One of the big puzzles about climate policy is that, according to most studies, reducing emissions, even by a large proportion, appears to cost very little, but despite this, the politics are hard. Why is this? One reason may have to do with the difference between how costs are typically expressed in such studies on the one hand and how people actually experience them on the other.
Costs of mitigation are usually expressed as a percentage of GDP. For example, the Stern Review originally put the global costs of avoiding a greater than 2C rise in temperatures at 1% of GDP (although he subsequently revised this upwards to 2%). For the UK, ippr’s 2007 study put the cost of an 80% cut in carbon emissions at 2-3% of GDP by 2050, while the Climate Change Committee estimates the cost of hitting a 34% reduction by 2020 would be 1% of GDP.
As noted, these sound like small numbers, especially considering we have just been through a recession in which the economy contracted by about 5% in one year. However, this % of GDP headline figure is misleading in terms of understanding the politics.
Take the UK as an example. 2009 GDP was £2.183 trillion, which converts to a little over £35,000 per head. Average household size is now about 2.4, so GDP per household is almost £84,000. Against this, a cost of mitigation of 1% of GDP per household of £873 isn’t that much (of course, many of the costs of mitigation will fall initially on businesses not households, but the former will tend to pass most of these through to the latter, as, for example, happens currently with the price of carbon in the emissions trading scheme).
Households earning £85k a year would probably spend £873 without batting an eyelid. But in a highly unequal society, the mean is not the same thing as the median, and the vast majority of households have an income nowhere near that high. In fact, the Institute for Fiscal Studies puts median, post-tax household income, adjusted for household size and composition, at £20,280. Half of the UK’s households have a disposable income of between around £10,000 and £23,400 a year. Thus the centre of gravity of the income distribution is much lower than the abstract GDP/households figure, and it is this group that matters politically. For the median household, £873 is 4.4% of post-tax income. For a 2% of GDP cost of mitigation, the median household would be paying almost 9% of disposable income. For those on £10k a year, the figures are more like 9% and 17% respectively.
A final point is that the overall cost estimates mentioned above are generated by models that typically seek the optimal path to decarbonisation and assume that policymakers never make any costly mistakes. This is clearly unrealistic, and we can expect actual costs to be higher.
It is therefore easy to see how what look like negligible costs to (well-paid) policy wonks or international negotiators start to seem politically more difficult.
UPDATE: as one of our sharp eyed readers spotted – see comment below – just as income is not equally distributed, so the costs of mitigation will not be equally spread. But these costs will not be as unequal as one might think. A large element is the cost of decarbonising energy, and differences in energy use are nowhere near as large as the disparity in incomes. For example, in 2006, households on £20,000 a year spent an average of around £800 a year on energy, while households on £50,000 a year spent £950. While the distribution of mitigation costs will not be completely equal, it may not be far off .