“Saving the earth won’t cost the moon,” asserted Ottmar Edenhofer of the Potsdam Institute for Climate Impact Research. Okay, but how much will it cost? UN researchers predict $300 billion. A few years earlier, the Intergovernmental Panel on Climate Change said $65 billion. Nobel laureate and Yale University economics professor William Nordhaus estimates $1.75 trillion. That’s a lot of zeros. A figure of that magnitude may seem unrealistic. But the fact is: these expenditures will boost the economy.
Protect the earth, propel the economy
A 2018 study by the Federation of German Industries (BDI) found that Germany would have to invest about €1.5 trillion to cut its emissions by 80% by 2050. Reducing its emissions by 95% (as it pledged in the Paris Agreement) would cost €2.3 trillion. In other words, Germany would have to spend €800 billion more to achieve the final 15%, (around 100 million metric tons of carbon). That’s a lot of money. Yet the study’s authors claimed it would have no adverse impact on the country’s economy.
“Four-fifths of the measures needed to achieve the 80% climate target involve direct abatement costs,” BDI president Dieter Kämpf says. This will create new business for machine-tool, construction, and insulation companies. But the abatement costs – namely, carbon taxes – will make other companies less profitable. They will also make it more expensive for people to heat their homes and drive their cars. The carbon tax Germany introduced in January 2021 has mechanisms to ensure that these costs don’t unduly burden – or unduly annoy – households.
Have your climate-protection cake and eat it too
A recent McKinsey study, “Net-Zero Europe,” suggests that there may be no reason to fear consumer pushback. It predicts that, on balance, the average household in a climate-neutral EU will have a lower cost of living in 2050 than today. By contrast, wealthy households will have greater outlays. McKinsey believes that, on balance, the energy transition will be good for the labor market: although it will eliminate about 6 million jobs, it will create 11 million. The study says that if the EU would produce more wind energy in the North and more solar energy South it could be climate-neutral as early as the 2040s. Remarkably, McKinsey claims that EU citizens won’t have to alter their lifestyles: they’ll be able to consume, drive, heat, and even dine much like they do today.
How to get there: carbon taxes
Researchers and policymaker generally concur on which mechanism will change companies’ (and households’) behavior: a carbon tax. Some scientists, however, think Germany’s carbon tax – which is currently €25 euros per metric ton – is far too low. Martin C. Hänsel of the Potsdam Institute for Climate Impact Research, who has refined Nordhaus’s models, thinks the tax needs to be at least €100 per metric ton to have an impact. That would be more like Sweden, whose carbon tax has risen from €30 to €115 over three decades. Without, by the way, causing resentment, rancor, or resistance among consumers. How? Because the introduction of the carbon tax was accompanied by tax reforms in which payroll taxes were reduced and other taxes (inheritance, property) were eliminated altogether to offset higher gasoline and energy costs. An individual’s overall tax burden hasn’t really changed.
Thomas Sterner, professor of environmental economics at the University of Gothenburg, believes that other countries can learn three things from Sweden: “A carbon tax must be introduced gradually, but firmly. The government has to explain it clearly. And the revenue must be used for something useful." Sweden, for example, has steadily expanded its district heating networks and added new heating plants nationwide. Its emissions have fallen by more than 25% since the tax was instituted, while its GDP has almost doubled. This indicates that economic growth and climate protection are indeed compatible.
Inaction will cost more
Nordhaus crystalizes the problem of quantifying the costs of climate change into two percentages: he estimates that it will cost 2% of global GDP to stop climate change, whereas climate change’s consequences will cost 5%. Inaction will actually cost more. In short, the problem isn’t cost, but time. We’re running out of time. The United Nations Climate Council has advocated picking up the pace of climate protection for almost 25 years. During this time, many companies, countries, and communities have pledged to do more. They gradually need to do more faster.