The Risky Business Project was originally formed to quantify the economic risks to the U.S. from unmitigated climate change. This new report examines the business opportunities and challenges in addressing climate risk. This chapter offers an introduction to the report.

From Risk to Return: Investing in a Clean Energy Economy

Our first report, released in June 2014, took a traditional business risk assessment approach to the issue, including analysis of both likely impacts and risks, and less likely but potentially more severe risks. The report found that while the physical risks vary across region and sector, the likely economic impacts to key sectors such as real property, agriculture, and energy are enormous.

In order to avoid these serious economic consequences, the best available science suggests that U.S. greenhouse gas (GHG) emissions need to be reduced by 80 percent or more by 2050. Similar cuts must be made across all major economies. Achieving these reductions will require a transition to an economy powered almost entirely by low- and zero-carbon energy sources.

With the scale and urgency of such a transition in mind, this new report summarizes the findings of recent research and analysis on pathways to achieve a clean energy economy in the United States. We combine a literature review with new modeling to analyze four feasible pathways to reduce carbon emissions across the U.S. economy by 80 percent. These pathways use different mixes of energy technologies, including renewable energy sources, nuclear, and fossil fuels with carbon capture and storage. They are designed to ensure that American businesses and consumers will have access to at least as much energy as they would if the nation continued to rely on the current mix of high-carbon energy sources.

We believe this large-scale transition is urgently necessary to maximize the chance of avoiding the potentially devastating impacts of climate change on our economy. Making a convincing case for such a major transition, however, requires answering key questions, including:

  • Is creating a clean energy economy technologically and economically feasible?
  • What are the investment needs of this transition and how might specific economic sectors and regions be affected?
  • What are the opportunities and challenges for business?
  • What is the role of policy in this transition?

Risky Business: The Economic Risks of Climate Change

Before describing the possible pathways for achieving a clean energy economy, it is important to understand why such a transition is necessary. Our 2014 report did not estimate the costs of climate change to the entire American economy, but it did calculate the likely economic impacts in four key areas: coastal property, commodity agriculture, energy demand, and worker health and productivity.

We found that the financial toll from rising seas, steadily increasing heat, and more frequent and extreme storms will likely add up to hundreds of billions of dollars in direct costs to both the public and private sectors over the coming decades. For example:

  • Rising seas and more powerful storm surges are expected to more than double the average cost of coastal storms to $3.5 billion per year along the Eastern Seaboard and the Gulf of Mexico within 15 years.
  • Yields of corn, wheat, and other crops in the Midwest and South are likely to drop by more than 10 percent in the next five to 25 years absent adaptation—and could decline by more than 20 percent in some counties.
  • Some regions of the U.S., especially the Southwest, Southeast, and upper Midwest, will likely see several months each year with temperatures of 95°F or above. Extreme heat could make working outdoors or living without air conditioning a serious and potentially fatal health hazard.

These are the impacts and risks that are likely to occur over the next few decades—that is, those impacts with more than a 2-in-3 chance of occurring given the emissions that have already been released into the atmosphere. The risks at the tail end of the distribution of possible impacts, which would become likely impacts without action to combat climate change, are even more severe. For example, while it is likely that between $66 billion and $106 billion worth of existing coastal property will be below sea level nationwide by 2050, there is a 1-in-20 probability that this value will reach $701 billion by 2100 if we stay on our current emissions trajectory, with another $730 billion worth of property at risk during high tide. There is also a 1-in-100 chance that cities like New York, Norfolk, Virginia, and Honolulu will experience more than 6.9 feet of sea level rise by 2100.

As the 2014 report concluded, some of these physical impacts from climate change are already being felt across the U.S. today. In response, many businesses and local governments are already adopting adaptation plans or making investments that bring greater resilience to extreme weather and other climate change impacts. But the most severe climate impacts we modeled are not inevitable, and can be avoided with strong public and private sector action to cut emissions. To that end, we strongly recommended—and continue to urge—that business leaders take action now across all industries to measure and manage climate risk within their own companies and encourage policymakers to seriously address this issue.

New Science, Market Trends, and Policies Change the Equation for Business

The risk assessment model we used in 2014 anticipated changing conditions, including new climate science1. Since that time, the likelihood of severe risks from climate change has continued to grow. Indeed, every year that goes by without reductions in GHG emissions increases both the likelihood and potential magnitude of future climate change impacts. Since 2014, new scientific research has suggested that the likelihood of rapid sea level rise and sustained, higher temperatures has increased, underscoring the expected severity of climate impacts and the urgency of action2. With the benefit of this new research, we now believe our 2014 numbers were too conservative.

The financial risks of investments in the high-carbon fuels driving climate change are also growing. One example is the significant devaluation of publicly listed U.S. coal stocks in the past several years. A combination of citizen pressure, compliance costs associated with public health and environmental regulations, and the declining costs of renewable energy and natural gas led to a 12 percent drop in domestic coal consumption in 2015 alone, bringing coal’s share of U.S. electricity generation to its lowest level since 1982. As a result, coal mining companies such as Peabody, Arch, and Alpha Natural Resources have filed for bankruptcy, and across the industry workers and shareholders have faced significant losses as the industry contracts3, 4.

