Can Mitigating Global Climate Change be a Free Lunch?

Paul Krugman launched the latest salvo in the battle over the economics of climate change when he recently announced: “Saving the planet would be cheap; it might even be free.” Unfortunately, his pronouncement ignores critical nuances on policy and technology that lead him to the wrong conclusion that climate mitigation is a free lunch.

Historically, economists have haggled over the true costs of burning fossil fuels and the social cost of carbon, but Krugman’s assessment is a newer argument around the true benefits of decarbonizing the global economy. The basic idea is that stating climate solutions will ruin the economy are wrong and society will actually see a net benefit to a low-carbon economy in the long-term.

This narrative got its start when climate advocates latched onto an IPCC finding that under strict assumptions of policy, technology readiness, and technology deployment mitigating climate change would only cost between 0.04 and 0.14 percent of global GDP per year through 2100—a pittance compared to the potential costs of runaway climate change.

Except that advocates can’t ignore the underlying challenges for making this scenario a reality – for example, the IPCC finding is driven by the implementation of a global carbon price, which has already been determined as costly in the short-term and politically difficult, if not impossible. Failure to meet any or all underlying assumptions considered in climate economics studies jacks up the cost to the global economy. Calling climate mitigation “cheap” overlooks the very real and significant challenges for making mitigation truly affordable at all.

Krugman’s latest foray adds a new wrinkle to the debate: climate change mitigation is potentially cheap because of co- benefits, like increased public health due to less coal burning. Take one of his cited sources—the Better Growth Better Climate: The New Climate Economy report—a study supported by seven countries that commissioned leading economists, business leaders, and policy wonks to devise a new climate strategy. The report argues that if we factor in the health benefits of a low-carbon economy and reduced costs due to eliminating fossil fuel subsidies, the impact of climate policies like a global carbon price and higher cost clean energy zero out.

His other source—a new working paper from the International Monetary Fund—similarly argues that top emitting countries can implement higher carbon taxes without significant economic impact. The main co-benefit is a healthier population, but the catch is that countries need to use the carbon tax revenue to reduce taxes elsewhere.

Of course, even if these cost-benefit analyses holds true (the technical analysis behind the New Climate Economy report hasn’t been released yet), it’s obviously easier said than done. As many have argued already, eliminating fossil fuel subsidies is absolutely the right policy choice, but difficult to do particularly in developing countries that use oil subsidies to increase energy access and prop up domestic industries. The positive health impacts of climate mitigation are very real, but highly contested, difficult to quantify, and not factored into investment decisions at the country level. And the studies recommendations include policies like implementing carbon pricing, securing a global climate agreement, banning new coal power plants in developed countries, and accelerating urbanization—all politically and economically contentious recommendations in the United States and elsewhere.

So is mitigating climate change a free lunch? No, not really. There are very real short-term costs to transitioning to a low-carbon economy (politically, technologically, and economically) that can’t realistically be ignored.

For Krugman and others looking to convince policymakers to adopt a progressive climate strategy, rather than make spurious claims that climate mitigation is free, advocates and policymakers should be discussing how policy (in this country and others) can make it as cheap as possible. And the key way to lower the cost of climate mitigation is to continue lowering the cost of low-carbon technologies like wind, solar, nuclear, CCS, storage, energy efficiency, and bioenergy at or below the cost of fossil fuels through investments in technological innovation.

For its part, the New Climate Economy study prominently lists energy innovation policy as a critical tool for reducing climate mitigation costs (although this recommendation was ignored by Krugman), and the report advocates for tripling global research and development investments to ensure that a steady stream of new technologies and science breakthroughs continue entering the market and lower costs. It’s an area of climate policy that is vastly undervalued in the climate policy debate, so it’s important to note its prominence in the study.

One clear takeaway from studies like New Climate Economy and the IMF working paper is that mitigating climate change isn’t the economic “Armageddon” climate skeptics make it out to be, especially if we do it right. But much more work is needed to cut clean energy costs further and across a broader swath of low-carbon technologies. Energy innovation policy certainly costs money in the short-term, but it is one of the best opportunities to cut clean tech costs and fuel rapid deployment. It’s time Krugman and like-minded advocates stop coming up with ways to paper over this fundamental fact. Like Germany climate economist Ottmar Edenhofer stated recently, “Climate policy is not a free lunch, but it is a lunch worthwhile to buy.”