Climate Change Economics and Policy

An RFF Anthology

Michael A. Professor Toman, Michael A. Toman, Michael A. Professor Toman

• Publisher: Routledge
• Year: 2010
• eBook ISBN: 9781136525148
• Topic: Biological Sciences
• Subtopic: Ecology
• Index: Biological Sciences

What are the potential adverse impacts of climate change? How can society determine the amount of protection against climate change that is warranted, given the benefits and costs of various policies? In concise, informative chapters, Climate Economics and Policy considers the key issues involved in one of the most important policy debates of our time. Beginning with an overview and policy history, it explores the potential impact of climate change on a variety of domains, including water resources, agriculture, and forests. The contributors then provide assessments of policies that will affect greenhouse gas emissions, including electricity restructuring, carbon sequestration in forests, and early reduction programs. In considering both domestic and international policy options, the authors examine command and control strategies, energy efficiency opportunities, taxes, emissions trading, subsidy reform, and inducements for technological progress.
Both policymakers and the general public will find this volume to be a convenient and authoritative guide to climate change risk and policy. It is a useful resource for professional education programs, and an important addition for college courses in environmental economics and environmental studies. Climate Economics and Policy is a collection of Issue Briefs, prepared by the staff of Resources for the Future (RFF) and outside experts. Many are adapted from pieces originally disseminated on Weathervane, RFF's acclaimed web site on global climate change.

1 Climate Change Economics and Policies

An Overview

Michael A. Toman

Life on Earth is possible partly because some gases, such as carbon dioxide (CO₂) and water vapor, which naturally occur in Earth’s atmosphere, trap heat—like a greenhouse does. Humans are greatly adding to the presence of such gases, commonly referred to as greenhouse gases (GHGs), by burning fossil fuels and through other industrial activities as well as various kinds of land use, such as deforestation.

Anthropogenic GHG emissions (those that are produced, induced, or influenced by human activity) work against us when they trap too much sunlight and block outward radiation. Many scientists worry that the accumulation of these gases in the atmosphere has changed the climate and will continue to change it. Potential negative climate risks include more severe weather patterns; hobbled ecosystems, with less biodiversity; changes in patterns of drought and flood, with less safe drinking water; inundation of coastal areas from rising sea levels; and a greater spread of infectious diseases such as malaria, yellow fever, and cholera. On the positive side, climate change might benefit agriculture and forestry in various locations by increasing productivity as a result of longer growing seasons and increased fertilization.

A great deal of controversy surrounds the issue of climate change. Some participants in the debate say that climate change is one of the greatest threats facing humankind, one that calls for immediate and strong controls on GHGs, particularly CO₂ emissions from the burning of fossil fuel (by far the largest source of anthropogenic GHGs). Others say that the risks are weakly documented scientifically, that adaptation to a changing climate will substantially reduce human vulnerability, and consequently, that little action is warranted other than additional study and the development of future technological options. The same kinds of divisions arise in discussing policy options to reduce GHG emissions, in which some parties predict net benefits to the economy and others fear the loss of several percentage points of national income.

These disagreements surface in international negotiations under the 1992 U.N. Framework Convention on Climate Change (UNFCCC). Article 2 of the UNFCCC requires signatories to take actions to “prevent dangerous anthropogenic interference with the climate system” from GHG emissions (and other actions, such as deforestation). However, the term “dangerous” in Article 2 does not have an unambiguous, purely scientific definition; it is inherently a question of human values. Article 3 states that precautionary risk reduction should be guided by equity across time and wealth levels, as expressed in the concept of “common but differentiated responsibilities”; however, this phrase is not precisely defined. Article 4 states that nations should cooperate to improve human adaptation and mitigation of climate change through financial support and low-emission technologies. Articles 3 and 4 also refer to the use of cost-effective response measures. These articles provide a basis for an ongoing debate on policies to implement the goals of the convention.

