Citigroup’s research arm released a new report this week, Energy Darwinism II:Why a Low Carbon Future Doesn’t Have to Cost the Earth. The report offers a rigorous cost-benefit analysis of taking significant action on climate change, namely, adopting a low-carbon energy transition quickly enough to stay within an increase in global temperatures of two degrees Celsius.
What Citigroup found is pretty remarkable: the total cost of not acting on climate change could add up to as much as $44 trillion by 2060 (for reference, that’s about half of current global gross domestic product, adjusted for relative differences in the value of global currencies). What’s more, the price tag for preventing these potential future costs is not so much different from what we are doing already. Between 2015 and 2040, Citigroup analysts estimate we would need to spend only another $1.1 trillion above current spending levels. In the end, this averages out to $30 billion per year, which sounds expensive until one learns that we already spend about $250 billion per year on renewable energy alone.
While the headline figures are worth taking note of in their own right, the report also contains several below-the-fold findings that are worth highlighting:
Climate policy writ large contains a lot of uncertainty. While Citigroup’s analysts rely on sophisticated econometric modelling and data analysis to derive cost-benefit calculations, they readily admit that such methods can give a false sense of security about the cost of climate impacts:
While the relationship between carbon dioxide emissions and increases in global mean temperatures are now fairly well understood, the uncertainty over the specific impacts in specific places at specific times remains substantial.
Human-created climate change is an unprecedented experimental intervention into the ecological balance of this planet. Analyses are making a highly-educated guess about how sensitive the Earth is to growing concentrations of carbon dioxide. Sudden changes—rapid sea ice melt, ocean acidification—may end up being orders of magnitude more disruptive and expensive than current assessments predict.
Cost estimates don’t always contain everything worth measuring. Another factor to keep in mind in conversations on climate change is that discussion of gross domestic product data omits a lot of future costs, many of which are hard to predict or model. The report mentions mass displacement of populations due to sea level rise, or a decline in agricultural productivity in a particular region. The impact of migration—either voluntary or involuntary within a nation-state or across an international border—is difficult to assess in financial terms. A lot depends on the policies adopted to deal with the issue: do they try to integrate new populations into new areas, or, rather, do they throw up barriers? While specifics are hard to come by, it is hard to imagine these would not add significantly to projected costs.
The future of coal is dire, even with carbon capture and sequestration technology (CCS). Coal is the most carbon-intensive of the three primary fossil fuels, and consequently, using less of it will have a substantial impact on climate change mitigation. Citigroup notes that coal companies are trying to remain optimistic that their role in the world’s energy mix will remain robust, even as the price of renewables and natural gas generation are (in most regions) declining.
Energy Darwinism does not share that optimism: “[The coal industry’s] ultimate survival may perversely come down to government intervention, which given the current political backdrop regarding C02 emissions doesn’t appear likely.” The one saving grace—the aggressive and widespread adoption of carbon capture and sequestration—is dependent on research and development money which, Citigroup notes, is not yet forthcoming: “We think the timeframe for commercial success may be beyond the survival window for a lot of the coal mining companies.”
Debt financing in non-OECD countries is critically important. If historical patterns of economic development are any indication, most new energy generation investment will be in non-OECD countries—countries whose debt and equity markets are less mature than those of OECD countries. Thus, the places that need the money the most, especially for renewable technologies that require more upfront investment, do not have a robust track record of return on investment for international capital.
Fixing that gap, Citigroup says, requires international financial institutions—like the World Bank or the newly-created Green Climate Fund—to backstop the creditworthiness of the least developed countries.
Energy Darwinism ends by saying that the international climate change negotiations in Paris later this year represent a “generational opportunity” to avoid the worst effects of climate change. According to Citigroup’s analysis, getting to a strong agreement will take a lot of brave and imaginative leadership, but a lot of the stage has already been set by changes in regulatory regimes and energy markets. With prudent planning, the international community can reinforce those trends at a cost that is more than outweighed by the benefits.