Chapter 5: The Costs of Tackling Climate
Change
73. If the costs of tackling climate change are
small, then a cautious approach to decision-making in the face
of uncertainty would dictate that those costs should be incurred
as an insurance against the chances of the worst effects of global
warming occurring. But the costs of tackling global warming may
be large. Moreover, those costs will largely be borne by the current
generations, while the benefits will accrue to generations yet
to come, who are projected to be significantly wealthier and technologically
more advanced. Hence it is very important that a realistic
picture of the likely costs be conveyed to, and understood by,
people today who will have to pay them. We note the considerable
efforts that the IPCC has made in constructing likely cost estimates
for the world as a whole. We are far less satisfied with the data
currently available on the costs to the United Kingdom, and we
call for a significantly greater effort to clarify and estimate
those costs.
74. We heard evidence on costs and we were interested
to note the different ways in which this cost information was
conveyed. We therefore outline below our own understanding of
the cost data.
Global costs
75. We acknowledge that estimating abatement
(or "mitigation") costs is very complex. First, costs
are lower if the world in general adopts the lowest cost emission-reduction
technologies first and the highest cost technologies last—but
we have no guarantee the world will behave that way. Costs are
estimated in different ways. Usually they are based on the direct
costs of the technologies, e.g. the cost of building a nuclear
power station. But many other kinds of costs are involved and
technology costs do not necessarily correspond with the correct
concept of cost which is measured by the "welfare" losses
incurred to consumers and producers. Costs can vary considerably,
depending on how compliance policies are introduced. For example,
market-based instruments, such as carbon taxes and tradable permits,
are thought to have lower compliance costs than simply telling
emitters what technology to use ("command and control").
It is for this reason that so much emphasis is being placed on
the newer policies such as permit trading systems. Many economists
believe that costs will be lower than anticipated because emitters
will find new technologies and the cheaper ways of overcoming
compliance problems: climate regulation may "force"
innovation[70]. But others
believe that there are many hidden costs in regulation, so that
actual costs may prove to be higher than estimated. For all these
reasons, and others, we would expect wide variations in the estimates
of the costs of control.
76. Integrated Assessment Models (IAMs), in which
simplified climate models are combined with economic models of
the world economy, produce estimates of costs. As one would expect,
as the target for atmospheric CO2-equivalent concentrations
gets tougher and tougher, so not only the total costs of meeting
those targets rise, but so do the incremental costs (the "marginal"
cost). In a very interesting diagram, the IPCC Synthesis Report
2001 tries to bring together the cost estimates of several
of the IAMs, and links them with emissions reductions and atmospheric
concentrations. Table 6 shows the IPCC estimates converted to
an "annual" form and with some adjustments to current
year prices and using a lower discount rate than that used by
IPCC.
TABLE
6
Costs to the world of achieving the 550
ppm target, expressed in annual terms, $2005 prices, per annum
| Present value of cost $2005 prices, trillion
| Annual cost at 3%, borne in first 50 years, billion
| Annual cost at 3%, borne in first 20 years, billion
|
| 2 | 78 |
134 |
| 17 | 661
| 1141 |
Notes: For 50 years at 3% divide the present value by 25.7. For
20 years, divide by 14.9. The above figures are therefore annuities
derived from the present values. Present values taken from R.
Watson et al. Climate Change 2001: Synthesis Report. Cambridge:
Cambridge University Press. 2001. Figure 7.3
77. Table 6 suggests that getting to the 550 ppm level may
cost the equivalent of $2 trillion to $17 trillion in present
value terms, i.e. equivalent of spending this sum of money once
and for all today[71].
Expressed, more meaningfully, as an annual flow, the sums are
$78 billion to $1141 billion per annum. To get some idea of these
sums, the world's annual GNP is currently about $35 trillion.
