The first real controversy over the costs of climate change began when US President George W. Bush announced in 2001 that his country would not sign the Kyoto Protocol on the grounds that it "would cause serious harm to the US economy".
Although there was no economic impact assessment underpinning the US administration's U-turn on Kyoto, previous studies had pointed to high economic costs for the American economy, like 'Impacts of the Kyoto Protocol on US Energy Markets and Economic Activity,' which was carried out by the US Energy Information Administration in 1998.
The most comprehensive cost analysis was carried out for the UK government by former World Bank chief economist Lord Nicholas Stern. The Stern Review on the Economics of Climate Change, presented in October 2006, concluded that were the world to take no action on climate change, it would lose between five and 20% of its GDP, while the costs of tackling the risks could be limited to 1% of annual global GDP.
The 700-page review underlined that urgent action is imperative and offered an economic motivation by demonstrating that the benefits of immediate measures outweigh the costs. "Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and economic depression of the first half of the 20th century," the report stated (for a good overview, see BBC News).
Furthermore, the secretariat of the UN Framework Convention on Climate Change (UNFCCC) published a study in August 2007 on the costs related to climate change mitigation and adaptation. It concluded that dealing with climate change would require significant changes to global investment patterns, including much greater investment flows to the developing world of up to 1.7% of global GDP by 2030 (EurActiv 06/09/07).
McKinsey's cost abatement curve
The most recent contribution to the debate came from consulting firm McKinsey, which argued that investing in the shift to a low-carbon economy would be significantly cheaper than the cost of inaction as presented in the Stern review.
Should the most cost-effective green technologies be implemented urgently across the world, global warming could be kept under the crucial 2°C threshold with possibly as little as 0.5% of global GDP, the 'Pathways to a Low-Carbon Economy' study concluded. This figure compares favourably to the Stern Report's estimates of the costs of inaction (EurActiv 27/01/09).
The report included an updated version of McKinsey's greenhouse gas cost abatement curve, first published in 2007, which analysed over 200 opportunities for reducing emissions by 70% from business-as-usual levels in 2030.
Potential of energy savings and renewables for fighting climate change
The McKinsey report concluded that the biggest cuts in greenhouse gases, 14 Gt of CO2 per year in 2030, can be made through energy efficiency improvements in vehicles, electrical appliances and buildings. These investments would also be most likely to be recouped over time. In addition, it detailed low-carbon energy supply and halting tropical deforestation as cost-effective opportunities.
The International Energy Agency's (IEA) latest assessment echoed these findings (EurActiv 12/11/09).
In its annual World Energy Outlook, published in November 2009, the agency outlined that energy efficiency would bring more than half of the CO2 cuts by 2030. Deployment of renewables would account for another fifth, while using biofuels in the transport sector would bring cuts of about 3%, according to the report. Finally, carbon capture and storage (CCS) technologies and nuclear could each slash emissions by 10%, it said.
The IEA called for $10.5 trillion of investment globally in energy efficiency and low-carbon energy to avoid runaway climate change.
The agency foresees that a global agreement to cut greenhouse gases would lead to massive investment in renewables, which would soak up 60% of the projected total investment in power generation between 2010 and 2030.
Wind power would be the biggest beneficiary of the injection of money while hydropower, concentrating solar power (CSP) and biofuels would also see large increases, the IEA predicts. Moreover, large-scale photovoltaic (PV) electricity generation would increase considerably, although PV in buildings will remain the dominant form, it added.
The EU has shifted its energy research priorities towards offshore wind and solar power in order to reach its target of producing 20% of its energy from renewable sources in 2020 (EurActiv 07/10/09).
Problems and challenges
The problems of calculating costs and benefits of climate change policies are linked to the fact that there are many complexities and uncertainties, including how potential freak weather can be predicted and what the long-term costs and benefits of prevention are.
Another point of contention is the "social discount rate," which calculates the value placed on the welfare of future generations relative to the present. In the Stern Review, the authors started from a near-zero discount rate (0.1% per year), arguing that from an ethical point of view, future generations should not be discounted.