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  • Johannes Frosteman

Chapter 1: What are Green Premiums?



Overview of the Episode

In Episode 1, I explain green premiums' underlying context and meaning. Bill Gates is doing an elegant explanation of the concept in this video, referenced in the episode. I also explain the relationship between green premiums and “willingness to pay,” which varies across countries and products (see below). Finally, I briefly explain why it is essential to focus on critical services and products when analyzing green premiums.


Which Sectors and Agents to Focus on in the Podcast

To explain green premiums and evaluate ways to decrease them, it is essential to focus on specific industries. Therefore, the podcast focuses on the four sectors with the most greenhouse gas emissions (Figure 1; IPCC, 2014): electricity, agriculture, transportation, and industry. Including various industries enlightens how we need many solutions using different technologies to reduce emissions (Ritchie, 2020). But it is also possible that solutions in one industry can be applied in another one. For example, the tax-incentive “feed-in tariff”, discussed in Episode 5, can be adopted and used in the clothing industry.


Figure 1: Global greenhouse gas emissions in 2014, by sector (IPCC, 2014).

While focusing on specific industries, it is also essential to involve the right stakeholders to reduce green premiums. There are mainly three ways to reduce green premiums:

  • Governments can incentivize low-carbon technologies either by taxing carbon-based products or making the cleaner version cheaper. Ideally, a combination of those may work better (Breakthrough Energy, n.d.). Governments can also shape financial markets to incentivize better investments and invest in research and developments.

  • Companies and investors can focus on cleaner alternatives, support green technology startups, and invest in R&D. Advocating for helpful government policies is also beneficial.

  • Individuals can affect both governments and companies. First, by holding their elected officials accountable, secondly by voting for parties with beneficial policies. Perhaps more importantly, consumers can actively choose products emitting lower levels of greenhouse gases. Increased demand for such products signals consumer interest in sustainability and increases economies of scale, reducing costs.


Green premiums can help in focusing on which zero-carbon options to deploy today. For example, products with low green premiums should be incentivized and adopted when possible. One example is electricity, for which the green premium is only 15% (in the US; (Breakthrough Energy, n.d.). Comparatively, the price for liquid fuels with low greenhouse gas emissions is many hundred percent higher than conventional bunker fuel (Figure 2).


Figure 2: The green premium for green electricity is much higher than green fuel. It provides evidence that we should incentivize quicker adaptation of green electricity, but keep innovating new, cheaper, liquid fuels (Breakthrough technologies, n.d.).


However, green premiums should also be compared with the willingness to pay for more sustainable products. Li & Kallas (2021) conducted a meta-study focusing on worldwide willingness to pay (WTP)-studies. They found an average WTP being 29.5%, but it varies significantly between countries, genders, and product categories. For example, Asian WTP estimates are higher than in North America. Comparing green premiums and WTP can help us understand where decreasing green premiums significantly impact consumer habits. For example, suppose the average consumers are willing to pay 30% more for a milk alternative with low greenhouse gas emissions. In that case, it may be less critical to subsidize such an option if the green premium is already 30%. At the same time, in industries where WTP is lower, such as in steel (Ito, 2021), governments and investors play a more critical role in incentivizing the development of green steel. It is only when consumer habits changes occur that decreasing green premiums positively impacts our shared climate.



References

Breakthrough Energy. (n.d.). The Green Premium. Retrieved February 16, 2022, from https://www.breakthroughenergy.org/our-challenge/the-green-premium

IPCC. (2014). AR5 Synthesis Report: Climate Change 2014 — IPCC. https://www.ipcc.ch/report/ar5/syr/

Ito, A. (2021, October 28). Green steel: The race is on. Roland Berger. https://www.rolandberger.com/en/Insights/Publications/Green-steel-The-race-is-on.html

Li, S., & Kallas, Z. (2021). Meta-analysis of consumers’ willingness to pay for sustainable food products. Appetite, 163, 105239. https://doi.org/10.1016/j.appet.2021.105239

Ritchie, H. (2020, September 18). Sector by sector: Where do global greenhouse gas emissions come from? Our World in Data. https://ourworldindata.org/ghg-emissions-by-sector

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