as a potential core contributor, can drive emissions reductions. In this first post of the series, we discuss tools that are available to insurers to support the energy transition. 

You’ve heard this before. Climate change-driven events — wildfires, hailstorms, tornadoes, hurricanes, and floods — have devastated lives and communities across the country, straining local economies and households as infrastructure, homes, and other personal effects are damaged and destroyed. Mounting costs from extreme weather events have significantly impacted the insurance industry, leading to rising costs and leaving many without sufficient insurance coverage to rebuild. In 2023 natural hazards accounted for $250 billion in economic losses, with insurers and reinsurers paying $95 billion globally. According to a report by SwissRe, insured losses from natural hazards have grown by about 5-7% annually since 1992. Human-driven climate change will continue to lead to more intense and frequent natural hazards. Global greenhouse gas emissions have increased by about 8% since 1990, and today those emissions are the highest they have been in human history. Without significantly greater efforts to reduce global emissions, climate change will only continue to drive costs and strain the insurance sector.  

What will it take to reverse these trends? Transformational action and an all-hands-on-deck approach from market sector forces and actors is needed. This includes the insurance industry. While insurance plays a vital role in supporting disaster recovery and resilience, the insurance sector also has a variety of tools and levers it can use to drive the adoption of low-emission, energy-efficient practices.  

As the insurance industry faces a period of unprecedented disruption in the face of climate change, insurance markets must evaluate, test and learn from a series of six levers that can make them part of the solution, while also helping their firms, their clients, and their communities remain leaders in innovation and competitiveness.  

1. Investing with a climate lens 

Insurance companies not only offer financial assistance after a loss, they are also major investors, holding substantial amounts of capital so they can pay out claims. At the end of 2022, the National Association of Insurance Commissioners estimated US insurance companies held cash and invested assets totaling $8.2 trillion. Bonds are typically their largest holding, although insurers may also hold some other assets, such as equities or real estate. Analyses from New York and California insurance regulators found only a very small number of insurers had invested in green bonds. In 2019, one analysis found that investments by United States insurers included $536 billion in fossil-fuel related assets. By applying a climate lens to investments — such as limiting investments in high-carbon assets or actively investing in companies or products that focus on lowering emissions — insurers can ensure their investments are aligned to support decarbonization. 

2. Developing climate-aligned underwriting criteria 

Underwriting is how insurers decide what to insure and on what terms. Integrating climate considerations into underwriting practices can help the industry support greater climate action through its clients. For example, while insurers are bound by regulation to price based on risk, they can choose to limit coverage to high-emitting industries or place other restrictions on when they offer coverage or the type of coverage they offer. As it relates to climate action, this could involve limiting coverage to only those that undertake specific climate mitigation investments. Chubb, a world leader in insurance, for example, has enacted new underwriting criteria for oil and gas operations to encourage methane emissions reductions. This type of strategy can play an important role in improving the climate performance of insurance company clients. 

Clean technology (“clean tech”) is another area of opportunity within underwriting. The clean tech sector represents a growing share of insurance policies, but the cost and availability of insurance for this sector is a growing challenge. Property and casualty insurance costs for clean tech rose by about 45% in 2023 alone. Limited data and performance history can pose specific insurance challenges as new clean technologies come on the market. While existing technologies like wind and solar power are well-established and trusted by insurers, according to research by The Geneva Association, new clean tech products can face data gaps that can make it difficult for insurers to feel comfortable assessing the risk or underwriting for a new product. Creating a shared data commons could help insurers assess risk and potentially increase insurance availability for these technologies. 

3. Engaging with clients directly on climate  

Policyholders may not always be familiar with the actions they can take to lower emissions within their own operations or buildings without clear technical assistance. Insurers have an opportunity, given their direct engagements with clients and policyholders, to provide advice and guidance on the steps that clients can take to reduce greenhouse gas emissions. For example, Chubb now offers services to help clients understand the types of measures they can implement to reduce methane emissions through consultations and the online Chubb Methane Resource Hub. Technical resources like these can be expanded to include different types of activities and support a wider range of high-emitting policyholders, or even be offered to individual households for homes and other property.

4. Reducing emissions during rebuilding  

Insurance helps households rebuild and repair after a disaster. Insurers may be able to use the claims process to better support policyholders in rebuilding more resiliently and sustainably — driving emissions reductions for buildings which currently account for 21% of all GHG emissions 

Energy retrofits can reduce emissions by 32% to 56% according to the American Council for an Energy-Efficient Economy. The cost of these climate retrofits is often in the tens of thousands to hundreds of thousands of dollars, which is well out of reach for many, particularly those with limited access to savings and credit. Post-disaster rebuilding can present an opportunity to incorporate energy improvements and to do so cost-effectively by including them with other needed work. 

