This page in brief
Earlier pages in this series have shown that the world really is warming, this is causing our climate to become more dynamic, extreme and perilous, and causing harm to nature and people. We can make changes, but how much will this cost?
Economic forecasts, especially to the end of the century, are fraught with difficulties, but on this page I summarise some of the evidence that shows that the cost of doing nothing is significantly higher than the cost of taking action now.
Aiming for a sustainable world
The hotter the world gets, the more the whole world will be affected. The more we reduce the warming, the better things will be. The sooner we can address the problem properly, the easier it will be.
But the world needs something to aim at. Once, we would have hoped to keep the warming to 1.5 degrees, but it appears to be too late for that now. So the goal is to limit warming to 2 degrees.
To do this, modelling shows that we’ll need to reduce greenhouse gas emissions to about a half, or less, of what they are now. Nothing is certain, and no-one can make totally accurate projections, but that is the result we should aim at.
The London School of Economics and Political Science has assessed a number of estimates on the cost of restricting warming to 2 degrees. It estimates that action to achieve this target will cost 1-4% of global consumption by 2030 (equivalent to about 2% of GDP), 3% of GDP by 2050 and 5% of GDP by 2100, although they expect these “losses” to be offset by underlying growth.
Our World in Data at Oxford University has come up with a similar estimate. If the world “aggressively” pursues abatement of climate change, the estimated cost is only 1% of GDP at 2030. Their graph (above) shows that some measures (the ones on the left, which should be given first priority because they are not costly) will actually save money. But completing the task will require the more costly measures to the right on the graph as well.
In summary, the cost of addressing climate change this century will likely be in the range of 1-5% of GDP, with lower costs early on and greater costs later. Combatting climate change won’t cost the earth, but it requires a significant change in priorities and concerted action.
The sooner the better
The longer the world community takes to get greenhouse gas reduction on target, the more severe the action will need to be. That will cost more, and increase the risks of permanent damage.
Acting on climate change has many other financial benefits.
Globally, the health benefits of reducing ozone and particulates alone would be worth about 5% of global GDP by 2030, more than the estimated costs. For example, analysis of air pollution in China showed that the health benefits of decarbonisation would outweigh the costs.
There are economic benefits in reduced congestion, less waste and inefficiency, energy security and fiscal reform from carbon pricing.
The world’s ecosystems provide multiple benefits to the human race, e.g. providing resources, disposing of pollutants, protecting against the elements, primary production, soil formation, habitat provision and pollination. It has been estimated that the annual global value of these services was about $125 US trillion in 2011, more than the global GDP. But these services are under threat from land clearing, climate change and other human activity, falling at a rate of more than a trillion dollars a year. Climate change and other causes of environmental degradation are robbing us all in ways that are not immediately obvious and rarely do the polluters and destroyers have to pay.
The World Bank has estimated that more than $4 trillion could be spent globally on infrastructure in low- and middle-income countries to ameliorate the impacts of natural disasters, including, but not restricted to events made worse by climate change – and the benefits would be 4 times as much. This report by Bloomberg recommends $1.8 trillion be spent to address climate change, again with a benefit of four times the cost. Spending on the right measures will reap huge rewards.
Doing nothing is not an option
We have already seen that there will be enormous consequences for some people and for the natural world if we allow the world to warm to unprecedented levels. All of this will have economic consequences.
Economists have examined the costs of doing nothing, i.e. continuing to burn carbon and increase the concentration of greenhouse gases in the atmosphere, so that global temperature rises by 4 degrees or more by the end of the century.
Such long term estimates can only be very approximate (some say too approximate to calculate), but it seems that the direct costs of doing nothing will be more than the costs of amelioration, perhaps by a little, perhaps up to 4 times as much. Some of the estimates:
- The Stern Review estimated the cost of inaction to be 5-10% of global GDP.
- The Economist estimates climate change will reduce the value of global manageable assets by 3% in 2100, and perhaps up to 10% if temperatures rise more than 4 degrees.
- Physics.org estimates losses to amount to 7% of global GDP by 2100.
- Future Super, quoting a UN report, says the cost of climate inaction will be 50% higher in 2050 than the cost of abatement.
- This paper estimates the annual global cost of climate inaction to be about 6% of GDP in 2010, with the worst effects felt by poorer counties near the equator.
How do the costs add up?
The estimates are too approximate to do the sums, but in very general terms, it seems that when all the benefits of climate action are considered, they will be significantly more than the costs. Doing nothing now will cost the next few generations heaps.
The International Monetary Fund has estimated that globally, government subsidies for fossil fuels amounted to a staggering $5.2 trillion in 2017, 6.5% of GDP. Eliminating these subsidies would add 1.7% to global GDP. If this is correct, ceasing these subsidies and spending the money on climate abatement could make a huge difference.
In Australia, IMF estimates total fossil fuel subsidies amount to $29 billion per year. Direct government subsidies account for about 40% ($12 billion per year), while indirect subsidies (the cost of pollution and other environmental & health impacts and the costs of climate change which fossil fuel companies don’t pay) amount to about 60% ($17 bn). By contrast, subsidies for renewable energy are less than $3 bn each year.
Costs of electricity generation
The relative costs of electricity generated by coal-fired power stations and renewable sources will vary all over the world. But in many countries, the cost of renewable energy has fallen fast so that it is now cheaper than coal-based generation, so that the majority of solar and wind generation plants being constructed are providing cheaper energy than coal-fired plants.
For example, in Australia, the costs per megawatt hour are approximately:
- Current coal power stations (operating cost only) < $40
- Renewables $50-60 (and falling)
- New coal power stations (capital and running costs) $75
In the US, about 75% of electricity generated from coal is more expensive than electricity generated from solar and wind.
It is clear then that converting to renewable energy generation, in most countries, will be cheaper than continuing with coal. Government subsidies, as noted above, distort the economics for power generators, but the overall costs are clear.
It makes economic sense to move electricity generation to renewable energy as soon as possible, and to take all necessary steps to keep global warming to below 2 degrees.
The economics are somewhat distorted by enormous subsidies to the fossil fuel industry.
The world stands to gain by climate action, but a few rich people and large companies stand to lose. As can be seen in the final page in this series (coming soon), they are fighting to protect their interests.
Graphic from Our World in Data