Shaping the Post-Carbon Economy

NEW YORK – At the end of this year, representatives of the 170 nations that are signatories to the United Nations Framework Convention on Climate Change will meet in Copenhagen for what they hope will be final negotiations on a new international response to global warming and climate change. If successful, the centerpiece of their efforts would be a global deal on how to reduce harmful greenhouse gases, by how much, and when. The agreement would go into effect in 2012, when the current Kyoto accord expires. Research at McKinsey into the effectiveness and cost of more than 200 mechanisms for reducing carbon emissions – from greater car efficiency to nuclear power, improved insulation in buildings, and better forest management – suggests that only concerted global action can ensure levels that the scientific community says is necessary to avoid the disastrous consequences of climate change. Our detailed analysis, conducted in 21 countries and regions over two years, suggests that every region and sector must play its part. If this isn’t daunting enough, consider this: if we delay taking action by even a few years, we probably won’t hit the required targets, even with a temporary decline in carbon emissions associated with reduced economic activity in the near term. The good news is that we can achieve what’s needed, we can afford to do it, and we can do it all without curtailing growth. The latest version of the McKinsey global carbon abatement cost curve identifies opportunities to stabilize emissions by 2030 at 1990 levels, or 50% below the “business as usual” trend line. Making these reductions would cost about €200-350 billion annually by 2030 – less than 1% of projected global GDP in 2030. The total up-front financing would be €530 billion by 2020 – less than the cost of the current US financial-sector bailout plan – and €810 billion by 2030, which is well within range of what financial markets can handle. Developing and developed nations alike must invest in reducing emissions. But the lion’s share of these investments result in lower energy usage, and thus reduced energy costs. Capturing the energy efficiency prize is critical both to climate and energy security – and it relies on a well-known set of policy signals and a proven set of technologies. None of this lowers growth or increases energy costs, and some of it potentially stimulates growth. Similarly, a global change to a new, more distributed power sector – with more renewable energy and a smarter grid infrastructure – could have growth benefits. Making all this happen requires moving toward a new model for ensuring that we are more productive globally with core resources that we have long taken for granted. To the extent that we invest across sectors and regions to improve our carbon productivity (GDP per unit of carbon emitted), we will weaken the pollution constrain on global growth. Improving carbon productivity requires improving land productivity. Forests and plants remove carbon from the atmosphere, potentially accounting for more than 40% of carbon abatement opportunities between now and 2020. Without carefully managing tropical forests – 90% of which grow in developing nations that have pressure to clear the land for other economic purposes – we cannot meet our global targets for reduced carbon emissions. Helping soybean farmers, palm-oil planters, and cattle ranchers from Brazil to Southeast Asia to use land more productively, thereby reducing pressure on tropical forests, must be an integral part of the solution. If increased agricultural productivity is necessary, so, too, is improved water management. Given that agriculture uses 70% of the world’s reliable water supply (and the potential impact of climate change on water reliability), a comprehensive approach to climate security will need to embrace better water policies, better integrated land management, and agricultural market reform. Our research suggests that annual growth in water productivity must increase from 0.3% to more than 3% in the coming decades. In other words, resources and policies are inter-dependent. Moving to a model in which carbon emission levels and growth move in opposite directions – what we call a post-carbon economy – may start with agreements in Copenhagen to reduce carbon in the air. But it can succeed only if we embark now on an agenda to boost natural resource productivity more broadly and on a more integrated basis. What this suggests is that we need new global rules of the road for total resource productivity. If we are to achieve the necessary levels of energy, land, water, and carbon productivity, we must develop an integrated global framework that recognizes resource inter-dependencies. A developed nation cannot meet carbon emission targets by outsourcing its dirtiest production to a developing country, and a developing country cannot meet its targets by chopping down forests to build the plants or expand low-productivity agriculture. To get to the post-carbon economy, countries will have to recognize their inter-dependence, strengthen global coordination of resource policies, and adapt to new, more contingent models of sovereignty. The opportunity in Copenhagen is to begin shaping some of the new collective-action models upon which we can build the post-carbon economy. Jeremy Oppenheim is global director of McKinsey & Company’s Climate Change Special Initiative; Eric Beinhocker is a senior fellow at the McKinsey Global Institute. Copyright: Project Syndicate, 2009.www.project-syndicate.org

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Shaping the Post-Carbon Economy