Get Rich Quick! (And Stop Global Warming in the Process)

Despite all of the rhetoric, a recently published series of studies demonstrates that the costs of reducing greenhouse gas emissions probably won’t be very harsh, and there might even be a net economic benefit to such cuts. The studies, published in a special issue of The Energy Journal under the umbrella of the Innovation Modeling Comparison Project, analyze various models that explore the economics of reducing carbon dioxide emissions, taking into account the effects of policies that induce technological change. You can access the entire special issue for free via the University of Cambridge.

This week’s issue of Nature features a news story (subscription required) that serves as a basic overview of the project and a good starting point for exploring it further:

Transforming the world's energy industry to stop the flood of greenhouse gases into the atmosphere might actually be quite cheap.

Figures of tens of trillions of dollars are often cited, and used to question whether measures such as the Kyoto Protocol, which attempts to limit carbon emissions, are too expensive. But according to a suite of economic models released late last month, the costs of stabilizing carbon dioxide levels could be tiny — equivalent to setting back the growth of global GDP (gross domestic product) by less than 1% over 100 years; global GDP generally grows 2–3% each year. In some cases, the right policies for limiting carbon emissions could even create a surprising win–win situation, leading to the stabilization of greenhouse gases and an increase in global wealth.

It is a controversial conclusion with which not everyone agrees, but which the modellers say should be food for thought for policy-makers. "If we prepare properly and acknowledge that carbon will be constrained, it will be relatively cheap," says Michael Grubb, a climate-policy expert at Imperial College London. "But only if we do the right things."…

…The results are striking. Nine of the models predict that stabilizing carbon dioxide levels at 450 parts per million, widely seen as the most ambitious target worth discussing, would set back global GDP by less than 0.5% or so by 2100 (the other two produced figures of 2.1% and 6.2%). In each scenario, the regulation of greenhouse-gas emissions persuades the private sector to shift investment into low-carbon technologies, which then become competitive with traditional energy sources.

In some cases, this shift in investment stimulates growth and actually boosts overall wealth. At least, that's the conclusion of two of the models — one developed at the University of Cambridge, UK, and the other at the Fondazione Eni Enrico Mattei, a centre for sustainable-development research in Italy. These models suggest that stabilization policies would give an added boost to global GDP of up to 1.7% over 100 years. They assume such climate policies will bring about side benefits, such as increased investment in new technologies.

Although the results sound convincing, I hope to go through the findings myself to get a better idea of how compelling they really are. The article in Nature already addresses some of the naysayers coming from an economics perspective, but I imagine that the harshest critics will be those from the industries that have fought so consistently against change and regulation (and in effect innovation). Although some models predict economic benefits to come from decreasing carbon dioxide emissions, major shifts in energy usage and production threaten the current system that has benefited the current dinosaurs so well.

In addition to the basic findings in economics, the authors of the introductory paper to the series offer their own policy recommendations based on the project's findings. In short, they stress the necessity of both regulation from government and research-driven technology innovations from industry. An optimal strategy from a governmental perspective, then, would involve both emissions caps and policies that stimulate the desired types of research:

Taken as a whole, the analyses give good grounds for believing that the atmosphere can be stabilized (or brought close to stabilization), at or significantly below a doubling of CO₂-equivalent concentrations (below 500ppm CO₂) at long-term macroeconomic costs that seem relatively modest—unlikely to exceed one year’s foregone economic growth. However, this broad figure over a century hides many distributional impacts, across sectors, across countries and across generations. In particular, stabilization may require big changes in investment patterns in the short run, which would obviously provoke resistance to the implementation of effective climate policies. Whether or not the costs are actually small, will be a function of policy, and in particular, whether or not the policies adopted send the right signals and get the right mix of investment in R&D at one end, diffusion at the other—and of no lesser importance—all that lies between….

…The policy implications are thus far more subtle than choosing between ‘technology led’ versus ‘cap-and-trade’ led approaches. Even with a strong role for ITC, future rounds of the Kyoto Protocol which duplicate the structure of sequential 5-year limits, without any clear and credible signals about the longer term evolution of the system, are unlikely to deliver the depth of innovation and adjustment to infrastructural investments required to minimize long-term costs. On the other hand, a purely supply-driven R&D strategy may generate ideas but not technology-based industries with the capacity to solve the problem, and with no signal at all to redirect ongoing investment and promote prior adjustment of infrastructure appropriate to a carbon constrained world. Thus both R&D, and carbon cap/pricing, appear necessary but in isolation insufficient instruments to deliver stabilization at low costs. What really matters may be combinations of these policies and all that lies between—together with the critical role of framing expectations that really influence the scale and direction of corporate investment in low-carbon knowledge, in learning-by-doing in the nascent technologies and industries, and in the infrastructure appropriate to low-carbon economies.

The idea that curbing greenhouse gas emissions won’t be disastrous for the economy isn’t a new one, and I’ve even written about it before. Still, it is important in these types of discussions not to lose site of the big picture. The most immediate goal needs to be halting global warming, by reducing carbon dioxide emissions, something that will require action that is both decisive and soon. If the economy benefits, that’s an added bonus, but if climate change is allowed to spin out of control, these matters of money will begin to appear increasingly trivial.