The Economic Case for Combating Climate Change

Introduction: The Big Myth

Consensus thinking holds that the world will have a hard time reaching the headline goal of the Paris Agreement—keeping the increase in global average temperature to less than 2°C above preindustrial levels. Moreover, in the absence of coordinated global action, countries that unilaterally pursue a “2°C path” will face significant first-mover disadvantages.

While the first point is very likely true, the second is not. There are clear paths for most countries to achieve substantial reductions in greenhouse gas (GHG) emissions that can generate near-term macroeconomic payback. Just about all leading emitters could eliminate 75% to 90% of the gap between emissions under current policies and their individual 2050 2°C Paris targets using proven and generally accepted technologies. If they prioritize the most efficient emissions reduction measures, taking the necessary steps will actually accelerate, rather than slow, GDP growth for many countries. All countries can generate economic gain by moving at least part of the way—even if they move unilaterally.

BCG recently completed a study of the economically optimized paths for implementing climate change mitigation efforts in Germany. Using this work as a model, we analyzed six other countries that, together with Germany, collectively account for close to 60% of current global GHG emissions: China, the US, India, Brazil, Russia, and South Africa. For each country, we examined three scenarios: the “current policies path,” the “proven technologies path,” and the “full 2°C path.”

This report presents the results of our work, including, summaries of the impact of accelerated climate mitigation actions on each country that we studied. The next few chapters examine our main findings and their implications. Principal among our observations is that there are good economic as well as environmental reasons for many countries to step up their climate change mitigation efforts—starting now.

HOW TO DECARBONIZE A DEVELOPED ECONOMY

In Klimapfade für Deutschland (or Climate Paths for Germany), one of the most comprehensive studies of national emissions reduction potential to date, BCG, together with the economic research firm Prognos, recently assessed how Germany can meet its stated goal of reducing GHG emissions by 72% to 93% (versus 2015 levels) by 2050. (This is equivalent to the officially quoted 80% to 95% reduction with respect to 1990 levels. ¹ 1 While the COP21 Paris Agreement uses 1990 emissions as a basis, a comparison with 2015 levels is more relevant for an action-oriented analysis. In this chapter on Germany, we indicate emissions reductions through 2050 with reference to both 2015 and 1990. For the rest of the report, we use 2015 as the base year. Notes: 1 While the COP21 Paris Agreement uses 1990 emissions as a basis, a comparison with 2015 levels is more relevant for an action-oriented analysis. In this chapter on Germany, we indicate emissions reductions through 2050 with reference to both 2015 and 1990. For the rest of the report, we use 2015 as the base year. ) The study presented economically optimized climate-change mitigation paths for reaching these goals, and the findings were surprising.

Under current policies, Germany is already on a path that cuts GHG emissions by more than 45% (60% versus 1990 levels) by 2050. The country can achieve a 77% emissions reduction (80% versus 1990 levels) by pushing further the use of proven technologies—and, if properly orchestrated, such a move would be economically viable even if Germany moves forward unilaterally. With global cooperation, a 93% reduction (95% versus 1990 levels) would not harm economic growth, although it would test the boundaries of foreseeable feasibility and require further maturing of, or overcoming acceptance hurdles against, some technologies.

In an unprecedented position paper, the Bundesverband der Deutschen Industrie (BDI)—the German Industry Association, which commissioned the study—united behind the core findings and demanded more systematic climate action by the German government. ² 2 Bundesverband der Deutschen Industrie (BDI): BDI-Handlungsempfehlungen zur Studie “Klimapfade für Deutschland,” 2018. Notes: 2 Bundesverband der Deutschen Industrie (BDI): BDI-Handlungsempfehlungen zur Studie “Klimapfade für Deutschland,” 2018.

Delivering the German contribution toward a global 2°C scenario requires that emissions decline by 93% from 2015 levels, to 62 million metric tons of carbon dioxide equivalent (Mt CO2e), by 2050. This is an ambitious goal, to say the least; for most sectors of the German economy, emissions would need to be eliminated entirely.

Nevertheless, achieving very substantial reductions is well within reach. Under current regulations and assuming current technology trends, Germany is on a path to reduce GHG emissions from 2015 levels by approximately 45% by 2050. Up to 77% lower emissions can be achieved by expanding further the use of proven technologies. Doing so would require the following changes:

• In the power sector, wind and solar power would need to cover more than 80% of demand, and Germany’s coal and lignite generation would need to be phased out in favor of gas to still provide sufficient flexible backup capacity. 3³ 3 This level of investment will require accelerated grid expansion, more storage capacity (mostly from batteries), and a flexible system integration of, for example, e-cars and heat pumps. Notes: 3 This level of investment will require accelerated grid expansion, more storage capacity (mostly from batteries), and a flexible system integration of, for example, e-cars and heat pumps.
• In parallel, all sectors would need to intensify their efficiency efforts—to accommodate new power consumers from the building and transportation sectors, and to avoid overstretching Germany’s renewable generation potential.
• Available biomass should be concentrated in the industrial sector, replacing fossil fuels in process heat generation. (See “A New Strategy for Biomass.”)

