A question we’ve been asked (and have asked ourselves) is how much climate change mitigation will cost developing countries. We recently revised our numbers so that the ones presented in the final version of the World Development Report 2010, due out in early November, differ from those in the advance version of the report, which is now online.
What are our new numbers? Here goes: In the medium term estimates of mitigation costs in developing countries ranges between $140 billion and $175 billion annually by 2030. That is the annual net cost of developing-country mitigation measures to stay on a 2 °C trajectory.
But financing needs will be higher however as many of the savings from the lower operating costs associated with renewable energy and energy efficiency gains only materialize over time. McKinsey, for example, estimates that while the incremental cost in 2030 would be $175 billion, the upfront investments required would amount to $563 billion (over and above business-as-usual investment needs). McKinsey points out that this amounts to a roughly 3 percent increase in global business-as-usual investments, and as such is likely to be within the capacity of global financial markets (McKinsey 2009).
However, financing has historically been a constraint in developing countries, resulting in underinvestment in infrastructure as well as a bias towards energy choices with lower upfront capital costs. Often such choices ultimately incur higher overall costs.
Setting up financing mechanisms for developing countries must therefore be a priority. Estimated annual financing requirements in 2030 range from $265 billion to $565 billion.
What about the longer term? Mitigation costs will increase over time in line with growing population and energy needs—but so will income. As a result, the present value of global mitigation costs to 2100 is expected to remain well below 1 percent of global GDP, with estimates ranging between 0.3 percent and 0.7 percent. Developing countries’ mitigation costs would represent a higher share of their GDP, however, ranging between 0.5 and 1.2 percent.
Why did we change our numbers? Because in the advanced version we were not separating between mitigation costs and financing requirements – which caused no end of confusion. It is appropriate to differentiate the incremental costs (which will require assistance from high-income countries) from the associated financing requirement (which requires developing financing instruments rather than net new resources).
To finish – many thanks to Jeremy Oppenheim (McKinsey & Company), Brigitte Knopf (PIK) and Volker Krey (IIASA) for their help.
Please watch out for the final WDR 2010 edition, which will be posted on our website in early November.