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Introduction to climate economics: Why even strong climate action has such a low total cost

By Joe Romm on March 30, 2009 at 5:46 pm

"Introduction to climate economics: Why even strong climate action has such a low total cost"

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A cost of one tenth of a penny on the dollar — not counting co-benefits

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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29 Responses to Introduction to climate economics: Why even strong climate action has such a low total cost

  1. tidal says:

    Well said.

    That said, I hate to pick a nit, but you might want to explicity relate this presentation of “small foregone net GDP growth over decades” to what the Stern Review and others are saying (in fact, I am pretty sure this would be similar for McKinsey)… that we probably need to invest about 2% of GDP p.a. on the transition. I recognize that is an apples to oranges comparison, but just as we would object to conflations of GHG “emissions” versus “concentrations”, or “carbon caps” versus “CO2 caps”, I think we need to be clear on this, so that the casual reader isn’t confused.

    That annual investment, of course, is also good news because of the growth in new industries that can spur, but I think we need to be clear on the underlying implications that arrive at your presentaion of 0.1x% p.a. “cost”.

    Keep up the great work.

  2. hapa says:

    shorter version: “ecological remediation does not mean burning money, it means spending it — productively”

    those who say the money’s wasted are selling something else

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  5. john says:

    Tidal:

    Your point, while true as far as it goes, ignores the rest of the story. Which is, that we will have to invest a similar amount on new infrastructure to continue using fossil fuels.

    Oil exploration and development (tapping increasingly lower-grade and increasingly scarcer reserves from harder to get at places), new grid capacity, digging up deeper and less concentrated coal from ever more remote places — all this will impose costs comparable to investing in new infrastructure.

    So we can spend on a finite resource that is rapidly disappearing, leaving stranded investments littering our economic landscape within a few decades or we can spend a similar amount on efficiency and renewables, which essentially last forever.

    Hmmmmmmmm. seems like a no-brainer to me.

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  7. Roger says:

    Thanks for posting this information and analysis. While I support action on climate change, perhaps the collapse of civilization as we know it might be a good thing if it were not for all of the lives that would be lost.

  8. jorleh says:

    Just so. But what about this Danish anti-science idiot I don´t just remember it`s name, the pseudo-economist, you perhaps remember.

  9. paulm says:

    As the carbon door swings shut, the infighting intensifies…at least Obama is gathering the confidence to stick his foot in.

    Just when we need him, the professor has an acute attack of the Bellamoids
    http://www.guardian.co.uk/commentisfree/2009/mar/31/george-monbiot-wind-farms-renewable
    The new planning regime for wind farms is not a ‘fascist’ erosion of our freedoms; it is vital for the survival of our planet

  10. Jim Beacon says:

    Climate change writers keep bouncing the ball off the hoop. Just because scientists use the metric system is no reason for the media not to convert degrees Celsius to degrees Fahrenheit for the purpose of informing the American public of the danger we face. That *is* the idea, right?

    Let’s get real. When Americans hear that the planet is facing a “2 to 6 degree temperature rise” they react with a shrug because they are still thinking in terms of Fahrenheit even if they hear “Celsius” or see the little ‘C’ sign next to the data.

    Bottom line: Most Americans still do not grasp the fact that a rise of 2 to 6 degrees Celsius actually means a temperature jump of 3.6 to 10.8 degrees Fahrenheit! Put the warning to them in those terms and you might start seeing some faces light up with real concern instead of the usual yawn.

    Can we all stop being too cool for school and start speaking in terms that Joe Sixpack can understand and relate to? He and his family are going to have the deciding votes on whether the solutions get funded or not. The least we can do is stop talking down to them.

  11. Bud Man says:

    Nice analysis, but of course people will be focused on the up-front costs and ‘quo bene’, and will fight like dogs against bearing any costs. Look at what’s happening now with the credit crunch!

    What’s needed is a very careful look at whose ox is going to get gored and how to ameliorate that so the changeover is painless as possible for all concerned, even the “bad guys” – most of whom are just playing the cards they’ve been dealt.

  12. Mark Shapiro says:

    The McKinsey chart ranking carbon-free energy technologies in order of economic savings might be the most important single item in the solutions arsenal. It shows the path to mitigation without slowing economic growth.

    The chart shows that even with today’s technology, we could decarbonize profitably.

    But it is also important to repeat that any individual can decarbonize today at a profit. Some portion of my wealth comes from simple efficiency and conservation steps that I took years ago. And that wealth componds — it grows every year.

  13. charlie says:

    The McK graph is very interesting but also misleading.

    In terms of what the federal government can do on the left side on graph, I see:

    1. setting Fuel efficiency vehicles standards (commercial and retail)
    2. Research into sugar can biofuels (i.e. let Brazil sell us sugar).

    the rest (insulation/AC/water heating/lighting) is stuff the federal government can’t really mandate well. At the end of the day, the feds don’t tell me how to insulate my house, or, alternatively, can provide me the money/credit to pay someone to do so (if I can’t afford it right now).

