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Briefing Book: Global Climate Change June 1997
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administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
Council of Economic Advisers
Series/Staff Member:
Jeffrey Frankel
Subseries:
OA/ID Number:
13726
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Folder Title:
Briefing Book: Global Climate Change June 1997
Stack:
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20
5
1
1
Global
Climate
Change
June 1997
Global Climate Change
30 May 97
I. Climate Change Cheat Sheet
II. A Brief Overview of Global Climate Change Issues
III. Common Perspectives on Climate Change Issues
IV. A Brief History of the Administration Position on Climate Change
V. Economic Impacts
VI. A Technical Point on Technological Change
VII. CEA Positions
VIII. Glossary
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1
Divider Title:
Fact Sheet
What's happening to the climate?
Climate Change in the last century:
-- Global temperatures have increased between 0.3 and 0.6 degrees Celsius
-- Sea levels have risen between 10 and 25 centimeters
-- Experts believe these changes are unlikely to be entirely natural in origin
Estimated Climate Change over the next century:
-- Within a reasonable range of emissions scenarios, global temperatures are
likely to increase between 1 and 3 degrees Celsius
-- Sea levels may rise between 50 and 94 cm.
-- Because of the temperature inertia of the earth, climate change would continue
for some time even with drastic immediate action.
Why is it happening?
Four gases account for 99.5% of anthropogenic sources of greenhouse gases.
They are, in descending order of importance, carbon dioxide, methane, nitrous
oxide, and fluorocarbons. These gases remain in the atmosphere for a long time
(decades to centuries).
Greenhouse gases have been accumulating: Atmospheric concentrations of
GHGs have grown significantly (1750-1992): Carbon dioxide -- 30%; methane
145%; nitrous oxide -- 15%.
Concentrations of Greenhouse Gases (parts per million)
Gas
Preindustrial
1992
2100 (upper bound,
(1750)
business-as-usual)
Carbon Dioxide
280
358
650
Methane*
-
43
77
Nitrous Oxide*
-
92
119
Fluorocarbons
0
.04
.18
* in CO2 Equivalent concentrations
The US Situation
US responsible for 21% of global GHG emissions (25% of the CO2 emissions from fossil
fuel burning).
Breakdown of GHG Emissions:
By Gas (mmtce)
By Sector
Carbon Dioxide
1406
30% Utilities
Methane
178
27% Transportation (fastest growing)
Nitrous Oxide
40
Carbon Dioxide represents 86% of the global warming potential of US emissions.
Emissions of Carbon by Energy Source:
Energy Source
Average Carbon Produced (metric tons of carbon)
one metric ton coal
.63
one gallon motor gasoline
.00267
1bbl crude oil
.119
one mcf natural gas
.0145
Emissions predicted to be 200 million metric tons (mmt) over 1990 levels by 2000
Economics of a Climate Change Policy
Effect of Carbon Tax, $100 carbon tax would increase, in the short run:
gasoline -- $0.27/gal (currently $1.14 for unleaded regular)
coal -- $63/ton (currently $27/ton CIF)
petroleum -- $12 per bbl (currently $17/bbl)
natural gas -- $1.45 per 1000 cf (currently $2.04 at wellhead)
electricity from coal-fired plants -- $.10/kwh (currently $.03/kwh)
electricity from natural gas combined cycle (NGCC) -- $.0035/kwh
(currently $.040/kwh)
Energy Infrastructure Costs
Coal fired generating capacity in 1993 was 302,000,000 kw
Capital costs for NGCC plants is $500/kw, for coal fired plants is $142/kwh
Rough Estimate: Replacing 10% of coal fired plants with NGCC plants
Industries Most Affected by Reducing CO2 Emissions
coal mining
gas and oil producers
agriculture
petrochemicals
steel
automobile
utilities
aluminum
cement
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2
Divider Title:
A Brief Overview of Global Climate Change Issues
30 May 97
Scientific consensus: There is now fairly wide scientific consensus that anthropogenic global
warming is occurring. While uncertain, the effects of climate change on crop yields, sea levels,
disease patterns, and storm frequency could nevertheless be far-reaching. For the policy maker,
climate change offers a somewhat imposing set of complications: the potential for irreversible
damages or costs, a very long planning horizon, long time lags between emissions and effects, a
global scope, wide regional variations, and multiple greenhouse gases of concern. This memo
focuses on the economic impacts of climate change, with particular attention given to modeling
the cost of achieving various mitigation goals and targets, the economic instruments available to
lower greenhouse gas emissions, and the consequences on global climate change of non-
compliance on the part of non-Annex I countries.
