The CBI brought out a report on climate change. It argues that the UK can achieve emissions reductions at a sufficiently rapid rate to meet the government’s old target of 60% cuts by 2050. The optimism is underpinned by McKinsey work that assesses 120 different options for reducing carbon dioxide, ranging from domestic solar panels to carbon capture. McKinsey assesses what carbon price is necessary to create the incentives for business and consumers to switch to using these technologies. The McKinsey analysis appears to show that getting the UK on track will need carbon prices in excess of €90 by 2020, though this number will then fall.
The CBI’s report, Climate Change: Everyone’s Business, is a curious mixture. Part of the document is devoted to telling us that business thinks that climate change is a problem that can be cured by conventional market mechanisms. McKinsey’s appendix tells us that the challenge will not ‘require a reduction in consumption of goods and services’. The whole report is eager to assure that the response to global warming can be smooth and trouble-free. Government needs to provide consistent leadership, and consumers need to respond to price signals, but significant changes to the structure of the economy are unnecessary.
This is a brave and thoughtful approach and there is a surprising degree of commitment from the extremely senior businesspeople who comprised the CBI steering group. But a close look at the McKinsey figures must make us extremely concerned that business may be deluding itself if it thinks that wrenching changes are unlikely.
The McKinsey work McKinsey’s global research practice has already published ‘abatement curves’ for the main emissions reductions technologies. This extremely intelligent approach takes individual opportunities, such as domestic condensing boilers or offshore wind power, and assesses how many million tonnes of carbon dioxide could be abated by the full use of the technology and at what cost. The opportunities are then plotted on a curve, with the least-cost emissions reduction technologies on the left, and the most expensive innovations on the right.
Many technologies have a negative cost. Cavity wall insulation in a typical 1930s British semi-detached house will repay its owner within two or three years. In 2020, McKinsey identifies almost 50m tonnes of annual emissions reduction techniques with a positive financial return, rising to about 100m tonnes a year by 2030. Other techniques are extremely expensive. The consulting firm says that domestic solar hot water heating has a cost of about £600 per tonne of carbon dioxide avoided. (This is much higher than my estimates of about £300 per tonne, but we shouldn’t quibble about the differences – most micro-generation technologies are extremely expensive according to any calculation.)
The core McKinsey numbers are as follows:
|(m tonnes CO2e)||2002||2020||2030|
|Expected UK emissions with 'frozen' technology||690||848||942|
|'Baseline' emissions with no initiatives beyond current measures||723||728|
|Maximum reductions if all abatement opportunities are taken||592||498|
498m tonnes (2030, with maximum abatement) is about 38% below the UK’s 1990 figure. McKinsey is therefore able to say that this figure is consistent with the UK being on track for 60% emissions reductions by 2050. As the rest of this short article will suggest, there are a host of problems with this assertion.
McKinsey’s estimates suggest that the UK can reduce its annual emissions by about 10m tonnes per year every year until 2030. To put this in context, CO2 emissions rose over 1% in 2006, or about 6m tonnes. Changing the trajectory is difficult, and McKinsey doesn’t suggest otherwise.
The report does not say that emissions will be 592 tonnes in 2020. It says that if all 120 abatement opportunities are taken, and they are all applied to the economically rational extent, then the emissions reductions will occur. The same is true for 2030. This is, of course, an extremely strong assumption.
How will the possible emissions reductions be apportioned? This is the breakdown of 2002 emissions:
2002 emissions by sector
|m tonnes CO2e||%|
With no technology changes (the ‘frozen’ scenario), the figures are expected to increase by an average of 37% by 2030.
‘Frozen’ technology: emissions in 2030
|m tonnes CO2e||% increase|
In what McKinsey calls the ‘baseline’ scenario, which assumes existing technologies are productively employed to reduce CO2, emissions growth is reduced to 6%.
Baseline scenario: emissions in 2030
|m tonnes CO2e||% increase|
In this projection, the most important reduction is in the carbon intensity of electricity generation. Coal is supplanted by gas, which generates 79% of all electricity, and the average CO2 produced per unit of electricity declines over 21%. Efficiency gains are made in aircraft engines meaning that ‘international bunkers’ only increases by 100%, not the 150% in the frozen scenario. This is a very demanding target: average aircraft fuel efficiency is expected to be 20% better than today, even though many airplanes now flying will still be in the air in 2030.
The suspicion has to be voiced that McKinsey was already being optimistic in its assumptions in constructing the baseline scenario.
Abatement technologies reduce expected CO2 emissions to 498 million tonnes in 2030.
Maximum abatement: emissions in 2030
|m tonnes CO2e||% decrease on baseline figure|
The reduction is much more marked in power generation than in other areas. This reduction is derived from an increase in nuclear and wind, some carbon capture and storage, and substantial demand reduction from end-users. (I have tried to understand these figures and there seems to be an arithmetic mistake in McKinsey’s calculations. The report seems to ignore the fact that carbon intensity improvements cannot simply be added to demand reduction.)
Of the 230m tonnes of maximum abatement, almost half comes from electricity generation. The major other improvements are improved car engine efficiency, the use of biofuels, and enhanced residential insulation. McKinsey says that all these changes taken together put the UK on the road to 60% emissions reduction by 2050. This is a difficult assertion to accept because the principal sources of reduction have already been exploited by 2030. It is, for example, simply impossible to reduce the figure for electricity to less than zero, meaning that the rate of improvement between 2030 and 2050 cannot be as fast as in the 2002 to 2030 period. Its bold assertions that the 60% emissions target is attainable by 2050 are quickly made. One senses that McKinsey did not want us to look too closely at this point.
In some ways, the McKinsey document is profoundly depressing. It makes the case for ‘business as usual’, rather than suggesting that really significant changes need to be made. It says that the UK can plausibly make substantial cuts by 2030, but provides little evidence that these reductions will actually happen. And getting down to the 300m tonnes or so required by 2050 actually appears impossible, at least if no further emissions abatement opportunities arise. The report accepts that potential improvements up until 2020 are extremely limited except at very high CO2 prices. It says that any such reductions that do take place will require a carbon tax of at least €90 per tonne, or four times the current ETS price.
And, of course, the UK government is now talking of trying to achieve 80% emissions reductions by 2050, not 60%. McKinsey says that we will have to use all available abatement technologies to get us down 38% by 2030, and that the carbon price will have to be high for the next decade or more. The people at McKinsey are intelligent enough to realise it doesn’t add up. The CBI wouldn’t have liked it, but the consultants should have said outright that the scale of the necessary emissions reductions may simply not be compatible with ‘business as usual’.