A cost
curve for greenhouse gas reduction
A
global study of the size and cost of measures to reduce greenhouse gas
emissions yields important insights for businesses and policy makers.
The debate about greenhouse gases is heating up. Across a wide spectrum, some voices
argue that emissions and climate aren’t linked, while others urge immediate
concerted global action to reduce the flow of emissions into the atmosphere.
Even the advocates of action disagree about timing, goals, and means. Despite
the controversy, one thing is certain: any form of intensified regulation would
have profound implications for business.
Our contribution on this topic is not to
evaluate the science of climate change or to address the question of whether
and how countries around the world should act to reduce emissions. In this
article we aim instead to give policy makers, if they choose to act, an
understanding of the significance and cost of each possible method of reducing
emissions and of the relative importance of different regions and sectors. To
that end, we have developed an integrated fact base and related cost curves
showing the significance and cost of each available approach, globally and by
region and sector. Our other purpose is to help business leaders understand the
implications of potential regulatory actions for companies and industries.
Indeed, regulation is already on the minds of many executives. A recent survey indicates that half of all companies in Europe’s
energy-intensive industries regard the European Union’s Emissions Trading
Scheme (EU ETS) as one of the primary factors affecting their long-term
investment decisions.
As the baseline for our study, we used the
“business-as-usual” projections for emissions growth from the International Energy Agency (IEA) and the US
Environmental Protection Agency (EPA). We then analyzed the significance and
cost of each available method of reducing, or “abating,” emissions relative to
these business-as-usual projections. Our study covers power generation, manufacturing industry (with a
focus on steel and cement), transportation, residential and commercial
buildings, forestry, and agriculture and waste disposal, in six regions: North
America, Western Europe, Eastern Europe (including Russia), other developed
countries, China, and other developing nations. It spans three time
horizons—2010, 2020, and 2030—and focuses on abatement measures that we
estimate would cost 40 euros per ton or less in 2030. Others have conducted
more detailed studies on specific industries and geographies. But to our
knowledge, this is the first microeconomic investigation of its kind to cover
all relevant greenhouse gases, sectors, and regions.
Reading
the cost curves
The cost curves we developed show
estimates of the prospective annual abatement cost in euros per ton of avoided
emissions of greenhouse gases, as well as the abatement potential of these
approaches in gigatons of emissions. The abatement cost for wind power, for
example, should be understood as the additional cost of producing electricity
with this zero-emission technology instead of the cheaper fossil fuel-based
power production it would replace. The abatement potential of wind power is our
estimate of the feasible volume of emissions it could eliminate at a cost of 40
euros a ton or less. Looked at another way, these costs can be understood as
the price—ultimately, to the global economy—of making any approach to abatement
cost competitive or otherwise viable through policy decisions. A wide range of
assumptions about the future cost and feasible deployment rates of available
abatement measures underlie the estimates of their cost and significance. For
example, the significance of wind power assumes that actions to abate greenhouse
gases will have already begun across regions by 2008. The volumes in our model
(and this article) should be seen as potential abatement, not as forecasts.
Our model for the “supply” of abatement
can be compared with any politically determined target (“demand”) for abatement
in the years 2010, 2020, and 2030. The science of climate change is beyond the
scope of our study and our expertise, however. We thus compare, for
illustrative purposes, our findings on supply with three emissions targets discussed
in the debate—targets that would, respectively, cap the long-term concentration
of greenhouse gases in the atmosphere at 550, 450, or 400 parts per million (a
measure of the share of greenhouse gas molecules in the atmosphere). The goal
of each target, according to its advocates, is to prevent the average global
temperature from rising by more than 2 degrees Celsius. Any of these emissions
targets would be challenging to reach by 2030, for they would all require at
least a 50 percent improvement in the global economy’s greenhouse gas
efficiency (its volume of emissions relative to the size of GDP) compared with
business-as-usual trends.
A simplified version of the global cost
curve (Exhibit 1 in the original article) shows our estimates of the significance
and cost of feasible abatement measures in 2030—the end year of a period long
enough for us to draw meaningful conclusions but short enough to let us make
reasonably factual assumptions. We have developed similar cost curves for each
sector in each region and for each of the three time frames.
At the low end of the curve are, for the
most part, measures that improve energy efficiency. These measures, such as
better insulation in new buildings, thus reduce emissions by lowering demand
for power. Higher up the cost curve are approaches for adopting more greenhouse
gas-efficient technologies (such as wind power and carbon capture and storage)
in power generation and manufacturing industry and for shifting to cleaner
industrial processes. The curve also represents ways to reduce emissions by
protecting, planting, or replanting tropical forests and by switching to
agricultural practices with greater greenhouse gas efficiency.
We have no opinion about the demand for
abatement or the probability of concerted global action to pursue any specific
goal. But the application of our supply-side research to specific abatement
targets can help policy makers and business leaders to understand the economic
implications of abatement approaches by region and sector, as well as some of
the repercussions for companies and the global economy. Our analysis assumes
that the focus would be to capture all of the cheapest forms of abatement
around the world but makes no judgment about what ought to be the ultimate
distribution of costs. Of course, the ability to pay for reducing emissions
varies greatly between developed and developing economies and among individual
countries in each group.