Annual expenditures would therefore be 0.2 to 3.2% of annual current
income. Unless "Kyoto plus" agreements extend to developing
countries, these costs would be borne by the richer nations of
the world alone, suggesting that the burden would rise to 0.3
to 4.5% of their annual current income. However, in both cases,
world income would be growing. For example, if the world economy
grows at 2% per annum, then the "worst case" level of
costs (assuming all costs are borne in the next 20 years) would
fall to some 2.3% of world income in 2035. If the costs are spread
out over 50 years, the fraction would fall to 1.3% of world income.
World costs per tonne carbon
78. While Table 6 shows costs in formats that convey an overall
picture of the likely cost burden to current generations, expressing
these costs as an average cost of removing carbon is also useful.
Indeed, we show in Chapter 6 why such figures are needed for a
comparison with the damage done by carbon emissions in a cost-benefit
framework. Table 7 shows our attempt to translate the figures
into costs per tonne of carbon. While the IPCC Synthesis Report
shows these costs as rising at an increasing rate per unit of
change in CO2 concentrations, the resulting figures
in terms of costs per tonne of carbon emissions reduced do not
show this pattern[72].
TABLE 7
World costs expressed in $ per tonne carbon
| Concentration target (ppm)
| Cumulative emissions, billion tC
| Incremental reduction in emissions billion tC
| Incremental cost at 3% discount rate $2005, trillion
| Incremental cost per tC $2005
|
| | | MERGE
| FUND | MERGE
| FUND |
| 750 | 1348 | -
| 0.7 | 0.0 | -
| - |
| 650 | 1239 | 109
| 2.0 | 8.7 | 18.3
| 79.8 |
| 550 | 1043 |
196 | 3.5 | 8.7
| 18.3 | 44.4 |
| 450 | 714 | 329
| 4.3 | 19.5 | 13.1
| 59.3 |
Column 1 shows the various concentration targets. Column 2 shows the cumulative emissions corresponding to those targets. Column 3 shows the change in emissions, i.e. the emission reductions, needed to secure targets of 650 ppm or less. Column 4 shows the total worldwide cost of achieving these reductions, according to two different Integrated Assessment Models - MERGE and FUND. The final column shows this cost expressed per tonne of carbon reduced.
|
79. The "cost per tonne of carbon" for the 550 ppm
target is thus embraced by figures like $18 to $80 tC, or about
£10 to £44 tC.
Conclusions on world costs
80. We conclude that there are several ways of presenting
global costs of controlling emissions so as to achieve a long
run goal of atmospheric concentrations of 550 ppm. In present
value terms—akin to a "one off" payment—the
sums are anything from $2 trillion to $17 trillion. In annuitised
form—the present value expressed as an annual payment—the
range is $80 billion to $1100 billion per annum, assuming these
costs are borne in the first 20 to 50 years. In terms of cost
per tonne of carbon removed or avoided, the figures range from
$18 to $80 tC.
The technologies to tackle climate change
81. A key issue is the range of the technologies that are
available to tackle climate change. It is clear to us that there
is no shortage of innovations available. The more important issue
is their cost and the capacity to diffuse them at a rapid rate
in the world economy. Professor Dennis Anderson of Imperial College
London was especially helpful in providing cost information on
the likely candidates[73].
His data are presented in Table 8.
TABLE 8
Illustrative costs of emissions-reducing
technologies
| Technology
| Marker | Cost unit
| Cost of Marker | Cost of Substitute
| Net cost |
| Near term estimate (10 years time)
|
| Nuclear | NG/CC | c/kWh
| 3.5 | 6.0
| 2.5 |
| Hydrogen from coal or gas + CCS | NG
| $/GJ | 4.0 |
8.0 | 4.0
|
| Electricity from fossil fuels + CCS | NG/CC
| c/kWh | 3.5
| 5.0 | 1.5
|
| Wind | NG/CC | c/kWh
| 3.5 | 5.0
| 1.5 |
| Photovoltaic (solar input = 2000kWh/m2)
| Grid electy. | c/kWh | 10.0
| 15.0 | 5.0
|
| Biofuels | Petrol | $/GJ
| 12.0 | 15.0
| 3.0 |
| Distributed generation | Grid electy.