Insurers could help supply these extra funds during rebuilding so that homes are built back in a more climate-friendly way. One possibility is through so-called endorsements on an insurance policy, optional riders that provide policyholders with additional funding for certain activities during rebuilding. A climate endorsement, for example, could provide additional funding to support the installation of climate-friendly building materials, electrification, energy efficient systems, or certified designs, along with changes that would minimize future damages from extreme weather. 

5. Improving operations  

Insurance companies, like all firms, can improve the environmental practices of their own day-to-day operations. Beyond general operations, insurers may have opportunities to invest in energy efficient equipment or consider climate impacts in product purchasing. Insurers can use clean energy to power their offices, reduce car and air miles traveled, and incentivize electric vehicle usage. Insurance companies can institute trainings that build employee awareness of environmental practices.

6. Advocating policy changes 

An increase in the volume and size of insurance claims will only continue as the climate changes. Without stronger policy action, climate change will continue to drive insurance claim payouts for insurance companies. The insurance industry can take action by voicing their political support for climate policy at the local, state, and federal level. Additionally, they can showcase their support of organizations and candidates who actively work to address the climate crisis and strengthen people’s ability to thrive.  

For more discussion on the ways insurers can support climate action, see Leveraging Insurance for Decarbonization 

Posted in Climate Change, Economics, Energy Transition / Leave a comment

Navigating a Just Labor Transition: Unveiling the JLT Progress Scale and Strategies for a Fairer Future

This blog was authored by Brigitte Castañeda and Minwoo Hyun, former EDF Doctoral Interns, Raphael Heffron, Professor at the Universite de Pau et des Pays de l’Adour, and by Environmental Defense Fund economist, Luis Fernández Intriago.

As temperatures rise globally, the energy sector stands clearly accountable, putting a critical spotlight on the need for a just energy transition. In particular, the ongoing strikes and labor disputes within the energy sector emphasize the urgent necessity of ensuring an equitable workforce transition. Our new Environmental Defense Fund Economics Discussion Paper: A Global and Inclusive Just Labor Transition: Challenges and Opportunities in Developing and Developed Countries,” addresses this by evaluating labor policies in both developed and developing countries, introducing the Just Labor Transition Progress Scale to assess their energy transition efforts.

From the experience of the energy transition in developed countries, we find that a successful Just Transition for labor markers in energy sectors requires robust government leadership, financial support, inclusive local consultations, a well-structured taxation framework, evaluation of social security and labor regulations, and a focus on economic diversification to create alternative (and green) job opportunities. Developing countries transitioning from fossil fuels to cleaner energy face further and particular challenges due to having higher informal employment and less social protection. For example, coal-dependent countries are at higher risk due to characteristics that include labor-intensive and low-skilled jobs and geographic concentration, while oil-dependent countries face less disruption with more specialized roles. Overall, careful planning is crucial to maintaining affordability, accessibility, and inclusive employment, particularly in countries with concentrated fossil fuel jobs. Targeted strategies and economic diversification are two policy actions needed to ensure a Just Labor Transition (JLT).

This is why we propose a decision-making policy tool called the Just Labor Transition Progress Scale (JLTPS) to evaluate national progress toward a just labor transition. Our results highlight that most developing countries are at the beginner or moderate stage, while developed countries are at the intermediate stage, with very few at an advanced stage.

Lessons and Challenges in 7 Developed Countries and 7 Developing Countries

From the partial energy transition experiences in developed countries — given their continued reliance on fossil fuels— and the initial stages of developing countries, we draw several key lessons about the JLT. First, JLT policies are expected to be effective within a comprehensive framework characterized by a robust, explicit, and cohesive top-down leadership approach, coordinated efforts, and substantial central (federal) government funding. Second, the success of JLT initiatives also hinges on fostering extensive and inclusive local consultations, primarily through local networks capable of accessing top-down funding and coordination. Finally, realizing successful JLT efforts may require emphasizing “economic diversification,” aimed at revitalizing energy communities (through regional development plans) by fostering alternative labor market opportunities.

These lessons highlight the importance of strong and committed government support for diversifying the local economy, comprehensive ‘just’ policy frameworks that provide clear guidelines and funding, developing new renewable energy projects, and creating worker retraining and education programs.

Fig 1: Just Labor Transition Progress Across Countries

Source: Castaneda Rodriguez, Brigitte and Fernandez Intriago, Luis and Heffron, Raphael and Hyun, Minwoo, A Global and Inclusive Just Labor Transition: Challenges and Opportunities in Developing and Developed Countries. Environmental Defense Fund Economics Discussion Paper Series, EDF EDP 24-03, Aug 2024, Available at SSRN: https://ssrn.com/abstract=4927054

Next Steps of a Just Labor Transition

With UN COP29 just a few months away, many policy issues discussed in international, national, and local policy fora. However, labor remains a primary issue in any societal stakeholder’s policy action and priority list. For many people, labor is the essence of how they can achieve a sustainable and just livelihood. Our research identifies policy gaps and misalignment in many countries, indicating they are far from reaching their labor transition targets. However, applying the Just Transition Labor Transition Scale provides insights into what many countries have achieved and how far they still need to go to meet clear just labor goals.

