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.