What is a Green Premium?
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Since the release of Bill Gate’s new book ‘How to avoid a climate disaster’, there has been an increase in people talking about one of his concepts – the ‘Green Premium’. In this post, I’m going to talk about what it is, how it might help as well as some of the criticisms of it.
What is it?
The concept of a green premium is simple. If you have an unsustainable product that costs $1 and there is a sustainable version available for $1.50, then the ‘green premium’ is $0.50. This is the additional amount that has to be paid in order for that product to be sustainable. It can be complicated to calculate these figures though. It has long been argued that fossil fuels are artificially cheap because their price does not factor in the cost to the environment. As a result, compared dollar to dollar, the product made with fossil fuels could have an unfair advantage unless a cost of carbon emissions is factored in. In addition, the green premium differs per country.
What is it used for?
The green premium concept is being used to measure progress on green technologies. It help us to figure out our next steps (which technologies we should switch to immediately, which we need to research more first).
To explain what I mean, I’ll start with an example of green energy. In the US and Europe, it is estimated that the green premium for exclusively using renewable energy in homes is quite low (around $18/month for most households). That is a lot of money for people who are already struggling to pay the bills, but for a large group of people this amount would not substantially impact them. In this concept, it would be ideal if these people would switch to renewables where possible, because they can afford the green premium.
Another example is one which has attracted a lot of publicity – flying. We’d all love for flying to be sustainable but it is a problem that is hard to solve. There are several ideas for this, ranging from biofuels to electric/hydrogen planes. If we only look at the short term, the option which can be scaled up the fastest is biofuels. Non-sustainable jet fuel has historically cost around $2.22 per gallon whereas the biofuel alternative costs over $5. This would be a significant price to pay for airlines (and sometimes biofuels aren’t as clean as they might seem anyway). Because of this, it’s clear that more research and development has to be done, so that the green premium can be reduced.
These examples allow us to make several conclusions. If a green premium is negative or zero, then people should be widely adopting it as it has reached an acceptable price. When the premium is small, then people with higher disposable incomes should adopt the green product which will allow the price of it to come down to a level everyone can afford. When the green premium is very high, then more research and development is needed to make it viable.
There are several potential issues with the concept. I already mentioned it earlier, but fossil fuels are cheap because the financial cost of cleaning up the environment is not factored in. If we only rely on green premiums, then better alternatives will always have a very difficult time competing. That is why some have proposed a ‘carbon tax’ which will factor in a product’s emissions. This will even the playing field.
Furthermore, the concept does not factor in how informed the regular person is about a green alternative. There are many areas where people miss out on better alternatives or spend more money than they have to simply because they aren’t aware of how they can do things differently. You can see this a lot with money unfortunately, where it’s often the poorest in society who know the least about managing finances. You can also see this problem a lot today with buying appliances such as fridges. People often buy cheaper, energy-intensive ones even if they could pay slightly more for one which uses significantly less energy which would save them money in a relatively short amount of time.
To conclude, I believe there is real value in the concept if it is used correctly. It provides decision-makers with more information about which technologies they should promote, which technologies might need subsidies and also where to direct research and development funding. We need to be aware that items made with fossil fuels are artificially cheap and that we should try to buy a more sustainable option if we have the ability and resources to do so. If we look at it from a general environmental perspective, we also need to realize that this is only part of the solution. It’s also important that people and businesses are informed about what their purchasing options are so they can make the right choice for them and for the planet.
If you’d like to read more about the concept, I’d highly recommend reading Bill Gate’s new book. If you have any thoughts on the concept, feel free to leave a comment below!