How much will it cost to fight climate change?

During the recent federal election in Australia the cost of converting to renewable power and eliminating carbon emissions was raised and the ALP seemed to suffer by not providing an adequate answer. So what is a reasonable answer to this question and what are political groups in other countries saying?

The UK government recently announced a goal to reduce greenhouse gas (GHG) emissions to net zero by 2050. The cost was estimated by the UK Committee on Climate Change (CCC) to be 1-2% of UK GDP (1). For the UK this equates to US$25-50 billion/year over a 30 year period.

Jay Inslee, a Democrat candidate for the 2020 US presidential election with a strong climate focus, has pledged to spend US$300 billion/year from federal funds to fight climate change with a goal of “catalyzing” a further US$600 billion/year from states and private investors (2). In total this equates to about 5% of national GDP – well above the UK estimate. Perhaps Gov Inslee appreciates that the US is more reliant on fossil fuel production than the UK and that with a much larger land mass the costs for new power distribution infrastructure will be higher. In this regard Australia is probably more like the US than the UK.

At a global level the International Energy Authority (IEA) estimates that the annual investment in low carbon energy production plus expenditure for reduced energy demand (a key part of the IPCC pathways) required to limit warming to 2C is about US$2 trillion/year (3). This represents about 2.5% of global GDP so broadly in line with the CCC report.

This quick review of current decarbonisation cost estimates, including two provided by active participants in national political processes, gives a ballpark figure of 1-5% of GDP. This range combines estimates for individual countries with a global figure and includes different decarbonisation timetables so an imperfect calculation but better than Bill Shorten’s claim that it was “impossible” to estimate the potential cost.

A range of 1-5% of GDP is between US$13 – 65 billion for Australia. During the election two reports were released providing estimates on the impact to GDP from the policies proposed by the ALP – one suggested 0.4% and the other 2.0% (4). Allowing for the fact that the ALP was aiming for a 50% reduction in GHGs (rather than the more aggressive targets of the UK and Inslee proposals) these two estimates are probably at either end of a 1-5% of GDP range.

Would the ALP have had better luck if they had presented a figure of US$25 billion/year as a likely cost for full decarbonisation? Given that this represents about 6% of Australia’s total annual tax revenue this would have stimulated some interesting debate. Some would have argued that this is entirely manageable and highlighted areas where tax revenue could be increased to fund the expenditure. Others would have used the same figures as clear evidence that Australia can not afford to pursue rapid decarbonisation with this level of expenditure.

We will never know what impact a different approach would have had on the 2018 election but we can be sure that this question will come up again. It seems obvious that at future elections progressive parties seeking strong action on climate will need to quantify the cost of decarbonisation and probably also specify where the money will come from. The majority of the population seems pretty clear in thinking that decarbonisation is not going to be cheap and that claims that replacing coal with renewables will save money are simply not credible. Nor are they in line with what is being presented in the UK and the US

After a reasonable estimate for the cost of decarbonisation has been presented, topics like avoiding costs associated with responding to warming above 2C and potential financial benefits from a low carbon environment can be discussed. While these future cost savings will inevitably be heavily discounted against actual real time money, at least they will be part of the broad national discussion and not just key talking points on climate centric blogs.

Some commentators believe that the election result demonstrates that ambitious policies present an easy target for scare campaigns. While this may be true, progressive climate groups should recognise that they will need to present a realistic picture of what it is going to take to decarbonise the Australian economy if they expect to get a majority of the country to give them their support.