One-percenters underbid by McKinsey
I’ve put up quite a few posts supporting the conclusion of the Stern review that large cuts in C02 emissions could be achieved at very modest economic cost. Mostly, the analysis has focused on policies aimed at reducing developed country emissions by 30 per cent by 2020 and 60 per cent by 2050, and the typical conclusion is that the cost would be around 1 per cent of national income. For Australia, at current income levels that would be about $10 billion per year. Today’s news reports a study by McKinsey estimating a much smaller cost, around $3 billion per year. I haven’t seen the report yet but a quick Google found a similar study for the US.
I suspect the report is over-optimistic in the sense that it estimates the cost of doing the job in the most technically efficient fashion, whereas any feasible policy to induce adoption of the necessary measures will have higher costs. But it’s easy to show that the order of magnitude estimate must be approximately right. You can see this by looking at an absolute upper bound assuming we just replace all energy generation by expensive but feasible sources like solar (given the costs of generation, the extra cost required for large grids and pumped storage to smooth out supply variability is a rounding error here). That cost is no more than 10 per cent of income. Taking account of the obvious adjustment responses such reduced consumption in response to higher energy prices implies an even tighter bound, maybe 5 per cent of income.
The most important criticism to be made here is that it is increasingly evident that a 60 per cent reduction in emissions by 2050 may well not be enough. That suggests that, after exhausting the easy options to improve energy efficiency, substitute away from energy intensive activities and so on, there will be a residual 40 per cent of energy demand, almost entirely electricity, that has to be delivered with less than half the emissions of current best practice. Taking Australia’s current consumption of around 250 Twh/year, that’s 100 TwH at a cost of maybe $25 billion a year (=25c/Kwh) or 2.5 per cent of GDP.
One point that came up in the earlier thread linked above, and that I wanted to note, is that the problem of intermittent supplies of solar and wind, much stressed by some pessimists, will be greatly mitigated by a shift to electric vehicles/plug-in hybrids. 10 million or so car batteries would constitute a large storage capacity for Australia. At a minimum, assuming pricing reflected scarcity, recharging would be timed to match high availability of cheap electrons (motorists are ready-trained to hunt for cheap fuel, so no cultural change needed here, and the meters currently being rolled out are sophisticated enough for this kind of thing).
With slightly more advanced technology, but not requiring any fundamental breakthroughs, car batteries could recharge the grid in times of peak demand (some of my colleagues at the ARC Centre for Complex Systems have been looking at this).