For simplicity’s sake, we compared our
cost curve with the 450-parts-per-million scenario—in the midrange of the
targets put forward by advocates. This scenario would require greenhouse gases
to abate by 26 gigatons a year by 2030. Under that scenario, and assuming that
measures are implemented in order of increasing cost, the marginal cost per ton
of emissions avoided would be 40 euros. (As a point of reference, since trading
under the EU ETS began, in 2005, the price of greenhouse gas emissions has
ranged from 6 to 31 euros a ton.)
We had to make many assumptions about
future cost developments for these measures and the practical possibilities for
realizing them. We assumed, for instance, that the cost of carbon capture and
storage will fall to 20 to 30 euros per ton of emissions in 2030 and that 85
percent of all coal-fired power plants built after 2020 will be equipped with
this technology. These assumptions in turn underpin our estimate that it
represents 3.1 gigatons of feasible abatement potential.
In a 25-year perspective, such assumptions
are clearly debatable, and we make no claim that we are better than others at
making them. We believe that the value of our work comes primarily from an
integrated view across all sectors, regions, and greenhouse gases using a
uniform methodology. This model allows us to assess the relative weight of
different approaches, sectors, and regions from a global perspective.
The
supply of abatement approaches
Our analysis offers some noteworthy
insights. It would be technically possible, for one thing, to capture 26.7
gigatons of abatement by addressing only measures costing no more than 40 euros
a ton. But because these lower-cost possibilities are highly fragmented across
sectors and regions—for instance, more than half of the potential abatements
with a cost of 40 euros a ton or less are located in developing economies—an
effective global abatement system would be needed to do so. Politically, this
may be very challenging.
What’s more, power generation and
manufacturing industry, so often the primary focus of the climate change
debate, account for less than half of the relatively low-cost potential (at a
cost of up to 40 euros a ton) for reducing emissions. The implication is that
if policy makers want to realize abatement measures in order of increasing
cost, they must also find ways to effectively address opportunities in
transportation, buildings, forestry, and agriculture. This potential is more
difficult to capture, as it involves billions of small emitters—often
consumers—rather than a limited number of big companies already subject to
heavy regulation. Looking at specific measures, nearly one-quarter of the
abatement potential at a cost of up to 40 euros a ton involves
efficiency-enhancing measures (mainly in the buildings and transportation
sectors) that would reduce demand for energy and carry no net cost. The measures
we include in this category do not require changes in lifestyle or reduced
levels of comfort but would force policy makers to address existing market
imperfections by aligning the incentives of companies and consumers.
Further, we found a strong correlation
between economic growth and the ability to implement low-cost measures to
reduce emissions, for it is cheaper to apply clean or energy-efficient
technologies when building a new power plant, house, or car than to retrofit an
old one. Finally, in a 2030 perspective, almost three-quarters of the potential
to reduce emissions comes from measures that are either independent of
technology or rely on mature rather than new technologies.
The
role of developing economies
Even though developed economies emit
substantially more greenhouse gases relative to the population than developing
ones, we found that the latter account for more than half of the total
abatement potential at a cost of no more than 40 euros a ton. Developing
economies have such a high share for three reasons: their large populations,
the lower cost of abating new growth as opposed to reducing existing emissions
(especially in manufacturing industry and power generation of high-cost
developed markets), and the fact that tropical countries have much of the
potential to avoid emissions in forestry for 40 euros a ton or less .
Forestry measures—protecting, planting,
and replanting forests—make up 6.7 gigatons of the overall 26.7 gigatons of the
potential abatement at a cost up to 40 euros per ton. We estimate that for no more than 40 euros a ton,
tropical deforestation rates could be reduced by 50 percent in Africa and by 75
percent in Latin America, for example, and that this effort could generate
nearly 3 gigatons of annual abatement by 2030. Major abatements in Asia’s forests
would cost more, since land is scarce and commercial logging has a higher
opportunity cost than subsistence farming in Africa and commercial agriculture
in Latin America.
In agriculture and waste disposal, which
produce greenhouse gases such as methane and nitrous oxide, developing
economies also represent more than half of the 1.5 gigatons of possible
abatements costing no more than 40 euros a ton. Abatement measures in this
sector would include shifting to fertilization and tillage techniques that generate
fewer emissions and capturing methane from landfills.
Reducing
growth in energy demand
An additional 6 gigatons—almost a quarter
of the total abatement potential at a cost of 40 euros a ton or less—could be
gained through measures with a zero or negative net life cycle cost. This
potential appears mainly in transportation and in buildings. Improving the
insulation of new ones, for example, would lower demand for energy to heat them
and thus reduce emissions. Lower energy bills would more than compensate for
the additional insulation costs. According to our model, measures like these,
as well as some in manufacturing industry, hold the potential to almost halve
future growth in global electricity demand, to approximately 1.3 percent a
year, from 2.5 percent.
As for measures that would have
a net cost, we found that around 35 percent of all potential abatements with a
net cost of up to 40 euros a ton involve forestry; 28 percent, manufacturing
industry; 25 percent, the power sector; 6 percent, agriculture; and 6 percent,
transportation.
