Cargo bikes are all the rage in the trendier parts of Berlin. The locals use the bicycles, with a wheelbarrow attached to the front, to do their weekly shopping or to transport children. Because they lower carbon dioxide emissions, local authorities subsidize the craze. But the well-intentioned systems look expensive when you consider how much carbon is being broken down. A program costs the city 370,000 euros (450,000 US dollars), but is supposed to reduce emissions by just seven tons per year. This corresponds to a decrease of over 50,000 euros per ton. Conversely, the equivalent value for systems that support the sale of low-carbon heating systems is EUR 200 per tonne.
Over 100 countries and 400 cities (including Berlin) have pledged to zero by 2050 or earlier. Investors and regulators are encouraging companies to do the same. To achieve these goals, policymakers and bosses must choose from a range of guidelines, from building wind farms to subsidizing low-carbon jet fuel. That begs an important question: what is the cheapest way to reduce carbon?
One way to see the answer is to price carbon, either as a tax or as a cap-and-trade system. This would encourage businesses and consumers to find the cheapest ways to slack off. But setting a price is politically difficult. Only a fifth of global emissions are covered by an explicit price. Even in Europe, the world’s largest market for liquid carbon, free loans allow many industries to continue to cause pollution.
Therefore, other tools are also required. In his new book “How to Avoid Climate Disaster”, Bill Gates suggests using a “green premium” or the gap between the price of dirty and clean activities as a guide. When the premium is low, there are carbon-free alternatives and consumers have no reason not to use them. Where the premium is high, more innovation is required.
A similar approach that has been popular in climate circles over the past decade is to consider the marginal costs of control. Like green bonuses, these calculate the costs of a climate intervention (including operating costs and upfront expenses). However, they are compared with the emissions that policy is expected to reduce. For example, when considering whether to regulate car or airplane travel, it is helpful to know that cars account for 11% of global greenhouse gas emissions, while aviation only accounts for 2%. The graph of the costs and emissions that have been reduced shows the policies that will bring the greatest profit (see Figure 1).
Such curves have been calculated over the years by a number of forecasters, including McKinsey and the Boston Consulting Group, two consulting firms; Goldman Sachs, a bank; and the UK Climate Commission, which advises Parliament. As a rule, most show that the biggest bang is making buildings more energy efficient, for example by installing insulation or intelligent cooling and heating systems. Often times, these have negative costs – analysts believe they will ultimately save consumers money from cheaper bills.
The next best bang for money is to replace power plants that burn natural gas or coal with power plants that run on renewable energy. There is less agreement on which option is next best after that. However, the most expensive industries to decarbonise tend to be transportation (planes and ships), heavy industry (steel and cement), and agriculture (cows belching methane). In these cases, there are still no clean, cheap, and scalable alternatives.
Just as the cost reduction curves provide a rough guide to policy makers, they also show how difficult the math is. For example, the cost estimates vary widely (see Figure 2). An article by Kenneth Gillingham of Yale University and James Stock of Harvard University compares the marginal costs of guidelines in more than 50 studies. Wind energy subsidy costs can range from more than $ 260 per tonne of carbon dioxide avoided to close to zero.
This is partly because the mitigation potential of a technology can vary from place to place. Some countries like the UK are blessed with strong winds and shallow seas that are ideal for offshore wind farms. In other places, wind energy will hardly help.
Calculating the cost is also difficult. For example, the International Energy Agency (IEA) routinely underestimated the pace of the use of renewable energies (see Figure 3). And because economies of scale lower prices, it means that the cost of switching has also been overestimated. In 2010, the lowest drop in solar prices expected by the IEA over the next decade was around $ 195 per megawatt hour. Today the price in America and Europe is between $ 30 and $ 60.
Nor do the cost reduction curves show how technologies interact. Hydrogen is rarely produced without emissions. But if it did, the Hydrogen Council believes it could be used in 35 different environmentally friendly applications, from storing energy to heating buildings. Ignoring it could lead to underinvestment in hydrogen today.
Interactions also affect how much interventions reduce emissions. Consider two things that are required to decarbonize the economy: converting the grid to low-carbon electricity and electrifying transport. The order in which you carry out these matters. According to a model developed by the Massachusetts Institute of Technology and others, electrifying transportation would require less oil to fill the tanks with gasoline. However, as the demand for dirty electricity for electricity would increase, total emissions would only decrease by 2% by 2050 (compared to a typical baseline). However, if the network were cleaned first, emissions would decrease by around 30%.
In the face of all these difficulties, forecasters take a more nuanced approach rather than simply working along the marginal cost curve. Goldman Sachs includes a variety of scenarios and a wider range of costs in its analysis. Others turn to the modeling of “energy systems”, in which models are repeatedly estimated using different assumptions. This allows technologies to interact and makes predictions less based on a set of assumptions, such as prices.
With this type of analysis, you can divide climate action into three categories, says Jesse Jenkins of Princeton University, all of which require financial support. First, he mentions “robust” measures such as improving energy efficiency that are useful in many scenarios. Next up are “shaping” interventions such as investing in hydrogen and batteries that increase the likelihood of a low-carbon future. Then there are “hedging strategies”: long-term options just in case, such as direct air separation, which sucks carbon dioxide out of the atmosphere. The result is a more complex framework that is better suited to the complex, increasingly urgent task of decarbonization.