Greenhouse Gas Reduction
February 5, 2007

Economic Notes:

This Weeks Leads:



A cost curve for greenhouse gas reduction

A global study of the size and cost of measures to reduce greenhouse gas emissions yields important insights for businesses and policy makers.

The debate about greenhouse gases is heating up. Across a wide spectrum, some voices argue that emissions and climate aren’t linked, while others urge immediate concerted global action to reduce the flow of emissions into the atmosphere. Even the advocates of action disagree about timing, goals, and means. Despite the controversy, one thing is certain: any form of intensified regulation would have profound implications for business.

  • A study of the relative economics of different approaches to reducing greenhouse gas emissions offers surprising insights for policy makers and business leaders.
  • For starters, in a 25-year perspective, power generation and manufacturing industry offer less than half of the potential for reducing emissions.
  • Almost a quarter of possible emission reductions would result from measures (such as better insulation in buildings) that carry no net life cycle cost—in effect, they come free of charge.
  • The study finds that a substantial share of the overall opportunities, including a large potential to reduce emissions by protecting and replanting forests, lies in developing economies.

Read the whole article: http://www.mckinseyquarterly.com/article_page.aspx ?ar=1911&L2=3&L3=41&srid=27&gp=0

Our contribution on this topic is not to evaluate the science of climate change or to address the question of whether and how countries around the world should act to reduce emissions.

In this article we aim instead to give policy makers, if they choose to act, an understanding of the significance and cost of each possible method of reducing emissions and of the relative importance of different regions and sectors.

The supply of abatement approaches

Our analysis offers some noteworthy insights. It would be technically possible, for one thing, to capture 26.7 gigatons of abatement by addressing only measures costing no more than 40 euros a ton. But because these lower-cost possibilities are highly fragmented across sectors and regions—for instance, more than half of the potential abatements with a cost of 40 euros a ton or less are located in developing economies—an effective global abatement system would be needed to do so. Politically, this may be very challenging.

What’s more, power generation and manufacturing industry, so often the primary focus of the climate change debate, account for less than half of the relatively low-cost potential (at a cost of up to 40 euros a ton) for reducing emissions

The implication is that if policy makers want to realize abatement measures in order of increasing cost, they must also find ways to effectively address opportunities in transportation, buildings, forestry, and agriculture. This potential is more difficult to capture, as it involves billions of small emitters— often consumers—rather than a limited number of big companies already subject to heavy regulation. Looking at specific measures, nearly one-quarter of the abatement potential at a cost of up to 40 euros a ton involves efficiency-enhancing measures (mainly in the buildings and transportation sectors) that would reduce demand for energy and carry no net cost. The measures we include in this category do not require changes in lifestyle or reduced levels of comfort but would force policy makers to address existing market imperfections by aligning the incentives of companies and consumers.

Further, we found a strong correlation between economic growth and the ability to implement low- cost measures to reduce emissions, for it is cheaper to apply clean or energy-efficient technologies when building a new power plant, house, or car than to retrofit an old one. Finally, in a 2030 perspective, almost three-quarters of the potential to reduce emissions comes from measures that are either independent of technology or rely on mature rather than new technologies.

The role of developing economies

Even though developed economies emit substantially more greenhouse gases relative to the population than developing ones, we found that the latter account for more than half of the total abatement potential at a cost of no more than 40 euros a ton. Developing economies have such a high share for three reasons: their large populations, the lower cost of abating new growth as opposed to reducing existing emissions (especially in manufacturing industry and power generation of high- cost developed markets), and the fact that tropical countries have much of the potential to avoid emissions in forestry for 40 euros a ton or less.

Forestry measures—protecting, planting, and replanting forests—make up 6.7 gigatons of the overall 26.7 gigatons of the potential abatement at a cost up to 40 euros per ton.7 We estimate that for no more than 40 euros a ton, tropical deforestation rates could be reduced by 50 percent in Africa and by 75 percent in Latin America, for example, and that this effort could generate nearly 3 gigatons of annual abatement by 2030. Major abatements in Asia’s forests would cost more, since land is scarce and commercial logging has a higher opportunity cost than subsistence farming in Africa and commercial agriculture in Latin America.

In agriculture and waste disposal, which produce greenhouse gases such as methane and nitrous oxide, developing economies also represent more than half of the 1.5 gigatons of possible abatements costing no more than 40 euros a ton.

Abatement measures in this sector would include shifting to fertilization and tillage techniques that generate fewer emissions and capturing methane from landfills.

