Ahead of the McKinsey Curve

I remember the second time I saw this graph. It was shown to me by that enthusiastic young guy Guy Shrubsole, who waved a printed copy under my nose and asked me if I’d seen it and knew what it meant. I had and I did :-

http://climatechange.cbi.org.uk/uploaded/climatereport2007mckinseyapp.pdf

This is the now much-cited McKinsey Cost Abatement Curve which has seen several and various incarnations which all say and imply the same things.

Simply put, there are vast rafts of Carbon-cutting exercises that Society and Business and Governments can take, at zero or less than zero cost to the Economy. This graph shows that fact in a very clever way, ordering the actions from cheapest to most expensive.

By integrating the area under the curve it is possible to know how much it will cost in total to achieve a given reduction in Greenhouse Gas Emissions.

That is, as long as the lowest cost options are always taken first, and at the scale calculated.

This could in theory be used to calculate an effective Carbon price, a deterrent for emissions.

American version :-
http://www.epa.gov/air/caaac/coaltech/2007_05_mckinsey.pdf

Most recent global version :-
http://www.mckinsey.com/clientservice/ccsi/pathways_low_carbon_economy.asp

Comment is free :-
http://www.guardian.co.uk/commentisfree/cif-green/2009/apr/25/climate-copenhagen-carbon-emissions

Nicholas Stern devotes a good deal of Chapter 3 in his new book to this graph. His words betray one of the key problems with current global policies :-

A Blueprint for a Safer Planet : How to Manage Climate Change and Create a New Era of Progress and Prosperity” : Nicholas Stern : page 52

“…the ordered structure of options illustrates both the importance of policy in promoting the seeking out of low-cost options, and that there are many options. The analysis draws attention to the importance of negative cost options associated with energy efficiency. It also draws attention to the importance of using the price mechanism for greenhouse gases to ensure that options for reductions with cost below that price are viable and those with cost above it are not…if crudely and naively interpreted, this analysis might lead us astray. It might be taken to imply that we have a world planner who can identify with full information and wisdom where emissions cuts should take place and make sure they happen according to plan. Or it might be taken to imply perfection in policy and competition in a market economy which could look implausible in a world of imperfect information and special pleading…”

My main problem with what Nick Stern is asserting here is to do with his statement “…price mechanism…to ensure that options for reductions with cost below that price are viable and those with cost above it are not.”

It seems that the answer to the question “who pays ?” will determine the choice of options, not the rational choice that Stern assumes.

Let us take a central example from the United Kingdom.

One of the bars on the left-hand side of the version of the chart in Stern’s book is labelled “Retrofit Residential HVAC” (HVAC means Heating, Ventilation and Air Conditioning).

This would clearly have some up-front investment costs in each home, but result in high energy savings so be cost-negative (that is, you get a return on your investment) after a certain payback period.

But what would ensure that this option was taken ? There is talk from Ed Miliband, Secretary of State for Energy and Climate Change.

There is talk from several quarters of some kind of grant or loan scheme to each household that volunteers to go for the targets suggested on Enery Efficiency at home.

But the Department DECC has no authority over what people do in their own homes, and cannot intervene.

So how likely is it that “voluntary behaviour change” will include retrofitting thermal regulation systems in all but a small proportion of houses ?

And another one of the bars on the right-hand, cost-positive side of the chart is “Coal CCS new build” – that is new coal-fired power stations built with incorporated Carbon Capture and Storage (CCS) to capture the Carbon Dioxide and pump store it permanently (hopefully) underground or undersea.

Why is Coal with CCS one of the fattest news stories of the month ?

It’s always going to be more Carbon-intensive than Natural Gas with CCS.

And it’s always going to cost more than Renewable Energy.

And, anyway, nobody really knows how expensive CCS will turn out to be (if it can be implemented on any large enough scale to count).

And those who run Coal-fired power stations are not going to suddenly turn round and say “Coal looks bad. Let’s stop this Coal-fired power generation and turn to offering domestic energy efficiency services.”

Those who run Coal-fired power stations are tied to carrying on running Coal-fired power stations for the benefits of their shareholders. They’re not in a position to choose the Low, Zero or Negative Cost Options from McKinsey.

So my question is : if our current Climate Change Mitigation strategy in the UK is following the high-cost choices, such as CCS and new Nuclear, how are we going to be able to afford cuts in Greenhouse Gas Emissions : given that a global Carbon Price would be set at a level that gives benefits for those who take the low-cost abatement options ?

And my next question that naturally follows on is : why are we even contemplating new Nuclear and CCS before we’ve worked out how to offer universal domestic insulation and electric public transportation ?

If a Carbon price can be assumed implemented in the next 5 years, then it just doesn’t make sense to pick high-cost options such as new Nuclear (with its high-Carbon build phase) and CCS.

Seems to me that the only reason these are being chosen is because the cost of the projects can be passed on to the electricity consumers.

The Polluter will not Pay, the People will. So we end up with expensive large scale “solutions”.

These will always be “viable” if somebody else (that is, the End Consumers) will be paying for them.

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