The True Cost of Reducing Greenhouse Gas Emissions
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- Authors: KENNETH GILLINGHAM
- Published: December 2, 2019
- DOI: https://doi.org/10.1086/261968
Scientific and policy context
- Climate change is associated with increasingly frequent and intense natural disasters ranging from droughts and wildfires to hurricanes and coastal flooding.
- Climate scientists argue that emission reductions must be rapid and deep, with a goal of reaching net zero by 2050, if not sooner (Millar and others 2017).
- The US Energy Information Administration’s International Energy Outlook 2019 projects that fossil fuels will still generate 57 percent of electricity in 2050.
- Policymakers must decide how much to spend on measures to reduce greenhouse gas emissions and compare costs across options such as renewable-energy sources and electric cars.
Short-term (static) cost assessment of technologies
- Method: estimate up-front costs and divide by tons of carbon dioxide (or equivalent) emissions reduced (example: $20 million to reduce 1 million tons → $20 per ton).
- Renewable-energy technologies are among the least costly based on a review of recent literature and the Energy Information Administration’s Annual Energy Outlook 2018.
- Caveat: estimates are averages from the United States and may vary by location and implementation; do not account for intermittency.
- Intermittency issue: renewables must be complemented with storage technologies such as pumped hydroelectric storage or batteries, or with quick-response generation.
- Natural gas combined-cycle generation cited as a low-cost, low-carbon alternative to coal in the United States; estimated cost cited as $27 per ton assumes no methane leaks.
- Methane leak risk exemplified by the Aliso Canyon, California, leak in 2015, which could raise greenhouse gas emissions and per-ton costs for natural-gas generation.
Social cost benchmarks and implications
- The Obama administration developed a central-case estimate of $50 per ton of carbon dioxide in 2019 as carbon’s social cost.
- Using $50 per ton, several mitigation technologies are less expensive than the social cost, while others (e.g., solar thermal and offshore wind) are more expensive.
- A recent IMF report estimates that a tax of $75 per ton of carbon dioxide applied around the world would make it possible to meet the Paris Agreement target of limiting global warming to 2˚C over preindustrial levels.
- If the $75 per ton benchmark is used, advanced nuclear becomes an option less expensive than carbon’s social cost.
Short-term costs of policy interventions
- Studies show an extremely wide range of policy costs.
- Low-cost interventions: energy efficiency “nudges” (e.g., electricity-bill neighbor comparisons) can reduce electricity use by about 2 percent and yield net savings.
- High-cost interventions: many subsidies for renewable generation and decarbonizing transportation appear expensive in short-run, static terms; the most expensive cited are subsidies for electric vehicles (partly because charging may use fossil-fuel-generated electricity).
- Some costly technologies provide side benefits (e.g., reduced air pollution) that may improve their attractiveness beyond carbon-only cost metrics.
Long-term, dynamic costs and innovation spillovers
- Climate change is long-term; carbon dioxide persists for hundreds to thousands of years, making technological change central to mitigation.
- Spending on new technologies today may lower future mitigation costs via:
- R&D spillovers (firms only partially appropriate gains).
- Learning-by-doing and engineering/managerial improvements that lower costs with cumulative production.
- Positive network effects (e.g., a common electric-vehicle charging standard).
- Dynamic perspective: some approaches expensive in the short term (e.g., subsidies for electric vehicles) may spur innovation and lower long-term costs (Acemoglu and others 2016; Vogt-Schilb and others 2018).
- Optimal long-term policy may differ from myopic short-term choices; uncertainty about technological paths remains, and long-term gains are more plausible for nascent low-carbon technologies.
Feasibility, trade-offs, and recommended policy direction
- Deep decarbonization to approach net-zero greenhouse gas emissions by 2050 is feasible today—the technologies exist—but will be costly and challenging if undertaken all at once.
- Inexpensive near-term measures include energy conservation, efficiency nudges, and replacing retiring fossil-fuel electricity generation with renewables; costs of these measures are already lower than the damage they would avert based on estimates of carbon’s social cost.
- Many other approaches are quite costly in the short term, especially those promoting new low-carbon technologies.
- When policies have strong potential to spur innovation, they may lead to much lower total costs over the longer term.
- Policy recommendations:
- Provide incentives for both low-cost greenhouse gas mitigation and low-carbon innovation.
- Pursue economy-wide carbon pricing.
- Judiciously invest in new technologies with high potential (examples noted include small modular nuclear reactors and carbon capture technologies) that could be game changers in achieving net-zero emissions at low cost.
- Quotation reminding uncertainty of technological forecasting: “prediction is very difficult, especially if it is about the future.” (attributed to Niels Bohr in the source).
Kenneth Gillingham, F&D Magazine, December 2019
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