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).

89 thoughts on “One-percenters underbid by McKinsey

  1. What I find unhelpful about your approach to the debate is that you continuously conflate what could happen, given appropriate policy, with what will happen, assuming wrong policies. The result is, as far as I can see, to give support to those advocating wrong policies.

    I’m not supporting those advocating wrong policies, that’s why I make these comments here (and not some RWDB blog) because there are very few denialists here. Almost everyone here has good intentions, and hopefully we can have a frank and honest discussion about solutions, and not whether the problem exists.

    However, I feel very strongly there is a huge disconnect between the discussions we have here, and what happens in the real world. This problem desperately needs to be taken seriously, but our politicians are still giving it little more than lip service. I also see very little evidence in my day-to-day life that the general public is aware of the seriousness of the issue and making lifestyle changes accordingly.

    Carbonsink, I think the only real good news at this stage comes from Europe

    Yes there is some good news from Europe, but drilling down into the data you’ll notice that most of the reductions in emissions have come from agriculture, waste disposal and industrial processes (which wizofaus alludes to above). Emissions from the stationary energy sector are down only slightly, and transport emissions are growing strongly in most EU countries.

  2. cabonsink,

    you really are too depressing. On the one hand you are going around telling everyone how prices are going go through the roof, and on the other hand you think that demand won’t abate if it will. There’s lots of good news out there, as far as I’m concerned (aside from Ford going bankrupt due to their own stupidity). For example, whilst you think that solar is still hopeless, lots of people think the opposite and are willing to put their money where there mouth is. For example, recent gains in solar are going to make it cheaper than coal in the near future. It seems so likely that stories like this:

    tp://www.wealthdaily.com/articles/grid+parity-renewables-coal/1013

    now appear in the popular press (there’s also an article in yahoo finance today telling people to buy this concept as a defensive play). Obviously Australia is not the right country to compare for this, but for lots of other countries (especially like China which already has massive pollution problems due to coal — so they have an additional reason to invest in alternative technologies), it seems pretty clear where the cheapest future lies.

  3. As regards solar, there’s a sense in which the failure of costs to fall over the last few years reflects good news.

    Until a few years ago, solar cell producers sourced their silicon from offcuts from the semiconductor industry. That was very pure and quite cheap.

    Now demand has outrun that supply, and they are being forced to source their own silicon, which is producing a lot of innovations to lower costs (thin films, for example). In the long run, this should be good, but in the short term, it means higher prices.

  4. Carbonsink, here’s my suggestion. In comments on a post about whether emissions could be reduced to a given level at low cost, under appropriate policies, please focus on the analysis supporting that claim and what you see as wrong with it.

    If you want to make the point that there’s no sign of the required urgency, you could do so on an appropriate post or in the regular open threads.

  5. please focus on the analysis supporting that claim and what you see as wrong with it.

    Fair enough.

    Getting back to Brian’s post (#68) and the fantastic chart he found.

    In Australia on 2005 figures we have a problem. Land use (6%) and agriculture (15.7%) comprise 21.7% of emissions. Cuts of 80 to 90%, or even 95% if world equity in per capita terms is mandated, will mean that we will have to make severe cuts in agriculture.

    Almost half the GHG emissions from argiculture are from livestock and manure. If we all gave up red meat we could significantly reduce agricultural emissions overnight, and would probably be a lot healthier.

    Land use change (~18% of global total) could be turned into a positive with reforestation, and a worldwide ban on tropical forest products, palm oil and the like.

    Cement manufacture (~4% of global total) could also be reduced if something like Eco Cement lives up to its promise.

  6. You can add mini-wind generation to things that are going drop in price too. These are going to be especially good for the hundreds of millions of poor people that want access to energy but don’t necessarily need perfect supplies nor huge amounts of energy (the expensive mini-generators are also likely to become cheaper too — which would be great for cities like Melbourne where it is constantly windy). These, for example, seem great in terms of really cheap power:

    http://www.inhabitat.com/2007/03/21/micro-wind-turbines-small-size-big-impact/

  7. the expensive mini-generators are also likely to become cheaper too — which would be great for cities like Melbourne where it is constantly windy

    I know I’m not allowed to say anything negative but micro wind generation really doesn’t work in urban environments. The wind is too turbulent in built up areas. Wind turbines need to be placed away from buildings to work efficiently. And then there’s the noise issue…

  8. If people go to honda.com, they’ll see that the price difference between the hybrid and conventional versions of the Honda Civic in the US is around US$7500.

    Meanwhile plug-in conversion kits are available from US$5000.

    Given those two figures and the economies of scale from building the plug-in capacity in on all vehicles, I don’t think my figure of A$10,000 per vehicle is particularly unrealistic.

    As john, sort of said, the point here isn’t to argue about what will happen – it’s to point out what could happen if we get policy right.

  9. Here’s a possible solution to the cement problem:

    Serpentine, a common rock, is already used as aggregate in some types of concrete.

    Serpentine has an interesting characteristic – it reacts chemically with carbon dioxide from the air, breaking it down and absorbing the carbon.

    I wonder if it’d be possible to tweak the properties of serpentine concrete so it absorbed carbon dioxide over time, offsetting the carbon dioxide emissions from the cement production.

  10. Given those two figures and the economies of scale from building the plug-in capacity in on all vehicles, I don’t think my figure of A$10,000 per vehicle is particularly unrealistic

    Ian, in a high fuel price environment (created by the market or by policy) it is more likely diesels will dominate than hybrids, and the premium for a diesel engine (over petrol) is generally less than $3000. Look at Europe where they’ve been paying more than $2/L for years. 50% of new car sales are diesels, whereas hybrids represent less than 1%.

    I don’t know what the “right” policy is regarding diesels vs hybrids. Hybrids are obviously a good stepping stone to electric vehicles, but battery disposal is an issue. Equally diesels produce more particulates in the exhaust, but are cleaning up rapidly to meet strict U.S. standards.

    Ideally we’ll see diesel hybrids like the Peugeot 308 Hybrid HDi in mass production soon. This car is rated at 4.0L/100km and just 90g/km. The price premium over a petrol 308 is likely to be considerable though, and production won’t start until 2010.

    Serpentine has an interesting characteristic – it reacts chemically with carbon dioxide from the air, breaking it down and absorbing the carbon.

    That’s what Eco-cement does. It actually sequesters CO2. Brilliant! Makes me wonder why we’re not using it exclusively now.

  11. Carbonsink, I have to confess that when you mentioned ecocement earlier I confused it with ecocrete and didn’t bother to follow the links. (Ecocrete is polymer-based and reduces the initial emissions of carbon dioxide but doesn’t sequester it.)

    Ecocement sounds even better than serpentine cement because the magnesium oxide actually displaces some of the portland cement. (For people not following this in insane detail: making portland cement involves heating limestone to drive off the carbon dioxide.)

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