MGI Research

The carbon productivity challenge: Curbing climate change and sustaining economic growth

| Report

Any successful program of action on climate change must support two objectives—stabilizing atmospheric greenhouse gases (GHGs) and maintaining economic growth. Research by the McKinsey Global Institute and McKinsey's Climate Change Initiative finds that reconciling these two objectives means that "carbon productivity," the amount of GDP produced per unit of carbon equivalents (CO2e) emitted, must increase dramatically.

To meet commonly discussed abatement paths, carbon productivity must increase from approximately $740 GDP per ton of CO2e today to $7,300 GDP per ton of CO2e by 2050—a tenfold increase. This is comparable in magnitude to the labor productivity increases of the Industrial Revolution. However, the "carbon revolution" must be achieved in one-third of the time that economic transformation took in the Industrial Revolution if we are to maintain current growth levels while keeping CO2e levels below 500 parts per million by volume (ppmv), a level that many experts believe is the maximum that can be allowed without significant risks to the climate.

The macroeconomic costs of this carbon revolution are likely to be manageable, being in the order of 0.6–1.4 percent of global GDP by 2030. To put this figure in perspective, if one were to view this spending as a form of insurance against potential damage due to climate change, it might be relevant to compare it to global spending on insurance, which was 3.3 percent of GDP in 2005. Borrowing could potentially finance many of the costs, thereby effectively limiting the impact on near-term GDP growth. In fact, depending on how new low-carbon infrastructure is financed, the transition to a low-carbon economy may increase annual GDP growth in many countries.

If we do not increase our carbon productivity, the consequences will be stark, the report suggests. Meeting commonly discussed abatement target would require a per-person carbon budget of 6 kilograms of CO2e per day. If one had to live on such a carbon budget with today’s low levels of carbon productivity, one would be forced to choose between a 40 kilometer car ride, a day of air conditioning, buying two new T-shirts (without driving to the shop), or eating two meals. So without a major boost in carbon productivity, stabilizing greenhouse-gas emissions would require a major drop in lifestyle for developed countries and would hinder economic development in low income countries.

The microeconomic changes needed to increase carbon productivity at the levels required will not occur without the active leadership and collaboration of governments and businesses globally. We need new policies, regulatory frameworks, and institutions focused on four areas: creating market-based incentives to innovate and raise carbon productivity; addressing market failures that prevent abatement opportunities from being captured profitably; resolving issues of allocation and fairness, in particular between the developed and developing worlds and between industry sectors; and accelerating progress to avoid missing critical emissions targets.

It will be essential to identify and capture the lowest-cost abatement opportunities in the economy. Analysis of McKinsey's global cost curve, a map of the world's abatement opportunities ranked from lowest-cost to highest-cost options, identifies five areas for action to drive the necessary microeconomic changes: capturing available opportunities to increase energy efficiency in a cost-effective way; decarbonizing energy sources; accelerating the development and deployment of new low-carbon technologies; changing the behaviors of businesses and consumers; and preserving and expanding the world's carbon sinks, most notably its forests.