Friday, February 15, 2008

New Report Sees Profit in Combating Climate Change

Once again, late breaking news trounces what I had prepared for today. According to the Financial Times yesterday, McKinsey was set to release a report about the cost of addressing climate change, and the man conclusion is that about half of the required reductions in greenhouse gas (GHG) emissions could actually be achieved at a profit. I have not been able to find this report yet on the web, but it seems to be a follow-up to the report they issued last November, prior to the Bali conference. (See for a summary and the ability to download the full report, an executive summary, video or slideshow presentation.)

The good news is that McKinsey believes that about half the reductions in greenhouse gas GHG required to meet the IPCC goal of stabilizing GHG atmospheric concentration at 550 ppm not only can be achieved by energy savings using existing technology, but that it can be done at a profit (with an average return of 17%). That would suggest to me that the other half would probably be achievable and profitable with the imposition of a relatively low carbon tax or the equivalent, especially when measures other than energy efficiency are included.

The bad news is that we are apparently not doing it. That is to say, we are not acting in our own economic interest. Adam Smith’s invisible hand is not working. I wonder why? One explanation is that this conclusion must be quite sensitive to the price of fossil fuels, and these have only recently reached the dizzying heights they are today. Other reasons, especially among individuals and small companies, probably include ignorance, apathy, and an inability to make the necessary capital investment. I have also found personally that companies often look for unrealistic rates of return, often expecting a payback period of 2 years. I do not understand why this is; where can they invest and get a 50% return? (For insights into how big business regards climate change issues, see another McKinsey report “How Companies Think about Climate Change,” which indicates that climate change issues are considered mostly with regard to the effect on a company's brands and reputation. This and other McKinsey reports on climate change can be found at

In the new report, McKinsey looked at all energy-saving technologies which would provide a return of 10% or more and found that adopting all of them would cost about $170 billion a year worldwide (0.4% of global GDP and not much more than the US spends annually on the Iraq war) but would provide an average return of 17% on this investment. It identifies heavy industry in China as the sector with the most to gain, with the second being residential housing in the US, where homes are large, poorly insulated and equipped with a range of appliances that are often themselves inefficient or poorly used, such as air-conditioning systems left on unnecessarily. (US homes happens to be the subject of the posting prepared for tomorrow, Saturday being my day for what individuals can do.)

Overall, out of the $170 billion, $83 billion would be spent on industrial applications, $40 billion would be spent on residential, $25 billion on transportation, and $22 billion on commercial. $38 billion of this would be spent in China and $28 billion in the US.

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