Home > Economics - General, Environment > How much does it cost to save the planet?

How much does it cost to save the planet?

July 31st, 2007

There’s been quite a bit of discussion here and elsewhere about the cost of large (60 per cent or more) reductions in CO2 emissions. A lot of people are intuitively convinced that since everything we do uses energy, large reductions in energy use can only be achieved at the cost of large reductions in living standards. Economic analysis says the opposite. Typical estimates of the cost of such reductions are in the range 1-3 per cent of income for the world as a whole. Australia is more energy intensive, and ABARE (by no means biased low on this kind of thing) gives a range from 1.7 to 3.4 per cent for plausible scenarios. Only by rigging the game could ABARE get the high estimate of 10 per cent, quoted by Howard a while back. And even a 10 per cent reduction in income, by 2050, would not actually be noticeable against the background noise of macroeconomic and individual income fluctuations. On plausible projections, it would mean average income would increase by 110 per cent instead of 120 per cent.


When people talk about big transformations arising from climate change mitigation or peak oil they surely have in mind something more dramatic than marginal reductions in the rate of income growth implied by even the worst-case ABARE scenarios. In my experience, pointing to the results of economic models does not help much here. So, let’s take a look at an absolute upper bound for the electricity side of demand, in which we leave electricity demand unchanged and replace 60 per cent of it with photovoltaics, the most expensive of the alternatives, but also one that has no effective limit on supply (I will deal with quibbles about supply variability in comments if desired). Unsubsidised photvoltaics are about 5 times as expensive as coal (25c/KwH vs 5c). Australia’s total electricity output is around 250 terawatt-hours (billion Kwh) so the additional cost if we replaced 60 per cent of that with solar comes out at 150*0.2 billion or $30 billion which is about 3 per cent of GDP (approximately 1 trillion). You can get the same answer by looking at the share of electricity generation in GDP (a bit under 1 per cent). Electricity accounts for about a third of all CO2 emissions, so a simple scaling suggests a cost of 9 per cent if similarly expensive backstops were adopted in other areas.

Of course, this estimate is way too high. In reality, most of the savings would be achieved through conservation, at much lower cost, as the economic models show. I’ve already done exercises of this kind and the point was made by Nanni on the RSMG blog not long ago.

But, if anyone would like to present a plausible calculation of their own showing that the cost of a 60 per cent reduction in emissions would be significantly in excess of 10 per cent of income, now is their chance.

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  1. August 3rd, 2007 at 21:39 | #1

    BilB wrote:

    But all of that aside i am not clear on what your total solution is. Please elaborate

    My solution? A big income-to-carbon tax switch. i.e. Introduce a carbon tax in return for income tax cuts. I’m talking about an overhaul of the tax system that would make Costello’s new tax system look like tinkering at the edges. The entire tax system would be focussed on reducing carbon emissions. In fact, why not scrap the GST as well and fold it into the carbon tax. After all, why should you pay GST a solar panel?

    The carbon tax would start at a few dollars a tonne but ramp up quickly, and keep rising every year until we stabilise CO2 in the atmosphere. Obviously there would be equity issues with energy taxes hitting low income earners hardest, but hopefully everyone could be adequately compensated.

    I’d sweep away all the rebates, subsidies, low-interest loans and other incentives to reduce emissions and just tax the crap out of carbon. Not only that, energy consumers would know that the carbon tax would keep rising indefinitely. If that doesn’t drive conservation and investment into low-emission energy technologies I don’t know what will.

    Now if you’re asking what my technological solution would be, I wouldn’t dictate one, I’d leave it to the market. If I were to guess at what the best low-carbon solution for personal road transport would be, it would be battery electric vehicles. The greenhouse benefits of biofuels are dubious at best, downright catastrophic at worst. In a world with a high price on carbon BEVs would win hands down because (hopefully) proper carbon accounting would price biofuels out of the market, but mainly because the well-to-wheel efficiency of BEVs is vastly better than any ICE.

    Of course, I realise this plan is totally impractical and politically impossible. What will actually happen is more handouts, rebates, subsidies and handwringing about climate change before elections. We might see emissions trading get up around 2012, but naturally the fossil-fuel lobbyists will ensure that allocations are overly generous and it will make absolutely no difference to overall emissions.

    You think I’m overly cynical? You just watch.