Timing: The U.S. is currently engaged in international negotiations concerning limits on
greenhouse gas emissions with the goal of signing an agreement in Kyoto, Japan in December
1997. Some key equity and efficiency issues will need to be addressed in a somewhat limited
amount of time.
Modeling: Numerous models have been developed to examine the potential economic impacts of
stricter greenhouse gas mitigation requirements. However, there is no clear consensus in the
literature on what the economic impacts may actually be. Estimated global CO₂ abatement costs
relative to the baseline projection range from a 0.1% loss of GNP for a 14% reduction of
emissions to a 5.7% loss of GNP for an 88% reduction of emissions. Studies of U.S. CO₂
abatement costs relative to the baseline projection range from a 1.2% gain in GNP for a 21%
reduction in emissions to a 10.9% loss of GNP for a 96% reduction in emissions. These results
indicate a serious lack of consensus on the magnitude of the impact that anthropogenic warming
will have on the domestic and international economy.
In a recent study by Stanford's Energy Modeling Forum (EMF), researchers compared a diverse
group of economic models employing different methodologies. Standardizing these models by
assuming common exogenous parameters yielded remarkably similar results. This suggests that
the choice of methodology is secondary to the choice of values for population growth, per capita
income, energy intensity, and technical progress.
In particular, assumptions of the rate of improvement in the energy/GDP ratio have caused some
degree of controversy in certain economic impact models. Current studies typically focus on the
rate of autonomous energy efficiency improvement (AEEI), which tends to be a good
Abve
approximation of the rate of change in the energy/GDP ratio when energy prices remain relatively
flat. Long term historical evidence suggests a number in the range of 0.5 to 1.0 percent per year.
qualifiers
The modeling group (Interagency Analysis Team--IAT) believes that the announcement of a
global warming accord and the need to meet these strict mitigation goals will prompt businesses
to accelerate the implementation of energy efficient methods of production. This alleged
"announcement effect" is incorporated in these models by assuming a rate of improvement in the
energy/GDP ratio of between 1.25 and 1.75 percent per year. This more closely approximates the
1973 to 1985 average in the U.S. of 2.0 percent per year, which provides the modelers with a
justification for using a relatively high value of energy/GDP. However, after adjusting for the
quadrupling of energy prices over that time period, the implied AEEI from 1973 to 1985 becomes
0.5 percent. This weakens considerably the assumption that energy/GDP falls in a range of 1.25
to 1.75 percent per year.
Goals and Targets (emission budgets): Two key terms are floating around in the discussions to
set mitigation goals and targets. The first is the level of greenhouse gas emissions, which is a
flow. The second is the level of greenhouse gas concentrations, which is a stock. It is important
to note the difference in the implications of the two measures. For a long time now, the
concentration of greenhouse gases in the earth's atmosphere has been increasing. This comes
from a past flow of emissions above the implied steady state flow necessary to maintain a stable
climate. In order to bring the concentration of greenhouse gases down to what scientists consider
a more environmentally stable level, it becomes necessary to decrease current emissions well
below the steady state rate.
Many different emission reduction requirements have been suggested. A recent Dutch proposal
would cut EU emissions of six greenhouse gases to 10% below 1990 levels in 2005 and to 15%
below 1990 levels by 2010. Similar plans have been proposed for the U.S., with the Climate
Change Action Plan (CCAP) designed to reduce domestic emissions to 1990 levels by the year
2000. Some analysts point to a need for designing a mitigation proposal capable of providing
some degree of equity across countries. It has been suggested that industrialized countries be
required to decrease their level of energy/GDP while permitting developing countries to increase
this same measure. However, it becomes increasingly difficult at the global level to incorporate
high levels of both efficiency and equity into any mitigation proposal.
Economic Instruments: It is clear that a desire to lower greenhouse gas emissions necessitates
the creation of certain economic incentives for the U.S. as well as for the rest of the world.
