How much would it cost to save the earth? I don’t know, but McKinsey does

In January, the consultants McKinsey & Company released an updated version of their report Pathways to a Low Carbon Economy, which is a global analysis of the potential, and cost, of pretty much every technological solution to climate change you can think of.

The biggest strengths of this report are firstly that it is a bottom-up analysis (it looks at each technology option individually and aggregates the results), and secondly the way that it displays the results – using abatement cost curves (known in environmental economics textbooks as a Marginal Abatement Cost Curve). The great thing about these curves is that you can do a massive amount of analysis and display nearly all of it on one graph*. So here it is (click to expand):

McKinsey world MACC

If you haven’t seen one of these before, it requires a little explanation. Along the horizontal axis is the cumulative abatement potential. Any point on the axis represents the total amount of greenhouse gas emissions you save, per year, if you do everything to the left of that point.

The vertical axis is the marginal abatement cost – that is, the net cost of pursuing each of the options between now and 2030. Many of the “costs” are negative, which means that they save you so much money (by reducing your energy bill, for example) that you end up earning more than you spent.

Each of the blocks represents the total potential for a single technology option, if that option is pursued to its maximum. By stacking the blocks up from the most profitable options to the most expensive, you get an (economic) prioritisation of options. You can also see which are the economically feasible options for a given price on emissions. For example, if the average price of emitting a tonne of CO2 were €10 (AUD$17), everything to the left of “Degraded land restoration” would be feasible, and everything to the right would need direct government subsidies to go ahead. It also tells us that if we pursued all of the economically feasible options to their maximum extent, we would achieve around 20 GtCO2-e, a reduction of around 28% on business-as-usual.

Another important outcome of this graph is that you can get a sense of the total cost of pursuing climate change mitigation by looking at the area of the blocks above the horizontal axis, minus the area of the blocks below the axis. The report predicts a total worldwide cost of pursuing all these options to be €200-350 billion annually by 2030, less than 1% of global GDP.

It’s important to note that the study is in one sense very optimistic, as it looks at the (assumed) maximum potential for all of the options. But in another sense it is pessimistic, as it does not assume any changes in behaviour, or demand reduction. But one of the main reasons for putting a price on emissions is that it will raise the price of energy-intensive goods and services, thus reducing the demand for them.

I’m going to avoid talking about some of the individual measures and sectors in this post, as I don’t want to get bogged down in detail – suffice to say that I don’t agree with all the numbers, but most of them make sense intuitively. I’ll stick to the broad findings here. Here are some important messages I want to highlight:

  • There is no silver bullet – no single technology that can solve everything, or even a large chunk of the problem. We need to do lots of stuff, all at once.
  • The efficiency measures, which are very profitable in the long run, are a no-brainer. In theory they shouldn’t need government intervention of any kind, the market should be falling over itself to install more efficient lighting/electronics/insulation/HVAC/etc. But it’s not. Why not? It is a massive market failure, and one that will have to be carefully considered.
  • Another point made in the report is the urgency of taking action, because any delay will lock in high-carbon infrastructure for many decades to come – 40-50 years for power plants, 20-30 years for many industrial plants. Also note that 50% of the cost curve relates to new infrastructure, and only 15% relates to retrofitting existing infrastructure.
  • In terms of government policy, this clearly highlights the importance of putting a price on carbon (through a tax or cap-and-trade system – see “2″ below). But that’s not the only policy response that is implied:

McKinsey world MACC - policy

  • A final, very important point is to look at the effect that a high oil price will have on the curve. I knew that more expensive energy would make most forms of abatement more economically attractive, but I didn’t know the effect would be so large. And this doesn’t even take into account the effect of reduced demand:

McKinsey world MACC - oil price

As someone who believes that the era of cheap oil (and hence cheap energy) is over, I find this graph quite heartening. High energy prices really are a game changer for climate change mitigation. I’m not saying that I would choose to have higher energy prices if I could – this would hurt the poorest people the most, and create major shocks for an already fragile economy. But if this situation is inevitable, I console myself that at least it will make global warming a little easier to deal with.

