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Building a postcarbon economy

By Eric D. Beinhocker and Jeremy Oppenheim

22 February 2009

The world faces two urgent demands. First, the global economy is in crisis and needs to be turned around. Second, scientists tell us that time is running out on tackling climate change and we are putting our planet at risk. The conventional wisdom is that those two demands are competing. The conventional wisdom is wrong.

The pivotal factor will be achieving a dramatic increase in society’s “carbon productivity”—the amount of economic output created per ton of greenhouse gas emissions sent into the atmosphere. The concept of carbon productivity follows a familiar logic: just as the productivity of labor and capital can be measured—by weighing the amount of output created per hour worked or dollar invested—the productivity of carbon use can be readily measured as well.

The global economy’s carbon productivity is now about $740 of GDP per ton of emissions. But if we are to meet the twin goals of strong economic growth and reduced risks from climate change, that number needs to increase dramatically. The science tells us that by 2050, carbon emissions need to be cut by at least 50 percent from their 1990 levels to avoid potentially catastrophic levels of climate change. Simultaneously, just to keep economic growth in line with the world’s population increase, the world’s GDP must continue growing by at least 3 percent each year. Combining these figures, carbon productivity must reach $7,300 by 2050—almost a tenfold increase.

Multiplying carbon productivity by a factor of ten is clearly a challenge. Yet such levels of economic change have happened before: during the height of the Industrial Revolution, between 1830 and 1955, US labor productivity increased tenfold. If we are to stimulate economic growth and tackle climate change, a Clean Energy Revolution must fundamentally transform the economy on a scale similar to that of the Industrial Revolution. But the time frame will have to be much faster. It took 125 years for labor productivity to multiply ten times, but we now probably have less than 40 years before greenhouse emissions inflict irreversible damage to the environment. The Clean Energy Revolution needs to happen three times faster than the Industrial Revolution did.

That is the sobering news. But the reassuring news is that we can afford it and we have most of the technologies to address it already. The McKinsey Climate Change Special Initiative has examined in detail 200 specific opportunities to increase carbon productivity across ten industry sectors and 21 world regions. Overall, about 70 percent of the carbon abatement needed over the next 20 to 30 years can be captured with existing or near-commercial technologies. Likewise, the shift to a low-carbon economy would require new global capital investments averaging about $570 billion per year between 2010 and 2030—a sum that is only around 2 to 4 percent of expected total capital expenditures during this period.

Better still, the necessary investment would largely go into assets that have a long life span, such as more energy-efficient buildings, cleaner power generation, and low-emission vehicles. As long-term assets, they would be financed not by lump-sum investments but by borrowing over time. Many of the needed investments would actually reduce energy costs over the long term while generating jobs in the short term. A number of studies show that accelerating investments into clean energy infrastructure and technologies would most likely boost economic growth rather than slow it. There is plenty of precedent for this: the US government’s investments in rural electrification, which helped create jobs and economic opportunity during the Great Depression; the creation of national highway systems in many countries; and the investments by both the public and private sector that created the Internet. That is why there is talk in many countries of a “green economic stimulus.”

There are five components in the transition to a postcarbon economy. The first is improving energy efficiency—the low-hanging fruit of the Clean Energy Revolution. Work by the McKinsey Global Institute shows that by investing in such priorities as better building efficiency, low-energy lighting, more fuel-efficient vehicles, and best-practice industrial processes, world energy demand growth can be cut by more than 64 million barrels of oil per day—a savings that’s equal to one-and-a-half times current US energy consumption. Tightening up on today’s energy inefficiency would more than pay for itself: while it would require an additional $170 billion per year over the next 13 years, that investment would generate an economy-wide return of more than $900 billion per year by 2020, simply through reduced energy use. With an average annual rate of return of 17 percent or more, this would clearly be a good investment both for energy security and for the economy.

Second is decarbonizing the energy supply. There is no one technology that is the answer—no silver bullet. Rather we have a broad set of technologies, ranging from wind to solar, geothermal, biomass, small-scale hydro, and others that are in a race to become cost competitive with traditional fossil fuel sources. Such competition across technologies is good as it is driving significant innovation. While renewables have the potential to play a major role, countries such as China, India, and the United States will likely still have lots of coal—the highest-emitting energy source—in their energy mix for a variety of reasons. This makes carbon capture and storage technology critical. CCS captures carbon emissions from the power generation process and stores the gases in geological formations (for example, empty natural-gas reservoirs) deep underground or beneath the ocean floor. This technology has been proven in the oil and gas sector but needs to be proven at scale in the power sector.