More than 160 nations signaled their commitment to address the problem of climate change by initialing the Kyoto Protocol in December 1997. The protocol requires industrialized “Annex I” countries to reduce their total emissions of CO₂ and other GHGs by an average of roughly 5% compared with 1990 levels by 2008–12. Developing countries are not required to meet quantitative emission goals, but all signatories to the 1992 UNFCCC have certain obligations to measure and report emissions and to encourage climate-friendly activities. How the Kyoto Protocol targets will be met—in particular, the design of international “flexibility mechanisms” for low-cost GHG abatement—continues to be negotiated. However, larger questions remain in the United States and other countries about whether, when, and how the Kyoto Protocol will be ratified and implemented.

The authors of this book address many economic and policy issues related to climate change. Several points set the context for addressing these issues. First, some degree of climate change appears inevitable. Given current emissions trends and the inertia of the climate system, even if emissions were stabilized or substantially reduced, scientific models suggest that climatic changes and their consequences would continue. To stabilize atmospheric concentrations of GHGs (and thus their effects) would eventually require very large cuts in emissions from current levels, not to mention the future levels implied by continued economic growth under a “business as usual” scenario. For example, to stabilize CO₂ concentrations at something over twice preindustrial levels would require emissions ultimately to fall by more than 70% from their current level. The authors of this book allude to the scientific underpinnings of climate change and the controversies that surround them, but the emphasis is on economics and policy issues.

Second, the potential human consequences of climate change are key to analyzing economic and policy issues. The findings of climate scientists and studies of physical impacts from climate change alone do not suffice. This simple but important point often seems to be overlooked in debates about “what the science says.”

Finally, the problem is global. Rich and poor countries alike argue over how the burden of GHG emissions reductions should be allocated. However, no solution can be effective in the long term unless it ultimately leads to reductions in total global emissions, not only emissions in selected countries.

The economics perspective reflected in this book suggests several basic points for evaluating climate change risks and response costs:

• Think comprehensively about risks. Climate change can have several possible impacts over space and time, and each of these impacts remains uncertain at present.

• Address adaptation. The risks of climate change depend not only on what happens to the natural world as a consequence of GHG accumulation in the atmosphere but also on how humans respond to the prospect of those impacts.

• Consider the long term. The impacts of climate change are driven strongly by the accumulation of GHGs in the atmosphere over decades and, to some extent, by the speed of climate change over decadal periods. This attribute makes climate change quite different from many other local and regional environmental problems.

• Make the focus international. The sources of GHGs, the risks posed by climate change, and the opportunities for mitigating risks all are global.

• Keep in mind distributional issues. Climate change will have very uneven effects over space and time, and the capacities to mitigate climate change risk also vary greatly.

• Estimate control costs comprehensively and realistically. It is important to remember the many subtle costs that economies can experience from attempts to limit GHGs, even while recognizing opportunities to reduce GHGs affordably through new technologies and the reduction of market distortions.

• Several themes also recur in the analysis of what constitutes effective and efficient climate policies:

• Incorporate economic incentives into emissions-reduction policy. Years of research and an increasing body of international experience provide strong support for the cost-effectiveness of this approach in lieu of technology-oriented policy mandates that are less flexible. This approach also can be used to address distributional concerns that surround the impacts of climate policies.

• Provide opportunities for emissions reductions wherever possible. Because the sources of GHGs are global and the costs of GHG control vary by location, large joint benefits—for developing as well as developed countries—can result from seeking the cheapest abatement options.

• Allow flexibility in the timing of cumulative emissions reductions to reduce overall costs. This controversial proposition relates to how rapidly GHG emissions reductions goals should be implemented and ratcheted upward. Whereas a strong case can be made for current action, one also can be made for more flexible policy goals and for a more gradual phasing-in of significant emission limits.

• Encourage the development of the climate change knowledge base and improved technology for emissions reduction.

• Given the long-term nature of climate change, improved knowledge is critical for refining policy and for increasing public understanding and support.

• Increase the emphasis on adaptation. The focus of international negotiation has been almost exclusively on reducing GHG emissions. Yet, many opportunities for increasing resilience to the potential negative effects of climate change need to be pursued given the likely prospects of some negative effects. Increased resilience lowers the long-term cost of climate change, allows more gradual implementation of costly GHG mitigation measures, and in many cases pays immediate dividends in addressing other environmental and social problems.

Outline of the Book

This book is organized in four sections.

