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Economists claim carbon cuts won't break the world's bank

Naturevolume 441pages264265 (2006) | Download Citation

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Price tag for reduced emissions could be lower than expected.

Panel beaters: could low-carbon energy be surprisingly affordable? Credit: PHOTOFUSION PICTURE LIBRARY/ALAMY

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.

“Reducing greenhouse gases will be relatively cheap — but only if we do the right things.”

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 models simulate a complex issue in economics: how government climate policies such as research investment or greenhouse-gas regulation can bring about technological development. It is obvious that technologies evolve, but the processes involved have been factored into economic models only since the late 1990s, in part because it is difficult to untangle how advances occur. The Innovation Modelling Comparison Project, published in a special issue of The Energy Journal, is a two-year effort involving eleven different models that represent the latest thinking on the problem.

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.

Ottmar Edenhofer, an economist at the Potsdam Institute for Climate Impact Research in Germany who edited the issue along with Grubb and others, says the new estimates of lost global GDP are significantly lower than previous ones, which put the range at 3–15%. They suggest the price will be a lot lower, agrees Terry Barker, an economist who helped developed the Cambridge model, especially as costs will be spread over 100 years.

The models are likely to influence the next report from the Intergovernmental Panel on Climate Change, due for publication next year. The authors hope the results will then filter through to governments. They say the cheapest stabilization route can only be achieved if industries are given a strong signal that carbon emissions will continue to be restricted — and that means the United States must join a future version of the Kyoto Protocol. Europe also needs to do more, say the authors, particularly in terms of investment in energy technologies, where it lags behind the United States.

But some economists are wary of the results. Jae Edmonds of the Pacific Northwest National Laboratory in Richland, Washington, describes the models as a valuable “intellectual experiment”. But he questions the fact that most of the models emphasize learning-by-doing — a process by which technologies become cheaper as industry learns how to produce them more efficiently.

Edmonds points out, for example, that many advances in hybrid vehicles have been made possible by developments in areas outside the automotive industry. It is hard to distinguish these advances from those due to learning-by-doing or research by automotive firms. If advances are attributed exclusively to one mechanism, Edmonds warns that the benefits of the process could be exaggerated and costs underestimated: “We don't necessarily have a good handle on how important different factors are and how they interact.”

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