Operational versus Capital Expenditure Risk in a Clean Energy Transition 20 w 30 w 6 w 0双 .2 03 碳 06 文 0. 库 vi p Brian C. Prest and Jordan Wingenroth Report 24-04 March 2024 Operational versus Capital Expenditure Risk in a Clean Energy Transition A About the Authors Brian C. Prest is an economist and fellow at Resources for the Future (RFF) specializing in the economics of climate change, energy economics, and oil and gas supply. Prest uses economic theory and econometrics to improve energy and environmental policies by assessing their impacts on society. His recent work includes improving the scientific basis of the social cost of carbon and economic modeling of various policies around oil and gas supply. His research has been published in peerreviewed journals such as Nature, the Brookings Papers on Economic Activity, the Journal of the Association of Environmental and Resource Economists, and the Journal of Environmental Economics and Management. His work has also been featured in popular press outlets including the Washington Post, the Wall Street Journal, the New York Times, Reuters, the Associated Press, and Barron’s. 20 w 30 w 6 w 0双 .2 03 碳 06 文 0. 库 vi p Jordan Wingenroth is a research associate at RFF with a focus on the Social Cost of Carbon (SCC). Jordan leads the current effort to add SCC estimates pertaining to biodiversity loss to the RFF-Berkeley Greenhouse Gas Impact Value Estimator (GIVE) model, having formerly contributed to the development of GIVE as was published in Nature in 2022. Prior to joining RFF, Jordan studied ecology in the Department of Environmental Science, Policy, and Management at the University of California, Berkeley. Acknowledgements This work was supported by the National Renewable Energy Laboratory, a national laboratory of the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, operated by the Alliance for Sustainable Energy LLC. The authors would like to thank Paul Donohoo-Vallett, Daniel Steinberg, Ryan Wiser, and Jun Shepard for their valuable comments and feedback on this work. Their insights and suggestions helped improve the quality and clarity of the manuscript. Resources for the Future i About RFF Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy. The views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. Sharing Our Work 20 w 30 w 6 w 0双 .2 03 碳 06 文 0. 库 vi p Our work is available for sharing and adaptation under an AttributionNonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) license. You can copy and redistribute our material in any medium or format; you must give appropriate credit, provide a link to the license, and indicate if changes were made, and you may not apply additional restrictions. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. You may not use the material for commercial purposes. If you remix, transform, or build upon the material, you may not distribute the modified material. For more information, visit https://creativecommons.org/licenses/by-nc-nd/4.0/. Operational versus Capital Expenditure Risk in a Clean Energy Transition ii Abstract 20 w 30 w 6 w 0双 .2 03 碳 06 文 0. 库 vi p This report analyzes the differences between risk profiles posed by fossil assets, such as natural gas power generation and gas-powered vehicles, and those of “green” alternatives, such as wind power and electric vehicles. Fossil assets tend to be exposed primarily to uncertainty in operational expenditures (OPEX) such as fuel prices, whereas green assets tend to be exposed primarily to uncertainty in capital expenditures (CAPEX). This report builds a quantitative dynamic economic model of investment under uncertainty that accounts for these different kinds of risk. The results show the relative value of such CAPEX-exposed green assets over OPEXexposed fossil assets for reducing exposure to future cost uncertainty. The model’s key conclusions are that (1) correlated OPEX risk across assets implies that an allgreen portfolio has lower un