Part 1: Introduction

In Part 1, Anderson (Chapter 2) and Darmstadter (Chapter 3) begin by presenting the historical evolution of concern for climate change, the development of the existing international regime for climate policy, and the backdrop of energy use and economic activity that gives rise to GHG emissions. Shogren and Toman (Chapter 4) discuss how the benefits and costs of climate change, mitigation, and adaptation should be addressed. They address both the scale of climate change policy goals (how much GHG emissions reduction) and the timing, and provide an overview of how costs and benefits are assessed. Cline (Appendix A) provides more detail about cost assessment for mitigating GHG emissions through a review of many of the large-scale computer simulation models used for this task.

Part 2: Impacts of Greenhouse Gas Emissions

In Part 2, several possible impacts of climate change are addressed from an economic as well as a physical perspective. Crosson (Chapter 5), Frederick (Chapter 6), and Sedjo and Sohngen (Chapter 7) show how economic analysis combines scientific information about climate change impacts with social scientific information about human responses and valuations. These chapters strongly illustrate how adaptation can greatly reduce the expected negative impact of climate change. The authors also draw attention to the importance of policies that can increase resilience (for example, improved water and forest management and agricultural productivity) and the possible constraints on resilience measures (for example, poverty as an obstacle to improved agricultural technology and the challenges of balancing harvest and biodiversity values in forestry). Burtraw and Toman (Chapter 8) instead look at how reducing GHG emissions can have benefits beyond emissions reduction in the long-term risk of climate change. The authors particularly focus on how well-designed GHG policies can yield short-term dividends from improved local air quality and how these ancillary benefits of GHG policy can affect the desirability of some degree of GHG emissions control. Krupnick (Appendix B) summarizes a key concern about the impacts of climate change beyond natural resources, namely, the possibility of increased threats to human health. Again, the message is that the concern is real, but adaptation—here, in the context of various practices for improving public health and avoiding disease—lessen the risk, perhaps substantially.

Note that Part 2 does not address the whole panoply of concerns about climate change, which include the loss of current coastal areas from rising sea levels, threats to unique areas and other ecological resources, and unlikely but catastrophic changes such as the rerouting of ocean currents and massive storm surges. Even taking into account the possibilities for adaptation, the last word on the threat of climate change is not yet in. Given the information available, the initiation of long-term efforts to abate GHG emissions seems indicated; however, climate change is not a clear and present danger that requires a draconian short-term response.

Part 3: Policy Design and Implementation Issues

Part 3 addresses the questions that surround the development and implementation of climate policies as well as climate aspects of other policies that can have important implications for GHG emissions (such as electricity sector restructuring). Pizer (Chapter 9) lays out the economic trade-offs between using the kinds of policy tools embedded in the Kyoto Protocol framework—binding quantitative limits on GHG emissions—versus another class of policies designed to induce the reduction of GHG emissions through price incentives without a binding emission ceiling. A fossil energy tax on the basis of its carbon content is the standard example of this latter approach. Pizer shows that a tax-based approach could substantially increase the overall efficiency of GHG emissions policy. It highlights one of several sharp dichotomies between the Kyoto Protocol policy architecture and the implications of economic analysis. Pizer also shows how a hybrid policy can combine aspirational quantity targets with the cost-reducing flexibility of the price-based approach.

Fischer, Kerr, and Toman (); Parry (Chapter 11); and Goulder (Chapter 12) consider in more detail several elements in designing cost-effective quantity and price policies. Fischer and others review the many key components going into an effective domestic emissions trading program for GHG emissions control. This general approach involves issuing emission allowances that can be bought and sold, so that GHG sources have a built-in economic incentive to seek the lowest-cost opportunities for GHG emissions abatement (conservation, switching fuel, or otherwise) throughout the economy. An emissions trading program already has proved successful in cost-effectively reducing sulfur dioxide emissions from power plants in the United States.

Fischer and others () argue that an effective domestic GHG emissions control program needs to regulate the sources of fossil fuels themselves rather than attempt to measure and regulate the myriad sources of actual emissions in the economy. They further a...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface
• Contributors
• 1. Climate Change Economics and Policies: An Overview
• PART 1. Introduction
• PART 2. Impacts of Greenhouse Gas Emissions
• PART 3. Policy Design and Implementation Issues
• PART 4. International Considerations
• Glossary
• Index