The Costs and Benefits of Transition to a Green Economy in the Context of Energy and Climate Change

 

 

 

 

 

Jinmi Kim, Ph.D. Candidate

Center for Energy and Environmental Policy

University of Delaware

(Newark, DE)

 

 

Green economy has become one of the main topics that the world community deliberated in the Rio+20 United Nations Conference on Sustainable Development(UNCSD). The concept of green economy appeared first in the UNEP report in 2012 as a tool for operationalizing sustainable development which has been in existence more than two decades. It was presented as a vehicle for a new engine for growth, employment and poverty eradication. OECD in 2011 released a similar report which highlights the role of green growth as instrument of opening up new sources of growth and reducing risks of shocks from imbalances of natural systems. UNEP identified further positive aspects of green economy which included safeguarding natural capital and social equity and improving opportunities for jobs, energy and mobility. Notwithstanding these assertions, developing countries are concerned that transition to a green economy will require additional costs to them and as such they demand measures to reduce such risks. There is no reason to expect that transition costs would be limited to developing countries.

This paper examines the global costs and benefits of transition to a green economy, using the DICE model. The agenda document of the Rio+20 UNCSD provides quantitative targets for energy sector transformation for green economy. Energy is the only natural capital for which the Rio+20 sets quantitative goals. This may imply that energy transformation is prerequisite to moving toward a green economy. The agenda document calls for doubling of energy efficiency improvement rate by 2030 and also doubling of the share of renewable energy in the global energy mix by 2030. These actions will entail abatement costs and in return reduce climate damages. The consequent reduction in damages will be the benefit of mitigative actions.

Results

Under a green economy, the emissions in 2035 are estimated 19.6% below the level under the business as usual (BAU) assumptions, and by 2105 the emissions will be 40% below BAU. As a result, the cumulative emissions for the period 2005-2055 will be 1953.9 Gt CO2. The upper limit for cumulative emissions for a 2℃ temperature stabilization is 1,000 Gt CO2 at which the probability of exceeding 2℃ is 25%.[1] The green economy goals fall short of limiting emissions to achieve 2℃ target. The atmospheric concentration of carbon and the global mean temperature under green economy will continue rising, though at a lower rate than BAU. By the end of this century, the global warming under the green economy will be 2.76 degree Celsius vs. 3.19 degree Celsius under BAU.

 

 

Figure 1. Emissions

 

The Costs and Benefits of a Green Economy

The abatement cost is dependent upon emission reduction rates which are exogenously given by the green economy goals. The estimate of average abatement cost is rising at an increasing rate over time. The incremental abatement cost for the period 2015-2025 is $15 per ton of carbon reduced and this rises to $54 for the period 2045-2055, and $122 for the period 2085-2095. For the entire 100-year period, the present value of total abatement cost is $0.62 trillion.

Benefits are the amount of damages reduced due to green economy actions. In this paper, the damages are assumed to reflect negative impacts of climate changes. The climate damages are a function of global mean temperature increase and the scale of the world economy. The global mean temperature under the green economy will be 0.45 degree Celsius less than the BAU temperature. This reduced warming is due to 25% decrease in cumulative emissions under the green economy to 1107 billion tons of carbon over years up to 2105. In terms of present value, the estimate of climate damages under the green economy would be 13% less than the damage estimate under BAU, leading to a present value benefit of $1.8 trillion.

In the BAU, climate damages rise from $0.084 trillion in 2005 to $ 7.56 trillion in 2105. The green economy reduces the climate damages 13% relative to BAU in 2055 and 25% relative to BAU in 2105. The reduction in climate damage will not begin appreciably until 2065. The benefits of emissions reductions belong to future generations living in the second half of this century, while the costs of the decision to adopt the green economy, however, begin to impose immediately on the current generation.

The DICE model estimates that the present value total costs of a transition to green economy would be one third the present value total benefits of the transition, $1.8 trillion. The positive net benefit implies that a more ambitious action is warranted. Such a move would increase net benefit as evidenced by the higher estimate of incremental benefits than incremental abatement cost as shown in Fig.2.

 

 

Figure 2. Incremental Abatement Cost and Benefit ($/tC)

 

Conclusions

The current targets would yield slightly less climate damages compared to BAU, but fail to contribute to stabilization of atmospheric CO2 concentration. The cumulative emissions will continue increase, exacerbating climate changes and attendant impacts and vulnerabilities. If climate changes continued worsen under the green economy, what would be rationale for pursuing green economy? Would the grand vision of the green economy survive when it fails to respond to climate change challenges?

A cost-benefit comparison calls for more ambitious targets than proposed by green economy advocates. Whether such target will indeed be achieved depends upon the availability of financing. The front-end costs of efficiency improvement and renewable energy use are high and thus financing of investment is key to realizing potential benefits. With a benefit side subject to larger uncertainty than the uncertainty facing the cost side, the prospect of financing a transition to green economy may not be good. The concerns raised by developing countries are thus rational and apply as well to developed countries. The poor countries are, however, more exposed to the risks than the rich ones due to differences in the financing capacity. The developing country’s demand for financing and technology support to get on board the green economy is justified not only by equity consideration but also by efficiency criteria which call for global participation in emissions reduction.

The positive net benefit reported in this paper applies only to the analysis of climate related activities. What’s not covered in the analysis is an assessment of net benefits between climate investment and non-climate investment. Would technological progress and productivity increase differ between these two types of investment? Would this difference, if exists, reflect opportunity costs of green economy? The green economy goal competes against many other global challenges. Each individual, each country has different perspectives and priorities toward competing global problems. Should the cost and benefit assessment of green economy consider the balance of the competing goals? Further research is needed.

 

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[1] Malte Meinshausen, et al., “Greenhouse-gas emission targets for limiting global warming to 2℃, Nature Vol 458, 2009

 

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