This Earth Day, we’re marking ten years of our greenhouse-gas cost curve, a decision-making tool that changed how experts approach the carbon-emissions debate.
In 2007, leaders the world over were seeking ways to meet their commitments to reduce greenhouse gas emissions in line with the Kyoto Protocol. What were the most efficient, cost-effective ways to get greenhouse gases out of the atmosphere? McKinsey sought to answer that question with our greenhouse-gas (GHG) cost curve.
Ten years on, our cost curves have helped countries and businesses create strategies to address climate change. By presenting the relative cost-benefit of each option, the curve opens the way to a more dispassionate, fact-based conversation about what to do. Behind the curve is research and data on each of the different options for reducing emissions. These range from investing in solar panels to grasslands management to electric vehicles to windfarms.
Research for the cost curve began as a study conducted for a Swedish utility company but quickly grew into something more. As the report circulated, “in three months, McKinsey very suddenly became the thought leader on climate economics,” says Tomas Nauclér, a senior partner based in Stockholm. The cost curve methodology was used in Germany that very same year, and then, in short succession, in the United Kingdom, United States, and Australia. Since then, McKinsey went on to produce abatement studies for China, India, Brazil, Russia, and Sweden, among others.
In 2009, one of the most important audiences for the GHG cost curve was the governmental ministers and experts involved in the run-up to the 15th session of the Conference of the Parties (COP 15), the annual flagship United Nations summit on climate change. There was no uniform set of data that could inform climate-change discussions. Environmentalists, corporate executives, academics, campaigners, and policy makers were often talking at cross-purposes and the cost curves gave them a shared vocabulary—on a single page.
Matt Rogers, a senior partner based in San Francisco and leader of the Sustainability and Resource Productivity (SRP) Practice, explains, “In an environment where many people were making bold assertions about what needed to be done, the firm, true to its roots, was the first to put economic unit costs against abatement measures.” This gave structure to policy debates and led to a more practical set of recommendations on how to address climate change.
Beyond the political realm, business leaders also were searching for the way forward on climate change. Shannon Bouton, COO of the McKinsey Center for Business and the Environment, has seen the cost curve embraced by many organizations: “Companies use it to galvanize emissions-reduction efforts within their industry, and to prioritize efforts within their own operations.” And Nicolas Denis, a partner in our Brussels office who focuses on advising governments on sustainable economic development, recalls, “Companies could see on this ‘map’ how they could contribute to the debate.”
The GHG-abatement curve soon became a calling card for the SRP Practice. Matt was sought out by the US Department of Energy, where the cost curve changed the debate to a focus on economic priorities and data-driven decisions. He went on to serve as a senior adviser to Secretary Chu from 2009 to 2010, overseeing the Department of Energy’s funding of more than 5,000 innovation projects in energy efficiency, renewable energy, and carbon capture and sequestration, among other responsibilities. Nicolas particularly remembers the excitement at COP 15, as attendees mentioned how the cost curve had transformed the debate. “I remember one of them saying at the end of this conference, ‘There will be a before and after the cost curve in the COP.’”
Besides being a game-changing framework for carbon abatement, the cost curve also reveals important realities frequently ignored in climate-change debates. Nicolas stresses, “It was the first time we showed that it is possible to combine economic growth with GHG-emissions reductions.” It also confirmed that there is “enough technology to go a long way into decarbonization without needing complex carbon-capture approaches.” And Tomas stresses that “land use and forestry are a huge part of the ‘problem’ but also play a central role in the solution.” He adds, “Curbing climate change can be done and will only cost 1 to 2 percent of global GDP, but it requires a comprehensive set of actions across all sectors.”
The first curve from ten years ago wasn’t perfect. It vastly underestimated how quickly technology costs would fall for renewable-energy sources like batteries, LED lighting, wind turbines, and solar photovoltaic panels. Meanwhile, it posited that carbon capture and sequestration (ways of taking carbon dioxide out of the atmosphere and storing it somewhere else) would make more progress. And, as Matt explains, “we totally missed the revolution in unconventional gas, which has been one of the biggest contributors to greenhouse-gas reduction globally. We were not alone, but it goes to show how hard it is to forecast technologies.” Tomas adds, “Had we redone it today, we would also have included the benefits of optimizing end-to-end value chains, like improving transportation use, reducing waste in retail, and the benefits of the sharing economy.”
Ten years on, the cost curve framework still plays an integral role in our work for national governments, cities, and companies. Emissions are still high, and creating binding reduction targets is a challenge further complicated by politics. But there is much hope for the future. So onward to the next ten years!