Economic co-benefits of reducing CO2 emissions outweigh the cost of mitigation for most big emitters

Posted on 3 Nov 2017 in

The knotty problem of allocating greenhouse gas emission quotas across countries was, until the Paris Agreement, the primary barrier to concerted action on reducing climate change. Digging deeper, however, two facts about climate change have also impeded progress.

First, CO2 lasts about 100 years in the atmosphere once emitted. This means that the benefits of abating CO2 emissions today will be stretched over a century into the future, with corresponding uncertainties about the size of benefits. The second uncomfortable fact is that the costs of abating emissions of CO2 must be incurred today or in the near future if the goal of the Paris Agreement, to limit global warming to ‘well below 2°C above pre-industrial levels’, is to be met.

From policymakers’ perspective, therefore, countries are being asked to incur the costs of reducing CO2 emissions today in return for often distant future benefits that are themselves uncertain. This is a hard sell to taxpayers and large emitters today.

However, a new report by the Grantham Research Institute on Climate Change and the Environment, Multiple benefits from climate change mitigation: Assessing the evidence, helps to dispel some of the gloomy arithmetic of climate change by providing evidence on the scale and range of ancillary benefits that derive from reducing emissions of CO2 and other greenhouse gases. And in contrast to the benefits of abating emissions, the largest of these ancillary – or co- – benefits are immediate and will occur with a high degree of confidence.

The report looks at the full range of potential co-benefits from reducing emissions, including reduction in damages from local air pollution, and economy-wide benefits and costs associated with carbon taxation, impacts on competitiveness, green jobs, green innovation, energy efficiency, and dealing with short-lived climate pollutants. Assessing climate models to 2030 also enables us to take a longer-term perspective on the co-benefits from climate change mitigation.

There are large, and immediate, economic co-benefits from reducing CO2 emissions, by far the largest of which is the mitigation of air pollution which is now a major challenge for cities across the world.

Fossil fuel combustion emits both CO2 and particles less than 2.5 microns in size (‘PM2.5’), which is the major contributor to deaths from air pollution. The economic cost associated with mortality from air pollution is large, amounting to several % of GDP for many countries.

In China for example, the economic cost of the 1.23 million air pollution related deaths in 2010 amounted to 9.7-13.2 % of China’s GDP. In the US the cost of 103,027 air pollution deaths was equivalent to 3.2 – 4.6% US GDP.  In the UK 23,036 air pollution deaths cost the equivalent of 4.6-7.1 % of GDP.

Substituting low-carbon energy for fossil fuels would help to mitigate this impact and create large benefits.

The graph below plots the range of benefits from this substitution in 15 large CO2 emitters in 2010 for every tonne of CO2 abated. It shows the range of avoided PM2.5 damages per tonne of CO2 abated in US$ 2010.

The local air pollution benefits of abating each tonne of CO2 emissions varies but tends to be in the US $50-100 range

The central tendency shown is for PM2.5 damages avoided for every tonne of carbon dioxide (tCO2) abated to be in the US$50–100 range, with the benefit generally being larger in high-income countries than in developing countries. The biggest figures are for Japan, Germany and the UK, owing to their high carbon efficiency (GDP per tCO2 emitted).

These figures are based on the WHO Global Burden of Disease (GBD) for 2010, which reported a total of 3.2 million deaths globally from air pollution. The results are comparable with newer estimates in the literature.

The World Bank (2016) updated the estimates of the welfare value of deaths from ambient air pollution to 2013 using the GBD 2013. Because the estimated global deaths from ambient air pollution reported in GBD 2013 amounted to 2.8 million (owing to the evolution of the underlying data and methods of estimation), the low-end estimates of the figures for 2010 reported here are roughly comparable to the central estimates of the World Bank (2016).

To put the potential avoided damages from air pollution into perspective it is useful to consider the most recent estimate of the social cost of carbon by the US Interagency Working Group, which was given as US$36 per tCO2 in 2015.

If governments introduced a carbon tax of $36 per tCO2 then the marginal cost of abating 1 tCO2 across the economy would equal this figure (and average costs would be lower). As the graph shows, the lower bound of the average avoided PM2.5 damages per tCO2 abated is comfortably above $36 in all but two of the large emitters.

In May 2017 the Report of the High Level Commission on Carbon Pricing chaired by Joseph Stiglitz and Nick Stern stated that “many past modeling exercises to calculate the global social costs of carbon have produced numbers that probably underestimate these costs by very large margins”. They recommended that a carbon price of $50-$100 by 2030, is consistent with the core objective of the Paris Agreement of keeping temperature rise below 2 degrees.  As the graph shows, most of the avoided PM2.5 damages in the largest emitters lie above $50 per tonne of CO2 abated, and many above $100. The analysis in the Multiple benefits report of co-benefits from greenhouse gas mitigation in 2030, based on the modelling literature, presents a similar picture. The global air pollution co-benefits in 2030 of mitigation scenarios aiming at 2°–2.4°C warming by the end of the century lie in the range of $49–214 per tCO2-equivalent abated.

In other words, the local air pollution benefits of abating 1tCO2 by substituting low-carbon energy for fossil fuels exceeds the cost of abatement in most large CO2 emitters.

Beyond CO2 mitigation using new energy technologies, the new Grantham Research Institute report assesses the evidence that increasing energy efficiency can also be a significant source of co-benefits. Assuming that energy efficiency investments are profitable in financial terms, these investments can contribute to increases in real GDP via energy cost savings. And because increasing energy efficiency typically leads to a reduction in fossil fuel use, there are corresponding health benefits due to reduced local air pollution.

Governments have generally focused solely on the financial costs of abating emissions when choosing their climate change mitigation investments. Benefits are downplayed because most countries will enjoy only a small share of the total benefits from dealing with a global pollutant. A wider perspective on benefits, to include avoided local air pollution damages, would make clear that many abatement actions are, in cost–benefit terms, strongly in the country’s interest. Similar conclusions apply for energy efficiency investments.

Governments need to rediscover social cost–benefit analysis as a tool to support decision-making. Without this, many worthy emission abatement projects that can provide both global and local benefits will not be implemented. Reforming public investment management can ensure that social benefits are taken into account and, more generally, that the quality of public investments will increase. In contrast, the private sector has little incentive to reduce production externalities, whether global (CO2) or local (PM2.5). It therefore falls to governments to provide incentives, ideally in the form of taxes on both local and global pollutants, in order to increase the welfare of citizens.

The views expressed in this commentary are those of the author and not necessarily those of the Grantham Research Institute.