Reducing growth in energy demand

An additional 6 gigatons—almost a quarter of the total abatement potential at a cost of 40 euros a ton or less—could be gained through measures with a zero or negative net life cycle cost. This potential appears mainly in transportation and in buildings. Improving the insulation of new ones, for example, would lower demand for energy to heat them and thus reduce emissions. Lower energy bills would more than compensate for the additional insulation costs. According to our model, measures like these, as well as some in manufacturing industry, hold the potential to almost halve future growth in global electricity demand, to approximately 1.3 percent a year, from 2.5 percent.

As for measures that would have a net cost, we found that around 35 percent of all potential abatements with a net cost of up to 40 euros a ton involve forestry; 28 percent, manufacturing industry; 25 percent, the power sector; 6 percent, agriculture; and 6 percent, transportation.

A power perspective

The power sector represented 9.4 gigatons, or 24 percent, of global greenhouse gas emissions in 2002, the latest year that consistent global figures are available across all sectors. In the IEA’s business- as-usual scenario, emissions from power generation will increase to 16.8 gigatons a year in 2030 as a result of a doubling of global electricity demand. Five key groups of abatement measures costing 40 euros a ton or less are relevant to the power sector: reducing demand, carbon capture and storage, renewables, nuclear power, and improving the greenhouse gas efficiency of fossil fuel plants. Com- bined, these measures hold the potential to reduce the power sector’s total emissions to 7.2 gigatons by 2030.

Among power generation technologies, nuclear (at 0 to 5 euros a ton for avoided emissions) is the cheapest source of abatement and nearly cost competitive with power generated by fossil fuels. We estimate that abatements from carbon capture and storage could cost 20 to 30 euros a ton by 2030; those from wind power could average around 20 euros a ton, with a wide cost range depending on the location and on the previous penetration of weather-dependent electricity sources. In our model, the overall additional cost to the power sector of achieving the target of 450 parts per million, compared with the business-as-usual scenario, would be around 120 billion euros annually in 2030. This figure illustrates the very significant potential implications, for companies in the power sector, of any further actions that regulators may take to reduce greenhouse gas emissions.

Addressing the abatement potential described above would likely create a major shift from traditional coal and gas power generation to coal plants with carbon capture and storage, to renewables, and to nuclear power. In our model, coal- fired plants using carbon capture and storage would increase their share of the world’s power generation capacity from nothing in 2002 to 17 percent by 2030; renewables (including a big but slow-growing share for large-scale hydropower), to 32 percent, from 18 percent; and nuclear power, to 21 percent, from 17 percent. Fossil fuel power generated without carbon capture and storage would decrease to 30 percent, from 65 percent.

Low-tech abatement

The role of technology in reducing emissions is much debated. We found that some 70 percent of the possible abatements at a cost below or equal to 40 euros a ton would not depend on any major technological developments. These measures either involve very little technology (for example, those in forestry or agriculture) or rely primarily on mature technologies, such as nuclear power, small-scale hydropower, and energy-efficient lighting. The remaining 30 percent of abatements depend on new technologies or significantly lower costs for existing ones, such as carbon capture and storage, biofuels, wind power, and solar panels. The point is not that technological R&D has no importance for abatement but rather that low-tech abatement is important in a 2030 perspective.

What are the implications?

Our analysis has revealed a number of important implications for each sector and region, should regulators choose to reduce emissions. We summarize the primary overall conclusions below.

Costs for reducing emissions

For the global economy, the cost of the 450- parts-per-million scenario described in this article would depend on the ability to capture all of the available abatement potential that costs up to 40 euros a ton. If that happens, our cost curve indicates that the annual worldwide cost could be around 500 billion euros in 2030, 0.6 percent of that year’s projected GDP. However, should more expensive approaches be required to reach the abatement goal, the cost could be as high as 1,100 billion euros, 1.4 percent of global GDP.

If, as some participants in the climate debate argue, the cost of reducing emissions could be an insurance policy against the potentially severe consequences of unchecked emissions in the future, it might be relevant to compare the costs with the global insurance industry’s turnover (excluding life insurance)—some 3.3 percent of global GDP in 2005.

