Friday, September 12, 2008

Climate change: how steep?

Now that the ETS is law, we have an important question: what long-term targets should we set, and how steep a downward path should we pursue?

As someone who sees climate change as a pressing concern on which we must do our bit, I favour a steeper path. The Stern Review has recommended that rich countries cut their emissions by 60 - 80% relative to 1990 levels by 2050 in order to avoid dangerous levels of climate change, and I take that seriously. But I'd also argue for a steep path, at least initially, because of uncertainty - we don't know how deep we will have to go, so it is better to preserve our options for a deep cut rather than commit to a higher emissions pathway. The business sector, OTOH, will argue for a shallower pathway, on the basis that deeper cuts will be incredibly expensive and bring about economic collapse. They're wrong, and I'm going to stick some solid numbers on how wrong they are.

Firstly, some pathways. I'll take as a baseline National's proposal of a 50% reduction on 1990 levels by 2050. This sounds weak, but it is actually a fair contribution compared with proposed EU targets (however, its endpoint per-capita is still too high, and essentially commits us to a murderous 550ppm concentration of CO2-e - in other words, to the dangerous effects we seek to avoid). Net 1990 emissions were 40 MTCO2-e, giving a target of 20 MTCO2-e. If we start a cap of 65 MTCO2-e in 2013 (which is a rough estimate based on the government's budgeted ETS allocations), this means reducing emissions by 45 MTCO2-e over 38 years, or 1.18 MTCO2-e / year on average. If we start from a more generous 2013 baseline of 75 MTCO2-e, then the required reduction is 1.45 MTCO2-e / year. In practice, targets are likely to be set in five year blocks, rather than annually, but I'm using average annual reductions so we can compute annual costs later.

What about a steeper pathway? A 75% reduction on 1990 levels by 2050 would reduce net emissions to 10 MTCO2-e, or about 2 tons per capita (this is consistent with a 450ppm scenario). This would require average annual reductions of 1.45 - 1.7 MTCO2-e / year, depending on the initial baseline. A 95% reduction, reducing national emissions to only 2 MTCO2-e annually (less than the Huntly power plant currently puts out) would require average annual reductions of 1.66 - 1.92 MTCO2-e / year. So, the marginal difference of a steeper path is 0.27 - 0.48 MTCO2-e / year. We'll call it 0.3 - 0.5, just so I can get some round numbers.

A steeper pathway is achieved by the government lowering the cap and issuing fewer permits. In 2020, a 75% reduction pathway would see 2.4 million fewer permits than usual issued; a 95% reduction pathway would see 4 million fewer. New Zealand emitters would thus have to buy in that many more permits, or (if they have reduced their emissions) have that many fewer to sell. Either effectively costs money.

How much money? Not nearly as much as you'd think. The Garnaut report used a carbon price of A$34.50 / ton (in real 2005 $). Adjusting for a nominal exchange rate of 0.8 gives NZ$43.50 / ton, which I'll round up to $50/ton because I want round numbers. So, the cost in 2020 of pursuing a 75% reduction is $120 million across the entire economy. The cost of a 95% reduction is $200 million (both figures are in real 2005 $). To put those figures in context, Budget 2008 projected [XLS; "Base" R208] 2020 GDP to be on the order of $240 billion (in real 2005 $; they use 1995 $, but its easy to convert with the CPI spreadsheet [XLS]). So, the cost of a steeper path is between 0.05 and 0.08% of GDP, depending on how steep we want to go. Alternatively, in 2020, the population is projected to be around 4.75 million, so it would cost the equivalent of $25 and $42 per person.

There's a word for these sorts of figures. That word is "chickenfeed". The financial "argument" / special pleading by business just doesn't stack up; we should commit to a steep reduction path as quickly as possible.

(I am indebted to Larvatus Prodeo's analysis of Australia's options for putting the argument so succinctly).