Investors are also recognizing that the risks of investing in other fossil fuel sectors are increasing as governments consider policies, such as carbon pricing and emissions curbs, that would reduce fossil fuel consumption along with emissions. Meanwhile, zero-carbon sources of renewable energy are becoming increasingly cost competitive. BlackRock, the world’s largest asset manager, noted in a recent report that investors with the longest time horizons are the most sensitive to these risks: “The longer an asset owner’s time horizon, the more climate-related risks compound. Yet even short-term investors can be affected by regulatory and policy developments, technological disruption or an extreme weather event5.”

Some large investors have begun to reduce risks in their own portfolios through greater diversification or by explicitly “decarbonizing” their investments. For example, the Investor Network on Climate Risk, a network of more than 120 institutional investors with more than $14 trillion in assets, has committed to addressing climate change, including by investing in low-carbon energy and technologies.

Even absent a price on carbon, governments at all levels are working to reduce greenhouse gas emissions and to encourage the growth of clean energy. Their actions and policies are having an impact on business practices across the country. To cite just a few examples, dozens of U.S. cities (many of them members of the Global Covenant of Mayors for Climate Change & Energy) have committed to reducing their emissions by 80 percent or more over the next few decades. California and a number of New England states have capped emissions from specific sectors, thus putting a de facto price on carbon. Twenty-nine U.S. states and the District of Columbia have renewable portfolio standards, which require a specific percentage of electricity to be generated from renewable sources6. Nearly every state uses building codes to encourage or require improvements in energy efficiency.

At the federal level, the U.S. EPA has promulgated rules under the Clean Air Act that require the power sector to cut carbon emissions 32 percent below 2005 levels by 2030. And at the international level, 197 nations around the world agreed to reduce GHG emissions and increase support for clean energy and energy efficiency in the 2015 Paris Agreement, which went into effect in late 2016. This evolving policy landscape is putting increasing pressure on companies to cut their own emissions. It also means that companies must include a range of carbon constraints and costs in their future planning in order to reduce their potential financial risks.

However, and this cannot be said strongly enough: taken as a whole, current government policies cannot achieve the needed emissions reductions to avert the worst impacts of climate change. Moreover, these policies are inconsistent across cities, states, and nations, creating an uncertain business and investment environment. Finally, policies remain in place both nationally and internationally that subsidize or otherwise encourage climate risk, including favorable tax treatment for fossil fuel production and consumption, and publicly-funded insurance for high-risk real estate investments.

This fast-changing policy landscape creates new risks and opportunities for business. If momentum continues to build for a transition to a clean energy economy, businesses face the risk of falling behind in the global competition for market share and technological leadership. If climate action stalls, those businesses establishing a leadership position now may not benefit from moving first. But even in the absence of consistent government policy on climate and clean energy, almost all businesses will be forced to adapt to some climate change impacts.

Moving from Risk Measurement to Risk Management

Many U.S. business leaders, including members of our Risk Committee, believe that moving to a low-carbon energy economy is necessary if business—and the U.S. overall—is to avoid severe climate-related economic impacts. To reduce current and future risks from climate change, businesses must begin taking specific steps now to transform the economy away from its current dependence on carbon-intensive fuels, processes, and products.

We know that most businesses and investors operate on a shorter time horizon than some of the key steps in the transition discussed here. Ultimately, for business to act with the necessary speed and scale to address climate change, government must put in place a strong policy framework that supports the transition and rewards first movers. This is a matter not only of risk reduction but also of basic competitiveness: As the rest of the world starts moving toward a clean energy economy, our innovators and investors can lead the way.

There are other important economic benefits: For example, renewable energy sources can reduce fuel price risk for businesses with considerable exposure to fossil fuel price volatility. This transition could also stimulate innovation and create new jobs across multiple industries. But such a transition will have costs, both to companies and workers, and its benefits will likely be unevenly distributed.

In order to assess the economic and technical feasibility of this transition and to identify the most significant costs and opportunities for business, the Risky Business Project commissioned this new report, “From Risk to Return: Investing in a Clean Energy Economy.”

Methods and modeling approach

Our analysis relies predominantly on the PATHWAYS** model, a bottom-up, stock rollover model with similar structure and inputs as the National Energy Modeling System (NEMS) maintained by the U.S. Energy Information Administration. PATHWAYS projects the energy system costs (and COemissions) associated with meeting an exogenous demand for energy services. The modelers choose to deploy technologies over time within a specified pathway in a way that meets that demand, both in terms of specific technological characteristics and how they would interact within the entire energy system.

A key strength of the PATHWAYS model is the very granular level of detail it brings to modeling of the energy system as a whole, and to the electricity sector in particular. PATHWAYS builds new generation, transmission, and distribution infrastructure to meet reliability needs in each of the nine census regions, and dispatches generation resources to balance supply and demand in each of the three main interconnection regions in the U.S. The model has several options for maintaining load balance in the case of high levels of variable renewable generation.