Cost-conscious regulation

Should regulators choose to step up current programs to reduce greenhouse gas emissions, they should bear in mind four types of measures to restrain costs:

  1. . Ensuring strict technical standards and rules for the energy efficiency of buildings and vehicles
  2. . Establishing stable long-term incentives to encourage power producers and industrial companies to develop and deploy greenhouse gas-efficient technologies
  3. . Providing sufficient incentives and support to improve the cost efficiency of selected key technologies, including carbon capture and storage
  4. . Ensuring that the potential in forestry and agriculture is addressed effectively, primarily in developing countries; such a system would need to be closely linked to their overall development agenda.

Shifting business environment

For companies in the power sector and energy- intensive industries, heightened greenhouse gas regulation would mean a shift in the global business environment on the same order of magnitude as the one launched by the oil crisis of the 1970s. It would have a fundamental impact on key issues of business strategy, such as production economics, cost competitiveness, investment decisions, and the value of different types of assets. Companies in these industries would therefore be wise to think through the effects of different types of greenhouse gas regulation, strive to shape it, and position themselves accordingly.

No matter whether, how, or when countries around the globe act to reduce greenhouse gas emissions, policy makers and business leaders can benefit from a thorough understanding of the relative economics of different possible approaches to abatement, as well as their implications for business and the global economy.

Source: McKinsey and Company, 2007

  • Economic Notes:
    • China
    • The Agricultural Bank of China is seeking a government bailout to clear $95 billion worth of nonperforming loans, 40 percent of which are from state-directed lending, Han Zhongqi, the bank's vice president, said Feb. 1. The final bailout amount will be set at the end of February following an audit, and the capital is expected by the end of 2007. According to Standard & Poor's Rating Service, the Agricultural Bank could need as much as $140 billion to cut its bad loans from 23.55 percent of loans to less than 5 percent and meet the 8 percent adequacy requirements specified by the central bank. The Agricultural Bank, the last of China's four largest state banks to go public, will spend more to clean up bad debt than any of the others. According to figures released by the bank, the institution's savings rose by 17.3 percent, or $90 billion, in 2006 -- making it China's largest deposit-taking financial institution. Considering the amount of savings held at the bank, once its bad debts are cleaned up the Agricultural Bank will be a promising investment opportunity for foreign companies interested in generating retail banking profits.
    • Natural Gas Cartel
    • The Iranian and Russian governments are flirting with the idea of forming a natural gas cartel. Not only is such a proposition impossible, but Russia already has demonstrated that it has all the power over that market it could possibly need.
    • Agricultural Prices
    • The preliminary All Farm Products Index of Prices Received by Farmers increased 2.5% in January from December. The Crop Index rose 3.1% and the Livestock Index increased 2.7%. Producers received higher commodity prices for corn, oranges, broilers, and eggs. Lower prices were posted for cattle, tomatoes, calves, and grapefruit. The All Farm Products Index is up 9.7% from January of last year. Prices paid by farmers rose 1.3% from last month and now stand 2.7% higher than a year ago. Farmers paid higher prices for complete feeds and feed supplements, some services and feed grains. These gains more than offset lower prices for diesel fuel, feeder cattle, cash rents and LP gas.
    • Construction Spending (C30)
    • Construction spending decreased 0.4% in December. Private construction decreased 0.8%, due to a 1.6% decline in residential construction. In addition, public construction increased 0.9%.
    • Employment Cost Index
    • Employer costs rose 0.8% in the fourth quarter of 2006, below expectations of a 1% increase. Wage cost growth slowed to 0.8% from 0.9% in the previous quarter, driving the moderation in overall employment costs. Benefits costs rose 1.1%, the same as in the third quarter. This tame report shows that wage pressures remain well in check, removing fears of developing wage-side inflationary pressures and providing further reason for the Fed to leave rates unchanged.
    • FOMC Meeting
    • For the fifth straight meeting, the FOMC held the fed funds rate steady at 5.25%. The committee noted “somewhat firmer economic growth”, including indications that the housing market may be bottoming out. The statement said that core inflation has “improved modestly”, with further slowing expected. However, the tight economy could lead to greater inflation pressures. Once again the FOMC maintained its tightening bias, referring to “additional firming that may be needed”. The decision was unanimous. Richmond Fed President Lacker, who had dissented at the four previous meetings, no longer sits on the FOMC. Today’s statement is largely as expected, and points to reduced odds of Fed monetary loosening in the near term.
    • GDP
    • Real GDP growth accelerated to a 3.5% annualized pace in the fourth quarter of 2006, up from 2.0% in the third quarter. This was well above the 3.1% consensus expectation for the fourth quarter. Real GDP increased 3.4% between the fourth quarter of 2005 and the fourth quarter of 2006 and also increased 3.4% for all of 2006 over 2005. The improvement in growth was due to strong consumption, exports and government spending, partially offset by negative contributions from housing and inventories. The strong growth will raise concerns about inflation heading into 2007.
    • Oil and Gas Inventories
    • Crude oil inventories rose by 2.7 million barrels for the week ending January 26, according to the Energy Information Administration, above expectations of a 1.1 million barrel build. Distillate inventories fell by 2.6 million barrels, greater than the 2.2 million barrel draw expected. Gasoline stocks rose by 3.8 million barrels, well above expectations of a 1.5 million barrel build. Weaker refinery activity drove this increase in crude inventories. The report will put some bearish pressure on energy prices.