• In the building sector, up to 80% of current building stock would need to be renovated by 2050 (an acceleration of today’s energetic renovations by nearly 70%). Low-emission district heating could replace individual oil and gas heating in urban areas and heat pumps in less populated ones.
• In transportation, electric mobility would need to take over a large part of road transport— meaning battery power for passenger transport and light commercial vehicles and possibly electric overhead lines for trucks on major highways (a GHG-reduction measure that is already in piloting but remains controversial).

To be sure, the investment required is substantial: a total of $1.6 trillion through 2050 (1.1% of annual GDP). ⁴ 4 This estimate includes investments for current noneconomic measures. Notes: 4 This estimate includes investments for current noneconomic measures. But the annual direct add-on costs (after the substantial savings in operating costs are accounted for) are less than $20 billion. When individual hardships are systematically mitigated, they would barely hurt the German economy as a whole. Moreover, even if Germany moves forward unilaterally, the overall economic impact from a systemically optimized implementation (including “carbon leakage” protection ⁵ 5 That is, preventing industrial processes from simply moving abroad, often increasing global carbon emissions while unilaterally hurting the German economy. Notes: 5 That is, preventing industrial processes from simply moving abroad, often increasing global carbon emissions while unilaterally hurting the German economy. ) would be slightly positive, thanks to GDP gains from accelerated investment and a nearly 80% decline in fossil fuel imports, which together would outweigh declining industrial competitiveness.

Achieving the full 2°C target will be much harder. In addition to unpopular carbon capture and storage (CCS) for industrial processes, it will require significant amounts of expensive, imported synthetic fuels to eliminate emissions in power backup and high-temperature industrial heating (power-to-gas) and in shipping, air transportation, and the remaining non-electrified road transport (power-to-liquid). As of today, this will require either solid G20 consensus or alternative—as yet unidentified—technological innovations. (See Exhibit 1.)

ONE GOAL, DIFFERENT CHALLENGES

The seven markets that we studied reflect the global diversity of economic, demographic, geographic, and technical circumstances affecting climate change mitigation—and reveal many of the challenges that ambitious mitigation paths face. Under current policies, all seven countries will fail to meet their individual 2°C Paris targets; all of them need to invest more in reducing the carbon intensity of their economies. Developed nations must accelerate their decline in per capita emissions. Most developing countries, which continue to employ carbon-intensive technologies in their desire to catch up economically, need to change direction. (See Exhibit 2.)

Europe and the US

Developed economies, such as the US and Germany, have already managed to decouple economic growth from GHG emissions growth. At the same time, the mobility and consumption patterns of their prosperous populations result in a high emissions footprint per capita. Under current policies, most developed nations are on a path to lower emissions, thanks to rising efficiency, more electric mobility, and gradual displacement of fossil fuels. The lessons from Germany can largely apply to other European countries because most have comparable economic structures and similar, high levels of fuel importation.

There are some key differences between European nations and other developed countries, however. For example, while Europe’s population (despite continuous immigration) is expected to decline, the US population is expected to increase by one-fifth, or some 67 million people—the equivalent of the population of the UK—by 2050. In the US, with a larger land mass and a strong preference for larger cars, transportation is a much bigger source of emissions. And while Europe needs to import the vast majority of its energy, the US has substantial domestic resources, which reduces the economic benefits of displacing fossil fuels.

These differences have a big bottom-line impact; for example, while Germany will reduce its emissions footprint by 45% under current policies, US emissions are expected to decline by only 11% by 2050.

Reaching their respective 2°C targets would require both countries to substantially accelerate existing efforts. Similar imperatives apply to all highly developed economies around the world.

The World at Large

Many other countries face an even harder challenge. To catch up economically, they continue to employ low-cost and carbon-intensive technologies, increasing their per capita and total emissions footprints. From the perspective of global climate change mitigation, this situation is not sustainable. Most countries need a change in direction.