  2. sillytree
    August 4th, 2007 at 10:15 | #2

    Cleaner burning fuels, more efficient engines and direct taxes on excessively polluting industries with the revenue being spent directly to mitigate the polluting activity is the way to go.

    We do not have a fossil fuel shortage so lets not confuse this debate by drawing conclusions to solving pollution & carbon emmission issues on the assumption that we do.

    Certain countries already have very high average mileage rates for their automobiles, which Australia can emulate. Mandate newer cars by taxing older less efficient cars annually. People will trade them in. Government will have increased revenue for maintaing roads and bridge infrastructure. Sam idea with trucks.

    And lets plant some more trees before we tell our farmers to grow more crops to produce ethanol. Start with Wilson’s Prom. I won’t be around in 1000 years when that place finally gets back its old beauty by waiting for Mother Nature.

  3. August 4th, 2007 at 11:12 | #3

    Sillytree – “We do not have a fossil fuel shortage so lets not confuse this debate by drawing conclusions to solving pollution & carbon emmission issues on the assumption that we do.”

    So how do you come to this conclusion that we have no fossil fuel shortage? We don’t right at the moment however this is not going to last.

  4. BilB
    August 4th, 2007 at 12:19 | #4

    Carbonsink,

    Well that makes it clear. I think that you are totally unrealistic if you think that the Australian public are going to just drop their $200 billion investment in their existing vehicles and buy an electric vehicle even if they were available and if there was sufficient electricity to power them. You seem to want to block out the thirty year period that it would take to make such a transition. And that makes it clear as to what you issue with bio fuels is. It annoys you intensely that there is an option to fossil fuels, so you feel a need to make it as bad as possible.

    I understand. I have the same intense dislike for Fission Nuclear Power because I can clearly see the pitfalls. The other flaw in your logic is that you seem to believe that the “market” will automatically deliver the optimum end result. Well by giving the market a clear constraint with with an agressive carbon tax you have improved the chances of that happening. But I suggest that the market which created the existing GW problem is unpredictable and could well give an unforeseen result.

    Ender,

    I have to agree that electric vehicles are the future. The issue is how to get there. You do not appear to have a vision of how that might happen.

    On Brazil. That sounds terrible that they should be the world’s eigth largest oil consumer (2006). That 185 million people (versus US 300 million people) are being totally irresponsible you might think. It turns out that they use one tenth of the oil that the US uses despite having two thirds of the population of the US. Each Brazillian releases 2 tonnes of CO2 compared to each US American at 20 tonnes and each Australian at 18 tonnes. And how dare they cut down their forrests we cut down most of ours and cannot wait to get rid of the rest, but how dare they. And I think that I can see a couple of Indonesian fingers, even from here.

  5. derrida derider
    August 4th, 2007 at 18:23 | #5

    Yep, done properly greenhouse policy should cost buggerall in terms of material welfare precisely because capitalism is incredibly adaptable and innovative. And, yep, it would have cost even less if the energy lobby’s tools and fools hadn’t delayed things. As I’ve said before I hope that these peoples’ children piss on their graves (assuming the graves are not underwater).

    But I’m extremely pessimistic that any serious action will be done in time to avert catastrophe because it requires large scale collective action. The temptation to defect from a one-shot prisoners dilemma with hundreds of nations as players is just too strong – such defection, will, of course, be covered by a barrage of “look over there” mutual finger-pointing.

  6. August 4th, 2007 at 22:43 | #6

    BilB wrote:

    I think that you are totally unrealistic if you think that the Australian public are going to just drop their $200 billion investment in their existing vehicles and buy an electric vehicle even if they were available and if there was sufficient electricity to power them.

    Yes its a monumental challenge. I’ve been arguing all along that the transitition to a clean energy future will be very costly and extremely difficult politically. However, I don’t think a transition to BEVs will necessarily be harder than a transition to biofuels.

    A few points:
    1. The $200 billion car fleet will completely turn over in 10-15 years anyway. So the Australian public will spend the money on new cars anyway.
    2. There definitely isn’t sufficient electricity (clean or otherwise) to power a substantial fleet of electric vehicles, but there isn’t sufficient supply of biofuels either.
    3. BEVs are no longer science fiction. Hybrids are here now. PHEVs are not far away. BEVs will follow soon after. We could make the transition in 10-15 years carbon was priced correctly.