    Even fuel efficiency standards are best dealt with by a gas tax to REDUCE consumption rather than to improve efficiency. Getting rid of all vehicles that get less than 20MPG on the highway would be a start — but since we own GM now that may not be desirable.

  14. DB says:

    This UK study by Utility Week and Accenture indicate an 18% rise in electricity costs to meet their renewables goal.
    http://www.utilityweek.co.uk/features/uk/power-generators-pessimistic-a.php

    “With most of this increase [in renewables] expected to come from wind, electricity prices will inevitably rise. Even including the cost of carbon dioxide emissions permits, power from offshore wind costs roughly twice that generated by a modern gas-fired plant.”

  15. Chris Winter says:

    That UK study found a remarkable degree of consumer support for the higher prices: “…a sizeable majority of UK adults (60 per cent) say they are willing to pay the expected 18 per cent increase in electricity prices to help avert climate change.”

  16. Mark says:

    Dumb question – I thought all the science says at least 50-80% below 1990 levels of CO2e to get to 450ppm. Obama plan reported as 83% below 2005. Can anyone give me the conversion between 1990 levels and 2005 levels that get you to 450ppm by 2050?

  17. Greg Robie says:

    Do the assertions made about what mitigating climate change will cost in this/the previous(?) economy/economic modeling still have veracity?

    Do assumptions need to be updated to accommodate the import of a collapsing economic model?

    Has the updated science made this referenced economic work less than relevant (beyond how it feeds into motivated reasoning and a feeling of hope)?

    I pose these questions as they seem both relevant to this blog entry and do not seem to be addressed in the framing of this post. The following queries are ones that, from what I can determine, were overlooked in even the initial economic evaluation and assumptions–had the credit crises not happened (until a later date).

    Has the US been able to borrow what it needs because the US$ is the global reserve currency, or because we are a nation of savers and good for the extended credit?

    To what degree is the US$ the current global reserve currency due to OPEC’s decision to sell its oil in US$?

    What, besides sustainable credit, gives value to fiat debt-based currencies?

    What, besides economic growth that exceeds the growth in population and inflation, and is reflected in rising wages, makes the extended credit good relative to the debt it denominates if sustainability is the desired outcome?

    The relationships among debt, credit, OPEC oil sales, peek oil, the growing rich/poor divide seem to be, like land based ice and the 2007 IPCC report, left out of the referenced economic evaluations. Am I wrong about this?

    In any event, it seems to me that the first steps are unfolding for decoupling the US$ from its global reserve currency role. As examples, China has called for the shift in the lead up to the G20 (and a year an a half ago–I think–warned its citizens to not invest in US$); the Russian Foreign Minister, about a month ago, predicted a shift in the reserve currency. The President of the EU has expressed concern about the US’s approach to resolving its credit crises. If the role of the IMF currency basket is expanded to become a global reserve currency our failure to build our nation’s economy as a polity of thrift and savers transforms our systemic dynamics and all assumptions based on them.

    What beyond an ability to blow up the world, or track and profit from the enslavement of the world to debt, do we have an excess of to offer in trade for what we do not have/produce? What besides these are our current policies preserving (or at least are trying to preserve)?

    Currently, of the three basic physical needs–food, shelter, and clothing–without “cheap” foreign imports, low foreign wages, and illegal immigrant labor, all of these would cost more than they do today. As the US$ is shifted out of its role as the planet’s reserve currency, what is cheap becomes more expensive; what is foreign and “low” becomes domestic and moves toward parity; what is illegal goes home as the relative advantages of being on the lowest rung of the ladder of this society’s economy ceases to be a ladder to anywhere. This shift means that the costs of all of these basic needs are set to rise and, thereby, further erode the value of the credit that has already been extended and the debt-denominated fiat currency it is based on. Where is the “sound”/sustainable credit for a “greening” of a debt-based economy coming from? As the McKinsey Global Institute work that is linked to notes it all “depend[s] on how new low-carbon infrastructure is financed.” What if there is no credit left when all the books are opened and balanced?

    In any event, the shift in a reserve currency will be accomplished with peak oil. The current collapsing credit systems has been funded due to an abundance oil. While the preponderance of the pre-peak oil benefits of this dynamic have accrued to the financiers of US$, there has been a bit of a trickle down affect. Just enough for the trickle to not be experienced for what was really happening (getting urinated on). Rather than put her on a responsible diet, the grants, professorships, NGO employment was just enough for even liberal/progressive deniers of how we have lived to succor ourselves at the teats of the litter of the great sow of global debt-based capitalism. Consequently, the greed/motivated reasoning of the financiers of the military industrial complex have, and thanks, in large part, to the policies of the IEA (and our exempting our oil companies from our anti-trust laws to serve for the US in this supra-governmental agency), fed this fatted sow to a sickness that has dried her up. Her litter are the walking dead but for accounting rule changes and the guaranteeing of over leveraged financial institutions by an already over leveraged taxpayer. The surgery being done to effect a dystopian kind of soylent green-like feeding arrangement of her litter of spiritual runts has a limited life. Peak oil will accomplished the same milking of the sow dry. Counter-intuitively, the rise in the price of oil will not created more demand for the US$, but, rather, a collapsed the demand for it. The exponential rise in demand will break the system.

