A low-carbon Economy

As per the McKinsey Quarterly, the EU Emission Trading Scheme (ETS) and similar regulatory mechanisms, the total value of the emission rights in the EU scheme is about €40 billion a year.

Only a fraction of that value is traded now, but it is a growing fraction. Many roles are attractive—buying or selling for speculative purposes, for example, or creating clean-development-mechanism projects that would help companies outside the system reduce emissions at low cost and then profitably selling the emission rights in the market.

In parallel with efforts to optimize the existing infrastructure’s carbon performance, there will be major moves to develop radically more effective low-carbon solutions for new infrastructure. Emissions can usually be reduced at lower cost by building new houses, factories, or cars than by retrofitting existing assets. Indeed, regulation will have to encourage these new low-carbon solutions, for they could only match a predicted doubling of global GDP by 2030 with a significant and simultaneous decrease in greenhouse gas emissions.

The need to decouple emissions from economic growth will reinvent industries. In forestry and bio-energy, for example, a major new value chain seems likely to appear around the large-scale supply of biomass to power plants. Another value chain may build on cellulosic ethanol, which could significantly change the supply patterns of transportation fuels if its cost comes down as quickly as many predict. Power companies and property owners could form new alliances to generate distributed power, provided, for instance, by rooftop solar panels, if regulatory conditions were right.

A recent McKinsey Global Institute (MGI) analysis of the economic sectors most responsible for the end use of energy indicates that overall demand, which has increased by 1.6 percent a year for the past decade, is on track to grow by 2.2 percent annually over the next 15 years. Developing countries such as China account for the largest part of this growth. Curbing demand for energy in the emerging world would mean asking its consumers to reduce their newfound expectations of comfort, convenience, and economic growth—an unacceptable proposition for them.

Is there an escape from the vice grip of finite supplies and surging demand? We believe there is. Both developed and developing economies could use energy more productively by reducing the raw-materials inputs required to produce a given level of energy use, increasing the quantity or quality of the economic output from a given set of energy inputs, or both. These approaches wouldn’t call for reducing the benefits that energy’s end users enjoy.

MGI defines energy productivity as the ratio of value added to energy inputs. Energy prices, business practices, market forces, and government policies all influence energy productivity. Japan leads the world here. Thanks to consistently high energy prices and strict government energy efficiency standards based on the best practices of leading companies. Japanese gas- and coal-fired power plants are 70 percent more energy productive than Russian ones, and Japan’s 2007 standards for room air conditioners are nearly 50 percent stricter than their Chinese counterparts. The Arab Gulf, by contrast, is among the least energy-productive parts of the world as a result of large, sustained energy subsidies, and an energy-intensive growth model. Similarly, US cars are 15 percent less energy efficient than European ones in the same class, partly because European gasoline taxes are roughly seven times higher and partly because US regulatory exemptions have long helped automakers market SUVs as light trucks, which are subject to less stringent fuel-efficiency rules than passenger vehicles.