A power
perspective
The power sector represented 9.4 gigatons,
or 24 percent, of global greenhouse gas emissions in 2002, the latest year that
consistent global figures are available across all sectors. In the IEA’s
business-as-usual scenario, emissions from power generation will increase to
16.8 gigatons a year in 2030 as a result of a doubling of global electricity
demand. Five key groups of abatement measures costing 40 euros a ton or less
are relevant to the power sector: reducing demand, carbon capture and storage,
renewables, nuclear power, and improving the greenhouse gas efficiency of
fossil fuel plants. Combined, these measures hold the potential to reduce the
power sector’s total emissions to 7.2 gigatons by 2030.
Among power generation technologies,
nuclear (at 0 to 5 euros a ton for avoided emissions) is the cheapest source of
abatement and nearly cost competitive with power generated by fossil fuels. We
estimate that abatements from carbon capture and storage could cost 20 to 30
euros a ton by 2030; those from wind power could average around 20 euros a ton,
with a wide cost range depending on the location and on the previous
penetration of weather-dependent electricity sources. In our model, the overall
additional cost to the power sector of achieving the target of 450 parts per
million, compared with the business-as-usual scenario, would be around 120
billion euros annually in 2030. This figure illustrates the very significant
potential implications, for companies in the power sector, of any further
actions that regulators may take to reduce greenhouse gas emissions.
Addressing the abatement potential
described above would likely create a major shift from traditional coal and gas
power generation to coal plants with carbon capture and storage, to renewables,
and to nuclear power. In our model, coal-fired plants using carbon capture and
storage would increase their share of the world’s power generation capacity
from nothing in 2002 to 17 percent by 2030; renewables (including a big but
slow-growing share for large-scale hydropower), to 32 percent, from 18 percent;
and nuclear power, to 21 percent, from 17 percent. Fossil fuel power generated
without carbon capture and storage would decrease to 30 percent, from 65 percent.
Low-tech
abatement
The role of technology in reducing
emissions is much debated. We found that some 70 percent of the possible
abatements at a cost below or equal to 40 euros a ton would not depend on any
major technological developments. These measures either involve very little
technology (for example, those in forestry or agriculture) or rely primarily on
mature technologies, such as nuclear power, small-scale hydropower, and
energy-efficient lighting. The remaining 30 percent of abatements depend on new
technologies or significantly lower costs for existing ones, such as carbon
capture and storage, biofuels, wind power, and solar panels. The point is not
that technological R&D has no importance for abatement but rather that
low-tech abatement is important in a 2030 perspective.
What
are the implications?
Our analysis has revealed a number of
important implications for each sector and region, should regulators choose to
reduce emissions. We summarize the primary overall conclusions below.
Costs
for reducing emissions
For the global economy, the cost of the
450-parts-per-million scenario described in this article would depend on the
ability to capture all of the available abatement potential that costs up to 40
euros a ton. If that happens, our cost curve indicates that the annual
worldwide cost could be around 500 billion euros in 2030, 0.6 percent of that
year’s projected GDP. However, should more expensive approaches be required to
reach the abatement goal, the cost could be as high as 1,100 billion euros, 1.4
percent of global GDP.
If, as some participants in the climate
debate argue, the cost of reducing emissions could be an insurance policy
against the potentially severe consequences of unchecked emissions in the
future, it might be relevant to compare the costs with the global insurance
industry’s turnover (excluding life insurance)—some 3.3 percent of global GDP
in 2005.
Cost-conscious
regulation
Should regulators choose to step up
current programs to reduce greenhouse gas emissions, they should bear in mind
four types of measures to restrain costs:
1. Ensuring strict technical standards and
rules for the energy efficiency of buildings and vehicles
2. Establishing stable long-term
incentives to encourage power producers and industrial companies to develop and
deploy greenhouse gas-efficient technologies
3. Providing sufficient incentives and
support to improve the cost efficiency of selected key technologies, including
carbon capture and storage
4. Ensuring that the potential in forestry
and agriculture is addressed effectively, primarily in developing countries;
such a system would need to be closely linked to their overall development
agenda
Shifting
business environment
For companies in the power sector and
energy-intensive industries, heightened greenhouse gas regulation would mean a
shift in the global business environment on the same order of magnitude as the
one launched by the oil crisis of the 1970s. It would have a fundamental impact
on key issues of business strategy, such as production economics, cost
competitiveness, investment decisions, and the value of different types of
assets. Companies in these industries would therefore be wise to think through
the effects of different types of greenhouse gas regulation, strive to shape
it, and position themselves accordingly.
No matter whether, how, or when countries around the
globe act to reduce greenhouse gas emissions, policy makers and business
leaders can benefit from a thorough understanding of the relative economics of
different possible approaches to abatement, as well as their implications for
business and the global economy.
By Per-Anders Enkvist, Tomas Nauclér, and Jerker Rosander
http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/a-cost-curve-for-greenhouse-gas-reduction?cid=other-eml-cls-mkq-mck-oth-1606
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