On Sunday, 300,000 activists took to the streets of New York for the People’s Climate March, the biggest climate protest in history, and the United Nations on Tuesday held the Climate Summit. In the spirit of Climate Week, we’re presenting insights from members of the Harvard Business School Business and Environment Initiative. The common theme: Why business leaders need to address the stubbornly touchy topic of climate change.
BY REBECCA HENDERSON
No one knows how much it will cost to keep the risks of significant climate disruption to a reasonable level. One commonly cited estimate puts the cost at roughly 1 percent of world GDP a year, or about $840 billion.
This is a large number, but it seems smaller when one remembers that that most studies suggest that failing to address climate change will result in even higher overall costs. For example, a study published in the Proceedings of the National Academy of Sciences estimates that damages from uncontrolled climate change (an increase of 3.4 degree Celsius) could cost $12 trillion (2.8 percent of global output) by 2095. Moreover delaying action could increase mitigation costs by 40 percent every decade, making it ever more difficult to do what may need to be done.
Most importantly, there are good reasons to think that the world will surprise us , and that once we put our mind to addressing climate change the costs will be significantly lower.
Building an energy efficient, decarbonized economy is a massive shift —of the same order of magnitude as the diffusion of globalization, the mechanization of agriculture, the widespread adoption of computers or the diffusion of the Internet and the digitization of almost everything. It will require the transformation of almost every energy company’s business model, and the transition from a world in which throwing CO2 up the chimney was free to one in which throwing away CO2 is a costly activity. This won’t be easy, but it will be easier than we expect.
Between 1942 and 1944, for example, the United States nearly quintupled its outputs of ships while costs fell by more than 60 percent. We’ve seen change of a similar magnitude in civilian industries as well. Less than 2 percent of the US population/workforce now works on the land, but agricultural production has only continued to increase. Computing power is now infinitely cheaper than it was 20 years ago. In the environmental arena, the emissions allowance program enacted to control emissions of sulphur dioxide was much more effective —and much cheaper —than early estimates had suggested. We tend to take these kinds of advances for granted, but we shouldn’t —they hint at what might be possible if we really put our mind to addressing the problem of climate change.
For example we’re already beginning to see evidence of the existence of very significant learning curves in many key energy technologies. One recent paper estimates that the electrical efficiency of computation has doubled roughly every year and a half for more than six decades, outpacing Moore’s law. The paper shows also that the costs of wind and solar power have also been falling dramatically.
Nuclear energy remains in flux, but a number of promising new approaches, particularly so called “modular” or “fourth generation” nuclear reactors, promise to significantly reduce costs while simultaneously easing doubts over safety and waste disposal.
Many investments in energy conservation are already NPV positive. A recent report estimated that an investment of $3.2 trillion worldwide in energy conservation would avoid new supply investments of $3 trillion and would pay for itself within three to five years, while a recent Department of Defense sponsored study concluded that using LEED-Silver or equivalent standards in the design and construction of new buildings increased construction costs by less than 1 percent while reducing energy costs by between 5 and 30 percent over the life of the building. Between 1990 and 2012 IBM reduced electricity consumption by 6.1 billion kWh, saving $477 million through energy conservation alone.
And this is all in a world in which we are spending a ridiculously small amount of money on clean energy research, and the private sector has only minimal incentives to invest. In 2014, for example, the Department of Energy will spend about $1.6 billion on research into renewable energy, energy efficiency and nuclear power. That’s about 5 percent of what we will spend this year on research at the NIH, and only 2 percent of what we’ll spend on military research.
Renewable energy is widely subsidized, of course, but so are fossil fuels: one estimate suggests that the world spends $523 billion a year subsidizing fossil fuels as against $88 billion a year to renewables. But of course we shouldn’t be subsidizing —or mandating —any fuel directly!
If we were to mobilize the private sector by creating a truly competitive market in which the real costs of any particular fuel were borne by those who use them —if, in other words, we imposed a realistic price for carbon emissions that reflected our best estimates of the real cost of dumping them into the atmosphere — then I suspect we would see unprecedented levels of innovation across the economy in ways we can only begin to imagine.
In manufacturing, US labor productivity more than quadrupled between 1950 and 2000 because the price of labor encouraged firms to become really efficient at using it. My guess is that we will be very pleasantly surprised when we start to price carbon in the same way.
About the author: Rebecca Henderson is the John and Natty McArthur University Professor at Harvard University, where she has a joint appointment at the Harvard Business School in the General Management and Strategy units.