Risks and opportunities on the path to a Low Carbon Economy
By Andrew Sentance, Senior Economic Adviser, PwC
In order to achieve the transition to a Low Carbon Economy and limit climate change, there needs to be a significant reduction in the carbon intensity of GDP across the world economy. With continued population growth and rising living standards, world GDP is set to continue to continue to rise at around 3% per annum or more. A lot of this growth is now being driven by the economic development of large emerging market economies – like China, India and Brazil.
At the same time the world needs to achieve absolute reductions in carbon dioxide and other greenhouse gas emissions if we are to limit the extent of global warming to around 2 degrees Celsius – which scientists have come to regard as a sustainable limit which avoids the worst consequences of climate change.
So how is the world doing at meeting this challenge? The answer – according to PwC’s Low Carbon Economy Index – is not very well. Since 2000, the reduction in carbon intensity of world GDP has been 0.8% per annum. That means carbon emissions have still been increasing – though less rapidly than the output of the world economy. In other words, we are a long way from achieving the absolute cuts in emissions needed to limit climate change in the way that scientific analysis suggests that we should.
What do we need to get on track? Looking ahead to 2050, we are likely to need a reduction in the carbon intensity of world GDP of around 5% per annum - more than six times the decarbonisation rate since 2000. This is not something that has been achieved in the history of our industrialised society.
There is some prospect that policies and measures which are in train will lead to some pick up in the reduction of carbon intensity in the future. But much more dramatic action is likely to be needed to get us on a sustainable path to limit global warming to around 2 degrees.
This situation poses both risks and opportunities for business. The risk is that there will be a dramatic lurch in policies affecting business in the future as governments wake up to the need for much more dramatic action. The cost attached to carbon emissions could rise sharply – either as a result of a carbon tax or emissions trading – and new regulations could be introduced to force economies on to a low carbon path.
The opportunity is that companies that anticipate the transition to a Low Carbon Economy and start to develop and invest in the products and technologies which will drive the transition could open up new sources of business growth and competitive advantage. We are already seeing some of the key low carbon technologies emerging – such as solar power, wind energy and electric cars. Others – such as carbon capture and storage have not been developed much so far. An acceleration in the development and application of new low carbon technologies could make a significant contribution to a new wave of economic growth as the world’s economies struggle to recover from the global financial crisis.
The PwC Low Carbon Economy Index suggests that if we carry on along the emissions reduction path we have been on for the last decade, global warming in the next century will be more like 6 degrees – rather than the 2 degrees which scientists believe is sustainable. At some point, the pace of emissions reduction will need to dramatically increase if the world economy is to move onto a more sustainable path. Businesses which have started sooner rather than later to plan for this transition are likely to be better placed both to manage the risk of an abrupt shift in policy and to grasp the growth and competitive opportunities created by a more sustainable Low Carbon Economy.
Andrew Sentance | Telephone: +44 (0) 20 7213 2068