By the way, anyone who thinks that $120 oil is unrealistic in the long term should note that the oil price now, in the middle of the biggest recession since the great depression, is up around $68 – a price that would have been unthinkably high a decade ago. Even the pollyannas at the International Energy Agency are starting to sound the alarm bells, ableit tentatively.

*[Another great thing about these curves is that they can be applied to any scale or sector of the economy - an individual facility, an organisation, a city, a state, a sector, a country, or the whole world. Who knows, maybe even the entire universe]

More money for low carbon R&D and energy efficiency in Australia – Budget 09 summary

The government tonight released the budget for 2009-10. The big themes were infrastructure spending and debt, but I want to focus specifically on the programs relevant to climate change. Robert Merkel at LP rated it as having a “distinctly camouflage mottled hue”, but I’m a little more positive, albeit with some criticisms. See my analysis below.

RD&D, innovation and skills

The biggest area of spending, and the biggest increase in spending, came in what I have categorised as RD&D, innovation and skills. Then headline items in this area are under the umbrella of the $4.3 billion Clean Energy Initiative, which includes $3 billion of new money – mostly going to Carbon Capture and Storage (CCS) and the Solar Flagships Program (which will fund up to 4 very large solar thermal or photovoltaic installations, totaling 1GW of capacity). There is also a $1.3 billion Green Car Innovation Fund, and $100 million per year for the Global Carbon Capture and Storage Institute, both 10 year programs that were announced last year.

So by my calculations (see below), this adds up to $6.9 billion of commitments in this area, up from $3.4 billion previously. One important point is that in the area of low carbon stationary energy, $4.9 billion is allocated to specific technologies – CCS and large scale solar, compared with only $615 million to technology neutral, competitive funding. Admittedly, there are several competing technology options within CCS and solar, but this amounts to a fairly significant picking of winners by the government. I’ll come back to this difficult issue in a future post.

RD&D

Energy efficiency and small scale renewables

On the demand side of the energy equation, we have energy efficiency and small scale renewables. By my calculations, this budget is committing about $5 billion to this category, up from $4.1 billion before the CPRS was announced. Most of this is going towards domestic insulation and solar hot water through the Energy Efficient Homes Program. There seems to be a confusing array of 9 overlapping programs in this area, with various timeframes, 5 of which are relevant to domestic and 7 of which are relevant to business. Why so many? The $100 million smart grid funding is welcome, but should be larger and allocated to a wider national roll-out, rather than another demonstration project. The technology is well established and has been demonstrated ad-nauseum.

efficiency

Miscellaneous spending includes $98 million allocated to Australia Climate Change Regulatory Authority (which will oversee the CPRS) and the National Carbon Accounting Toolbox.

Conclusions

Overall, there are some important boosts to the green economy in this budget. But is it enough, and is it well directed? I would have liked to see more going towards Renewables Australia and the Energy Innovation Fund, which are both good, technology neutral funds. Also, the Clean Business Australia program could have been a lot bigger, particularly in comparison to the massive Energy Efficient Homes package. Business energy efficiency is less visible to voters, but equally important. As I’ve already mentioned, more on Smart Grids would also have been welcome.

But I do support the big spending committments that were made, in CCS, large-scale solar, and green cars. Overall, I give the 2009/10 Budget 6 1/2 green stars out of 10.

Emissions trading – it’s time to support it

Last weekend, the Australian government announced several amendments to their proposal for an emissions trading scheme. I had a number of criticisms of the original CPRS scheme, which I discussed here, but with these changes, along with the newly expanded Renewable Energy Target, I would be prepared to support it. It’s time to get behind this legislation and support its passage through a hostile senate.

In a nutshell, the changes are -

  • An effective delay of 2 years before emissions trading begins (with no trading in 2010 and a very low fixed price of $10/tCO2 in 2011)
  • Increased compensation for polluters
  • A “Carbon Trust” scheme to make voluntary emissions reductions meaningful
  • Moving the conditional emissions reduction target from 15% to 25% by 2020

The first two changes are disappointing, but in the grand scheme of things will make little difference to the environmental outcome. I can accept that they are justifiable politically and economically.

The third change addresses one of the big criticisms that many environmental groups and green commentators had about the original scheme, that voluntary reductions (at a personal and household level) were not counted, and would only decrease the burden on industry. Personally I was, and still am, ambivalent about this issue, because I have a feeling that the scale of these voluntary measures would be pretty small.

