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Going Green - Cheaper Than You Thought

From early 2007 a research team from McKinsey and Company worked to develop a consistent fact base to estimate the costs and potentials of different options in reducing greenhouse gas emissions (GHG’s) in the US over a 25 year period.

Still Going Up
Annual US greenhouse gases are set to rise from 7.2 gigatons in 2007 to 9.7 gigatons in 2030, a 35% increase, while carbon absorption by forests is decreasing. This is largely as a result of economic expansion, population growth, and increased carbon-based power generation. On this path US emissions in 2030 would exceed greenhouse gas reduction targets, currently before congress, by a massive 3.5 to 5.2 gigatons.

Turning Down the Heat
The McKinsey report suggests that annual GHG emissions could be reduced by 3.0 to 3.5 gigatons by 2030 at a marginal cost of just $50 a ton. Moreover it says that 40% of reductions could be made at negative marginal costs i.e. these investments would make positive returns over their life cycle and could even pay for options with positive marginal costs.

The GHG reduction opportunities are also highly fragmented. The largest option (carbon capture and storage for coal-fired power plants) offers just 11% of total reduction potential. This means broader efforts throughout the economy will be essential in cutting greenhouse gas emissions.

The report drew up five major areas of greenhouse gas reduction potential. In order of marginal cost from lowest to highest these were:

1. Improving energy efficiency of buildings and appliances.
2. Increasing fuel efficiency in vehicles and reducing the carbon intensity of transportation fuels.
3. Achieving greater energy efficiency in power intensive industries.
4. Expanding and enhancing carbon sinks by increasing forest stocks and improving soil management.
5. Reducing the carbon intensity of electric power production.

The main theme of this list is greater productivity, as opposed to more costly large-scale renewable energy projects. Efficiency improvements could substantially offset future demand growth for electricity, eliminating the need to expand the network. Furthermore, the breadth of the list means that intense policy changes will have to take place although, in the long-run, some changes will pay for themselves.

Outside the scope of this research the report also puts forward other suggestions for reducing carbon emissions. This includes encouraging changes in consumer lifestyles and behavior though price signals and education.

Too expensive for the United States?
The report admits that reducing emissions by 3 gigatons by 2030 would require a big change in investment patterns. Given the timing of investments relative to savings, the economy may well encounter periods of significant visible costs. Cumulative net investment would be $1 trillion or 1.5% of the $77 trillion the US economy is expected to make over this period.

Investments will however create long-run savings through greater efficiency and may also stimulate economic forces and create unforeseen business opportunities that reduce the overall cost. Future technology advances could also dramatically reduce the costs.

The report did not suggest any specific policy changes, but with the breadth and scale of the changes, it did emphasize that strong policies would be required throughout the economy. But given that the mid-range proposal of this report does not meet the 3.5 gigaton reduction suggested by legislation, currently before congress, it waits to be seen whether the US is ready to become a low-carbon economy.

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The summary was prepared by Cosmo Macfarlane of the Atlantic Community editorial team from “Reducing US Greenhouse Emissions: How Much at What Cost” published by McKinsey and Company and available online here.