The International Energy Agency has performed a service with its detailed comparison of a business-as-usual energy projection with one that assumes a global effort to mitigate climate change. The comparison is part of the agency's World Energy Outlook to be published next month. IEA released the section on climate change early as an excerpt entitled "How the energy sector can deliver on a climate agreement in Copenhagen," where international leaders will meet in December.
Some of IEA's analysis is questionable. And the agency makes no pretense of neutrality on core political questions. But its report is rigorous and illuminating. It deserves attention.
Political stance
IEA declares its political stance in the excerpt's first sentence: "Past editions of the IEA's World Energy Outlook (WEO) have highlighted the unsustainability of current energy trends—environmentally, economically, and socially—and the urgent need for action to bring about a wholesale global shift to low-carbon technologies." With this sentence, IEA brushes aside legitimate questions about climate-change remedies. At least it makes its prejudices clear.
The study's reference scenario includes projections that account for the economic slowdown and governmental policies adopted by mid-2009 on greenhouse-gas emission abatement. It assumes no implementation of policies merely under consideration or targets being discussed but not adopted as policy.
The mitigation scenario assumes globally coordinated enactment of policies that stabilize the atmospheric concentration of all greenhouse gases at 450 ppm carbon dioxide-equivalent by 2050. In the reference scenario, the concentration reaches 1,000 ppm. IEA asserts the lower concentration would result in a global temperature increase of 2° C. from an unspecified baseline.
Illumination comes from IEA's projections of investments related to the mitigation scenario. The agency assumes implementation of a range of remedies, including cap-and-trade systems, in industrialized countries and rapidly growing countries. The latter group includes Brazil, China, the Middle East, Russia, and South Africa. Other countries are assumed to seek climate-change remediation as well—but not via cap-and-trade.
IEA says measures implemented under the mitigation scenario would increase cumulative energy-related investment during 2010-30 by $10.5 trillion. Of that, $4.7 trillion would be for transport, $2.5 trillion for buildings, $1.7 trillion for electric power, and $1.1 trillion for industry, mainly for processing efficiencies and electric motors.
Of course, $10.5 trillion is a lot of money. If the investment occurred in equivalent annual amounts, however, each chunk would represent only 0.8% of global gross domestic product in 2007. That might seem like a minor diversion of capital. In fact, however, the capital shift would have economic consequences.
Investments required by governments are not the same as investments undertaken for purely economic reasons. If mitigation investments promised competitive returns at equivalent levels of risk, governments wouldn't need to evoke them by policy. Money invested to satisfy climate-change mitigation requirements is in fact money not invested elsewhere in pursuit of superior returns. Yes, mitigation investments would yield something. But it's easy to overstate the returns before the fact. At one point in its analysis, for example, IEA asserts that energy-cost savings would recoup the $8.3 trillion in extra investment over 20 years in buildings, industry, and transport. Without government coercion, what investors would risk so much capital on that proposition?
Substantial cost
It's unreasonable to expect the payoff on mitigation investments to be anywhere near what returns would be on the same money invested in commercial alternatives. The difference is cost. And the cost of diverted investment would amplify costs of the elevation in energy prices integral to any meaningful effort to reduce greenhouse-gas emissions. So the overall cost of mitigation would be substantial. It would hurt economies.
Yet IEA sees no difference in global economic growth between the reference and mitigation scenarios in either 2020 or 2030. It apparently believes the costs of capital dislocation and higher fossil-energy prices can be totally offset by reductions in energy use and activity increases related to alternatives. Because the economic effects of error in policies adopted under this belief might be dire, not everyone will wish to make the same leap of faith.
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