    Source: Economy.com, Stratfor, Financial Times

  • This Weeks Leads:
    • Tie Rack
    • Tie Rack, Inc. trades as Tie Rack.
    • The 20- unit chain operates locations nationwide and in Canada.
    • The stores, offering accessories and neckwear for men and women, occupy spaces of 300 sq.ft. to 500 sq.ft. in malls and airports.
    • Growth opportunities are sought nationwide during the coming 18 months.
    • For details, contact
      • Heather Larocque,
      • Tie Rack, Inc.,
      • 145 Renfrew Drive, Unit 120,
      • Markham, Ontario, Canada,
      • L3R 9R6;
      • 905-470-6290 Ext. 226,
      • Fax 905-479-2546,
      • Web site: www.tie- rack.com.
    • BCBG Max Azria
    • BCBC Max Azria Group, Inc. trades as BCBG Max Azria at 1,000 locations nationwide and in Canada and internationally.
    • The upscale ladies apparel stores occupy spaces of 800 sq.ft. to 6,500 sq.ft. in freestanding locations, malls and downtown areas.
    • Growth opportunities are sought nationwide during the coming 18 months.
    • For more information, contact
      • Danny Moizel,
      • BCBG Max Azria Group, Inc.,
      • 2761 Fruitland Avenue,
      • Vernon, CA 90058;
      • 323-589-2224 Ext. 5039,
      • Fax 323-277-5245;
      • Web site: www.bcbg.com.
    • Ben Sherman USA
    • Ben Sherman USA operates at four locations throughout Los Angeles, CA; Las Vegas, NV; New York City, NY and in London.
    • The men and women’s apparel stores occupy spaces of 3,000 sq.ft. to 4,000 sq.ft. in malls, lifestyle centers and urban/downtown areas.
    • Plans call for six openings throughout AZ, CA, FL and IL during the coming 18 months, with representation by Urban Retail Real Estate Group, LLC.
    • For more information, contact
      • Michael Hirschfeld,
      • Urban Retail Real Estate Group, LLC,
      • 606 Post Road East, Suite 595,
      • Westport, CT 06880;
      • 714-887-5380,
      • Fax 203-413-4338.
    • Cuppy’s Coffee, Smoothies And More
    • Cuppy’s Coffee, Smoothies And More operates 12 locations throughout AL, AZ, CA, FL, IN, MS, TN and TX.
    • The coffee and smoothie shops occupy spaces of 3,000 sq.ft. to 4,000 sq.ft. in endcap, entertainment and freestanding locations as well as lifestyle, outlet and specialty centers.
    • Plans call for 85 openings nationwide during the coming 18 months.
    • Preferred cotenants are cited as Bed Bath and Beyond, Dillards and Nordstroms.
    • Average leases run five to 10 years with two options.
    • For more information, contact
      • Dawn White,
      • Cuppy’s Coffee, Smoothies And More,
      • 348 Miracle Strip Parkway, Suite 10C,
      • Fort Walton Beach, FL 32548;
      • 850-244-7681,
      • Fax 850-243-0593;
      • Email: dawn@mediangt.com;
      • Web site: www.cuppys.com.

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  • Eagle Days at Farmington Bay
  • The eagles are starting to congregate.

    On Monday we saw only 3 bald eagles out.

    Today we have around 30.

    In another week or so, hopefully we will have 100-200.

    Directions to Farmington Bay

    1. Drive north on I-15 and take the Centerville Exit.
    2. Turn left and head north past the McDonalds on the frontage road.
    3. Turn left on the Glover Lane bridge and drive West until you come to the power lines.
    4. Turn left and drive into the Farmington Bay Wildlife Management Area.
    5. Proceed past the shops until you see the eagles.

    Enjoy the greatest concentration of Bald Eagles in the "lower 48".

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