The carbon productivity challenge: curbing climate change and sustaining economic growth

Any successful programme of action on climate change must support two objectives-stabilising atmospheric greenhouse gases (GHGs) and maintaining economic growth. Reconciling these two objectives means that ''carbon productivity,'' the amount of GDP produced per ton of carbon and other greenhouse gas emissions must increase by ten times over the coming decades.

This is a central finding of The carbon productivity challenge: Curbing climate change and sustaining economic growth, a new report by the McKinsey Global Institute and McKinsey's Climate Change Special Initiative. The report was presented and discussed at the GLOBE International G8+5 Climate Change Dialogue, as well as the GLOBE International CEO Dialogue, both in Tokyo, Japan, June 27-29.  GLOBE International is an organisation of legislators from around the world who are working on climate issues.

To meet commonly discussed abatement paths, carbon productivity must increase from approximately $740 GDP per ton of CO2e (carbon dioxide equivalents, a common measure of greenhouse gases) today to $7,300 GDP per ton of CO2e by 2050-a tenfold increase, the report finds. This is comparable in magnitude to the labour productivity increases of the Industrial Revolution.

However, the ''carbon revolution'' must be achieved in one-third of the time that economic transformation took in the Industrial Revolution if we are to maintain current levels of economic growth while keeping CO2e levels below 500 parts per million by volume (ppmv) and stabilizing long-term at 450 pppmv, a level that many experts believe is the maximum that can be allowed without significant irreversible risks to the climate.

The macroeconomic costs of this carbon revolution are likely to be manageable, being in the order of 0.6-1.4 per cent  of global GDP by 2030. To put this figure in perspective, if one were to view this spending as a form of insurance against potential damage due to climate change; it might be relevant to compare it to global spending on insurance, which was 3.3 per cent  of GDP in 2005. Borrowing could potentially finance many of the costs, thereby effectively limiting the impact on near-term GDP growth. In fact, depending on how new low-carbon infrastructure is financed; the transition to a low-carbon economy may increase annual GDP growth in many countries.

If there is no increase our carbon productivity, the consequences will be stark, the report suggests. Meeting commonly discussed abatement target would require a per-person carbon budget of 6 kilograms of CO2e per day. If one had to live on such a carbon budget with today's low levels of carbon productivity, one would be forced to choose between a 40 kilometre car ride, a day of air conditioning, buying two new T-shirts (without driving to the shop), or eating two meals. So without a major boost in carbon productivity, stabilizing greenhouse-gas emissions would require a major drop in lifestyle for developed countries and would hinder economic development in low income countries.

The microeconomic changes needed to increase carbon productivity at the levels required will not occur without the active leadership and collaboration of governments and businesses globally. The report underscores the need for new policies, regulatory frameworks, and institutions focused on four areas: creating market-based incentives to innovate and raise carbon productivity; addressing market failures that prevent abatement opportunities from being captured profitably; resolving issues of allocation and fairness, in particular between the developed and developing worlds and between industry sectors; and accelerating progress to avoid missing critical emissions targets.

It will be essential to identify and capture the lowest-cost abatement opportunities in the economy. Analysis of McKinsey's global cost curve, a map of the world's abatement opportunities ranked from lowest-cost to highest-cost options, identifies five areas for action to drive the necessary microeconomic changes: 1.) capturing available opportunities to increase energy efficiency in a cost-effective way; 2.) de-carbonizing energy sources; 3.) accelerating the development and deployment of new low-carbon technologies; 4.) changing the behaviours of businesses and consumers; and 5.) preserving and expanding the world's carbon sinks, most notably its forests.