The difference in starting points and current trajectories is striking:

• China expects economic growth of more than 300% by 2050. Emissions, however, are expected to increase by only about 6 percentage points under current policies, as the population declines, efficiency increases, and the country burns less coal.
• India combines even more ambitious economic growth (more than 700% by 2050) with a strongly expanding population (a 26% increase). The resulting rise in coal combustion, a principal source of energy for power and industrial processes, will lead India’s emissions to more than double by 2050, making it the second-largest emitter in the world. Countries in Southeast Asia face similar challenges.
• In Brazil, economic and population growth is expected to bring higher emissions in all sectors. The country faces a particularly thorny challenge in that more than 40% of its greenhouse gas footprint is caused by agriculture, much of which is for export.
• Among larger developing countries, only South Africa is expected to reduce its emissions footprint, despite economic growth and a population increase of more than 40% by 2050. Inefficient coal power generation today makes up more than half of the country’s emissions. As old plants are replaced, this footprint will shrink. The African continent overall, however, is heading toward large population and emissions increases.
• The trajectory of Russia’s emissions depends in large part on the global demand for fossil fuels. Assuming current policies continue, emissions will slightly increase despite mitigation measures and a decreasing population. (See “The Challenge for Russia.”)

PROVEN TECHNOLOGIES CAN GO A LONG WAY

It’s a high bar. To reach the global 2°C goal, all of our analyzed countries must significantly accelerate their emissions reduction efforts. To meet their respective Paris commitments, India and Brazil need to eliminate about half of their 2050 current-policy emissions. The US, China, Russia, and South Africa must eliminate all but one-quarter, and Germany all but one-eighth. (See Exhibit 3.)

Technically, these are achievable goals. All seven countries can close 65% to 90% of the gap between current-policy emissions and their individual 2050 2°C Paris targets with proven and generally accepted technologies. And for the remaining abatement gap, solutions also already exist.

In the following sections we note the changes needed in each of the major carbon-emitting economic sectors. Exhibit 4 illustrates how the most effective technology path differs by country, and why all of the countries analyzed require a national emissions reduction agenda.

Power Generation

By 2050, all of the countries studied could provide at least 80% of their power with low-carbon technologies such as wind, solar, hydropower, biomass, and nuclear. The exact mix depends on country-specific circumstances. For example, Russia will continue to rely heavily on nuclear power, but Germany decided to phase out this technology, along with fossil fuels. Brazil benefits from extensive hydropower capacity. Other countries will need to rely on a wider technology mix. In most, more wind and solar generation would need to be complemented by additional investment in grid infrastructure and demand flexibility, which, together with backup capacity, help to curb volatile generation profiles. (See “The Myth of Excess Power.”)

To further reduce emissions, the use of coal in power generation will need to decline over time. In many countries, this will result from both regulatory pressures and economic forces. As the cost of renewable energy sources continues to fall, and as their share of the power production mix rises, coal will gradually be pushed into a backup role. For this role, coal’s high fixed costs make it a poor fit, which will trigger a gradual shift to gas-based generation in many countries. More ambitious climate change mitigation efforts will accelerate this transition. Because CCS is economically unviable for plants that are running below full capacity, coal plants no longer have a viable economic path to eliminating emissions. For utilities, this means that any new plant construction carries a growing economic risk. (See “No Future for Coal?”)

Industry

All countries could significantly reduce their industrial energy demand by expanding use of efficiency technologies, such as efficient motors and pumps and state-of-the-art process innovations. They could also replace a significant share of the fossil fuels used for industrial process heat generation by redirecting biomass to this application from other sectors. Depending on the availability of sustainable biomass relative to demand in each nation, this shift could eliminate between 14% (in China) and 70% (in Brazil) of all industrial energy emissions.

Transportation

Cost-effective emissions reduction in the transportation sector requires a widespread shift to electric propulsion. ⁶ 6 Electric propulsion includes battery-powered (both full-time and hybrid) and fuel cell vehicles. The switch to electric mobility clearly presupposes continuous emissions reductions in the power sector. Notes: 6 Electric propulsion includes battery-powered (both full-time and hybrid) and fuel cell vehicles. The switch to electric mobility clearly presupposes continuous emissions reductions in the power sector. Our research suggests that about half of all new automotive powertrains will be partly or fully electric by 2030. (See The Electric Car Tipping Point, BCG Focus, January 2018.) New passenger cars and light trucks could all be electric by 2050 in the US, China, and Germany. The same is likely true for all of Western and Central Europe. Depending on the dynamics of fleet renewal in each country, this would lead to an overall e-mobility share of 75% to 90% in 2050. Developing countries would follow with a slight delay, although some could struggle to reach similar electrification levels given their infrastructure constraints.