The most important change to the environmental outcome of the CPRS was the fourth point above. The government is now saying that if a comprehensive international agreement is reached on reducing emissions, Australia will commit to a reduction of 25% on 2000 levels by 2020. That’s a significant improvement on their original position of 15%. It puts us in the right ballpark internationally and shows that we are prepared to lift our share of the burden. You could, if you were being generous, even call it a position of leadership, but I probably wouldn’t go that far.

Disappointingly, this position has been criticised heavily by some green groups – most notably the Australian Greens – and many left/green commentators. They still have their eye on the “unconditional” target of 5%, if no global agreement is reached, pointing out that this is our only real commitment. But I disagree. Frankly, if the world cannot reach a comprehensive agreement in the next few years, we’re all screwed. If we are still in a situation of business as usual by 2020, it may be too late to avoid dangerous climate change. In that case, it would be game over, and it wouldn’t matter one bit what reduction Australia had committed to. 5%, 15%, or 25%, if the world doesn’t come to the party, our actions are, sadly, pointless.

The global agreement is the whole point. That’s why having a big differential between the unconditional and conditional targets is good policy. The government is not trying to shirk our responsibilities, they are trying to add to the international pressure for action.

My other criticisms of the CPRS related to its support for innovation and green jobs. I would have liked to see a price floor on carbon, and a limit of the amount of abatement that can be outsourced to other countries. These criticisms still stand, but I am realistic enough to know that it probably won’t happen. And the consolation is that the expanded renewable energy target, which will force 20% of electricity to be renewable by 2020, along with other measures like R&D funding, state initiatives on energy efficiency and building standards, will help by supporting domestic innovation.

It’s time for green groups to stop pushing for some kind of theoretically ideal scheme and realise that this is as good as it’s going to get. The Australian Greens, in particular, need to realise that their absolutism has only made them irrelevant in these negotiations. If they want to have a positive effect on Australia low carbon future, they need to come down from the mountain.

Elsewhere: John Quiggin

If I were President of the World…

If I were President of the World, I would set a limit of the quantity of fossil fuels that could be extracted, worldwide. The amount would be determined by an independent body of scientists and economists, that would auction a fixed number of tradable permits every year – let’s call it the World Carbon Authority (WCA).

The WCA would be responsible for conducting audits and enforcement, and would be informed by very well funded scientific and economic research divisions. The revenue from the auctions would go partly to the WCA to fund its activities, partly towards complementary measures like stopping deforestation and promoting better land use, with the remaining revenue distributed to all countries based on their population, to offset the higher energy prices. All countries would receive the same per-capita income, but the less energy intensive countries would be net winners. This money would also be a strong incentive for countries to recognise the authority of the WCA.

It would be up to each national government to decide how to spend this money, but the natural incentive is for rich countries to spend it on improving efficiency and investing in renewable energy, and for poor countries to improve the general well-being of the population. It would be a force both for environmental responsibility as well as social equality.

The extraction industry and the emissions intensive industry would face the same conditions worldwide, so they would be able to pass through their higher costs to consumers, and would have no incentive to move their operations to unregulated countries.

Compared to an emissions trading system, an extraction trading system would also be far simpler, because it would cover only the thousands of organisations that extract significant amounts of coal, oil and natural gas, rather than the many millions of organisations that burn them.

This kind of system is not entirely without precedent. At a much smaller scale, some fisheries are managed in this way. And at the international level, OPEC  has been enforcing oil production quotas (although not always successfully) among its 12 member countries for many decades.

Of course, I’m realistic enough to know that I’ll never be President of the World (sigh…), and that this proposal will never be politically tenable. But its nice to dream.

Sustainability – the revolution of impossibility

Lately I have been thinking about the transition to a low carbon economy in terms of it being a “sustainability revolution”. Although I am guilty of being slightly lax with my terminology by equating these two concepts, I find it a useful position to think from.

