Last year, three facts about climate change became clear: Achieving a low-carbon economy is essential; new technologies make that goal attainable at an acceptable cost; but technological progress alone will be insufficient without strong public policies.

Extreme weather in December — big floods in South America, the United States, and Britain, and very little snow in the Alps — partly reflected this year’s strong El Nino (caused by warmer Pacific Ocean water off Ecuador and Peru). But the planet’s rising surface temperature will increase the probability and severity of such weather patterns, and 2015 — the warmest year on record — confirmed that human greenhouse-gas emissions are driving significant climate change. Earth’s average land surface temperature is now about 1 degree C above preindustrial levels.

Faced with that reality, the climate agreement reached in Paris last month represents a valuable but still insufficient response. All major economies are now committed to reducing emissions below business-as-usual levels: but the combination of national commitments would likely result in warming of almost 3 degrees above preindustrial levels — a terrifying prospect, given the adverse consequences already apparent from a 1-degree rise.

To cap the global increase in temperature at 2 degrees (the target endorsed in Paris), let alone to limit global warming to 1.5 degrees (an aspiration which was also confirmed), will require that emissions in 2030 be about 20 percent lower than the combined national commitments envisage. Moreover, it demands further reductions beyond 2030 that ensure subsequent progress toward net-zero carbon emissions by the second half of this century.

But 2015 also provided further evidence that we can achieve a low- or even zero-carbon global economy without sacrificing the growth still needed to pull many people out of poverty. Wind energy is now cost-competitive in many locations, and the costs of solar energy continue to plummet — down around 70 percent since 2008. Rapid cost reductions are also being achieved in battery and other energy-storage technologies, bringing electric cars closer to economic viability and enabling flexible electricity supply even where a large percentage of power comes from intermittent sources.

These and other technologies will enable the transition to low-carbon economies to be carried out at a manageable cost. Estimates from the International Energy Agency (IEA) suggest that in a “new policies” scenario that is broadly comparable with national commitments enshrined in the Paris agreement, the world would need to invest $68.3 trillion in energy-related systems between now and 2040.

By contrast, in a scenario compatible with limiting warming to around 2 degree, the required investment would be $74.6 trillion. Given annual global GDP of $74 trillion, the incremental $6 trillion of investment over 25 years represents only a small economic burden.

But while the absolute increase in required investment is moderate, the IEA’s low-carbon scenario entails a dramatic change in the pattern of investment. An additional $14 trillion should allocated to renewable or nuclear energy, or to buildings and transport systems to deliver improvements in energy efficiency, offset by a decline of more than $6 trillion in investment in oil, gas and coal production.

Reducing investment in fossil fuels reflects the reality that if the world is serious about its maximum 2-degree target, two-thirds of known reserves must be left permanently in the ground. And lower investment would be matched by a decline in cumulative fossil-fuel revenues amounting to as much as $34 trillion more than under the IEA’s “new policies” scenario, owing not only to lower volumes of oil, gas and coal consumed, but also to significantly lower prices.

And therein lies the problem. Lower oil, coal and gas prices would reduce incentives to develop and deploy renewable energy technologies, or to improve energy efficiency. And with technological progress continuing to reduce extraction costs, fossil fuels may at times over the next several decades still look cheap relative to low-carbon alternatives. We certainly will be able to produce low-carbon energy cheaply enough to support sustained economic growth and prosperity; what is much less certain is whether it will be cheaper than fossil fuels soon enough to avoid climate disaster.

Nor is it likely that free-market competition between fossil fuels and low-carbon energy will develop in a smooth and predictable fashion. In the last six years, the oil price rose from $77 per barrel in January 2010 to over $100 from 2011 to 2014, before collapsing to below $40 in the face of overcapacity (created partly by the investment spurred by high prices). Gas and coal prices have followed a similar pattern. That boom-and-bust pattern may well continue.

Indeed, we enter 2016 with cheaper gasoline, which weakens the incentive to purchase fuel-efficient automobiles, and lower heating costs, which weakens the incentive to insulate homes. A purely free-market approach to the required energy transition would produce insufficient progress on emissions reductions and leave behind large stranded assets, representing trillions of dollars of wasted investment.

Strong public-policy interventions are thus essential to support an adequately fast energy transition that is as cost efficient as possible. Increased public support for research and development in crucial technologies — particularly energy storage — is needed to prevent short-term movements in fossil-fuel prices from undermining the transition’s momentum.

The Mission Innovation initiative, announced in Paris, which commits 20 major countries to doubling clean-energy R&D, is a vital step forward in this respect. But a clear commitment by policymakers to achieve a steadily rising carbon price — ideally one that increases more rapidly whenever fossil-fuel prices are at a cyclical low — is also required.

Technological progress makes it possible to build a low-carbon economy; but without support from strong public policies, the extreme weather events of December 2015 will look trivial compared to the harm that climate change will subsequently bring.

Adair Turner, a former chairman of the U.K. Financial Services Authority, is chairman of the Institute for New Economic Thinking. © Project Syndicate, 2016

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.