Combating Climate Change Can Produce Economic Gain

October 5, 2018
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Countries that take ambitious action against climate change can benefit macroeconomically—if they prioritize the most economically efficient measures for mitigating emissions.

The Economic Case for Combating Climate Change, a report released today by The Boston Consulting Group (BCG) and the BCG Henderson Institute, shows that most countries can achieve 75 percent to 90 percent of their individual 2050 2°C Paris Agreement targets using proven and generally accepted technologies. If they prioritize the most efficient emissions reduction measures, mitigation activities actually accelerate, rather than slow, GDP growth for many of them—even if countries move unilaterally.

“Consensus thinking holds that the world will have a hard time reaching the headline goal of the Paris Agreement,” says Philipp Gerbert, a BCG senior partner and report coauthor. “While that may be true, substantial progress is within most countries’ reach. If managed appropriately, even unilateral emission reduction efforts do not need to trigger first-mover disadvantages.”

BCG examined climate change mitigation strategies in seven countries that collectively account for close to 60 percent of current global greenhouse gas (GHG) emissions: the US, China, India, Brazil, Russia, Germany, and South Africa. The work is modeled on previous BCG research commissioned by the German Industry Association, Climate Paths for Germany, one of the most comprehensive studies of national emissions reduction potentials to date. In an unprecedented position paper, German industry united behind the core findings of the study and called for more systematic and economically guided climate action by the German government.

Under current policies, all of the seven countries studied will fail to meet their individual 2°C Paris targets. BCG estimates that for all countries globally to move to a 2°C path would require total investment of up to $75 trillion until 2050. But almost half of this is accrued in the “last mile” between what can be done under current technologies and the full 2°C target, and much of it creates payback through efficiency gains or savings in fossil fuels. For many countries, a significant share of investments before this “last mile” can thus create macroeconomic gain.

The report corrects several common misconceptions:

We hardly require new technologies—more R&D remains critical, but current technologies can go a long way.

Power systems with high shares of wind and solar do not need to produce much excess power—flexibility to balance power is cheaper than storage.

The world will not go all-electric—liquid and gaseous fuel use will need to decline, but they remain an important pillar.

We are not (yet) moving to a hydrogen economy—broader hydrogen application still requires a breakthrough in cost digression.

Global emissions trading is no one-stop solution—while it would help, among many countries there is no economic case for trading.

Many subsidies for heating buildings with biomass or converting it into fuels are misguided—where biomass is scarce, it should go to industry.

Policymakers have a clear case for more decisive unilateral action to reduce national emissions. To motivate this, they need to help companies and individuals overcome the investment hurdles, as many measures accrue benefits in other parts of the economy but are uneconomic for decision makers. To avoid escalating costs, they need to stick to economic optimization as a guiding principle. Finally, they need to ensure critical infrastructure like power grids and e-mobility charging and take steps to prevent “carbon leakage” if they move unilaterally.

Many companies have started to focus on a low-emission world, and industry will contribute more going forward. In power generation, for example, companies are driving down the costs of renewables, with China a hot spot for solar and Germany a leader in wind. In transportation, a particularly important factor in the U.S., R&D investments in e-cars and batteries have surged. Investments in energy efficiency, a key lever in less developed economies, continue to be strong. Newer ways to isolate buildings and provide low-emission heating and cooling are being developed all over the world.

“Companies need to make the global action against climate change a key element of their long-term strategy,” said Jens Burchardt, a BCG principal and report coauthor. “They should also enter into active dialogue with their respective governments to encourage systemically optimized action. The transition will likely be faster than expected. Early movers stand to benefit; others will miss opportunities or risk stranded assets.”

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries. For more information, please visit bcg.com.

 

The BCG Henderson Institute is The Boston Consulting Group’s strategy think tank, dedicated to exploring and developing valuable new insights from business, technology, and science by embracing the powerful technology of ideas. The Institute engages leaders in provocative discussion and experimentation to expand the boundaries of business theory and practice and to translate innovative ideas from within and beyond business. For more ideas and inspiration from the Institute, please visit https://www.bcg.com/bcg-henderson-institute/thought-leadership-ideas.aspx.

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