    What will take longer, planting out a million hectares with sugarcane, or building a million electric cars?

    It annoys you intensely that there is an option to fossil fuels, so you feel a need to make it as bad as possible.

    Huh?! Where on earth do you get these ideas? Look, I was big believer in biofuels about 18 months ago, but the more I read, the more I realised that its not viable solution and will probably do more harm than good. I fought against it for a long time, but in the end I realised its madness to turn the planet into monoculture and force millions into starvation just so we can keep driving internal combustion vehicles.

    The reality is biofuels will probably play a small role in the near term, primarily as blends with fossil fuels. They are a good short term ‘fix’ because (as you say) they can be used with the existing vehicle fleet. However, biofuels can never and will never supply the world’s entire liquid fuel needs. Other solutions will have to be found.

    But I suggest that the market which created the existing GW problem is unpredictable and could well give an unforeseen result.

    Yes the market economy has done lots of harm. Yes climate change is the greatest market failure the world has seen. But the market has also delivered untold wealth to western economies, and is in the process of doing the same in China. The market is still our best tool for tackling climate change. Its certainly better than the agrarian socialism which you and the Queensland Nationals seem to favour!

    If we price carbon correctly, and do the carbon accounting correctly, the most efficient solution will emerge. You can invest in a biofuels company, and I can invest in a electric vehicle company. Let the market decide who is right.

  7. August 5th, 2007 at 12:04 | #7

    carbonsink – “2. There definitely isn’t sufficient electricity (clean or otherwise) to power a substantial fleet of electric vehicles, but there isn’t sufficient supply of biofuels either.”

    Agree with everything that you say except this point. There is actually quite sufficient electricity as most of it sits idle overnight and most charging can be done in off peak hours. The actual increase in capacity needed is quite small.

    Also we need to stop thinking of BEVs and PHEVs a being a problem to charge. On of the greatest barriers to high renewable usage is storage. BEVS and PHEVs with their large battery packs can be part of the solution not a problem to solve. Vehicle to Grid (V2G), also not science fiction, can use the battery packs of BEVs to store gigawatts of electricity in systems that the utilities do not have to pay for, only lease. New batteries from AltairNano, in production now, have a cycle life of 15 000 cycles and a charge time of 10 minutes.

    The beauty of V2G is that utilities do not have to buy the storage and we do not have millions of batteries sitting around in warehouses doing nothing. We can drive the batteries, mitigating the oil problem, and the utilities can use the batteries solving the storage problem.

  8. August 5th, 2007 at 18:47 | #8

    There is actually quite sufficient electricity as most of it sits idle overnight and most charging can be done in off peak hours.

    Ok, but most of that off-peak electricity is currently supplied by coal-fired power stations which I’m sure we’re all agreed should be phased out ASAP. It seems to me you’d most likely want to recharge your BEV/PHEV at night, which is not a good time for solar or coastal sea breezes.

    BTW, has ProfQ ever discussed carbon rationing and tradeable energy quotas here? Its an idea than Monbiot seems to have embraced. Thoughts anyone?

  9. August 6th, 2007 at 09:36 | #9

    carbonsink – “Ok, but most of that off-peak electricity is currently supplied by coal-fired power stations which I’m sure we’re all agreed should be phased out ASAP.”

    Yes true enough. There will always be off-peak times when cars can be charged however as renewables are more attuned to the cycles of peak and off-peak this will diminish. Perhaps as the percentage of BEVs and PHEVs grows and they leverage more and more renewables they will charge at different times to now.

  10. August 6th, 2007 at 11:11 | #10

    as renewables are more attuned to the cycles of peak and off-peak this will diminish

    Some are and some are not. Hot Dry Rock geothermal technology will presumably pump out electricity as readily at 1am as at 1pm. Likewise with Hydro electricity. Given that geothermal is cheaper than solar (or in the case of Hot Dry Rock is projected to be cheaper) it does not seem clear that the future necessarily belongs to solar or wind generators.

    Where off peak charging of plug-in hybrid cars may be helpful is in providing better overall utilization and return on investment for power transmission infrastructure. However with battery costs still being hugely uneconomical for plug-in hybrid electric cars it is an idea whos time has not yet arrived.

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