The model estimates the changes in investments, fuel expenses, and other operating expenses of low-carbon pathways relative to what we label the “High-Carbon Reference Case.” Investments can be estimated annually on an “as spent” basis, and they can be annualized over the lifetime of the investment. PATHWAYS combines changes in annualized investments, fuel costs, and operating expenses to estimate the annual net cost of a pathway, i.e., the “change in total energy system cost” for any given year (one of the key cost metrics of the model). The Appendix provides additional details about the PATHWAYS model. Appendix can be found at

Notably, PATHWAYS does not model the effects of price on supply and demand. It is not a partial or general equilibrium economic model, nor is it an optimization model. It is not designed to project macroeconomic impacts or to determine which clean energy pathway is “best” in terms of the narrow criterion of cost-effectiveness. Nevertheless, the model’s estimates of changes in investment, fuel costs, and total energy system cost illuminate the key questions of economic feasibility and affordability.

We gained additional insights into macroeconomic impacts by reviewing a study using PATHWAYS and the Policy Insight Plus model, a macroeconomic model developed by the Regional Economic Models, Inc. (REMI). Using outputs from PATHWAYS (changes in energy use and investments) as inputs, the REMI model can project how those changes would affect the U.S. economy relative to a reference case. A 2015 study using PATHWAYS and REMI in this way modeled very similar clean energy pathways with reduction goals for CO2 emissions of 80 percent by 2050 from 1990 levels. The macroeconomic projections from that study are presented here.

Uncertainties abound in any modeling exercise that looks 35 years into the future. We explored two key uncertainties as part of this study:

  • If the global economy succeeds in making a transition to clean energy, fossil fuel prices are likely to decrease significantly. We developed a plausible price scenario reflecting this, and explored the implications.
  • Rapid advances in Autonomous Vehicle (AV) technologies suggest that AVs could revolutionize how we conceive of and provide “personal mobility.” We explored a scenario in which AVs expand rapidly in the decades ahead.

In addition to the modeling using PATHWAYS and REMI, we critically reviewed more than a dozen studies that examine the technical and economic feasibility of achieving major reductions in greenhouse gas emissions (see Appendix), and also developed seven case studies on key aspects of a clean energy economy, such as energy storage technologies and transportation advances.

** PATHWAYS was originally built by Energy and Environmental Economics, Inc. (E3) and used to model the U.S. as part of the Deep Decarbonization Pathways Project ( Evolved Energy Research (EER) further developed the model and we engaged EER to apply it for this study (“EnergyPATHWAYS” is currently the official name of the model).

View footnotes

  1. Our 2014 report used modeling and analysis that is open source and available to anyone interested in identifying specific physical risks to their businesses or investments. Since its publication, many businesses, as well as public and private sector investors (including the federal government), have adopted and built on this methodology.
  2. The following sources are not exhaustive provide a solid sampling of recent research on the increasing effects of climate change: See Jessica Blunden and Derek S. Arndt, Editors, “State of the Climate in 2015,” Bulletin of the American Meteorological Society 97 no. 8 (2016), ; Robert M. DeConto and David Pollard, “Contribution of Antarctica to past and future sea-level rise,” Nature 531 (2016): 591–597,; Christopher Harig and Frederick J. Simons, “Ice mass loss in Greenland, the Gulf of Alaska, and the Canadian Archipelago: Seasonal cycles and decadal trends,” Geophysical Research Letters 43 no. 7 (2016): 3150-3159,; WMO Statement on the Status of the Global Climate in 2015,; Flavio Lehner, Clara Deser, and Benjamin M. Sanderson, “Future risk of record-breaking summer temperatures and its mitigation,” Climatic Change (2016),; Thomas R. Karl, et al., “Possible artifacts of data biases in the recent global surface warming hiatus,” Science 348 no. 6242 (2015):1469-1472,; Catherine M. O’Reilly, et al., “Rapid and highly variable warming of lake surface waters around the globe,” Geophysical Research Letters 42 no. 10 (2015): 10,773–10,781,; Jeremy S. Pal and Elfatih A. B. Eltahir, “Future temperature in southwest Asia projected to exceed a threshold for human adaptability,” Nature Climate Change 6 (2016): 197–200,
  3. Inti Landauro, “Engie Pushed to Loss by Hefty Write-Downs,” The Wall Street Journal, last modified February 25, 2016,; “Major step in ENGIE’s transformation to reach its ambition to be leader of the world energy transition,”, February 25, 2016,
  4. Camila Domonoske, “U.S. Coal Giant Peabody Energy Files for Bankruptcy,”, April 13, 2016,
  5. BlackRock, “Adapting portfolios to climate change”, September 6, 2016. Available at:
  6. “Renewable Portfolio Standard Policies,” DSIRE, last modified August, 2016,

Share this post