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It was Bill Gates who coined the term “green premium” to describe the additional cost for a product or service that doesn't emit CO2. The green premium makes it easier to see which industries and manufacturing processes need to innovate to achieve net zero emissions by 2050. Here we tell you everything you need to know about it and where it fits into the energy transition.
In 2021, Microsoft co-founder Bill Gates authored How to Avoid a Climate Disaster, a plan for the world to reduce net CO2 emissions and avoid a climate catastrophe. Gates dissects the industries that contribute most to climate change and puts forward several ways to save the planet from ruin. Though he highlights technological innovation to overcome the climate crisis, one of his most talked-about ideas is the “green premium”. The green premium is the additional cost of pollution-free production. In other words, it's how much more you have to pay to do an activity without somehow relying on fossil fuels.
Imagine a CO2-emitting truck that needs 100 euros per day of petrol/gas to make trips. If the truck company wanted to pollute less, it could use emission-free or low-emission trucks that run on biofuel; however, that would cost 250 euros per day. Thus, the green premium would be the 150 euros extra that the company would have to pay to be pollution-free.
How to bring the green premium down
The price between more and less eco-friendly options also varies considerably in agriculture, energy, fashion, trade and other industries. Being aware of the price difference is key to reducing it.
You might be wondering why some eco-friendly options are more expensive. One answer is production methods. For instance, heavy, decades-long investment has gone to building infrastructure and developing technology to produce energy from gas, oil and other fossil fuels. Decarbonizing the energy industry requires making great strides in developing renewable energy to make business more efficient and profitable.
Green premiums enable us to work out which emission-free solutions we should be using — solar power, for instance, has a low premium in some regions — and which we should seek to develop due to the elevated price of alternatives. The lower the premium for a non-polluting product or service, the higher demand for it will grow.
Green finance for tech
The energy transition will require vast transformation and provide opportunity to develop new technology to combat the climate crisis. Investment is already going towards green hydrogen, energy storage, accessibility to sustainable raw materials, the circular economy, clean mobility, smart cities, carbon capture, biofuels, agritech and others.
According to Bill Gates, reducing the green premium depends on many factors. Here are the main three:
Undoubtedly, one of the keys to a low green premium is an efficient, profitable and emission-free way of manufacturing products and operating services. That means the entire value chain: production, shipping, marketing, use and end of shelf life. R+D, tech and other areas can be pivotal in spotting and replacing processes that drive up green premiums.
Funding is crucial to innovation and transforming production to reduce green premiums. Green bonds and other financial products can help finance sustainable initiatives. Banks offer households and companies lines of credit and loans to help them go green.
Governments can help lower the green premium through policy. They can invest in research and sustainable development initiatives and incentivize the private sector to do the same. Governments can also introduce measures to discourage products, services and manufacturing processes that release CO2. That should make eco-friendly options more competitive.
The green premium tells us how much more it costs to manufacture and consume sustainable products and services. It also shines a light on the pathway to net zero. Bill Gates suggests concentrating resources, innovation and development on closing the gap with less eco-friendly products and services. The transition to net zero is one of society’s biggest challenges. Knowing where to take action and what resources to invest in it are the first steps.
