Costs and Potential of Greenhouse Gas Abatement in Germany Climate…

Costs and Potential of
Greenhouse Gas Abatement in Germany


Climate protection and economics
German business believes there are many ways in which it can work with           Dokumenten Nr.
                                                                                 D 0152
government to unleash further potential for reducing greenhouse gases and
                                                                                 Az.: II/4-2-5-0-00-00
taking further steps towards a low-carbon economy. But this must be              Datum
                                                                                 19. September 2007
achieved through a balance of ecological and economic criteria, include a
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cost-benefit analysis and be based on joint action. We commissioned              1 von 5

McKinsey to conduct a study into the "Costs and Potentials of Greenhouse
Gas Abatement in Germany" and believe that the findings suggest many
different and varied approaches to tackling the issue. We call upon the
German government to utilise the findings of the study in its activities and
to initiate appropriate measures to improve the level of acceptance of new
technologies, so that we will be able to use our innovative technologies in a
way which effectively contributes to climate protection.

If the binding climate and energy targets agreed by the EU in March
2007 ­ and which have been made more concrete at national level in
Germany through the Meseberg roadmap ­ are to be implemented, the
burden to reduce emissions to the levels agreed (a reduction of greenhouse
gases of at least 20%, a share of 20% of renewable energies in the energy
mix by 2020) must be divided up more fairly between the EU member
states. Germany's contribution to international efforts to protect our climate
should be defined on the basis of cost optimisation and reduction
potential, which differ according to sector. The study provides an
orientation guide for this, based on solid research and presented in the form
of a "price list" (costs from decision-makers' viewpoint).
                                                                                 Bundesverband der
                                                                                 Deutschen Industrie e.V.
The "BDI initiative - Business for Climate Protection" hopes the study will      Mitgliedsverband
                                                                                 BUSINESSEUROPE
lay the foundation stone for a process of increased cooperation between
                                                                                 Telekontakte
the federal government and society. We intend a "revised edition" of the         T: 030 2028-1555
                                                                                 F: 030 2028-2555
study which will evaluate progress made on implementing current findings         Internet
                                                                                 www.wirtschaftfuerklimaschutz.eu
and update and expand the database on the package of technological levers.       www.bdi.eu
                                                                                 E-Mail
                                                                                 J.Hein@bdi.eu
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Methodology and findings of the McKinsey study
   o The study commissioned by the "BDI initiative - Business for
      Climate Protection" identifies a wide variety of technological
      levers for reducing greenhouse gases and calculates their costs from
      the decision-makers' viewpoint for various sectors: energy, industry,
      construction, waste management, agriculture and transport.
   o The assessment is based on the viewpoint of decision-makers, i.e.
      those who would invest in the new technologies (business leaders,
      homeowners, car-buyers, etc.).
   o Using a cross-sector uniform methodology, over 300 individual
      technologies were assessed with the assistance of experts from over
      70 companies and German industrial associations. In order to assess
      each technological lever's potential for reducing emissions, a
      feasible degree of dissemination of each technology (penetration
      rate) was assumed.
   o An essential criterion for selection and assessment of the
      technological levers for reducing emissions was that they would
      restrict neither quality of life nor economic growth.
   o An important finding of the study is that all sectors in Germany
      exhibit potential for reducing greenhouse gas emissions. The
      types of technological levers and their respective costs vary
      dramatically between the sectors. The total potential for reducing
      emissions is the result of the application of many different levers ­
      there is no single panacea.
   o Assuming Germany sticks to its intention to phase-out nuclear
      energy, Germany's total reduction potential based on emissions
      figures for 2004 is around 100 million tonnes of CO2 equivalent per
      year up to 2020. This corresponds to a reduction of 25% of the
      base year emissions. By 2030 a figure of minus 28% is achievable.
      But a considerable amount of investment, in some cases very high
      investment, will be required to reach these targets.
   o Germany's greenhouse gas emissions could be reduced by 26% by
      2020 (compared to the base year) if all identifiable levers are
      utilised, with average costs (from the decision-makers' viewpoint)
      of up to 20 per tonne of CO2 equivalent. A reduction of 31%
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      becomes achievable if the share of renewable sources in the energy
      mix is also increased (while adhering to the plan to phase out
      nuclear energy). This would entail considerably higher average
      abatement costs in the range of 32 to 175 per tonne of CO2 equi-
      valent (32: electricity production from renewable energy sources;
      175: biofuels).
   o Further technological levers do exist, but significantly higher
      investments would be needed to implement them. If all identifiable
      levers were used, emissions could be reduced by 35% (from 1990 to
      2020). The average cost per tonne of greenhouse gases abated
      would, however, then be around 430 per tonne of CO2 equivalent.
   o Delaying the phase-out of nuclear energy would considerably
      increase the economically viable reduction potential (additional
      reduction of 90 million tonnes of CO2 until 2020) and greatly
      decrease the average abatement costs. A reduction of around seven
      percentage points more over the emissions figure for the base year
      would then be possible by 2020.


