McKinsey report shatters myths on cost of curbing climate change
The McKinsey Global Institute has published another terrific piece of analysis, “The carbon productivity challenge: curbing climate change and sustaining economic growth.”
MGI is best known for its comprehensive cost curve for global greenhouse gas reduction measures (reprinted below), which came to the stunning conclusion that the measures needed to stabilize emissions at 450 pppm have a net cost near zero. The new report has its own stunning conclusion:
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.
The new analysis explains that “at a global, macroeconomic level, the costs of transitioning to a low-carbon economy are not, in an economic ‘welfare’ sense, all that daunting — even with currently known technologies.” Indeed, 70 percent of the total 2030 emissions reduction potential (below $60 a ton of CO2 equivalent) is “not dependent on new technology.”
The final reality is perhaps the most important:
The macroeconomic costs of this carbon revolution are likely to be manageable, being in the order of 0.6â€“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 am reprinting the cost curve here, because MGI have provided a much bigger version of it (click to enlarge):
The report notes that “we have been fairly conservative in our assumptions about technological progress in these projections.” For instance, the analysis appears to ignore the potential of concentrated solar thermal electricity entirely (see “The best technology to protect the earth“).
Finally, although McKinsey is a classic market-oriented business consulting company, the report offers a realistic assessment of the policies needed to achieve our crucial low-carbon future:
The microeconomic changes needed to increase carbon productivity at the levels required will not occur without the active leadership and collaboration of governments and businesses globally. We need new policies, regulatory frameworks, and institutions focused on four areas: creating market-based incentives to innovate and raise carbon productivity; addressing market failures that prevent abatement opportunities from being captured profitably; resolving issues of allocation and fairness, in particular between the developed and developing worlds and between industry sectors; and accelerating progress to avoid missing critical emissions targets.
The entire report is well worth reading.