A cost curve for greenhouse gas reduction

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 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.

http://www.mckinseyquarterly.com/A_cost_curve_for_greenhouse_gas_reduction_1911