Conclusions
   o Each individual citizen and each company can make a contribution
      to reducing greenhouse gases. Government should therefore put
      itself more in the place of the individual decision-makers. Contrary
      to conventional climate scenarios this is the perspective our study
      aims to convey to the reader.
   o The innovative power and competitiveness of German industry can
      only be maintained if the profit situation allows us to finance the
      development of innovative technologies and their large-scale
      application in order to reduce emissions. And considerable advance
      investments are needed to pave the way for the technology's
      widespread use, i.e. there is a great need for the appropriate R&D
      funding programmes.
   o Economically viable measures, attractive incentives and market-
      driven innovations can make an effective contribution to climate
      protection in Germany. This is a challenge which all societal
      sectors must take up, and which requires a differentiated approach.
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o Currently, there are considerable barriers blocking the
   implementation of the solutions which industry has already made
   available. Even those technologies which make financial sense and
   have negative abatement costs do not provide sufficient incentive to
   the individual decision-makers, be they business leaders or local
   citizens, if they cannot afford to make the necessary investment.
   Wide-ranging investment incentives must be made available,
   although these must not distort or disrupt the market.
o The greatest economic efficiency can be achieved if measures in
   individual sectors continue to be implemented in harmony with the
   respective investment cycles. A forced shortening of investment
   cycles would be the wrong approach as that would cause economic
   advantages to be lost and would destroy national economic capital.
o If meeting higher reduction targets is considered imperative
   delaying the phase-out of nuclear energy is a valid option.
o CCS (carbon capture and storage) cannot make a significant
   contribution until after 2020, when all the legal, economic and
   technical questions have been resolved.
o With respect to attaining a global climate protection regime, the
   development and use of CCS technologies would provide an option
   to establish multilateral talks with countries that produce and
   consume large quantities of coal (primarily China, India, the
   United States) on allowing their continued use of coal to generate
   electricity, as the use of CCS would hugely reduce CO2
   emissions). But its practicability must first be proven in Europe
   (e.g. in Germany) before countries such as China will be
   persuaded of the technologies' viability. We therefore warmly
   welcome the EU's intended promotion of large-scale CCS
   demonstration power plants.
o The amount of biomass needed to generate energy by 2020 will
   exceed the amount which can be produced in Germany. The sharp
   increase in the use of biomass to generate energy will lead to
   intensified competition with the traditional users of biomass.
o Reducing greenhouse gases creates not only costs, but also
   opportunities for German companies. Implementing greenhouse
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   gas abatement measures in Germany and exporting the respective
   technologies can have positive effects on both the economy and
   employment. It is thus essential to accelerate the dissemination of
   innovative and efficient technologies. Therefore, the scope and
   efficacy of the CDM (Clean Development Mechanism) must be
   expanded.
o And we must pay particular attention to maintaining the
   competitiveness of German companies, particularly those in
   energy-intensive industries. Germany's status as a production
   location can only be maintained if cost efficiency becomes the key
   criterion for the selection of climate protection measures and the
   form they take. After all, acceptance of climate protection policy
   will depend on what burden will ultimately be imposed on the final
   consumers.