Wednesday, 12 December 2007

*The Real Costs of Saving the Planet

Critics say limiting carbon emissions could cost trillions. But a new study suggests the costs are much lower

On Dec. 5, the U.S. Senate will begin marking up a bill that would,
for the first time, put mandatory limits on the gas emissions that are
warming the planet. The bill, sponsored by Senators John Warner (R-Va.)
and Joe Lieberman (I-Conn.), imposes caps on the amount of carbon
dioxide allowed to spew from power plants, cars, and others sources. It
would also permit companies that cut more emissions than required to
sell their excess reductions to those that can't afford to meet the
limit. Economists say this sort of cap and trade scheme, which has
worked well in reducing acid rain-causing pollution, could help the
economy slash emissions at the lowest possible costs.

Meanwhile, delegates from around the world are meeting in Bali,
Indonesia, trying to hammer out a global agreement to cut emissions.
One of the biggest stumbling blocks: the perceived high costs.

But what are those costs? If you listen to opponents of action
against climate change, the American economy will be brought to its
knees by such efforts. The Chamber of Commerce, for instance, says the
bill would cost 3.4 million Americans their jobs; the nation's gross
domestic product, now about $13 trillion, would drop to $12 trillion;
and American consumers would pay as much as $6 trillion more because of
higher prices for gas, heating oil, and many other goods. Other
economic projections put the total price tag for preventing dangerous
climate change at up to $20 trillion.

Yet a new analysis from McKinsey & Co.<
not only pegs the price tag for making substantial cuts at just a few
billion dollars, it also shows that at least 40% of the reductions
bring actual savings to the economy, not costs.

Long-Term Forecasts Are Less Reliable

Why the big difference? First consider the numbers used by the
opponents. Typically, they come from large-scale mathematical models of
the economy. These models look at the economy from the top down. They
try to calculate the effects of changes such as rising energy costs or
financial penalties for carbon emissions. These models are widely used
to predict short-term changes in the economy. But longer-term forecasts
are less accurate because of their increasing reliance on the initial

For example, the final result varies dramatically depending on the
assumptions about the pace of innovation. If the model assumes that
development of new forms of renewable energy will continue at the same
rate as before carbon emission limits were enacted (when the financial
incentives for development were lower), then cutting carbon emissions
will be costly. But if you assume that an added financial incentive,
such as a price on carbon emissions, will increase the pace of
innovation and the development of new technologies, then meeting the
limits will be cheaper. And if the model discounts the future benefits
of avoiding the dangers of warming in terms of their present value, it
will also predict higher overall costs.

Different Conclusions Are Possible

Yet even with these inherent limitations, many of the models suggest
that the ultimate cost of slowing global warming is reasonable.
Stanford University climatologist Stephen Schneider, for instance, has
analyzed one of the most prominent models, from Yale's William
Nordhaus. According to Nordhaus' results, stabilizing the climate would
be "unimaginably expensive—$20 trillion," Schneider says.

But the $20 trillion hit to the economy isn't immediate. Instead,
that's the calculated cost in the year 2100, Schneider says, not now.
What does that really mean? Schneider ran the numbers, assuming the
economy grows at about 2% per year. The seemingly huge $20 trillion
price tag works out to "a one-year delay in being 500% richer," he
says. In other words, paying the price to reduce climate change would
mean Americans would have to wait until 2101 to be as rich as they
otherwise would have been in 2100. To Schneider, that's a minuscule
price to pay for saving the planet from the dangers of global warming.
"Are you out of your mind? Who wouldn't take that?" he says.

There's also a completely different way to approach the question of
costs. Instead of using a big, complicated mathematical model that
looks down at the economy, you can start by looking at the many
individual steps that could be taken to reduce emissions, and work from
the bottom up. That's what McKinsey did in its recently released

Cost-Saving Steps

The report was "born of the frustration that there are no solid facts
out there about the costs of reducing greenhouse gas emissions,"
explains McKinsey director Jack Stephenson. So Stephenson and his team
plunged ahead. They got support for the effort from Royal Dutch Shell
and a couple of environmental groups. They analyzed 250 possible steps,
from more fuel-efficient cars and buildings to all types of cleaner
energy. And they assumed people wouldn't change anything about their
lifestyles, driving just as much and not lowering their thermostats.

The results are surprising. The report concludes that the U.S. can
cut its greenhouse emissions in half from projected levels in 2030 at
minimal cost. None of the steps would cost more than $50 per ton of
carbon dioxide emissions avoided. Plus, 40% of the reductions would
actually save money. That puts the overall cost at just a few dollars
per ton of carbon dioxide—or in the tens of billions of dollars

Moreover, it doesn't take any breakthroughs in technology. "Eighty
percent of the reductions come from technology that exists today at the
commercial scale," says Stephenson. And the remaining 20% comes from
ideas already well along in development, such as hybrid cars that plug
into electrical outlets and have batteries big enough to go 30 or 40
miles on electric power alone and biofuels made from cellulose (such as
prairie grass) rather than foodstuffs like corn.

Waste Not

The overall price tag is so low because there are many simple ways
the country can use energy more efficiently, Stephenson explains. "The
U.S. wastes a huge amount of energy," he says. The vast majority of the
power used by VCRs and DVD players occurs when they're not even turned
on, for instance. Electronics equipment, buildings, lighting, water
heaters, and autos are just some of the many products and facilities
that could be far more efficient. Improving efficiency in this way
would save money, not cost money, McKinsey figures.

Overall, the McKinsey report paints a far more encouraging picture
than the figures from the U.S. Chamber of Commerce. "It's the
difference between a business consultant who sees opportunities for
business, and a hired-gun economist," says Dan Lashof, science director
of the Climate Center at the Natural Resources Defense Council.

Until the U.S. actually tries to reduce its greenhouse gas
emissions, we won't know who's right. But it does seem clear that the
economy wouldn't be crippled. "The common perception of high costs is
just so radically wrong," concludes Stanford's Schneider.

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