WHAT WILL THE CLIMATE AGREEMENT COST THE WORLD ECONOMY?

Contributed by Robert Lyman @ March 2016

How much of your money are they planning to take to ‘save the planet’? Lots!  … read on.

The December 2015 Paris “Conference of the Parties” on Climate Change resulted in an agreement in principle to take actions to ensure that global temperatures do not increase by more than two degrees Celsius above pre-industrial levels by 2100. The agreement contained no new target in terms of greenhouse gas (GHG) emissions reductions for the world or for each country. Instead, each party is committed “to prepare and maintain successive nationally determined contributions that it intends to achieve” and to pursue the related domestic emission reduction measures and report on them every five years. After three years, a Party may withdraw from the Agreement with one year’s notice.

 

Despite these limited legal commitments, the United Nations, the International Energy Agency and several national governments (including those of Canada and the United States) have chosen to interpret the Agreement as posing major new commitments to massively reduce GHG emissions.

 

To understand what this will all cost, one has to look beyond the vague commitments in the conference agreement and communiqué to what was included in the commitments submitted by the participating countries before the conference began. One hundred and fifty-four countries responsible for 85% of global annual GHG emissions submitted “Intended Nationally Determined Contributions” (INDCs).

 

Rodney Boyd, Joe Turner and Bob Ward of the Grantham Research Institute on Climate Change and the Environment published an analysis of the contents of these INDCs. They also compared the effects of the INDCs with the estimates of the United Nations Environment Program (2014) of the global emissions in 2030 that would be consistent with the “pathways” that offer a reasonable (i.e. 50-66%) chance of avoiding more than a 2 degree C average global temperature rise. The UN projected that the global emissions in 2030 without further action would be 68 gigatonnes of carbon dioxide equivalent (GtCO2).  A “median value” pathway to the 2 degree C target would be 36 GtCO2 (i.e. a 47% reduction). The emissions levels that would be reached based on the INDCs ranged from 56.6 GtCO2 to 52.8 GtCO2 depending on global GDP growth. That is, the INDCs, if completely implemented as promised (a very important condition), would reduce GHG emissions from the 2030 preferred pathway by somewhere between 17% and 22%.

 

According to this analysis, the regional pattern of emissions will change significantly by 2030. China and India will account for around 36-41% of global emissions, the United States and the European Union around 13%, and a group consisting of Brazil, Indonesia, Russia, and South Africa for about 11% of emissions.

 

Boyd, Turner and Ward concluded optimistically that the emissions pathway consistent with the INDCs “offered a reasonable chance of limiting the rise in global temperatures to no more than 2 degrees C”. As they have no way of knowing whether the commitments will be honoured and whether countries will continue and expand emission reduction efforts over the 70 years between 2030 and 2100, this seems like a bit of a stretch.

 

This has not prevented the International Energy Agency (IEA) from coming up with an estimate of what countries will have to spend to honour their INDC statements – $13.5 trillion to 2030. Lest one think that this was a lot of money, the IEA has reassured us that the world would probably have spent $68 trillion to meet its energy needs to 2040 anyway, and therefore it is simply a matter of spending more on renewables and less on hydrocarbons.

 

Not to be outdone, on February 27, 2016, the Finance Ministers and Central Bank Governors of the G20 major economies committed to find ways to stimulate $90 trillion in investments over the next 15 years to achieve climate objectives. Its plans include the implementation of 14 proposals covering fiscal, regulatory, judicial and institutional “innovations” to encourage (force?) more spending by private firms.

 

These numbers need to be placed in context. The IEA claims that the world needs to spend about $1 trillion per year on renewable energy. The G20 Finance leaders say that spending on “green initiatives”, whatever those are, must occur at the rate of $6 trillion per year.  In 2015, investments in renewables totaled $380 billion, a record, but far shy of the IEA’s admonition, and there is increasing resistance to higher solar and wind energy costs in Europe and elsewhere. The IEA one year ago, and the U.S. Energy Information Administration, British Petroleum, and EXXON more recently, published world energy supply and demand projections to 2040 showing that coal, oil and natural gas are likely to constitute 80% of world energy supply by then. This is down from 86% today, but still far above the level implied by the “pathway”. Oil, natural gas and coal prices are much lower today than they were two years ago; that will surely not make implementation of the INDCs any easier. The wealthier countries are expected to give the poorer ones one hundred billion dollars per year starting in 2020 to help them pay for all this; taxpayers in the wealthier countries may not be enthusiastic.

 

If the G20 Finance Ministers’ efforts are successful and are continued at the same rate to 2100, the world would spend $510 trillion pursuing climate change objectives. The GDP of Germany, Europe’s highest income country, was about $3.9 trillion in 2015. Global spending on climate initiatives to 2100 would thus equal 131 years of German national income. At the risk of enormous understatement, I think we need to consider some alternatives to following this path.

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Robert Lyman is an energy economist of 37 years experience, former diplomat and public servant.

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