| c/kWh | 10.0
| 15.0 | 5.0
|
| | |
| | |
| Long term estimate: |
| | | |
|
| Nuclear | NG/CC | c/kWh
| 4.0 | 5.0
| 1.0 |
| Hydrogen from coal or gas + CCS | NG
| $/GJ | 5.0 |
10.0 | 5.0
|
| Electrolytic Hydrogen (onsite & distributed)
| NG (distributed) | $/GJ |
10.0 | 30.0
| 20.0 |
| Electricity from fossil fuels + CCS | NG/CC
| c/kWh | 4.0
| 6.0 | 2.0
|
| Wind | NG/CC | c/kWh
| 4.0 | 6.0
| 2.0 |
| Photovoltaic (solar input = 2000kWh/m2) b/
| Grid electy. | c/kWh | 10.0
| 8.0 | -2.0
|
| Biofuels | Petrol | $/GJ
| 12.0 | 15.0
| 3.0 |
| Distributed generation | Grid electy.
| c/kWh | 10.0
| 10.0 | 0.0
|
Source: Professor Dennis Anderson, Imperial College London. Notes:
NG = natural gas; NG/CC is natural gas - combined cycle power
plant; CCS is carbon capture and geological storage; GJ = gigajoule;
kWh = kilowatt hour; c = US cents
82. Table 8 expresses the costs of carbon-reducing technologies
relative to a "marker", i.e. the technology that would
be displaced by the "new" technology. In the longer
term, the costs remain above the marker technologies by the same
margin other than for solar photovoltaic in regions where there
is fairly high levels of sunlight. The fact that the costs of
most of these technologies remain above the current technologies
means that the present free (or, rather, quasi-regulated) market
will not bring about their natural substitution. That substitution
must be managed, first by judging whether the extra costs of these
technologies is smaller or greater than the money value of the
environmental benefits they bring, and second, by designing incentive
systems to accelerate the diffusion of these technologies. The
former is an exercise in cost-benefit analysis, the second is
an exercise in designing market-based environmental policies such
as carbon taxes and tradable permit schemes, or of government
directly sponsoring the required R & D. Professor Anderson
also argued that, once incentives are in place, they will in turn
accelerate the process whereby unit costs are reduced[74].
83. Given the wide array of potential technologies in Professor
Anderson's list, we are surprised that the Government's Energy
White Paper[75]
should place such emphasis on just one technology, wind energy.
(There is also a debatable assumption about the likelihood of
pervasive energy efficiency gains.) It is one of the technologies
with a low excess cost burden over the marker technologies. Also,
Professor Anderson's table relates to the global picture, not
just the United Kingdom. Nonetheless, we would have preferred
a wider vision in the White Paper. Dr Dieter Helm of Oxford University
noted that, whereas the R & D budget in the US embraced the
"big" technologies such as linked coal and hydrogen,
the UK research programme has been "captured" by certain
renewable technology interests[76].
84. Finally, we note the position of (conventional) nuclear
power in Table 8. It is well known that nuclear power carries
an excess cost penalty at the moment. Indeed, this is why British
Energy has experienced such financial difficulties with the current
electricity market. But Table 8 suggests that this excess penalty
will be reduced significantly over time. In our view, it would
be unwise to close the nuclear energy option. It is prudent
to maintain as wide an energy portfolio as possible. We argue
that the current capacity of nuclear power, before further decommissioning
occurs, should be retained.
85. Additionally, there are serious doubts about the extent
to which energy efficiency and wind energy can get the country
on to a trajectory of emissions consistent with the 60% target.
As Dr Helm indicated to us, such a policy is heavily reliant on
"picking winners" among the technology options. We are
not confident that the Government, indeed any government, can
be so sure of the effectiveness of the technologies they choose
to back. It is far better that government sets the goal and the
price signals to achieve that goal, leaving the market to select
the technologies and their rate of diffusion through the economy.
