The economic case for combating climate change

The economic case for combating climate change

Boston Consulting Group takes a deep dive on how economic incentives can help power the fight against climate change in the absence of coordinated global action.

Consensus thinking holds that the world will have a hard time reaching the headline goal of the Paris Agreement—keeping the increase in global average temperature to less than 2°C above preindustrial levels. Moreover, in the absence of coordinated global action, countries that unilaterally pursue a “2°C path” will face significant first-mover disadvantages.

While the first point is very likely true, the second is not. There are clear paths for most countries to achieve substantial reductions in greenhouse gas (GHG) emissions that can generate near-term macroeconomic payback. Just about all leading emitters could eliminate 75% to 90% of the gap between emissions under current policies and their individual 2050 2°C Paris targets using proven and generally accepted technologies. If they prioritize the most efficient emissions reduction measures, taking the necessary steps will actually accelerate, rather than slow, GDP growth for many countries. All countries can generate economic gain by moving at least part of the way—even if they move unilaterally.

Boston Consulting Group (BCG) recently completed a study of the economically optimized paths for implementing climate change mitigation efforts in Germany. Using this work as a model, we analyzed six other countries that, together with Germany, collectively account for close to 60% of current global GHG emissions: China, the US, India, Brazil, Russia, and South Africa. For each country, we examined three scenarios: the “current policies path,” the “proven technologies path,” and the “full 2°C path.” This report presents the results of our work, including, summaries of the impact of accelerated climate mitigation actions on each country that we studied. The next few chapters examine our main findings and their implications. Principal among our observations is that there are good economic as well as environmental reasons for many countries to step up their climate change mitigation efforts—starting now. 

How to decarbonize a developed economy

In Klimapfade für Deutschland (or Climate Paths for Germany), one of the most comprehensive studies of national emissions reduction potential to date, BCG, together with the economic research firm Prognos, recently assessed how Germany can meet its stated goal of reducing GHG emissions by 72% to 93% (versus 2015 levels) by 2050. (This is equivalent to the officially quoted 80% to 95% reduction with respect to 1990 levels.1 ) The study presented economically optimized climate-change mitigation paths for reaching these goals, and the findings were surprising.

Under current policies, Germany is already on a path that cuts GHG emissions by more than 45% (60% versus 1990 levels) by 2050. The country can achieve a 77% emissions reduction (80% versus 1990 levels) by pushing further the use of proven technologies—and, if properly orchestrated, such a move would be economically viable even if Germany moves forward unilaterally. With global cooperation, a 93% reduction (95% versus 1990 levels) would not harm economic growth, although it would test the boundaries of foreseeable feasibility and require further maturing of, or overcoming acceptance hurdles against, some technologies. In an unprecedented position paper, the Bundesverband der Deutschen Industrie (BDI)—the German Industry Association, which commissioned the study—united behind the core findings and demanded more systematic climate action by the German government.

Delivering the German contribution toward a global 2°C scenario requires that emissions decline by 93% from 2015 levels, to 62 million metric tons of carbon dioxide equivalent (Mt CO2e), by 2050. This is an ambitious goal, to say the least; for most sectors of the German economy, emissions would need to be eliminated entirely. Nevertheless, achieving very substantial reductions is well within reach. Under current regulations and assuming current technology trends, Germany is on a path to reduce GHG emissions from 2015 levels by approximately 45% by 2050. Up to 77% lower emissions can be achieved by expanding further the use of proven technologies. Doing so would require the following changes:

  • In the power sector, wind and solar power would need to cover more than 80% of demand, and Germany’s coal and lignite generation would need to be phased out in favor of gas to still provide sufficient flexible backup capacity.33
  • In parallel, all sectors would need to intensify their efficiency efforts—to accommodate new power consumers from the building and transportation sectors, and to avoid overstretching Germany’s renewable generation potential.
  • Available biomass should be concentrated in the industrial sector, replacing fossil fuels in process heat generation. (See “A New Strategy for Biomass.”)
  • In the building sector, up to 80% of current building stock would need to be renovated by 2050 (an acceleration of today’s energetic renovations by nearly 70%). Low-emission district heating could replace individual oil and gas heating in urban areas and heat pumps in less populated ones.
  • In transportation, electric mobility would need to take over a large part of road transport— meaning battery power for passenger transport and light commercial vehicles and possibly electric overhead lines for trucks on major highways (a GHG-reduction measure that is already in piloting but remains controversial).

Many other countries face an even harder challenge. To catch up economically, they continue to employ low-cost and carbon-intensive technologies, increasing their per capita and total emissions footprints. To be sure, the investment required is substantial: a total of $1.6 trillion through 2050 (1.1% of annual GDP). 4 But the annual direct add-on costs (after the substantial savings in operating costs are accounted for) are less than $20 billion. Read more on the report here.

2020-09-30T17:58:35+00:00

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John Bärr
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