McKinsey’s Systematic Under Valuing of Efficiency

Economy versus the Environment. This is a slogan for many when they consider the challenges of dealing with Climate Change and the reduction of greenhouse gas (GHG) emissions.

In 2007, McKinsey issued Reducing US Greenhouse Gas Emissions: How Much at What Cost? that provided a a significant contribution to this discussion. McKinsey’s conclusion: at an “affordable” cost of well below $50 per ton, in aggregate, the United States can meet necessary 2030 targets for GHG emission reductions. All-in-all, this was quite good news for those advocating acting to deal with Climate Change.

There was (and is) reason why the original study and McKinsey’s continuing work in this arena have been widely discussed / cited over the past two years. And, variants of the graphic on cost abatement have shown up in briefing after briefing, article after article, book after book. Good news.

Or, well, is it? McKinsey’s work provides significant data that addressing the environment will have economic cost. Even if a low number, with many actions providing economic benefit, the McKinsey work has a serious underlying thematic: it will cost to address climate change.

Perhaps not a horribly painful cost, but a cost nonetheless. While the McKinsey reports (and, again, the broadly used graphics) demonstrate that we can achieve a substantial portion of the necessary carbon reductions at a net positive for the economy, their discussions and representations leave this as a discussion of “cost” to take action, even if a far lower cost than self-proclaimed “climate skeptics” and others working to hinder a move toward a clean energy economy would claim.

Is this, that action on reducing carbon will “cost”, truly an accurate conclusion to draw from McKinsey report?

Consider what the McKinsey team did not consider (107 pg pdf, pages xvi-xvii) :

“The project … did not examine economy-wide effects … Did not attempt to address other societal benefits from abatement efforts, such as improved public health from reducing atmospheric pollution or improving national security. …”

In other words, this is a highly conservative and stove-piped analysis. The conservative approach almost certainly significantly overstates the costs for Global Warming abatement while potentially just as significantly understating the benefits of system-of-system interactions.

Lets take just a few examples of how this stove-piping might have distorted the end results:

• Productivity via ‘greening’: While one can save money and reduce costs by “going green” in an office building, greening a work place’s value-added through added productivity is easily ten times the value of the energy savings. Does worker productivity not count to these business analysts? (And, greening school environments increases educational ‘productivity’ in similar ways, which also contributes to improved societal economic performance. See here for sources re greening schools.)
• Putting a white or green roof saves energy costs on a building, but it also reduces the urban heat island impact and has a multiplicative impact as it reduces cooling requirements in the surrounding area thus leading to lowered heat output from other buildings’ air conditioning systems driving down the demands on the ‘white roof’ building.
• And, this is a ‘positive feedback’: if a group of buildings ‘goes white’, every building owner gains even more due to the reduced ambient temperature lowering air conditioning demand and improving efficiency of cooling systems. Shouldn’t such ‘positive feedbacks’ be part of the equation for considering costs?
• The National Academy of Sciences released a report in September quantifying the health and other ‘hidden’ impacts costs of fossil fuel burning (not exploration, refining, or transport) at some $120 billion per year in the United States, alone. As McKinsey forthrightly states, the massive positive health implications (including, by the way, increased worker productivity due to better health) from reduced pollution are not part of the analysis.

In other words, the national security and trade balance and health and jobs and other benefits that McKinsey seems to have excluded from the analysis likely make the net result from addressing Climate Change a positive benefit, rather than a negative cost, for the economy.

There is yet an even greater ‘uncounted’ element that tips the scale from “cost” to “benefit”: the ‘insurance’ value of mitigation efforts reducing the future impacts of catastrophic climate chaos. While humanity already faces real economic (and other) impacts from climate change and those will grow more significant in coming years, mitigation efforts offer the potential for reducing future impacts and future costs.

This, however, is yet again explicitly not part of McKinsey work:

The project did not attempt to assess the benefits to society from reducing global warming.

When one begins to assess the myriad of direct and indirect benefits excluded from the McKinsey work, their conclusion that we can successfully take action to mitigate climate change for costs below $50 per ton of carbon begins to look quite pessimistic. Counting in that ‘insurance value’ and the benefits of reducing climate change impacts, the famous graphic begins to look like a dire doom & gloom scenario.

Sadly, for whichever set of reasons, those seeking to lay out honest economic discussions as to the cost structure for serious engagement on climate change issues seem to systematically apply conservative analytical principles. This analytical ‘conservatism’ (caution) is not matched by those striving to impede action toward a clean energy economy, who systematically engagement in distortion and outright deceit in their efforts to misinform the public and decision-makers.

The analytical caution (‘conservatism’) ends up fostering a discussion about relative amounts of cost of action (high or low cost of action) when the real societal discussion should be the costs of inaction in the face of ever-more conclusive scientific work on climate change and the benefits from acting to mitigate climate change.

NOTE: The “problem”, here, is not with the McKinsey team (at least not fully). Modeling and valuing ‘positive feedbacks’, attempting to quantify productivity gains across society from ever-‘greener’ work places, and placing meaningful figures on the ‘insurance value’ of mitigation are not simple tasks.

And, the McKinsey team forthrightly and explicitly laid out that they did not attempt to take on these sorts of challenges. The problem lies with those who ‘crib’ from the McKinsey work while failing to highlight the study team’s openly stated constraints that fostered a pessimistic statement about the true value of action.

Also, to reinforce, this is not ‘solely’ an issue with McKinsey & Co work. Here are some related discussions:

• EPA fails to think in four quadrants in valuing climate legislation examines how the EPA analysis on climate change fails to look at the benefits of action and the costs of inaction.
• Greenpeace grossly understates value of Energy [R]evolution is a look at how even an environmental organization’s research work quite significantly understates the payoffs from acting to mitigate climate change.
• Inhofe and Republicans are Right: Analysis of Climate Bills is Flawed due to the analyses systematic undervaluing of the benefits of action.
• CBO, Media in Need of Remedial Science Classes highlighting how CBO work significantly understates potential costs from unchecked climate chaos.
• CBO’s good news re Climate Legislation is significantly understated calls out the Congressional Budget Office’s analysis of legislation for not conducting a holistic analysis.

Article by A. Siegel, appearing courtesy of Celsias