How much will it cost to cut global greenhouse gas emissions?
Economists continue to model the costs of investment to reduce global greenhouse gas emissions and the different routes these cuts could take to avoid dangerous climate change. Earlier this year, the IPCC published its comprehensive report on climate change mitigation. It concluded that staying within 2°C of warming, the threshold recognised and accepted by the world’s governments to avoid the worst impacts of climate change, is still feasible, providing action is taken to swiftly and sharply cut emissions. The question is, how much could that investment cost?
In its review of the latest scientific evidence, Working Group III of the Intergovernmental Panel on Climate Change earlier this year concluded that ensuring greenhouse gas concentrations do not exceed a level that would offer a 66 per cent chance of avoiding global warming of more than 2ºC would mean losses in global consumption of 1-4% in 2030, 2-6% in 2050 and 3-11% in 2100. These wide ranging estimates depend on many assumptions which are openly acknowledged in the report, including measuring against a baseline in which climate change does not occur and ignoring the economic co-benefits of reducing emissions, such as an improvement in local air quality.
For example, a recent report by the New Climate Economy estimates that these co-benefits in many cases swamp the costs of reducing emissions. In China, a recent study* found that PM2.5 pollution has been linked to 1.23 million premature deaths in 2010 (median estimate) – or, put in monetary terms, damages equivalent to 9.7–13.2% of China’s GDP. The health damages caused by local air pollution alone are larger than the estimated cost of decarbonisation. Gains from reduced congestion, less waste and inefficiency, innovation spill-overs, energy security and fiscal reform from carbon pricing, further offset the costs of emissions reductions the report shows.
Moreover, costs of a magnitude outlined by the IPCC look quite small when compared with the strong underlying growth that the global economy is likely to experience. For example, an average 3% growth per year for the next 25 years would see the size of the global economy, and hence GDP, approximately double in size.
Cost estimates ultimately depend on the assumptions made about the availability and costs of technologies, scale and pace of emission cuts required and the timescales considered in the models.
Different forms of emissions reductions have different costs and some regions and sectors are better placed to make cost-effective cuts than others. For example, improving energy efficiency could save the investor money and cut emissions. At the other extreme, investment in carbon capture and storage from coal power stations in regions far from CO2 storage sites might be much more expensive, but necessary to reduce carbon pollution.
Models are still highly dependent on assumptions about low-carbon technological progress during this century. As such, some economists suggest cost estimates may overstate the true long-term costs of action to cut emissions because they cannot yet capture future advancements in technologies (and thus falling costs), and new innovations developed over time. There is still little real idea of what technologies will cost beyond 2030 and what will be available. It is not inconceivable that, after years of investment, alternative energy sources (such as solar) could be significantly cheaper than extracting fossil fuels from ever more challenging and marginal locations. The costs of some technologies have already fallen more than expected. The extent to which these costs fall further may depend on the policy commitment to developing and deploying these technologies.
Estimating near-term costs is arguably easier, as policy-makers know which energy sources and technologies are currently available, the scale of emission reductions each offer, and broadly, at what cost. For example, in large parts of the United States, Africa, Latin America, India, Australia, and parts of China solar photovoltaic technology already offers a cheaper form of electricity generation than convention fossil fuels in certain conditions. Elsewhere, wind and other solar technologies are already cheaper than fossil fuels that face a carbon price. Policy-makers also know there are more energy-efficiency savings to capitalise on in the short-term. The longer the time frame considered, typically the higher the investment cost estimates, given the difficulty in making long-term predictions about the future cost of technologies or the climate policies that might be implemented by the end of the century.
The models used to estimate economic costs of emission reductions (which go beyond just investment costs to look at impacts on total resource productivity), assume that both the economy and climate policies are efficient. Some models assume an implausibly efficient globally co-ordinated policy response, such as a uniform global carbon price implemented simultaneously across all countries. The reality is that the world is not fully rational and fully optimal when it comes to climate-policy decision-making. Indeed, providing a clear policy direction can help build investor confidence and encourage research and development and innovation, which may bring costs down in the long run, but this is not where we are yet.
Nevertheless, the majority of studies agree that delaying action increases the costs of reducing emissions. In order to stabilise the stock of greenhouse gases in the atmosphere, the flow of emissions will have to fall faster, from a higher baseline, for every year that action is delayed. Delaying cuts to greenhouse gas emissions will make it more expensive, as well as increasing the risks of serious climate impacts, as set out in the earlier IPCC assessment.
No expert or model can say precisely what the energy technology mix will be in the second half of the century, or what it will cost. Delay is likely to be expensive and the scientific risks from increasing atmospheric concentrations of greenhouse gases are well documented.
The latest assessment into costs of action from the Global Commission on the Economy and Climate recognises there are numerous additional economic benefits of cutting greenhouse gas emissions and concludes “that all countries at all levels of income now have the opportunity to build lasting economic growth at the same time as reducing the immense risks of climate change”. By proactively steering the transition towards sustainable, low-carbon economic development, policy-makers can increase the chances that the energy technology mix in the future will be both low cost and low carbon.
*Hamilton, K., Brahmbhatt, M., Bianco, N., and Liu, J.M., 2014. Co-benefits and Climate Action. New Climate Economy contributing paper. World Resources Institute, Washington, DC
This article was written by Dimitri Zenghelis of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.