Costs to the United Kingdom
86. Estimating the costs to the United Kingdom for the UK's
own programme is not straightforward. Indeed, this appears to
us to be a point of criticism—government estimates of cost
are unhelpfully vague for something as important as climate control.
However, the Government's long run target of 60% reduction in
CO2 emissions by 2050 is supposed to be geared to the
550 ppm target since it assumes that "others" act likewise.
According to the Department of Trade and Industry, the cost of
this target is assumed to be between £10 billion and £42
billion in 2050, with an assumption that costs up to 2020 are
"negligible" because the emission reductions are secured
by energy efficiency. The evidence presented to us by Dr Dieter
Helm suggests that this latter assumption is wildly optimistic.
Indeed, we detect signs that the Government is aware that its
Energy White Paper embodies very optimistic assumptions
about the exclusive roles afforded to energy efficiency and renewable
energy to achieve this long run target[77].
In an effort to prompt better and clearer estimates from the Government,
Table 9 below presents our best guesses of the costs to the UK.
87. Figure 1 presents a very stylised picture of our assumptions.
The dashed lines represent the DTI's assumption of zero cost to
2020 and rising costs thereafter. The continuous lines represent
our assumption that costs begin now, as indeed they must have
done through the current climate action programme.
FIGURE 1
Stylised cost trajectories for the UK
88. The trajectories encompass the DTI's optimistic
assumptions about energy efficiency and a more pessimistic scenario
(not subscribed to by the Government) in which the costs are incurred
immediately, i.e. before 2020 which is when the White Paper assumes
costs begin to rise.
TABLE
9
Possible costs for UK 60% target, present
values and annuities
| End point costs in 2050 p.a. £ billion, 2005 prices
| Present value of costs at 3% discount rate, 2005 prices, £ billion
|
| DTI path, positive costs starting in 2020
| Pessimistic case, positive costs start in 2005
|
| 11.3 | 63 | 94
|
| 47.5 | 265 | 398
|
| Annualised costs 2005-2050 at 3% discount rate, 2005 prices, £ billion
|
| 11.3 | 2.6 | 3.8
|
| 47.5 | 10.8 | 16.2
|
Source: EAC estimates
89. Table 9 suggests that the UK faces "one-off"
costs equal to £60 to £400 billion, or an annual cost
burden of £3 to £16 billion per year for nearly the
next 50 years. This annual cost would be higher still if we assumed
the cost burden has to be met in the next 20 years. In supplementary
evidence, Defra advised us that the marginal control costs (the
costs of reducing additional tonnes of greenhouse gases[78])
for the UK might lie in the range £25 - £150 tC in 2030,
and £300 - £600 tC in 2050[79].
However, even the 2030 estimates could be understatements if energy
efficiency does not progress as fast as assumed. Equally, widespread
emissions trading schemes for greenhouse gases could lower these
costs.
90. We acknowledge the rough and ready nature of our cost
estimates for the UK's long term target of 60% reduction in CO2
emissions by 2050, but the fact that we can only produce such
figures arises from the poor information embodied in the Energy
White Paper and elsewhere. We urge the DTI and the Treasury
to produce more detailed estimates of these costs. Moreover, the
cost trajectories should show sensitivity to the serious doubts
over the White Paper assumptions about the roles of renewable
energy and energy efficiency.
Costs of meeting UK goals as a percentage
of GNP
91. Several of our witnesses conveyed their view that the
costs of control to the United Kingdom are trivial. They expressed
costs as a fraction of anticipated GNP. For example, if GNP grows
at 2% for the next 45 years, it would be 2.4 times the current
GNP in 2050. Currently, UK GNP is £1.16 trillion. In 2050
it would therefore be £2.8 trillion. If we take the "high"
DTI figure of £47.5 billion climate change control cost in
2050, this is 1.7% of GNP. If we take the low figure, it is 0.4%
of 2050 GNP. We doubt if this way of expressing cost will convey
information in a comprehensible manner to more than an expert
audience, but we accept that "benchmarking" costs on
GNP is useful. However, fractions like 0.4 to 1.7% of GNP are
not trivial. If this benchmarking approach is to be used, it is
appropriate to relate it to other costs. For example, even the
lower end of the range exceeds the current international development
budget in the UK.