Cost-efficient reduction of emissions from larger trucks is possible with a mix of electric mobility technologies, including batteries, fuel cells, and overhead electric lines on highly frequented roads, complemented by renewable fuels. Germany, which has the highest road-freight transport density of all analyzed countries, could electrify more than half of its heavy transport with overhead lines. Such moves would not be necessary in countries such as Russia, where more than 60% of freight already travels via low-emitting rail.

Buildings

In the building sector, direct emissions can be reduced significantly by improving the efficiency of buildings and appliances and by expanding the use of heat pumps in place of gas and oil heating in suburban and rural areas. For countries that employ district heating systems (such as China, Germany, and Russia) it will be easier to phase out fossil fuels in cities. In warmer countries such as India and Brazil, solar thermal could play a growing role in water heating. In these countries, increased building efficiency will also help slow the power demand increase for air conditioning and cooling.

Other Sectors

In agriculture and waste management, efficient soil nitrification, better utilization of manure (for biogas production, for example), efficient waste utilization, and a ban on landfilling can help bring down emissions. Reduced mining and fossil fuel use would also help curb fugitive emissions. To reduce emissions from deforestation, several countries must employ more sustainable land use policies. (See “LULUCF: A Burning Platform.”)

THE EARLY-MOVER ADVANTAGE

Collectively, the various national paths described in the previous chapter could close about three-quarters of the gap between current-policy and 2°C emissions levels in the seven analyzed countries. The cost is high: some $28 trillion in total investment through 2050. The US, China, Brazil, and Germany (and likely most other OECD countries) would need to invest about 1% of their GDPs in accelerating emission reductions. India, Russia, and South Africa would need to invest nearly twice as much. In the latter countries, two sectors (power and buildings) account for more than 80% of the investment requirement; a more aggressive cost decline in renewables could relieve the financial burden.

But, contrary to conventional wisdom, countries that move unilaterally to lower emissions need not suffer an early-mover disadvantage. Planned and managed properly, unilateral climate change mitigation can have a positive impact on GDP because the required investments create significant economic stimulus. How much of this stimulus translates into a positive net impact depends on a country’s cost of capital and the share of imported fuel in its energy mix. (See Exhibit 5.) For countries with low costs of capital, the investment is relatively affordable. For countries that import a lot of their fossil fuels, energy savings carry higher macroeconomic value.

For Germany, and for many OECD countries with similar circumstances, all or most of the proven technology path creates positive macroeconomic value. In countries with high costs of capital, such as Brazil, India, and South Africa, higher interest payments on investment-heavy emissions reduction measures crowd out the benefits from energy savings. Countries with cheap domestic fossil resources, such as South Africa and Russia, do not save GDP-deflating imports. Russia is in a particularly tough spot regarding climate investments; capital is expensive, and even potentially large energy savings have little economic value while fossil fuels are domestically ubiquitous. Nonetheless, all of the countries we analyzed can create economic growth by moving closer to their 2°C target.

REACHING 2°C: A $75 TRILLION CHALLENGE

Although realizing the proven technology path will be hard, traveling the last mile to 2°C emission levels will be tougher still. To reach its 2°C GHG reduction target of 93% by 2050, Germany, for example, would need to eliminate entirely the emissions from all but two of its economic sectors (process industry and agriculture). It would be forced to employ persistently unpopular CCS to remove process emissions from steel, cement, and ammonia production. It would need to import about 340 terawatt hours (TWh) of expensive renewable synthetic fuels for emission-free flexible power backup, high-temperature industrial heat, and air traffic and shipping, and replace all fossil fuels in road freight transport and passenger cars. Finally, unless meat and cheese consumption patterns change, it would even need to reduce natural emissions from its cattle population, potentially by using methane-suppressing food additives (“methane pills”). (Agriculture would still remain Germany’s largest emitter, by a wide margin.)

A challenging problem for all countries is that costs rise in nonlinear fashion as measures become more far-reaching. To close the final quarter of their gaps to a 2°C path, the seven countries we analyzed would collectively need to step up investments by another 60% (to $45 trillion in total through 2050). Globally, this translates into a $75 trillion challenge, or 2% to 6% of countries’ annual GDPs. ⁷ 7 This estimate includes the cost of synthetic fuels to replace international bunkers. Notes: 7 This estimate includes the cost of synthetic fuels to replace international bunkers.

The additional investment burden would vary among countries. Most would need to spend less than an additional 1% of their GDP, but South Africa (at 1.6% more) and Russia (3.9% more) would be hit particularly hard.

