Tackling Climate Change Will Cost Less Than We Think

Yes, addressing climate change will be expensive, but not nearly as much as the costs of delaying action, argues Rebecca Henderson.
by Rebecca Henderson

No one knows how much it will cost to keep the risks of significant climate disruption to a reasonable level. One commonly cited estimate puts the cost at roughly 1 percent of world GDP a year, or about $840 billion.

This is a large number, but it seems smaller when one remembers that that most studies suggest that failing to address climate change will result in even higher overall costs. For example, a study published in the Proceedings of the National Academy of Sciences estimates that damages from uncontrolled climate change (an increase of 3.4 degree Celsius) could cost $12 trillion (2.8 percent of global output) by 2095. Moreover delaying action could increase mitigation costs by 40 percent every decade, making it ever more difficult to do what may need to be done.


The Business of Climate Change


The Business of Climate Change

What role should business leaders play in trying to affect climate change? Harvard Business School faculty share their thoughts.


Most importantly, there are good reasons to think that the world will surprise us , and that once we put our mind to addressing climate change the costs will be significantly lower.

Building an energy efficient, decarbonized economy is a massive shift —of the same order of magnitude as the diffusion of globalization, the mechanization of agriculture, the widespread adoption of computers or the diffusion of the Internet and the digitization of almost everything. It will require the transformation of almost every energy company's business model, and the transition from a world in which throwing CO2 up the chimney was free to one in which throwing away CO2 is a costly activity. This won't be easy, but it will be easier than we expect.

Between 1942 and 1944, for example, the United States nearly quintupled its outputs of ships while costs fell by more than 60 percent. We've seen change of a similar magnitude in civilian industries as well. Less than 2 percent of the US population/workforce now works on the land, but agricultural production has only continued to increase. Computing power is now infinitely cheaper than it was 20 years ago. In the environmental arena, the emissions allowance program enacted to control emissions of sulphur dioxide was much more effective —and much cheaper —than early estimates had suggested. We tend to take these kinds of advances for granted, but we shouldn't —they hint at what might be possible if we really put our mind to addressing the problem of climate change.

“Building an energy efficient, decarbonized economy is a massive shift”

For example we're already beginning to see evidence of the existence of very significant learning curves in many key energy technologies. One recent paper estimates that the electrical efficiency of computation has doubled roughly every year and a half for more than six decades, outpacing Moore's law. The paper shows also that the costs of wind and solar power have also been falling dramatically.

Nuclear energy remains in flux, but a number of promising new approaches, particularly so called "modular" or "fourth generation" nuclear reactors, promise to significantly reduce costs while simultaneously easing doubts over safety and waste disposal.

Positive Investments Already

Many investments in energy conservation are already NPV positive. A recent report estimated that an investment of $3.2 trillion worldwide in energy conservation would avoid new supply investments of $3 trillion and would pay for itself within three to five years, while a recent Department of Defense sponsored study concluded that using LEED-Silver or equivalent standards in the design and construction of new buildings increased construction costs by less than 1 percent while reducing energy costs by between 5 and 30 percent over the life of the building. Between 1990 and 2012 IBM reduced electricity consumption by 6.1 billion kWh, saving $477 million through energy conservation alone.

And this is all in a world in which we are spending a ridiculously small amount of money on clean energy research, and the private sector has only minimal incentives to invest. In 2014, for example, the Department of Energy will spend about $1.6 billion on research into renewable energy, energy efficiency and nuclear power. That's about 5 percent of what we will spend this year on research at the NIH, and only 2 percent of what we'll spend on military research.

Renewable energy is widely subsidized, of course, but so are fossil fuels: one estimate suggests that the world spends $523 billion a year subsidizing fossil fuels as against $88 billion a year to renewables. But of course we shouldn't be subsidizing —or mandating —any fuel directly!

