A Cost Curve for Greenhouse Gas
Reduction
McKinsey Quarterly
Presented by Jiaona Zhang
Professor Nordhaus
Econ 331
Aim of study
 Not to evaluate the science of climate change
 Not to say whether countries should act
 Instead:
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Cost of each emissions reduction method
Implications of regulations
First microecon investigation to cover all
relevant greenhouse gases, sectors, and regions
SECTORS
 Power generation
 Manufacturing
 Transportation
 Buildings
 Forestry
 Agriculture
 Waste disposal
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REGIONS
North America
Western Europe
Eastern Europe
Other developed countries
China
Other developing nations
Assumptions
 Future cost
 Feasible deployment rates
 Available abatement measures
CCS
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Cost of CCS will fall to 20-30 euros/ton by 2030
85% of coal plants built after 2020 will have this tech
Wind
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actions to abate will have already begun across regions
by 2008
Use of existing tech serves to
counterbalance
 “we have been fairly conservative in our
assumptions about technological progress in
these projections”
 Example: analysis ignores the potential of
concentrated solar thermal electricity entirely
Reduction Potential:
-assumption for volume growth in BAU scenario
-assumption for market uptake dependent on
competitiveness, consumer acceptance, industry
investment
-2nd order impact of the rebound effect?
Two ends of the cost curve
Low End: measures that improve energy efficiency
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Better insulation in new buildings lowers demand for
power
Retrofitting lighting
High End:
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Adopting more greenhouse gas-efficient tech: wind,
solar, CCS
Replanting tropical forests
Switching to agricultural practices with greater
greenhouse gas efficiency
Insights
Forestry/Agriculture
Power/Manufacturing
Buildings/Transport
 Capturing lower cost possibilities requires global
abatement system
 Power generation and manufacturing not only
focus: transportation, buildings, forestry, agriculture
 A quarter comes from efficiency enhancing
measures
 Correlation between economic growth and ability to
implement low-cost measures to reduce emissions
 Abatement can come from measures that are
independent from tech or based on mature tech
http://climateprogress.org/wp-content/uploads/2008/06/mgi-myths.jpg
How much would this cost?
 Cost of the 450ppm scenario depends on the ability
to capture all of the available abatement potential
that costs up to 40 euros/ton
 Cost curve indicates that annual worldwide cost
would be 500 billion euros in 2030, or 0.6% of yr’s
projected GDP
 With more expensive approaches, cost = as high as
1.1 trillion euros, or 1.4% of global GDP
Putting it into perspective
 “To put this figure in perspective, if one were
to view this spending as a form of insurance
against potential damage due to climate
change, it might be relevant to compare it to
global spending on insurance, which was 3.3
percent of GDP in 2005.”
http://climateprogress.org/2008/12/29/mckinsey-2008-research-in-review-stabilizing-at-450-ppm-has-a-net-cost-near-zero/
Impact on the economy
“Borrowing could potentially finance many of
the costs, thereby effectively limiting the
impact on near-term GDP growth. In fact,
depending on how new low-carbon
infrastructure is financed, the transition to a
low-carbon economy may increase annual
GDP growth in many countries.”
http://climateprogress.org/2008/12/29/mckinsey-2008-research-in-review-stabilizing-at-450-ppm-has-a-net-cost-near-zero/
If negative cost, why are we not
doing more?
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Consumers are short-sighted
Lack of information
Cost of abatement omits other relevant costs for
firms
Analysis might impose a discount rate that is
inconsistent with the trade-offs firms make in
practice
Methodological critique
 Assumptions
 Effects of additional disposable income on
future energy demand
 Rebound effects of energy savings
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Undesired consequences in the case of lowenergy bulbs
Role of technological innovation in driving new
sources of demand
Bibliography
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"CERA: Client Services: European Policy Forum: The Cost of Energy Efficiency Investments: The Leading
Edge of Carbon Abatement." CERA: Cambridge Energy Research Associates. Web. 05 Apr. 2010.
<http://www.cera.com/aspx/cda/client/MCS/MCSChapter.aspx?KID=227&CID=9484>.
“A Cost Curve for Greenhouse Gas Reduction,” The McKenzie Quarterly, 2007, 1, pp. 35-45
"The EPA Tackles Greenhouse Gas - Forbes.com." Forbes.com - Business News, Financial News, Stock Market Analysis,
Technology & Global Headline News. Web. 05 Apr. 2010. <http://www.forbes.com/2009/12/27/epa-greenhouse-gasclimate-opinions-contributors-ted-gayer.html>.
"McKinsey 2008 Research in Review: Stabilizing at 450 Ppm Has a Net Cost near Zero. «." Climate Progress. Web. 05
Apr. 2010. <http://climateprogress.org/2008/12/29/mckinsey-2008-research-in-review-stabilizing-at-450-ppm-has-a-netcost-near-zero/>.
“U.S. Greenhouse Gas Abatement Mapping Initiative: Executive Report.” Dec 2007. McKinsey and the Conference
Board. <http://www.econ.yale.edu/~nordhaus/homepage/documents/McKinsey_US_ghg_final_report.pdf>.