The sustainability revolution, should it come to pass, is comparable in scale to previous revolutions, like the industrial revolution, the green (agricultural) revolution, and the communications/internet revolution. However there is a very important distinction. These past revolutions were not driven by coherent visions of a better future being forced on a world that was reluctant to change. Perhaps visions did exist of how the world would be transformed by these technologies, but the visions were predictions, not blueprints. The revolutions were driven by new technologies and ideas that opened up new opportunities – more often than not, the driver was the potential for profit more than anything else.

So why should sustainability need a vision? Will it not just grow organically, riding on the back of a wave of new opportunities? Unfortunately no. Sustainability is not a revolution of possibility, but of impossibility. It is impossible to continue on our current path for much longer. Climate change, the stretching of natural limits and the availability of non-renewable resources mean that business as usual is no longer an option – one way or another, things are going to change. The sustainability & low carbon transition is driven but what is not possible.

That’s why this revolution, unlike previous ones, needs a coherent and credible vision of a sustainable future as a starting point.

Although if that statement is true, we have already fallen at the first hurdle. There seems to be as many conceptions of sustainability as there advocates. In general, such vision are caught between the pessimism that the world is coming to an end and the optimism of a brighter future. The schizophrenic nature of the debate has contributed to the ambiguous definition of the word “sustainable”, which can mean anything from the happy continuation of the status quo (e.g. “sustainable profits”, “sustainable growth”), to a complete transformation and downsizing of all of our human systems and impacts so that we can live in harmony with the earth.

Is this an impossible contradiction? Is sustainability, then, an impossible revolution, as well as being a revolution of impossibility?

Australia shuns the low carbon transition

Update: the government has released a number of amendments that have turned me around on this issue.

The Australian government is conducting a senate inquiry into climate policy, focusing on the recent draft legislation to set up an emissions trading system, called the Carbon Pollution Reduction Scheme. For me, the government’s climate policy increasingly looks like an exercise in avoiding change.

I added my 2 cents worth here (permanent link here) – submission number 391 out of 415 unique submissions posted so far and reportedly over 13,500 total submissions (including standard form letters from activist organisations). Probably it will just be lost in the noise, but there is no harm in trying.

On the “environmental” side of the argument, the criticisms of the scheme mostly fall into these categories:

  • targets too weak (5% reduction on 2000 levels by 2020, or 15% if a comprensive global agreement is reached)
  • excessive compensation to the big polluters
  • “voluntary” emissions reductions not counted – household energy efficiency, for example, will only reduce the obligation of industry to reduce emissions

In the “big business” corner (if that is a fair categorisation), the arguments are mostly:

  • targets are excessive
  • insufficient compensation to industry X
  • there is no climate change / there is climate change but its not anthropogenic / there is anthropogenic climate change but Australia is not the primary cause and shouldn’t be acting alone

That’s a very broad generalisation, and there are many exceptions on both sides, but that seems to be roughly how the argument is playing out.

I took a slightly different angle. To me, the biggest problem with the current draft is that the focus is on meeting our international obligations on emissions reduction at the lowest cost to the economy. There are two glaring problems with that. Firstly, the post-Kyoto negotiations are happening later this year, so why set these below-par national targets in stone now, other than to play the disruptive and self-serving role of – “Oh, we can’t possibly agree to that target because we’re already defined our national target in legislation”.

The second problem, which I concentrated on in my submission, is that the focus should really be on transitioning to a low carbon economy, rather than simply meeting targets. It is possible for us to meet our targets by buying all of our permits internationally, effectively outsourcing our emissions reductions by paying others to do it. This would impose a cost, without the attendant benefits of creating new jobs and industries. The world economy is changing – we simply have no choice – and the change brings with it enormous opportunities to the early movers. If we try to minimise the damage by minimising the extent of the change, we will be left behind. This point seems to be lost in the current debate.

For the record, here are my recommendations:

  1. Implement a stronger conditional target of 25% by 2020 (in the event of a substantial international agreement)
  2. Explicitly state the importance of the transition to a low carbon economy
  3. Place a limit on the proportion of credits that can be purchased internationally
  4. Establish a price floor in the permit market
  5. Establish a broader innovation framework.

For details see my full submission. For a laugh, also see the sentence before my recommendations: “Four recommendations are addressed in this submission”. I threw that in to make sure they were paying attention.

