Economists and policymakers have spent decades debating how much the world will have to pay to avoid the worst impacts of climate change, and whether it’s worth the cost. A key finding in the UN’s latest big climate report should help move that debate along: tackling climate change could slow economic growth by just 0.06 per cent a year, it says.
The Intergovernmental Panel on Climate Change (IPCC) released the third instalment of its review of latest climate change research last Sunday. While the first two instalments aimed to better define the climate change problem, the third report focuses on potential solutions – from ramping up wind and solar power, to halting deforestation.
But governments don’t just want to know what they must do to avoid the worst impacts of climate change, they also want to know how much it will cost. So the IPCC’s latest report spells out the choice: governments either pay a bit to curb emissions now, or risk much larger costs in the future.
Or, as IPCC co-chair Ottmar Edenhofer put it during the report’s launch, “Climate policy isn’t a free lunch but could be lunch [that’s] worthwhile to buy”.
Taking action is relatively cheap
In 1992, countries agreed they would curb emissions to prevent temperatures rising by more than two degrees above pre-industrial levels. 22 years on, after more than two decades of increasing emissions, that goal looks ever more ambitious.
So it may come as a surprise to find that the IPCC says the cost of keeping the pledge may be relatively low.
The IPCC estimates, over time, the economic impact of governments implementing climate policy could add up to between three and 11 per cent of ‘global consumption’ – an economic unit similar to GDP. That may sound like a lot at first, but once the figure is put alongside the cost of doing nothing, it looks less pricey.
The IPCC bases its estimates on a future where there is three per cent annual economic growth. That’s by no means certain – and the World Bank estimates it’s been below this for the last two years – but it allows the IPCC to make theoretical statements about how much implementing climate policy could cost.
In order for it to remain “likely” that the two degrees target can be achieved, the IPCC says governments will have to implement policies that will cost between 0.04 and 0.14 per cent of global consumption growth each year. The average cost could be around 0.06 per cent a year, it says.
That means global economic growth of 2.94 per cent per year, in contrast to three per cent growth in a fictional future where there is no climate change (known as a baseline scenario), according to the IPCC’s calculations.
The estimate shows “we do not need to stifle economic growth to mitigate”, Pete Smith, Professor in agriculture and food security at the University of Aberdeen tells Carbon Brief.
The chart below illustrates the difference. The blue bar shows how much economic growth the IPCC expects there to be if governments take action, and the grey bar shows the growth projected in the baseline scenario:
Source: This chart is based on this graphic from Climate Nexus.
Limiting warming may also turn out to be cheaper than the IPCC suggests, because its estimate doesn’t include the wider benefits of implementing such policies.
For instance, cutting emissions could mean improved air quality, better public health and increased energy security. In many cases, those benefits could have an economic value greater than the cost of mitigation. The IPCC says some models struggle to put a value on such benefits, so it doesn’t quantify them in its reports.
So paying the (relatively small) price to act now should be seen as an investment to avoid the future cost of failing to curb emission, the IPCC argues.
Working out the economic cost of climate change doesn’t stop there, however. On top of paying a bit to implement climate policy, the world is going to have to bear the cost of climate change that is already locked in due to greenhouse gases that have already been emitted, the IPCC says.
The IPCC’s second report – released at the end of March – said the cost of climate change would be around 0.2 to two per cent of GDP. That led to a minor controversy, with some people comparing that figure to the 3 to 11 per cent of global consumption cost estimate in a leaked version of the IPCC’s report.
Critics argued that, according to the IPCC’s own analysis, the cost of action (the third report’s number) outstripped the cost of inaction (the figure in the last report) to the extent that it may not be worth rolling out policies to reduce emissions.
But that’s not quite right, and the iPCC explicitly cautions against making that comparison.
The 0.2 to 2 per cent figured refers to the economic damage caused by around two degrees of warming. The IPCC says that without “substantial and sustained” emissions cuts the world is already well on its way to that passing that point, however.
So the world is already locked into paying something approaching that amount, whether emissions are cut or not. And if emissions are not cut, costs are going to be higher – possibly much higher.
Cost of inaction
While the IPCC acknowledges that not much is known about the potential cost of damage beyond a temperature rise of two degrees, it does estimate that costs will “accelerate” beyond that point.
Reacting to the report, Stanford University economist Charles Kolstad tells Carbon Brief one of its main messages is that “no matter what goal is desired, delaying action will only increase costs”.
That’s because the risk of triggering abrupt changes in the climate system – such as rapid sea level rise or widespread droughts – becomes high above one of two degrees warming.
The problem is, some models can’t currently estimate the vast economic damage of that happening. So while the IPCC expects the costs of inaction to be far higher than price of implementing policies, it can’t currently put a precise figure on it.
Seen in that context, the cost of acting to tackle climate change seems like a small price to pay.