This area requires further exploration; no country performs significantly better than others. For many countries, the priority should be the early adoption of policies that promote green jobs while aligning with the ‘just’ principles of the just transition. For populations worldwide, creating new jobs should bring opportunities for decent work and sustainable livelihoods.

 

 

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Clearing the Air: How New Rules for Oil & Gas Facilities Offer Major Wins for the Environment and Economy

This blog post was authored by Lauren Beatty, High Meadows Postdoctoral Economics Fellow and Aaron Wolfe, Senior Economics and Policy Analyst.

Image by freepik

Methane pollution caused by oil and gas production in the U.S. is a major contributor to climate change and releases health-harming pollution into nearby communities. New EPA rules are projected to slash methane emissions from covered sources by 80%.  

Between 2024 to 2038, EPA projects a reduction of 58 million tons of methane—equivalent to removing nearly a billion cars from the roads for a year—along with slashing 16 million tons of smog-forming volatile organic compounds (VOC) emissions and 590,000 tons of air toxics. Many of the common-sense measures in the rules will lead to economic and environmental benefits for Americans and have already been adopted by leading states and operators. They also result in capturing otherwise wasted gas. EPA estimates that by 2033, increased recovery of gas will offset $1.4 billion per year of their compliance costs. 

In response to arguments from the oil and gas industry that the rules will harm operators, EDF’s Economics team analyzed the economic impacts of the regulations, including their effect on small producers, marginal wells, and consumers. We found that: 

  • The regulations have low compliance costs, which are further offset by profits from captured gas and are not expected to influence operational decisions by oil and gas producers;  
  • Marginal wells are provided significant flexibility and are not expected to face significant compliance difficulties; and   
  • The regulations will cause no perceivable oil and gas price increase for consumers. 

Our conclusions are consistent with EPA’s own analysis and bolstered by the experience in leading states where similar methane regulations have been in effect for years without hindering production or harming the industry. 

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Empowering Chile’s Climate Action: A Citizen’s Guide to Article 6

This blog was authored by Francisco Pinto and Rodrigo Bórquez, economists of the Climate Action Teams (CAT) initiative, and by Environmental Defense Fund economist Luis Fernández Intriago.

Source: Climate Action Teams

Reducing emissions is imperative to address climate change. The mechanisms established in Article 6 of the Paris Agreement can serve as vital tools in our quest to stop the impacts of climate change and safeguard the future of our planet—but navigating its complexities can be tricky.

To tackle this challenge, between June and August 2023, the Climate Action Teams (CAT-Chile) initiative, co-founded by EDF, and the Consensus Building Institute (CBI) conducted a dialogue process in Chile. We aimed to convene key players in a discussion to better understand Article 6’s potential to boost Chile’s climate ambition.

This fruitful dialogue, called “Climate Dialogue: Strengthening Chile’s Ambition through Article 6 of the Paris Agreement“, explored three specific areas:

  1. The feasibility of implementing Article 6 in Chile,
  2. The application of safeguards, and
  3. The short-term actions and tasks to progress in this field.

The dialogue’s outcomes were delivered to Chile’s Ministry of the Environment to consider as they prepared to host their own public-private sector dialogue on ideas around the development of a Chilean Article 6 policy. Read More »

Posted in Economics, Energy Transition, International, Uncategorized / Leave a comment

How Economists Can Leverage MethaneSAT Data for Climate Action

This blog was co-authored by Maureen Lackner (Senior Manager of Economics and Policy Analysis, Environmental Defense Fund) and Lauren Beatty (High Meadows Postdoctoral Economics Fellow, Environmental Defense Fund).

Climate change is a pressing issue, partly fueled by methane: a greenhouse gas responsible for about 30% of today’s global warming. Reducing methane emissions will slow down the rate of near-term warming and help avert the worst climate damages. To tackle this problem, Environmental Defense Fund launched MethaneSAT, the world’s first satellite developed by an environmental non-profit. MethaneSAT aims to quantify regional emissions of methane across more than 80% of oil and gas production in the world, while disaggregating diffuse area emissions and high-emitting point sources. 

MethaneSAT will generate publicly available data allowing stakeholders to track emissions and hold polluters accountable. This data will empower various actors – governments, companies, and investors – to make informed decisions about emission reduction strategies. It will be an invaluable resource for economists and public policy researchers aiming to analyze and design effective climate policies.  Read More »

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