Peaking in 2015: Costs

And of course the fundamental question for businesses and households will be what a 2015 peak would mean in terms of costs.

Since the Stern report, the conventional wisdom has been that “the costs of inaction outweigh the costs of action”. But this can be a misleading mantra. It doesn’t mean that the present day costs of action are less than those of inaction – but the future costs.

Those who have studied the economics of mitigating climate change argue that if policies are well designed, the world economy could well benefit from strong action on mitigation, as money generated by carbon trading and taxes can channelled into cuts in other taxes as well as investment in clean energy and more sustainable land use, particularly in developing countries.  However these benefits will materialise over time rather than in the short term.

The Stern modelling has been crucial in demonstrating that over the long term it will cost less to overcome climate change than to deal with its impacts. His study said that the dangers of unabated climate change would be equivalent to at least 5% of GDP while each year while the annual costs of stabilising at around 490ppm are likely to be around 1% of global GDP by 2050.

But, as we have seen, 490ppm is probably too high a concentration to avert the 2°C  rise. And in any case the Stern modelling is all about what the costs will be over time, rather than what they would be in the near term and in a situation where the brakes are being applied very rapidly.

With a 2015 peak, the costs of action would bite quickly, while the costs of inaction happen two or three decades hence. A householder could say that costs of paying off a mortgage now are lower than the costs of inaction and allowing it to run a full term, but most people can’t afford the costs of action to repay the loan quickly so they simply accept the higher cost of inaction.  

In fact, while his modelling of peaks differs from the IPCC’s, Stern acknowledges that stabilising at 400ppm CO2 or below, is “likely to be very costly because it would require around 7% per year emission reductions.” He says: “Achieving this could mean, for example, a rapid and complete decarbonisation of non-transport energy emissions, halting deforestation and substantial intensification of sequestration activities.”[1]

Stern’s report is full of warnings about the increasing marginal costs of mitigating GHGs at speed. “.. each additional unit reduction of GHG becomes more expensive as abatement increases in ambition and also in speed…. “[2]

The CBI last year quoted McKinsey’s research calculating that cuts of 60% by 2050 would means a carbon price of  €40 per tonne in 2030, but up to €90 in 2020 – meaning an investment of around £100 per household in 2030.

The IPCC 2007 report is more encouraging, saying that stabilizing temperature at an increase of 2.0 to 2.4°C – by stabilizing emissions at around 400ppm CO2 - would cost the global economy a maximum of less than 3.0 % of its GDP by 2030, which means a loss of only around 0.12 % of growth per annum. [i]

But again, these reports look at future costs rather than short term ones. In truth, we simply don’t know what the costs of a 2015 peak would be over the next 7 years because most of the modelling has been done on a longer timeframe.

The UN Human Development Report for 2007-08 suggests that there will be an average annual cost of 1.6% of global GDP between now and 2030 to achieve stabilization around the 400ppm CO2 level. 1.6% may not sound a lot but it amounts to around two-thirds of global military spending or around 16 times the annual global aid budget.[3] [4] However, these macroeconomic costs are at the top end of the range, and there are many ways in which governments could reduce costs.

The best we can say is what was articulated by Dr Fatih Birol, Chief Economist and Head of the Economic Analysis Division of the International Energy Agency, who said of the 2015 peak scenario that “Exceptionally quick and vigorous policy action by all countries, and unprecedented technological advances, entailing substantial costs, would be needed to make this case a reality”. [5]

Businesses like to have certainty about future investments and cash flows, which is why there have been so many studies carried out, modelling the costs of mitigation. But most of these have been predicated on targets that may well now be obsolete if we accept the need for a 2015 peak and stabilisation at 400ppm CO2. There is little time left to produce the short term models that businesses will require, especially with so many variables in terms of which countries will have to make the most stringent cuts and how they will make them within the portfolio of energy efficiency, low-carbon energy and combating deforestation.