92. Other witnesses adopted a variant of the GNP benchmarking
approach and asked what climate change controls will do by way
of reducing UK economic growth rates. It was put to us that instead
of growing at an average of 2% per annum for the next 45 years,
the UK would grow at 1.95% to 1.99%, a barely perceptible difference.
The temptation is to conclude that such changes in growth rates
are trivial compared to the rewards of avoiding the worst impacts
of climate change. But we regard this manner of presenting cost
data as sleight of hand. It has to be recalled first that the
UK climate target only has meaning if all other countries adopt
the same course. If they do not, then the UK will have undertaken
unilateral action to no purpose. Hence the "return"
secured by the UK from pursuing its long run target is highly
uncertain. But, in any case, no other item of government expenditure
is treated this way. If it was, it would be easy to justify almost
any large scale item of public expenditure. We were therefore
surprised to see this approach being quoted by Defra in their
supplementary evidence to us on costs. We think it important to
avoid the deception embodied in the "change in the rate of
growth" approach.
93. Finally, we note that the Government uses the MARKAL model
to estimate the costs of meeting various emission targets. The
use of this model was noted approvingly by Professor Paul Ekins
of the Policy Studies Institute[80].
But Dr Dieter Helm of Oxford University was scathing in his criticism
of the model which he characterised as "garbage in, garbage
out"[81]. Dr Helm's
criticisms centre on both the nature of the model and the assumptions
built into it about the costs of energy efficiency and the costs
of renewable energy. He argued that both these costs are understated
by the Government and hence MARKAL produces the answer that the
costs to the UK of meeting the 60% target are similarly low. If
Dr Helm is right, then even our estimates in Table 9 are likely
to be understatements of the true cost.
94. We are concerned that UK energy and climate policy
appears to rest on a very debatable model of the energy-economic
system and on dubious assumptions about the costs of meeting the
long run 60% target. We call on DTI and the Treasury to improve
substantially (a) the cost estimates being conveyed to the public
and (b) the manner of their presentation. Without these improvements
we do not see how the Government can argue that it has adequately
appraised its long-term climate targets in terms of likely costs
and benefits. Indeed, in our examination of the witness from the
Treasury, it was clear to us that no such cost-benefit analysis
exists in substantial form. We believe that the Treasury should
be more active in scrutinising and publicising these costs and
benefits, in association with Defra and DTI.
70 In the business literature this tends to be known
as the "Porter hypothesis", after Professor Michael
Porter. Back
71
For comparison, Professor Nordhaus of Yale University has suggested
that the cost of achieving the Kyoto Protocol targets (inclusive
of US participation), and assuming the emissions levels in 2010
are sustained through 2100, would be some $3 trillion (in 2005
prices). See W. Nordhaus, Global warming economics. Science,
294, 9 November 2001, 1283-4 Back
72
This is rather counter-intuitive and we have been unable to determine
why. There is a question arising as to why the incremental costs
first go down and then up. Back
73
Supplementary evidence from D. Anderson (Vol II, pp 147-150) Back
74
Evidence from D. Anderson (Vol II, pp 137-150) Back
75
Our energy future-creating a low carbon economy, February 2003 Back
76
Evidence from D. Helm (Vol II, pp 87-95). In his evidence (Vol
II, pp 96-106), Sir David King was particularly keen on the development
of nuclear fusion. However, it seems to us that this technology
remains a distant prospect and we have discounted it in our analysis. Back
77
Our energy future-creating a low carbon economy, February 2003 Back
78
The cost estimates in Table 9 are annual averages, not marginal
costs. Back
79
Evidence from Defra (Vol II, pp 107-130) Back
80
Evidence from P. Ekins (Vol II, pp 178-196) Back
81
Evidence from D. Helm (Vol II, pp 87-95) Back
|