If we were to mobilize the private sector by creating a truly competitive market in which the real costs of any particular fuel were borne by those who use them —if, in other words, we imposed a realistic price for carbon emissions that reflected our best estimates of the real cost of dumping them into the atmosphere — then I suspect we would see unprecedented levels of innovation across the economy in ways we can only begin to imagine.

In manufacturing, US labor productivity more than quadrupled between 1950 and 2000 because the price of labor encouraged firms to become really efficient at using it. My guess is that we will be very pleasantly surprised when we start to price carbon in the same way.

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    • Gabriel
    • Chief Questioning Officer, Questions1st
    True, but business executives do no invest to prevent future disasters - they usually invest to make more money. I know it sounds simplistic, but it's a reality that will not change very soon.

    As for labor productivity, it would be nice to understand its impact on people and society. For instance, how come most people don't feel motivated at work and the middle class is struggling in the USA? How can we have higher productivity when people don't like their jobs and make less money?
    • Michael J. Schmitz
    • The Major Disaster Solutionist American Master, EARTH
    Costs for Man Made Climate Change is a LIFELESS PLANET.
    • Monckton of Brenchley
    • Chief policy advisor, Science and Public Policy Institute
    Spending as little as 1% GDP on mitigation will make no significant difference. The cost of adaptation is estimated in Stern (2006) at 0-3% GDP, and in IPCC (2013), for which I was an Expert Reviewer, 0.2-2.0% GDP.

    Very nearly all measures to mitigate CO2 - wind farms, solar, CO2 taxes, cap-and-tax - cost 10-100 times the lesser and later cost of adaptation.

    Interestingly, the sole exception (if it can be made to work) is CO2 capture and storage, which is about twice as costly as adaptation.

    Overall, there is no sound business case for doing anything to mitigate global warming, which is likely to continue to occur over the coming century at the rate evident since 1950 - i.e. half the rate predicted by the computer models, which contain numerous errors, not the least of which is a glaring failure to allow for the self-equilibrating effect of temperature change (the Bode system-gain equation takes no account of this, for it was designed for electronic circuits, where voltage change is a bare output).

    More caution is needed before Harvard commits to any further climate change initiatives. Neither the science nor the economics has been properly thought through.
    • Anonymous
    "addressing climate change will be expensive, but not nearly as much as the costs of delaying action"
    There is no consensus that this is true. The science is disputed and, so far, almost all the models that claim to predict the future are badly flawed. So how can there be certainty about the cost of delaying action? In the circumstances it's hard to see any business investing significant sums 'just in case'. Most businesses I know don't work that way.
    • malcolm whitmore
    • analyst, Intergen
    The economics of climate change have a fundamental problem in that the long term costs are discounted and the immediate costs of investments needed to mitigate are allowed.
    With this equation the short term beneficiaries are bound to win.
    We need a democratic system that acts in the interests of the people to take the necessary action for long term benefit.
    Currently our democratic process is not fit for purpose as it has degenerated into majoritarianism which is at the beck and call of rich lobbyists and the elite .
    • Stephen Wood
    • Strategic Planning, Intel Corp
    My expertise is not in climate but is instead in disruption theory and practice. In the research that I'm doing, it is proving possible to identify, characterize and leverage disruptive innovation based events significantly in advance of their occurrence. I happen to be following one that is relevant to your interests in climate change.

    There is evidence that a disruptive event is approaching in solar energy, battery technology and artificial photosynthesis. If valid, a relatively small investment in the critical technologies could generate an amplified effect (e.g. the investment in the transistor vs the change that computing has brought).

    If the government were to conduct a series of grand challenges or the equivalent to accelerate the timing of this event/the maturity of the pivotal technologies, it might be possible to make significant inroads in the climate problem with relatively small initial investments.

    While it is clear that significant expense will be required to deploy the technology broadly, the nature of disruptive innovation is that it creates significant advantage over existing technologies. The incentives to adopt would be compelling on their face (reduced energy costs, reduced pollution, safer cars, etc), reducing the requirements for government contribution.