Third, in transport there is a similar technology and innovation race. The competitors range from advanced internal-combustion engines that sip fuel; to new hybrid, plug-in hybrid, and electric-vehicle designs; to next-generation biofuels that are both more environmentally sustainable and offer a greater energy punch than the current generation does.

Fourth, we need to save and expand the world’s forests. Forests are the world’s lungs, inhaling carbon dioxide and exhaling oxygen. Logging, farming, and other human activity has caused a massive and accelerating loss in forest cover over the past decades. Keeping trees standing is one of the cheapest ways to address climate change. And if we let them go, there is almost no hope of avoiding very negative climate impacts.

Last is behavior. Managers and consumers make scores of decisions on a daily basis that drive energy consumption and greenhouse gas emissions. If those decisions were to be deflected in a low-carbon direction through a combination of economic incentives (for example, a price on carbon) and a shift in values and attitudes (for instance, just as attitudes towards smoking have changed), the impact would be hard to quantify but potentially massive.

Just one small example: Wal-Mart Stores made a commitment through the Clinton Global Initiative to sell only concentrated laundry detergents, which it estimates will save 400 million gallons of water, 95 million pounds of plastic, and 125 million pounds of cardboard, not to mention the energy and carbon emissions to manufacture and transport this unnecessary material. Independent studies show that concentrated detergents have 20 percent lower carbon emissions through their life cycles than do traditional products. This involved no loss of convenience to consumers, but by taking the carbon into account in the product and packaging design, the managers of Wal-Mart and their suppliers cut emissions.

While some of these changes might occur naturally as the economy evolves, the degree of change required to deliver a tenfold increase in carbon productivity within the time frame required will not happen on its own. At the present rate of improvement, achieving such a rise would take almost 200 years. To achieve the structural changes that the global economy requires, enacting new incentives and policies—most urgently, putting a price on the carbon we emit either through a cap-and-trade system or a carbon tax—is indispensable on both the national and global levels. Stronger energy-efficiency standards, transition incentives for renewables, expanded funding for research and development, and strong steps toward valuing and protecting the world’s carbon-absorbing forests will all be critical steps. It will also be important to provide support to developing countries. They have the least historical responsibility for the emissions currently in the atmosphere, will be among the worst affected by climate impacts, and have the fewest resources to mitigate emissions and adapt to climate change.

We have no choice but to put the world on the path to a low-carbon economy within the next decade, or face unacceptable risks to our future. But we must also continue to seek opportunities for economic growth worldwide to create opportunity in the developed world and to enable the citizens of the developing world to make their escape from poverty. The challenge is to do both—and carbon productivity is the yardstick by which we can measure our progress on that journey. Through policies that mobilize the creativity and innovation of the private sector, we can unleash a Clean Energy Revolution that will remake the unsustainable energy system that was created during the Industrial Revolution. It is time to begin creating the postcarbon world.

Comment [6]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

Air-conditioning is a huge energy-hog, and it was not ubiquitious in the US as recently as 30 years ago. I attented high school and college in FL in the late 70s and early 80s. The high school was not air-conditioned and at the college most buildings were not.

Air-conditioning is too expensive for humanity, and instead of people realizing this, they are using installing it everywhere. I now live in a climate that has at most 15 days a year when the temperature goes above 80 degrees. Yet at the university where I am a graduate student, all buidlings are air-conditioned except 2 older ones.

The biggest change we humans have to make is becoming more tolerant of nature and natural cycles, and quit trying to overcome or defeat them.

