There are several reasons why a delayed emissions reduction path is likely to be less costly. These results raise serious questions about why the United States has endorsed hard targets in a time frame when the costs of action are very high. The United States should place a high priority on understanding and explaining the costs of premature action to reduce emissions. This includes a careful look at the three factors that make early action expensive: • Discounting and the foregone returns to productive investment; • Turnover of capital stock, which makes gradual changes less costly than sudden changes; and Developing new technologies for energy efficiency and fuel substitution. Conducting additional scientific research and developing new energy technologies are components for a strategy of buying information before making the commitment to reduce emissions. The U.S. analytical agenda must also address the critical findings emerging from current research on choosing among different time profiles of emissions. The finding that no goal for ultimate concentrations requires emissions to be kept at current levels until well after 2020 should have been investigated fully by the U.S. Government. The implications of this finding for the United States position are clear. Delaying emissions reductions can significantly reduce the costs of meeting climate policy objectives. As discussed, additional study of the magnitude of avoidable damage from climate change and of whether there are risks that warrant immediate action despite their high cost, also need to be part of this agenda. Unless it is possible to determine, on the basis of current scientific evidence and benefit estimates, that the benefits of very large reductions in emissions will exceed the costs, the most rational economic strategy is to reduce emissions very little from projected trends for the next two decades. ANALYZE COSTS AND BENEFITS Any agreement in which the United States participates should provide benefits to the United States surpassing its costs. A number of topics need to be addressed in estimating costs and benefits of specific proposals, including: Costs Negative cost potential: is there empirical evidence from analysis of actual energy markets that there are imperfections that could be remedied in a way that produced economic benefits and emissions reductions, and is it proper to assume that such measures will be undertaken only if there is a climate agreement? Recycling: what does the current public finance literature say about whether revenue recycling can reduce costs? Environmental side benefits: what actual emissions reductions can be expected given existing environmental regulations? Transition: how would the shock of higher energy costs affect short-run economic performance? Impacts across industries: economy-wide analysis shows much higher costs than studies that consider only direct costs in energy markets. Command and control vs. taxes: how much more costly are regulatory solutions than the carbon taxes or similar economic incentives that have been studied so far? Trade and leakage: will industries migrate and will energy use increase in nonparticipating countries, causing emissions increases in developing countries that offset the efforts of Annex I countries? Benefits One question matters at this time: could potential damage be high enough to justify such low-concentration targets that an early start on emissions reductions is desirable? U.S. GOVERNMENT ANALYSIS OF POLICY IMPACTS Finally, let me address your question about whether the U.S. Government has concluded the analysis and assessment necessary to understand the impacts of these policies. I am uncomfortable with what I have seen thus far in the analysis unveiled by the Administration, though the beginnings of some valuable work appear to be underway at the Department of Energy. The Administration held a workshop on climate change analysis in Springfield, Virginia in April. At the workshop, some of the results of the Administration's analysis of the economic costs of emissions targets were released. The detailed assumptions, methods and contents of the Administration's analysis have not yet been made available for peer review. From what was presented at the workshop, I believe there are reasons for concern about the direction that some of the analysis is taking. In particular, the estimates of costs of meeting emissions targets presented by the Administration were seriously flawed due to two critical assumptions hidden in the economic analysis (which was commissioned by EPA and performed by DRI). The first was that the ability to use low-cost energy does not contribute in any way to the productive potential of the economy, and the second was that the Government would collect substantial revenues from selling permits to use fossil fuels and that the Congress would decide to devote most of those revenues to reducing taxes on business. With these assumptions, the administration claimed that adherence to binding targets might even be beneficial for the United States economy. Fortunately, officials from the Energy Information Administration (EIA) had also prepared an analysis which they presented at the workshop that was much more firmly rooted in the basic principles of economic analysis. ÉIA concluded that the costs of such targets would fall in the range I cited earlier, with targets for emissions at or below current levels, costing between 1% and 2% of GDP in 2010. Figure 7 compares the EIA results with those developed by EPA and presented as the Administration's conclusions. Figure 7 also includes the results of a study I directed for EPRI two years ago using the same basic model as EIA, adjusted to the same timing of emissions reductions as in the EPA and EIA studies. Most of the difference between EIA and EPA was due to the EPA assumption that one specific type of tax reform (reducing corporate tax rates rather then personal tax rates or lump sum refunds) would be financed with the proceeds from energy taxes or auctioned permits to use energy. The EPA results, assuming personal tax cuts, are similar to EIA and the EPRI study. The residual difference is due to the assumption in EPA Version 2 that energy availability has no effect on productivity, opposed to the more standard assumption used in the other studies. The workshop also featured discussions of work sponsored by the Administration on how climate policies would have other environmental benefits, and on how it has turned out to be much cheaper to comply with other regulatory programs like CAFE standards and the phaseout of CFCs than was predicted when those programs were being designed. These are interesting questions, but solid economic studies that come to exactly the opposite conclusions were not mentioned at the workshop. I am very concerned that the Administration has emphasized results that minimize costs of climate policy, rather than trying to present a balanced picture of the economic risks. I was also very proud of the staff of the Energy Information Administration and their willingness to stand behind results of a more balanced economic analysis. The presentations by representatives of the Administration at the workshop did not address the critical questions of what specific measures would be required to implement legally-binding commitments, how international cooperation can be achieved, whether where and when flexibility should be pursued rather than hard targets, and the role of policy responses other than immediate emissions reduction. Most of the topics that I have suggested as being important to provide a foundation for a U.S. negotiating position were not addressed. Until a great deal more of the Administration's analysis is released for peer review, it will be difficult to be comfortable with the state of analysis of potential consequences for the United States. Since the next important negotiating session on these legally-binding targets is scheduled for December, the details of the Administration's studies will have to be released very soon if peer review is to have any meaningful role. Figure 1: Percentage Change in GDP for the USA Under Alternative Emissions Targets. Percentage Change in GDP Targets. Figure 2: Percentage Reduction in Carbon Emissions Under Alternative Emissions Carbon Emissions Figure 3: Emissions Profiles Associated With Different Equilibrium Greenhouse Gas Concentrations 1995 2029 2050 2100 Source: Thomas Wigley, Richard Richels, and J. Edmonds, Nature, March 1996 Figure 4: Relative Carbon Contributions of Different Regions Global Carbon Emissions Baseline 750 ppm 650 550 450 350 (Adapted from Alan Manne and Richard Richels, Buying Greenhouse Insurance, MIT 1992, p. 91.) |