Cost Impacts of Near-Term Emission Reductions Q11. You have testified that near-term emissions reductions will actually raise the cost of achieving their objective—i.e., “haste makes waste." Could you expand on this concept? All To reduce carbon dioxide emissions will be expensive even if all countries agree to institute policies and even if these policies are implemented with maximum efficiency. Unfortunately, the approaches scheduled to be discussed in Kyoto greatly increase the cost of any given emissions reduction. There are two fundamental reasons for this increase. First, imposing a requirement for carbon dioxide emissions reductions on the industrialized countries but not on the developing countries will be to a large degree selfdefeating Energy costs will be much lower in countries that do not limit emissions compared to those that do, causing investment in energy-intensive industries to move out of industrial countries into developing countries. Demand for travel and motor vehicles is likely to increase in developing countries, because of lower fuel prices, while it will decline in the U.S. and other industrial countries. As a result of the shift of industry and greater fuel consumption, carbon emissions from developing countries will increase, offsetting a significant share of the emissions reductions achieved by the industrial countries. Making sure that these impacts do not occur requires a level playing field for energy prices across all countries, a result that can only be guaranteed by full participation of the developing countries. The latter must agree to emissions caps and some mechanism equivalent to an emissions trading program that equates the marginal cost of reducing emissions across all countries. Paradoxically, many if not most developing countries will face somewhat slower economic growth even if industrial countries unilaterally limit emissions. The entire world is connected by trade. Emissions limits in industrial countries will tend to lower the prices that developing countries receive for their exports. It will also increase the cost of the goods that developing countries import from industrialized nations. Second, even if all countries were to commit to reducing their carbon dioxide emissions, placing emphasis on near-term emissions limits would raise the costs of achieving any eventual reduction in global warming by causing the countries agreeing to near-term limits to forego important cost-saving opportunities. These opportunities include the significant cost reductions achievable through avoiding premature obsolescence of capital equipment, as well as the cost savings resulting from the development and implementation of lower-cost technologies for reducing emissions. Since any global warming impacts are driven by concentrations and not emissions of greenhouse gases, countries that incur these extra costs do not necessarily generate any offsetting benefits. These adverse effects on both industrial and developing countries can be avoided if a more inclusive and measured approach to emissions reduction is taken compared to those contained in the current proposals. For example, the work of Wigley, Richels and Edmonds (see question 1) shows that it is not necessary to reduce emissions much below baseline levels before 2020 to achieve concentration goals of 550 ppm, and that investing in development of new energy technologies that are deployed as the capital stock turns over naturally, avoiding stranded assets throughout the economy, can reduce costs by a large amount. The following excerpt from our forthcoming report amplifies on these points: The cost of carbon emissions reductions could be greatly reduced if countries were allowed to trade emissions permits either among themselves or across time periods within a country or both across countries and time periods. The ability to trade emissions rights among countries is often referred to as "where" flexibility. For example, this flexibility allows the OECD countries to buy and sell carbon emissions permits from either OECD or Non-OECD countries. Cost savings are available because emissions reductions and the cost to control emissions are smaller in developing countries. "When" flexibility refers to allowing countries to choose their emissions trajectory over time. Under "when" flexibility, regulators would set an emissions limit for a given interval (e.g., 20 years) for a country, and then this country could choose its own time path of emissions abatement as long as it met the preset target for total emissions over the interval. This approach offers cost savings because the flexibility involved allows countries to delay emissions reductions until capital stock turns over in an orderly manner and new technologies can be developed. Furthermore, "where" flexibility is beneficial because, as time progresses, the developing countries will be producing a larger percentage of the world's carbon emissions; therefore, it will be increasingly more difficult to reduce emissions only in the OECD and increasingly more efficient to spread emissions reductions over the entire world. However, to achieve these savings, it is necessary that the marginal cost of emissions reductions be equalized across all countries. This goal requires something equivalent to emissions caps on all countries, with an emissions trading system that equalizes the price of emissions permits across all countries. Such a system will also level the playing field