Posted 29 December 2009, 01:19 by S. Nunn
This article only focusses on two major problems: the climate and the economy, but forgets another very important problem: depletion of fossiel fuels and peak-production levels.
This changes the picture I think. I think that INSTEAD of a climate policy, we need to have (and should have had more early) a policy for peak-production of oil, gas, coal.
We know that prices of energy go up and those of durable alternatives are likely to go down. The question is when will some durable technology become cheaper then fossil fuel. The answer to that depends also on how much we invest in it.
If we put gas/oil/coal investments equal with investments on wind, solar, geothermal etc., there are a lot of techniques already cheaper then invstments in fossil, given the fact that investments in fossil fuel already deal with return-of-investment periods of 30 to 40 years.
But in economic policy making, they are not treated equal. For investments in durable energy sources/energy conservation, the return-on-investment has to be much shorter (around 10 years or so) to be a viable economic investments.
But why? Why can oil-investments take place on a significant longer time-scale as durable alternatives and energy-conservation can?
This of course has to do with how the financial system works, that treats those investments unequal. Oil and gas companies are large corporations, working worldwide, and in fact are more powerfull then some/most governments.
The dependency on energy produced by them is large, take for example also the large investments in infrastructure.
The problem is not just the energy source, but also the energy distribution. We need different infrastucture for durable energy.
For example high-voltage smart electric grids, to be able to deal with sources that can’t be scaled on demand, but have a large variation in production.
This requires large government investments (since no private capitalist can invest that, and would not be clever to do so, since we need democratic control over the infrastructure).
We can however speed up the process a bit, if governments would nationalize parts of the current oil- and gas and coal companies, and invest their profits partly into the new infrastructure and durable energy sources/energy conservation.
Also other capital sources (like pension funds) can be directed into the new energy future, based on national laws, and/or international treaties.
The problem is not that there isn’t enough capital around to invest for the new energy future. But since most of the money is in private hands, they currently end up in all kinds of bubbles. Governments should be clever and make a stragegy so that this capital flow can be invested into the new energy future, where it will benefit for all human kind, instead of hurting the economy by wrong investments.
We do NEED government and democratic control over these large capital funds, wether the capitalists like it or not. We have a democratic right (acting for the wellbeing of the majority of the people) and a responsibility to future generations to do so. The individual capitalist (the owner of large sums of capital) is not in any way hurt by this (in fact it protects the individual against wrong investments, so for the average capitalists, it is beneficial even!) and should have no problem with this.
Instead of running the risk that capital investments is somehow lost (in all kinds of ponzi-like schemes, like the Dubai real-estate bubble, or ends up in the hands of madof like investers, and so forth), we are offering the capitalists a long lasting healthy and sane investment opportunity, an offer they can’t refuse, and for their own sake would not want to refuse!
I know, this sounds like communism. But then, what’s the alternative?
Either capitalism self-destoys itself, or we let the democratic rights and demand of the current and future generations take control of society, and do what is best for all of us, or we’ll drown, and have to suffer immenseliy for our stupid mistakes.

Posted 3 December 2009, 14:18 by Rob Heusdens
Is the ten fold increase in productivity, in terms of $/ton of CO2e, related to the measurement of Gross Domestic/World Product that discounts the productivity of unremunerated and volunteer labor, i.e. the stuff that really counts for a sustainable world? It sounds like it is. To the degree this is so, isn’t this “familiar logic” the thinking that created the environmental and economic crises, and thereby it is not the thinking that can point to what the solution is?

In addition, isn’t it OPEC’s denominating its oil sales in US dollars that has enabled the dollar to become global capitalism reserve currency, and allowed the US to have a savings rate of zero? To the degree the world’s appetite for oil is satiated in other ways, isn’t that a threat to US, and its’ currency’s, hegemony? Given that our federal debt and obligations total in the mid to upper 50s—and that is in trillions of dollars—as the world needs fewer dollars for oil purchases. As the demand for dollars decreases servicing our debt becomes more of an in-house dynamic, which as a nation with no savings rate doesn’t add up.

Further complicating things, with debt at all levels of society needing to be serviced from income and not borrowing, this limits, likely eliminates, the capital required to do what is outlined. Was this constraint factored into what you have written?

Without disparaging the value of forests as carbon sinks, I believe it is the ocean that absorbs most of the CO2. The oceans are becoming more acidic because of this. That decrease in pH is starting to decrease its capacity as a sink.

I find it interesting that the attitude thing is listed last. You are in good company. The International Scientific Congress on Climate Change has also listed this last in its key messages. Returning to the initial comment about thinking, How can the the money we think about now—fiat currencies coined in debt secured with a credit that no longer has value—be the money that will fix the problem. Isn’t it part of the problem?

