Building a Low Carbon Economy: How much will it cost? Where do we start?

March 10, 2009

     By Duncan Green     

Leaders like Obama and (increasingly) Gordon Brown seem to be gravitating towards the ‘green new deal’ argument that massive international spending in response to the financial crisis must also shift economies onto a ‘low carbon recovery’ path. Looking at the science, there’s little argument – we have to massively reduce the carbon intensity of production if we are to keep below two degrees of global warming. In terms of politics, maybe the attraction is that it’s one of the few positive (rather than punitive or defensive) messages that makes sense right now.

But how do we make sure that warm words turn into action? I’ve previously argued that a carbon audit of existing stimulus plans might help, preferably independent, credible and public. But what should those plans consist of in the first place? Now McKinsey has helpfully updated its ‘Global Greenhouse Gas Abatement Cost Curve’. The bar chart below sums up their findings: the height of the bar corresponds to the cost of the measure per tonne of CO2 equivalent, with bars below zero meaning that you actually save money by doing things like insulating property or managing croplands better. The width represents the total potential of that measure to reduce emissions.

McKinsey then tries to work out how much it would cost to avoid catastrophic change by assuming political and economic decision-making is rational (big assumption) and that we start with the most cost effective measures, then move on up the curve until we get to the required level of GHG reductions. It’s conclusion?

There is potential by 2030 to reduce GHG emissions by 35% compared to 1990 levels. This would be sufficient to have a good change of holding global warming below 2 degrees Celsius.

A 10 year delay in taking abatement action would make it virtually impossible to keep global warming below 2 degrees.

If the most economically rational abatement opportunities are pursued, the total worldwide cost could be €200 to €350 billion annually by 2030. This is less than 1% of forecasted global GDP in 2030. The financing of such abatement efforts would need 530 billion per year in 2020 and €810 billion in 2030 – an extra 5-6% on top of ‘business as usual’ investments. They judge this to be ‘within the long-term capacity of global financial markets (as long as the current credit squeeze doesn’t have significant consequences in this time horizon)’ – another pretty big ‘if’!

One other important finding: 70% of total abatement opportunities (and about 60% of investments required) are located in the developing world, especially in foresty and agriculture. i.e. climate change has suddenly and drastically increased poor countries ‘comparative advantage’ in saving the world. That’s a potentially pretty huge silver lining, although it could of course become the pretext for some kind of green imperialism in which developing countries are obliged to tidy up the mess that the rich ones have created, without considering the impact on poor people and communities. McKinsey looks at everything in terms of economic cost and return on investment, not in terms of power and politics – and as we have seen in the case of biofuels, that makes a huge difference to the social impact of mitigation measures (quite aside from the issue of which biofuels actually reduce emissions). Threat or opportunity? I’d be interested in hearing any views on this.