Economic instruments available to achieve the required reductions in emissions range from simple
command and control mechanisms to carbon taxes to a system of tradable permits. For a global
treaty, a tradable permit system that is subject to enforcement is the only potentially cost-effective
arrangement where a dictated level of emissions is attained with certainty. It is widely believed
that a choice of tradable permits at the international level would provide maximum flexibility for
instrument choice at the domestic level.
Non-Annex I Cooperation: Considerable scientific evidence suggests that no single country is
sufficiently important or powerful enough to control global carbon emission in the short term or in
the long run. If non-Annex I countries (those countries not characterized by advanced
industrialized economies) do not alter their emissions path, global emissions levels will continue to
increase even if all industrialized countries completely eliminate all emissions. This situation is
exacerbated by the fact that, if controls of some sort were adopted only in the industrialized
countries, "dirty" industries would migrate to the non-Annex I nations. Clearly, the U.S. would
bear the costs of eliminating domestic CO₂ emissions but global emissions would continue to rise
without cooperation from non-Annex I countries.
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3
Divider Title:
Common Economic Perspectives on Climate Issues:
Many economists believe that the risks posed from global climate change are a real. But given
the level of uncertainty surrounding the predictions, they also argue that it seems best to proceed
pragmatically--taking out a small insurance premium (i.e., carbon tax) as we learn more about the
magnitude of climate change, its translation into changes in climates around the globe, and the
impacts of those climate changes on human welfare and natural environment. The key features
that most economists agrees with are:
1.
The relevant economic and physical processes operate globally and over decades rather
than years. Few observers foresee substantial climate change for at least several
decades, after emissions and atmospheric concentrations have increased substantially.
Most plausible emissions scenarios involve a significant human-induced increase in
climate change over the next century, with much of the increase coming from emissions of
countries that are not now wealthy.
2.
Important and probably long-lived uncertainties are ubiquitous. There are numerous
unanswered questions about the biophysical systems, potential thresholds, and economic
impacts. We do not know which regions will get warmer, which will cooler; which will
get wetter, which will get drier; which will get stormier; which will get calmer.
3.
The climate issue involves potentially huge stakes, both economic and environmental.
It would be mad to experiment with the survival of the human race. However, models
predict annual costs on the order of several percent of world income, dwarfing the
costs of reversing the ozone hole (CFCs). Developed countries are looking at 1-2% drop
in GDP; developing countries will not agree to transform their energy sectors unilaterally
given that it will reduce that rate at which they could increase per capita wealth. The
developing countries face health risks from poor drinking water and malaria right now that
demand their immediate attention. Economic growth is the main engine to reduce these
real risks happening today.
4.
Analyses of globally optimal climate policies generally do not support imposing
burdensome emission reduction policies over the next decade or so, though very stringent
policies may be optimal thereafter. Since damages seem to depend on long-term
concentrations, the argument for an optimal emissions reduction path is we should start
off slow and then drop like a stone. The rationale is that in the future we will know more
about the consequences of our actions, we will have developed cheaper abatement
methods, we will have had time to invest to prepare for their use, and we will be wealthier.
5.
Any serious program to control global emissions is almost certain to involve substantial
international transfers, the pattern of which may change over time. The modeling runs
suggest that with a trading system the US will be buying over $ billion dollars worth of
permits from the former Soviet Union. Congress may not look kindly on this size
transfer.
6.
Whatever the merits of the case for doing so, there is currently little political support for
devoting substantial resources to the issue, and there is no obvious reason to expect this
to change anytime soon. Convincing the public that a $0.25-$0.40 increase in gas prices
is a good idea will be a significant challenge.
Some Economics of Global Warming
By THOMAS C. SCHELLING*
Global warming from carbon dioxide was
biology, agronomy, health sciences, eco-
an esoteric topic 15 years ago, unknown to
nomics, sociology, and glaciology are needed
most of us. But in a few years, helped along
to identify and assess impacts on human
by some hot summers, it has climbed to the
societies and natural ecosystems. And those
top of the international agenda. Cabinets,
are not all.