If history can teach us things we need to know, isn’t it true that a valid view of history is one of cycles of accumulation and redistribution of wealth? If so, given where we economically find ourselves today, isn’t it time for a do over? If we accepted that the current fiat currencies are unconstitutional (at least in the US) and redressed this by coining a currency based on carbon credits as outlined and linked here: <http://home.roadrunner.com/~robie/opento/klimakatastrophe/DiscoveringMetanoia.html>, besides the loss of wealth, which we are loosing anyway, are not all the attitude challenges directly addressed and the entire plant united in a common cooperative struggle to clean up our mess? Doesn’t such a currency make the other components in a post carbon, post debt-based global capitalism transformation of the economy possible?

Posted 13 March 2009, 22:05 by Greg Robie
Eric/Jeremy
thanks for the thoughtful article. The question always comes down to this: if this is so much in our self interest, why does it not happen? For many the solution lies in government programs or moral communication, but from my perspective the solution is simpler and a well-trodden path: incentives in a capitalist economy. This is a problem of externalities. We need to shift behavior through full accounting of our choices and allow the free market to make it’s choices. US gas consumption fell when oil hit $140 a barrel. Righteous indignation about american over-consumption of oil made no such dent. The challenge then becomes political as shifting incentives creates winners and losers and it’s politically easier to create positive programs – although ultimately ineffective. It’s supposed to be painful. That’s what drives behavior change.
Nice to see you in print Eric, it’s been a few years but you still have great insights.

Posted 12 March 2009, 11:25 by richard owen
Another article mentions looking into “post-capitalism”. I think that means a post-carbon economy as you refer to in this acticle.
It means a system where the whole cost is measured and weighed from idea-creation to product-disposal. If we look at our current economy (which is really a hyper-efficient capitalism even in this current crisis), we see that this system cost approach isn’t considered. It would have been too difficult to figure this out in previous generations. However, as our measuring and calculation strength increases, we should begin recognizing end-to-end cost. Our use of carbon based fuels is basically unchecked by the actual costs of such a system. Nowhere in our price at the gas pump do you see an environmental cost calculated in the price. It merely includes, transportation, overhead and profit margin. I think if costs were properly recognized, most of your five points would be covered.

Food for thought:
If ‘post-capitalism’ = ‘post-carbon’, does carbon = capitalism?

*note: I’m not implying that I would get rid of current market-based structures for valuation and prioritization. Rather, that our current system is not recognizing certain costs.

Posted 4 March 2009, 02:56 by Jason Conner
The idea of “carbon productivity” as mentioned in this article is quite interesting. It points to America’s great history of inventiveness in improving processes and increasing efficiency and effectiveness. The other interesting eyebrow-raising aspect of the article is the fifth component of a post-carbon economy, behavior modification. These two aspects must be present in any solution.

The company I work for, ProtonMedia, sells a software product called ProtoSphere that helps reduce an organization’s carbon footprint through the reduction and often elimination of the need to travel to meetings of all types. Selling our product requires organizational and individual behavior modification. Everyone is used to traveling for things like divisional meetings, training meetings, or simply meetings to work on projects. This travel, whether its across town or across the country, requires employee downtime and carbon use in the form of gasoline and/or jet fuel. Companies and individuals have to change their pro-travel thinking when they adopt our product in order to see the aforementioned savings and improvements.

The challenge we all face is in changing both individual and organizational behavior is that the change has to be to something that makes individual lives better AND either costs the organization the same as the existing method or preferably costs less and makes more money. The options must be more efficient and effective or they won’t be adopted in a free market economy. Options that are more costly and less efficient/effective will die on the vine – that’s the history of invention throughout the world.

We believe that ProtoSphere makes individuals work experience better by allowing them to get things done more easily. Our clients have told us that the product makes their organizations more effective and efficient and contributes to their bottom line. For the change away from a carbon-based economy to happen we have to sell the positives, the improvements in efficiency and effectiveness for business and the individual. If the alternatives are more expensive and make “life” more difficult, they’ll fail.

Posted 4 March 2009, 01:14 by Stan Timek

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