    The rise in oils cost are not be factored into the risk assessment models for the credit that has been created. The resulting growth in demand for dollars will quickly outstrip the lactation capacity of this sow (had not the unconscionable leveraging of credit that has been effected done this first). Changing metaphors, in the past the increase in demand for oil and dollars was a “good” thing (i.e. worked). This is because the growth was gradual. The dynamic was kind of like slowly raising the heat on a frog in a pot of water. Doing it gradually you can boil it to death and it just sits there and lets it happen. Sudden changes are not responded to as passively.

    Are not such collapses and death inherent to the cyclical nature of things? Is it time to think different: like a constitutional currency coined in carbon credits assigned and held in trust for the people rather than the planet’s elite?

    Since my bias is that a sustainable economy is one that, as its fundamental principle, endows people with wealth that one must be mature to be responsible for, my questions and metaphors may simple be an expression of my version of motivated reasoning. Even so, good questions are important for learning and evolving . . . and I hope what I offer reaches that standard.

  18. Doug gibson says:

    Just one question:

    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.

    Is $45 trillion the annual investment? Or is it spread over more than four decades? The way this passage is written makes it unclear.

    [JR: Uhh, that's why we have links. But I think this was pretty clear. The cost is $45 trillion spread over more than four decades.]

  19. Sounds more optimistic than realistic. What exactly is the claimed existing solution to post-combustion CO2 capture and treatment? We can’t just junk the world’s fleet of pulverized coal plants, which supply most of our electricity, especially in India and China.

    Chemical capture (amine or chilled ammonia scrubbing) can’t work in the real world because the hot and dirty flue gas is 75% harmless N2. The nitrogen ballast makes mixing the chemicals in prohibitively difficult, and the fly ash and NOx and SOx play havoc with the reactor. Heat stable salts and corrosion remain unsolved problems. What other ready-to-deploy capture technology is there?

    Carbon treatment by underground sequestration is a ridiculous idea, as the GAO found.http://www.gao.gov/new.items/d081080.pdf What other ready-to-deploy alternative is there?

    Switching to renewables won’t work because the energy is intermittent.

  20. David B. Benson says:

    Wilmot McCutchen — One way to remove the CO2 is via enhanced mineral weathering. It might work simply to pump the flue gas underground into near-surficial ultramafic rock; it will certainly work with high concentrations of CO2 in the gas, hihger than flue gas.

    One means to concentrate the CO2 is to grow algae using the flue gas to enhance growth; there is a research project on this at MIT. The algae can then be put into an anaerobic digester to produce biogas. The biogas can be separated by amine (or other) process into methane and acid gas. The methane goes to market; the acid gas goes to sequestration. About 20% (or less) of the carbon in the algae is sequestered, so this won’t capture much.

    To put this in scale, to capture 1% of the excess carbon added yearly, using just air capture of CO2 via algae growth, would require a massive installation covering around half of Australia’s Nullarbor Plain and generate (yearly) a quantity of methane worth around $116 million at today’s (low) spot prices for natural gas.

    A bit discouraging, really.

  21. Bill Eacho says:

    Not only is the net economic impact of addressing climate change potentially positive, it is important to note that current estimates of NOT dealing with climate change are dramatic. The current estimate, as in FY09, of ignoring climate change is about (.5)% of GDP annually, which is estimated to climb to (5-6)% of GDP, annually, by 2050. So to spend up to (.5)% now to counter it, knowing that might drop to zero or even a positive effect, and prevent a dramatic negative effect, points out that purely from an economic perspective we MUST act, and act now.
    This is one issue where those who favor a strong economy and those who want to protect the planet are on the same side, if they know the facts.

  22. Phillip Huggan says:

    I’m not sure how much of this crisis is psychological and how much is long-term flat income taxes and debt.
    Whatever initiatives targetted at really psyching up the population (printing tons of cash and really getting TARP-y on non-financial sectors), that are being held off on for now, I suggest strongly the bulking of Keynesian stimulus not begin until after the long-term kW/h price of electricity from wind turbines is below the price from coal. The faster carbon is hurt and/or clean is buttressed, the better.
    This seems like a key long-term point of inflection for our species; there aren’t too many easy-to-avoid hazards like not building coal plants in the developing world now. Building wind-turbines artificially fast scales-up the introduction of technologies like wind-banking economies of scale. Wind turbine supply chain will always provide at-home employment opportunities in a progressively globalizing world. USA has 1st mover advantage over Canada, China, India.

  23. ChuckL's says:

    It sure has worked well in Spain, hasn’t it. Lets stop the BS and call it what it is, a huge tax on the already ailing American economy.

  24. Yep I agree, it worked well in Spain!

  25. Rose says:

    I also think there are good technologies now to get a good job, there is still time to start, the planet can not wait any longer.

  26. John says:

    This is a great site. Thanks for the great info. I will have to come back and read some more posts

  27. Thanks for posting this information and analysis

  28. while true as far as it goes, ignores the rest of the story. Which is, that we will have to invest a similar amount on new infrastructure to continue using fossil fuels.