among energy-intensive industries in different countries. A gradual and flexible approach to emissions reduction will be much less costly for three reasons. First, by not scrapping all current technology, the return to investment will not be hurt as much, which will mean more investment dollars for the future and continued economic growth. More investment money will be available to develop new technologies. Second, allowing capital stock to be retired more slowly will reduce scrappage and replacement cost. Third, by delaying emissions reductions, industry will, as noted, have more time to develop lower-cost technologies, allowing replacement of fossil fuels with carbon-free energy sources (especially in the developing countries, from where most emissions will be emanating). A gradual approach will allow for the most efficient and Carbon Emissions 1995 Because the environmental damage caused by carbon emissions depends on the level of carbon concentrations and not the level of carbon emissions, there are many emissions paths that lead to essentially the same level of carbon concentration. This means that there is a great deal of flexibility possible with regard to the timing of emissions reductions. Figure A-1 shows that for concentration goals of 450 ppm or higher, there is no need to depart from baseline emissions until well after 2010, and that even a decision to hold concentrations at today's level of 350 ppm still allows flexibility for emissions to continue to increase significantly until 2020. Concentrations are measured as parts per million (ppm). The IPCC considered scenarios ranging from 350 ppm to 750 ppm in its discussion of what concentration goals might be appropriate. Figure A-1 Achieving Concentration Goals Does Not Require Early Limits 2020 2050 Source: T. Wigley, R. Richels, J. Edmonds, Nature, 1996. Cost Index Figure A-2 Reduction in Global Costs to 2050 from "Where" and "When" Flexibility Figure A-2 illustrates the benefits of "where" and "when" flexibility. Flexibility in timing can reduce costs by about 25% even with a relatively short time horizon to take advantage of flexibility. Including developing countries fully in any compliance agreement can reduce global costs by about 65%, even if no timing flexibility is provided. When both flexibility in timing and participation by all developing countries are allowed, costs drop by 90%. Assumptions The "AOSIS Limits" scenario requires that OECD countries must reduce emissions to 100% of 1990 levels in 2000 and 80% of 1990 levels by 2010 and maintain emissions at this level throughout the 50 year model horizon. Under this scenario, trading among countries and banking within a country are forbidden. The time horizon is the same under the When, Where, and Both cases; world emissions cannot exceed the level of world emissions in the AOSIS Limits scenario. The bars represent the net present value cost of each policy relative to that of the AOSIS Limits policy. The cost equals the world's discounted welfare over the model horizon. Scenarios Under AOSIS Limits, each OECD country by itself must meet its own specified emissions target for each time period. The “When” scenario allows banking of emissions but emissions trading across countries is forbidden. The "When" bar in Figure A-2 represents the ratio of costs under "When" scenario to those under the AOSIS Limits scenario. Under "when" flexibility, costs are about 75% of what they are under the AOSIS Limits scenario. For the "Where" scenario trading across all countries (OECD and Non-OECD) is permitted, but countries are forbidden to bank their emissions. The "Where" bar on Figure A-2 represents the ratio of costs under this scenario to those under the AOSIS Limits scenario. Under the “where” flexibility case, costs are about 35% of what they are under the AOSIS Limits scenario. "Both" refers to the most flexible case. Here, the OECD countries can both bank and trade their emissions. In this case, costs are only 10% of what they are under the AOSIS Limits scenario. Conclusion To lower the cost of any carbon abatement scenario, policymakers should allow countries to decide how they want to allocate their emissions over time and should create a system in which all countries agree to emissions caps and can trade their emissions rights. Long-Term Greenhouse Gas Emissions Reductions Q12. If an agreement were reached that limited U.S. greenhouse-gas emissions to 1990 levels by 2010, how difficult would it be to maintain them at that level beyond 2010? A12. Very difficult. By 2030 baseline emissions would be at least 40% above 1990 levels, requiring even stronger policies to close the gap. In terms of the equivalent carbon tax required, or price of tradable permits, it would be at least twice as costly to hold to those limits in 2030 as in 2010. Impacts of Emissions Limitations on Investment in the U.S. Q13. You have said that under an agreement limiting emissions in industrialized countries, investment in the U.S. would decrease significantly. Investment is the fuel that drives the American economy, so any policies that reduce the climate for investment need a full airing. Could you expand on that point please? A13. Emission limits raise costs of production in the U.S. economy. Available, low cost energy enhances the productivity of both capital and labor. With restrictions on the availability of energy, because of emission limits, the resulting fall in productivity reduces the return on |