What would the economic cost of meeting the 2ºC target be? - Years Of Living Dangerously

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Joseph Romm, Ph.D. Chief Science Advisor

What would the economic cost of meeting the 2ºC target be?

Every major independent economic analysis of the cost of strong climate action has found that it is quite low, while the cost of doing nothing is very high.

 

In May 2014, the International Energy Agency (IEA) released its report on the cost of achieving the 2°C target, “Energy Technology Perspectives 2014.” The IEA said that a systematic effort to use renewable energy and energy efficiency and energy storage to keep global warming below the 2°C threshold (their 2DS scenario) would require investment in clean energy of approximately 1% of global gross domestic product (GDP) per year. However, it would still be exceedingly cost-effective:

The $44 trillion additional investment needed to decarbonise the energy system in line with the 2DS by 2050 is more than offset by over $115 trillion in fuel savings—resulting in net savings of $71 trillion.

A key point is that the investment is not the same as the net economic cost, because many of the investments reduce energy consumption and thus generate savings. In addition, investment in new technology is generally associated with higher productivity and economic growth.

The world’s top scientists and economists made a similar finding in April 2014. That is when the U.N. Intergovernmental Panel on Climate Change issued its Fifth Assessment report reviewing the scientific and economic literature on mitigation, which they define as “human intervention to reduce the sources or enhance the sinks of greenhouse gases.” This assessment also looked at the cost of meeting the 2°C (3.6°F) target, a total greenhouse gas level in 2100 equivalent to 450 ppm of carbon dioxide. The IPCC determined that meeting such a target would reduce the median annual growth of consumption over this century by a mere 0.06%. In other words, the annual growth loss to avoid dangerous human-caused warming is 0.06%, and that is “relative to annualized consumption growth in the baseline that is between 1.6% and 3% per year.”

In short, avoiding the worst climate impacts means global economic growth of some 2.24% a year rather than 2.30%. Every major government in the world signed off on every line of the report. This conclusion is not in much dispute.

Note that this cost estimate does not count the economic benefit of avoiding the most dangerous climate impacts. A few years ago, scientists calculated that benefit as having a net present value of as high as $830 trillion. These calculations do not include the so-called “co-benefits” of replacing relatively dirty fossil fuel-generated power with much cleaner sources of energy, including the use of more efficient technologies. Such co-benefits include reduced air pollution, improved public health, and the productivity gains associated with replacing old technology with new technology. An October 2014 IEA report concluded that “the uptake of economically viable energy efficiency investments has the potential to boost cumulative economic output through 2035 by USD 18 trillion.” It specifically found that the co-benefits from energy efficiency upgrades alone equal, and often exceed, the energy savings.

The conclusion that avoiding dangerous warming has a very low net cost is not a new finding. In its previous Fourth Assessment in 2007, the IPCC found that the cost of stabilizing at the equivalent of 445 ppm carbon dioxide corresponded to “slowing average annual global GDP growth by less than 0.12 percentage points.” These conclusions have remained consistent through time because they are based on a review of the literature, and every major independent study has found a remarkably low net cost for climate action and a high cost for delay.

For instance, in the private sector, the McKinsey Global Institute has done some of the most comprehensive and detailed cost analyses of how energy efficiency, renewable, and other low-carbon technologies could be used to cut GHG emissions. A 2008 McKinsey report, “The Carbon Productivity Challenge: Curbing Climate Change and Sustaining Economic Growth,” concluded the following (emphasis added):

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.

As for the cost of delay, back in 2009, the IEA warned that “the world will have to spend an extra $500 billion to cut carbon emissions for each year it delays implementing a major assault on global warming.” In its World Energy Outlook 2011, the IEA warned “Delaying action is a false economy: for every $1 of investment in cleaner technology that is avoided in the power sector before 2020, an additional $4.30 would need to be spent after 2020 to compensate for the increased emissions.” The German economist Ottmar Edenhofer, who was the co-chair of the IPCC committee that wrote the 2014 report on mitigation, put it this way: “We cannot afford to lose another decade. If we lose another decade, it becomes extremely costly to achieve climate stabilization.”