The Cost of Cutting Carbon Is Sure to Shock Investors

(Bloomberg Opinion) -- The goal of net-zero carbon by 2050 is almost certain to be drastically curtailed by its costs and lack of feasibility.

The International Renewable Energy Agency, an intergovernmental body, estimates that the world needs to invest $115 trillion in clean technologies such as solar and wind power and electric vehicles to limit global warming since 1900 to 1.5 degrees Celsius, the goal of the 2015 Paris climate agreement that was signed by 195 countries.

Much of the reduction would have to come in India and China, which would need to invest $21 trillion to overhaul transportation and construction while building nuclear, wind and solar facilities to reach zero net carbon emissions by 2060, according to the Wall Street Journal. But 57% of China’s energy consumption in 2020 was supplied by coal, and its consumption of that commodity is forecast to rise 6% from 2020 to 2025. With coal-mining a big employer in China, coal power plants heavily indebted and electric power needed for economic growth, the nation is reluctant to phase out coal before the 2040s. Coal supplies half of India’s energy needs and its share of world coal consumption is expected to rise from 11% to 14% in 2030.

With tightening restrictions on coal mining in China, the politically-inspired ban on coal imports from Australia and worldwide economic recovery, the Newcastle thermal coal price, a global benchmark, has tripled since the end of 2019. Low coal inventories at power plants portend even higher prices this winter. This encourages the resulting switch from coal to fossil fuels, and U.S. gasoline prices are up 92% since the spring, causing consumers much pain when they fill up their vehicles. Also, natural gas costs have leaped 273%, further distressing consumers since half of American houses are heated by gas. The Energy Information Administration forecasts 30% higher fuel bills this winter compared with last year and 50% more if the weather is 10% colder than normal.

A harbinger of U.S. consumer reaction to higher energy costs was the French nationwide “gilets jaunes,” or yellow shirts, protests in 2018 in response to a proposed fuel tax hike. President Emmanuel Macron was humiliated and forced to rescind the plan.

The total cost of fulfilling the Paris climate agreement alone would be $50 trillion in 2030, or $140 per American. Yet a recent Washington Post survey found that the majority would vote against even a $24 annual climate tax added to their energy bills. Still, the $140 per American per year investment, if sustained through 2100, would only reduce global temperatures by a minuscule 0.03 degrees Celsius. Everyone’s for emissions reductions unless they have to pay for it. President Joe Biden’s goal of 100% net-zero carbon emissions by 2050 would cost $11,279 per American annually, according to the Congressional Budget Office. That would equal 11.9% of gross domestic product, more than the 11.6% costs of Social Security, Medicare and Medicaid combined. The annual cost of the plan would rise to $4.4 trillion in 2030.

At the Glasgow COP26 climate summit, poorer countries demanded that wealthy nations channel at least $1.3 trillion in climate financing to them annually, starting in 2030. But developed countries fell $20 billion short of their $100 billion aid target for 2020 and aren’t likely to meet it until 2023, climate negotiators wrote in a report in October, according to the Wall Street Journal. 

Big polluters such as China, India and Russia have pledged emissions cuts, but not to the levels that Western nations have insisted are necessary to limit global warming. Saudi Arabia plans to reduce net carbon emissions to zero by 2050, although that doesn’t include carbon from the oil it exports. The kingdom produces about 10 million barrels of crude oil per day and has been installing solar panels in the sun-drenched desert to save hydrocarbon for sale abroad. Meanwhile, a recent survey of big companies by Boston Consulting Group found that only 11% had met their emissions-reduction goals over the past five years.

The surging costs of carbon reduction raises the important question of the bang-per-buck. Damage due to climate change as a percentage of global GDP has dropped from 0.25% in 1990 to 0.18% in 2020, according to the CFDA/CRED International Disaster Database.  And the trend has been down in rich and poor countries alike. Also, more disasters are made known today due to better reporting and higher minimum levels of damage that’s recorded. Climate-related deaths worldwide have plunged from almost 500,000 in 1920 to 14,000 in 2020 and 5,500 in 2021, and will probably reach 6,600 by year’s end. That’s a 99% lower death toll than a century ago, even though global population has quadrupled.

Economist William Nordhaus, who won the Nobel Prize in 2018 for his work on effective climate solutions, developed models calculating the cost of global warming but also the cost of climate-control policies and the reductions in economic growth they cause. Nordhaus’s models indicate that without any regulations to slow climate change, the average temperature in 2200 would be 4.1 degrees Celsius higher than in 1900 and cost $140 trillion in today’s dollars. Stringent climate policies would reduce the temperature rise to 2.2 degrees Celsius but cost $177 trillion to reduce climate change-related damage from $140 trillion to $38 trillion. That would raise the total cost to $215 trillion. His optimal solution, with a temperature rise of 3.5 degrees Celsius, would cost $21 trillion and reduce the climate-related damage cost by $53 trillion for a total cost of $108 trillion.

Even though a cleaner atmosphere promotes better health, malnutrition death rates in 2050 would be barely lower without climate change. With better nutrition, they’ve dropped from seven per million per year in 1990 to 2.78 per million in 2020 and are forecast by the World Health Organization to drop to 0.64 per million in 2050 with continuing climate change. If huge costs keep the global temperature flat, the 2020 number is the same, 2.78, and 0.56 per million in 2050, a tiny 0.08 percentage point lower.

The United Nations estimates that even if no country does anything to slow global warming, the annual damage in 2100 would be the equivalent of a 2.6% cut in global GDP. Since the UN expects the average person to be 450% richer in 2100 than today, the average falls only to 434% if the temperature continues to rise unimpeded. Relative to better health and economic growth, the effects of climate change are minimal.

Like any major economic event, the pursuit of carbon-cutting opens investment opportunities. But as is often the case, initial enthusiasm will probably soon give way to disappointment as soaring costs are revealed and hopes for net-zero carbon emissions fade. The prudent investor will probably be better off waiting for the retreat from current exuberance over climate investments and then buying cheaper. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.

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