Will innovation save us? Not necessarily

I have a problem with innovation.

That’s not a sentiment you will hear very often. Innovation is the darling of businesses and governments alike, a lovely concept that covers improvements of all types. It is the key to success and the solution to all our problems. How could I possibly reject it?

My problem is that innovation is morally neutral, or to be more specific, it is morally ambiguous. There is nothing necessarily “good” about innovation. An innovation, to be sure, is always better than what it replaces in some way, usually because it will grab market share from an incumbent or enable a more profitable business. But that does not mean it will be better for the general public. If you’re struggling to think of examples of undesirable innovations, let me help you – how about land mines that are so robust they can still rip apart a child 40 years after a war has ended; how about the Nazi death chambers, they were innovative too; or perhaps you prefer something closer to home like the “Collateralised Debt Obligations” – irresponsible and incomprehensible financial innovations that have helped to bring the world’s economy to its knees.

Of course it would be stupid to argue that we should avoid innovations for these reasons. We cannot afford to be luddites. Innovation is the route to a better future for us all; striding straight ahead towards the oncoming precipice is no solution.

Innovation can, and must, be a powerful force for the betterment of society. The challenge of innovation is not just to create more of it, it is to channel it. We need more of our best minds turned towards the task of re-imagining our technologies, our economic models and our way of life.

There is an important role for governments here. Businesses, with few exceptions, find it very difficult to make moral judgments unless specifically pressured to do so.  They are conceived and structured as profit-making entities. It is up to society – individually, through social organisations, and most importantly through our governments – to create the impetus necessary for the right business activity and the right innovations to be encouraged.

To understand how we can do this, I can do no better than to quote the academic Fred Steward from his paper “Breaking the boundaries: Transformative innovation for the global good”. Steward lists five principles for reconfiguring innovation policy for sustainability:

1. Long-term visions – short-term action
The policy goal should be radical incrementalism – short-term action with real prospects of translation into radical long-term change.

2. A sociotechnical approach – bridging the arenas of new technology and behavioural change
Successful innovation embraces a complex mixture of technical and social elements. Radical change is unlikely to be achieved through just one or the other…
It will require a reorientation from technology or product focused approaches to broader functional provision in terms of mobility, shelter, food and communication.

3. The global and local – reconfiguring national innovation policy
In spite of the emergence of international agreements on sustainable development and climate change, the focus for most policymakers remains resolutely national in scope. Yet we are all embedded in a global system.


4. Invention and imitation – being realistic about novelty
It is a mistake to overemphasise pure technical novelty. Reinnovation can also deliver radical results. It is therefore essential that the innovation policy domain is not overdetermined by the priorities of the basic science community.

5. Incumbent and emergent – recognising the contradictions within the business world
A sustainability oriented innovation policy needs to be much more discriminating and supportive of entrepreneurial firms whose mission is complementary to public environmental objectives…
[T]argeted policy initiatives are required which deliberately favour some firms over others…
[G]overnment must adopt a portfolio investment strategy that would recognise the need for a variety of prospects with an acceptance that some will fail.

Of all of these points, the last is possibly the most controversial, and also in my view the most important. Part of the process of innovation is what Joseph Schrumpter called “creative destruction” – the process by which innovative newcomers overtake and destroy the value of existing companies.

Not everyone would accept that this is the best way forward, least of all the established companies that are in line to be overtaken. The companies that are currently the most successful also tend to be very successful at lobbying governments. And with good reason. They are vital entities that provide jobs, income, and the goods and services that we demand. But they are also replaceable. If they don’t learn to adjust to changing priorities and circumstances, they won’t survive. There is no reason for us to listen to, and endlessly support, companies simply because they are big and important today. They will nearly always argue for business as usual, because that is what made them successful in the first place.

My point is that innovation – the right innovation – is too important to leave to entrepreneurs and companies operating in a free and undirected market.  I am arguing for greater governmental intervention in markets (something that would have seemed ridiculous 12 months ago to most policy wonks but is now the stratégie du jour). But we have to be smarter than simply “picking winners” and letting buearocrats control the levels of production. I’ll explain what I mean in the next post.

Follow

Get every new post delivered to your Inbox.