Cost of dealing with climate change

The bill for fighting climate change will be large

But the bill for letting climate change go out of control will be much larger.
Industrialized countries, which are responsible for the majority of the greenhouse gases in the atmosphere, must find the money to green their own economies.

But they are also liable, at the court of world opinion and fairness, for funding many of the emissions reduction plans and adaptation requirements of the “victim” countries – those hit hardest by a problem that they have no responsibility for creating.

A study by the consultants McKinsey identified the potential for reducing global emissions by 35% from 1990 levels by 2030 (or 70% below a likely business-as-usual trajectory).

Notwithstanding the cost of necessary lifestyle changes and some more expensive technologies, the total worldwide cost for most of the technologies and actions investigated would be in the region of €200-350 billion annually for the next 2 decades.

This annual figure is less than 1% of global gross domestic product (GDP) in 2030. Something like half of it would be invested in developing countries.

By 2030, wind, solar and other renewable energy could meet almost 1/3 of all global power needs; energy efficiency could reduce greenhouse gas emissions by more than 1/4; and deforestation in developing countries – one of the biggest drivers of climate change and a major threat to sustainable development – could be almost fully halted.

And all at a cost of less than 0.5% of global GDP.

This figure is only a fraction of a % of the global economy, but it still dwarfs the billions of dollars that developed countries have so far committed to tackling climate change and its consequences in developing countries.

For WWF, it remains a prerequisite for a Real Deal  that developed countries commit to a substantive reduction in greenhouse gas emissions in developing countries – in addition to their commitment to low-carbon development back home.

In the end, the costs should not be the key driver for action, nor must negotiations reach an impasse on “how much for what?”.

Crucial is the environmental effectiveness of the measures financed, and their implementation in close collaboration with developing countries to meet their needs-based demands.

What now seems to be “costly” may turn out to be extremely cheap in a few years’ time when new technologies become available on a large scale.

We see it everywhere, not only in some energy technologies such as wind power, but also with non-energy technologies like IT – including computers and cell phones – where costs are reduced by several magnitudes once the consumers start purchasing.

How should that 0.5% of global GDP be generated?

  • There could be a simple charge on rich countries, a % of their GDP (say, 0.5-1%).
  • Or there could be a tax on all carbon emissions in all countries above a certain threshold level of emissions per head of the population.

For example, Switzerland has proposed that a levy of US$2 per tonne should apply to all countries with annual per capita emissions above 1.5 tonnes of carbon.

Another idea is to charge according to historical responsibility for emissions.

WWF’s recommended option is for the money to be generated from either national or global auctions of pollution permits.

Even 10% of the revenues could potentially fund what is needed.

How should the money be managed?

On the whole, industrialized countries want any cash they provide for climate action in developing countries to go through existing bodies like the Global Environment Facility (one of the UNFCCC’s existing financial mechanisms) or the World Bank, or they prefer bilateral funding.

But most developing countries, which have been at the receiving end of these institutions for decades, want new institutions, based at the UN, perhaps managed through a single climate change fund. WWF agrees that the funding should be clearly linked with the UNFCCC. 

The precise mechanisms and formulae to manage and apply the budgets are crucial.

The other key element is that money is put on the table. If it is not, there is little chance that poor nations will accept that their economies need to develop differently from business-as-usual. They will simply – and not unreasonably – say to the rich world: “You created the problem; YOU solve it”.

Whose cash? Who will fund all this?

The private sector will clearly be a major player. It makes up 86% of global investment and financial flows.

Trillions of dollars of private-sector money will be invested in new and replacement energy and transport infrastructure in the coming decades. So retooling the world’s economies for a low-carbon world will only happen if there is private profit to be made from building infrastructure that cuts emissions, rather than creating them.

To make that happen will require concerted government action, however. That will include:

  • creating carbon markets that penalize emissions and reward low-carbon solutions
  • targeting research and development (R&D) and “seed-corn” investment to new technologies
  • building electricity grids that can carry and distribute green power
  • designing cities and public transport systems that reduce reliance on the car
  • setting standards to reduce the energy consumption of buildings
  • imposing ambitious low-carbon regulations and energy efficiency standards on consumer products
  • addressing the drivers of deforestation by introducing ecosystem service payments and changing consumption patterns, such as reducing beef consumption.

Public-sector involvement will also be vital to prevent a boom-and-bust carbon economy that undermines long-term investment.

Left to its own devices, the market will only encourage one or two emerging renewable technologies at a time. That is why wind power has been the dominant renewable technology of the last decade in many countries.

But to meet the tough targets for future decades, a range of technologies must be developed and expanded together.

One key lesson of the current global financial downturn is that governments have to resume their places as regulators of economies. That includes the task of creating a global low-carbon economy.

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