Parliaments, and heads of government have
There are expert judgments on large
issued pronouncements on reducing carbon
pieces of the subject, but no single person
emissions, and in June of this year more
clothed in this panoply of disciplines has
than a hundred governments will be repre-
shown up or is likely to. So, I venture to
sented by ministers or heads of government
offer my judgment.
at a great United Nations Conference on
Environment and Development to be held
I
in Rio de Janeiro. Together with non-
governmental organizations representing la-
First on the principle. The metaphor of
bor, business, students, environmentalists,
the greenhouse is not quite appropriate, but
scientists, and groups concerned with health
the basic idea is not in dispute. The earth is
and child development and family planning,
bathed in sunlight, some reflected and some
these representatives are expected to need
absorbed. If the absorption is not matched
25,000 hotel rooms. A "framework agree-
by radiation back into space, the earth gets
ment" is widely expected, together with
warmer until the intensity of that thermal
some institutional arrangements that will
radiation matches the absorbed incoming
keep global environmental issues perma-
sunlight. Some gases in the atmosphere that
nently on every government's agenda. And
are transparent to sunlight absorb radiation
at the center of these issues will be the
in the infrared spectrum, blocking that out-
phenomenon that has come to be known as
ward radiation and warming the atmo-
the "greenhouse effect."
sphere. When the atmosphere has warmed
The greenhouse effect itself is simple
enough to intensify the thermal radiation so
enough to understand and is not in any real
that it matches the absorbed incoming sun-
dispute. What is in dispute is its magnitude
light, equilibrium is achieved at the higher
over the coming century, its translation into
temperature. These so-called "greenhouse"
changes in climates around the globe, and
gases can be identified in the laboratory.
the impacts of those climate changes on
Carbon dioxide is one of them; methane is
human welfare and the natural environ-
another, as is nitrous oxide, as are the chlo-
ment. These are beyond the professional
rofluorocarbons (CFC's).
understanding of any single person. The
The principle has been in practice for
sciences involved are too numerous and di-
decades. On a clear day in January, the
verse. Demography, economics, biology, and
earth and its adjacent air in Orange County
the technology sciences are needed to pro-
California warm nicely, but the warmth ra-
ject emissions; atmospheric chemistry,
diates rapidly away during the clear nights,
oceanography, biology, and meteorology are
and frost may threaten the trees. Smudge
needed to translate emissions into climates;
pots, burning cheap oil on a windless night,
produce substances, mainly carbon dioxide,
that absorb the radiation and protect the
trees with a blanket of warm air. Green-
* Department of Economics. University of Mary-
houses, in contrast, mainly trap the air
land. College Park, MD 20742.
warmed by the earth's surface and keep it
2
THE AMERICAN ECONOMIC REVIEW
MARCH 1992
VOL. 82 NO.
from rising to be replaced by cooler air. The
bon dioxide equivalents and the original
thought, ar
phenomenon should have been called the
estimate applied to the mixture.) The NAS
the greater
"smudgepot effect," but it is too late to do
appointed another committee a few years
ture the g
anything about it.
later to reexamine that estimate, and the
climates fi
A first step in pursuing this phenomenon
new committee saw no reason to change it
while it is
is to assess how much warming might go
(NAS, 1982 p. 51). An intergovernmental
to happen
with an enhanced concentration of these
panel on climate change (IPCC), consisting
"warming"
gases. That cannot be done in the labora-
of scientists from many nations, revisited
average wa
tory; there are too many feedbacks. A
the estimate in 1990 and concluded, from
extent or S
warmer atmosphere will contain more water
the several climate models they had exam-
Unfortuna
vapor; water vapor itself is a greenhouse
ined, that "the models results do not justify
"global wa
gas. Changes in temperature and humidity
altering the previously accepted range of 1.5
things will
will change cloud cover; clouds can reflect
to 4.5 degrees C" (IPCC, 1990 p. xxv). Thus,
virtually a
or absorb incoming or outgoing light accord-
the estimate appears to be robust over time,
summers,
ing to their composition and altitude. The
but the spread of uncertainty remains large:
years ago
average temperature is only one dimension;
the upper limit is three times the lower
trend woul
temperatures at different altitudes and dif-
limit. (No quantitative interpretation of
milder win
ferent latitudes matter. But a starting point
these upper and lower "limits" has been
If three
has been the change in average surface at-
made public. Both National Academy re-
index of cl
mospheric temperature expected to accom-
ports referred to them as "probable error.")
next centu
pany a specified increase in the concentra-
with what
tion of greenhouse gasses; and arbitrarily,
II
tury, or th
but reasonably, the base case is taken as a
have just
doubling of the concentration.
