Introduction to Climate Economics

Joseph Romm

Introduction to climate economics: Why even strong climate action has such a low total cost one tenth of a penny on the dollar. By Joseph Romm, ClimateProgress.org

Since the nation is about to launch into a long debate about the costs of climate action versus the cost of inaction, here is an overview of the major cost analyses of global climate action.

In its definitive 2007 synthesis report of the scientific literature, the Intergovernmental Panel on Climate Change (IPCC) concluded:

In 2050, global average macro-economic costs for mitigation towards stabilisation between 710 and 445ppm CO2-eq are between a 1% gain and 5.5% decrease of global GDP. This corresponds to slowing average annual global GDP growth by less than 0.12 percentage points.

So global GDP drops by under 0.12% per year — about one tenth of a penny on the dollar — even in the 445 ppm CO2-eq case (through 2050, see Table SPM.7). And this is for stabilization at 445 ppm CO2-eq, which is stabilization at 350 ppm CO2 (see Table SPM.6).

And that has a very good chance of averting the incalculable cost of catastrophic global warming impacts to the next 50 generations, which means the cost of action is far, far less than the cost of inaction.

The IPCC’s conclusion — and every single word in the report — was signed off on by 130 nations including China and the Bush Administration. Nor is this an especially controversial conclusion, at least among the few groups that have done comprehensive global economic and energy modeling:

mgi-cost-curve-small.jpg

How can the world’s leading governments and scientific experts and McKinsey and the traditionally conservative International Energy Agency agree that we can avoid catastrophe for such a small cost?

Because that’s what the scientific and economic literature — and real-world experience — says. The IPCC summary report, which is, after all, primarily a literature review, notes:

Both bottom-up and top-down studies indicate that there is high agreement and much evidence of substantial economic potential for the mitigation of global GHG emissions over the coming decades that could offset the projected growth of global emissions or reduce emissions below current levels.

In fact, the bottom up studies — the ones that look technology by technology, which I believe are more credible — have even better news:

Bottom-up studies suggest that mitigation opportunities with net negative costs have the potential to reduce emissions by around 6 GtCO2-eq/yr in 2030.

Wow! A 20% reduction in global emissions might be possible in a quarter century with net economic benefits!

The technology-by-technology cost-curve from McKinsey demonstrates this finding more concretely. Whereas the IPCC merely says that 450 ppm could be achieved for a total GDP reduction of <3% in 2030 (the cumulative impact of the <0.12% of GDP per year cost), McKinsey believes it could be even less costly:

The macroeconomic costs of this carbon revolution are likely to be manageable, being in the order of 0.6–1.4 percent of global GDP by 2030. To put this figure in perspective, if one were to view this spending as a form of insurance against potential damage due to climate change, it might be relevant to compare it to global spending on insurance, which was 3.3 percent of GDP in 2005. Borrowing could potentially finance many of the costs, thereby effectively limiting the impact on near-term GDP growth. In fact, depending on how new low-carbon infrastructure is financed, the transition to a low-carbon economy may increase annual GDP growth in many countries.

I want to be clear here that stabilizing at 445 ppm CO2-eq does require a significant annual investment, as the IEA analysis shows. The IEA puts the investment at $45 trillion, which sounds like an unimaginably large amount of money — but spread over more than four decades and compared to the world’s total wealth during that time, it is literally a drop in the bucket — 1.1% or one part in 90 of the world’s total wealth.

Indeed, the IEA notes that one reason the dollar value of the investment is so high is “in part due to the declining value of the dollar.” [Not to self: How diabolical of President Bush — by weakening our economy he increased the total dollar cost of action on climate, thus encouraging inaction!]

And while the additional investments seem high, “they do not represent net costs.” They are not a pure negative hit to global GDP. That’s because “technology investments in energy efficiency” and many low-carbon power sources “reduce fuel requirements.” In all the scenarios the IEA considers,

… the estimated total undiscounted fuel cost savings for coal, oil and gas over the period to 2050 are greater than the additional investment required (valuing these fuels at Baseline prices). If we discount at 3%, fuel savings exceed additional investment needs in the ACT Map scenario [in which CO2 emissions in 2050 only return to 2005 levels].

But don’t we need new technologies? Of course, but we don’t need — and can’t afford — to sit on our hands when we have so many cost-effective existing technologies. The IPCC finds:

There is high agreement and much evidence that all stabilisation levels assessed can be achieved by deployment of a portfolio of technologies that are either currently available or expected to be commercialised in coming decades, assuming appropriate and effective incentives are in place for their development, acquisition, deployment and diffusion and addressing related barriers.

Yes we need to do two things at once: aggressively deploy existing technology (with carbon prices and government standards) and aggressively finish developing and commercializing key technologies and systems that are in the pipeline. Anyone who argues for just doing the latter is disputing a very broad consensus — and is neither pragmatic nor centrist.

McKinsey finds 70% of the total 2030 emissions reduction potential (below $60 a ton of CO2 equivalent) is “not dependent on new technology.”

The report notes that “we have been fairly conservative in our assumptions about technological progress in these projections.” For instance, the analysis largely ignores the potential of concentrated solar thermal electricity, which is a bit player for their analysis but which will probably be the single biggest supply side low carbon source in reality (see “Concentrated solar thermal power Solar Baseload — a core climate solution“).

[Yes, the IEA report does suggest we need major technology advances — but that is mostly for cost reduction if the price of oil stays low, which even the IEA doesn’t believe any more (see “IEA says oil will peak in 2020“).]

So the bottom line is that the economic cost of action is low, whereas the cost of inaction is incalculably greater — what exactly is the “price” of 5 feet of sea level rise in 2100 rising 6-12 inches a decade for centuries thereafter or the price of desertifying one third of the planet and losing all of the inland glaciers that provide a significant fraction of water to a billion people. Or the price of losing half the world’s species. For details, see “An introduction to global warming impacts: Hell and High Water.”

And this is without even adding in the various ancillary benefits such as reduced air pollution and averting the huge economic dislocations that are inevitable from peak.

Energy efficiency overview:

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1 comment

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Charles M. 110°

So these folk keep oscillating from saying that climate change mitigation is achievable and saying that it is already too late to do anything. Perhaps they need to make up their minds if they really expect anyone to take them seriously. Sure, people need to be open th changing their minds as knowledge changes but this is flip-flopping seems to be more politically than scientifically driven.

Two points make me rather concerned here:
1) There is very mention of agriculture, yet agriculture has a very significant impact through land use change.
2) It uses GDP as the benchmark. GDP is a very broken measurement of true economic performance.

This does require some technological breakthroughs. Probably too keen to expect these to come about within a decade, but probably reasonable to expect in a 40 year timeframe.

Written in April 2009

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