For this last mile, it is difficult for countries to act without broader international consensus, at least at the G20 level. With such consensus in place, however, even very ambitious mitigation efforts in many countries would not be detrimental to economic growth. Such efforts might also offer a softer landing for some of the world’s fossil fuel-based economies as the world inevitably moves toward renewables. (See “The Oil Exporter Paradox.”)

THE LIMITS OF EMISSIONS TRADING

To shoulder the investments needed, some countries will need help. Dedicated, low-interest financing and risk-reduction measures for companies making climate mitigation investments could enable many countries to accelerate their emissions reduction while safeguarding GDP growth. Current financing volumes, however, would need to rise significantly to have an impact.

One frequent recommendation—putting a global price on emissions—could convert what are now vague political ambitions into tangible investment incentives (and help alleviate the competitive imbalances that might arise in sectors where some countries move faster than others). Another widely touted instrument, global emissions trading, has some potential to increase economic efficiency by enabling developed countries with high abatement costs to pay for cheaper measures in less developed nations. In our judgment, however, this mechanism has limitations.

First, the notion that cheap mitigation measures should be implemented before expensive ones—the idea that underpins the emissions trading concept—begins to crumble in the face of ambitious reduction targets. If countries need to eliminate most of their emissions, there is greater economic benefit from implementing both cheaper and more costly measures from the start, because many involve durable capital goods with long replacement cycles. For example, if space-heat generation needs to be emission-free by 2050, an oil-fueled boiler with a 25-year lifespan that is replaced in the next decade should be switched to a non-emitting technology, even if cheaper short-term alternatives for emissions reduction exist. Even under a global emissions trading scheme, corresponding national regulation will be required to reach national targets efficiently.

Second, in their early phases, many technologies (electric vehicles, CCS, and synthetic fuels, for example) will be more expensive than mature mitigation alternatives. The cost of such technologies will fall over time, but they need to be deployed early, so that learning and scale can enable cost reductions.

Third, the ability to shift the emissions burden among countries has clear limitations, since many countries with lower reduction targets have no long-run incentive to trade. In principle, developed economies need to invest in more expensive abatement measures sooner, while countries such as China and India can continue to implement less expensive measures for a number of years. ⁸ 8 Another key concern related to global emissions trading is that regulating authorities in different countries compete, and emissions will always flow to the country with the most loopholes. The entire system would thus only be as strong as its weakest member. Notes: 8 Another key concern related to global emissions trading is that regulating authorities in different countries compete, and emissions will always flow to the country with the most loopholes. The entire system would thus only be as strong as its weakest member. Efficient emissions trading systems between developed and less developed economies should thus reduce abatement costs for everyone. However, for many countries the same logic does not hold. In reality, the high costs of capital in many countries with lower immediate national reduction ambitions (such as South Africa, Brazil, and Russia, along with others) make abatement costs for these countries as high or higher than those in the developed world. As a result, even advanced countries with only expensive national measures have no incentive to trade with them. (See Exhibit 6.)

Even an effective carbon trading scheme would therefore need to be accompanied by a range of global and national policy instruments, including low-interest financing support, research funding, and market ramp-up support for immature technologies that are required to reach the 2°C path, as well as new regulations (designed to increase energy efficiency and phase out inefficient fuel subsidies) at the sector level.

TIME TO MOVE

All in all, countries should—and will—accelerate emissions reduction. In many sectors (power generation and transport, for example), the shift toward climate-friendly technologies is already under way. As these technologies mature, their markets will grow, especially if governments around the world start pursuing more ambitious emissions mitigation agendas. The results of our study suggest that many will.

Policymakers have a clear case for more decisive unilateral action to reduce national emissions. Most countries can make significant progress toward their Paris accord targets without triggering any first-mover disadvantages, and many even stand to benefit economically. Moreover, global leadership in many new technologies is still up for grabs, and early movers can establish footholds in strongly growing markets. Given these benefits, policymakers should develop economically optimized mitigation agendas and implement thoughtful policies that incentivize companies (and individuals) to act and help them overcome the investment hurdle.

For their part, companies need to prepare for a world that moves far beyond current emissions policies and adopt much more ambitious emissions reduction in their strategies and planning. Leaders should start moving their business portfolios toward low-emission solutions and prepare for declining fossil fuel consumption. They should also enter into active dialogue with their respective governments to encourage policies that help address investment hurdles. The transition will likely be faster than expected. Early movers stand to benefit.

Limiting global warming is one of humanity’s defining challenges in the 21st century. Although the odds of reaching the 2°C goal remain challenging, comprehensive national action can help achieve a much-needed change in direction—and close a substantial portion of the gap while safeguarding economic growth.

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