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]


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

  1. Lia Says:

    Great article. We need to do something.

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