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 assumptions.
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 report.
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 (RDSa), Pacific Gas & Electric (PCG), Honeywell International (HON), DTE Energy (DTE), 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 overall.
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.
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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