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.
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I’ve been at the annual conference of the Australian Agricultural and Resource Economics Society for the last few days. I’ve been coming to these for nearly 30 years, and it’s always good to catch up with old friends and colleagues. For many, it’s the first time they’ve seen me without a beard, and quite a few failed to recognise me until I accosted them.

The big change in 30 years has been the rise of environmental and resource concerns at the expense of old-style agricultural economics. Most of my early papers dealt with now vanished policies like the wool price stabilisation scheme, and the analysis of production systems needed to inform such policies. Now the conference has continuous sessions on both water and climate change, and only a handful of papers on production economics.

Ross Garnaut spoke on Tuesday and his talk was pretty sobering. Short version – as regards the likely consequences of business as usual, Stern was an optimist. Unless the world acts decisively, and well before 2020, we’ll have emissions higher than the highest of the IPCC scenarios Stern looked at. What’s worse new information on feedbacks suggests that the models relating emissions to temperature change are also likely to be on the conservative side, as the capacity of sinks to absorb emissions declines.

The positive side of this, I guess, is that the problems arise from China (and to a lesser extent India) growing fast, and that means China has more resources to address the problem, if we can only get the politics right.

One aspect of the latter is the near-certainty that we won’t be able to get away much longer with the notion of historical rights for high-emission countries like the US and Australia. By 2050, under any plausible agreement, we’ll have uniform emission entitlements per person, for everyone in the world, at a level well below our current emissions.