The uncertainties are even greater in
terms of V
A moment on why a doubling is the
translating a temperature change into cli-
difference
benchmark. To compare estimates of warm-
mates. The media support a popular view
every win
ing, people must use the same hypothesized
that things will just get hotter; a news maga-
tures were
concentration of greenhouse gases in the
zine cover was a sweating global face. But
they other
atmosphere. (Alternatively, they could use
the laboratories that do the meteorology do
tion is: ho
the same hypothesized temperature in-
not simply predict warming; they do not
a global
crease and estimate the corresponding con-
even predict that the most noticeable effects
been expe
centration.) Doubling, like a half-life in re-
will necessarily be temperature changes.
The ans
verse, is a natural unit if it is within the
Among the great driving forces of weather
the disapp
range of practical interest, and it is. A dou-
and climate is the temperature differential
age tempe
bling is expected sometime in the next cen-
between equatorial and polar regions; con-
ied over a
tury, so it is temporally relevant; and a
vection currents coupled with the rotation
of one de
doubling is estimated to make a substantial
of the earth are engines of atmospheric
rent estir
but not cataclysmic difference. If fixation on
circulation and, ultimately, ocean circula-
tures have
a doubling seems to imply an upper limit on
tion. The models predict greater tempera-
history. W
any expected increase, the implication is
ture change in the polar regions than near
regime th
unfortunate: enough fossil fuel exists to sup-
the equator. This change in gradient can
the currer
port several doublings.
drive changes in circulation. The results may
"Mank:
In 1979, a committee of the National
be warmer in some places and colder in_
change in
Academy of Sciences (NAS) (1979 p. 2)
others, wetter in some places and drier in
experienc
estimated the change in average tempera-
others, cloudier in some places and sunnier
qualified,
ture to accompany a doubling of carbon
in others, stormier in some places and less
glects is
dioxide in the atmosphere: three degrees
stormy in others-generally a complex of
over gre:
Celsius, with a range of 1.5 degrees to ei-
changes that would bear no easy relation to
thousand
ther side. (In the last 15 years other green-
an average change in global temperature.
West Eur
house gases have received attention; these
The change in average temperature is
South A
other gases can be converted to their car-
useful as an index of climate change. It is
North di
VOL. 82 NO. I
SCHELLING: ECONOMICS OF GLOBAL WARMING
3
thought, and the models demonstrate. that
Northeasterners who moved southwest after
the greater the change in average tempera-
World War II all experienced changes in
ture the greater the departure of current
climate greater than any being forecast by
climates from what they are now. Thus.
the models. Almost everybody who attends
while it is wrong to think that what is going
this lecture in New Orleans will have under-
to happen can be readily characterized as
gone a greater change in the past few days
"warming" it is not erroneous to take that
than is expected to occur in any fixed local-
average warming as a rough measure of the
ity during the coming century.
extent or severity of change to be expected.
The changes that the models produce are
Unfortunately the widespread reference to
gradual both in time and in space. The
"global warming" promotes the notion that
models do not produce discontinuities. Cli-
things will simply get hotter. (Interestingly,
mates will "migrate" slowly. The climate
virtually all public discussion is on hotter
of Kansas may become like Oklahoma's,
summers, not warmer winters; a hundred
Nebraska's like that of Kansas, South
years ago popular discussion of a warming
Dakota's like Nebraska's, but none of these
trend would likely have concentrated on the
is expected to become like the climates of
milder winters to be expected.)
Oregon, Louisiana, or Massachusetts.
If three degrees Celsius is taken as an
A caution: the models probably cannot
index of climate change to come within the
project discontinuities-just gradual change
next century or so, how big is that compared
-because nothing goes into the models that
with what has happened within the last cen-
will produce catastrophes. There may be
tury, or the last 10,000 years? From what I
phenomena that could produce drastic
have just said, this cannot be answered in
change, but they are not known with enough
terms of whether anyone would notice the
confidence to introduce them into the mod-
difference if every night and every morning,
els. So the reassuring gradualness may be
every winter and every summer, tempera-
an artifact of the methodology. I will return
tures were exactly three degrees higher than
to this point later.
they otherwise would have been. The ques-
This greenhouse problem, if problem it
tion is: how would a three-degree change in
proves to be, is truly one of the "global
a global average compare with what has
common." A ton of carbon emitted any-
been experienced in the past?
where on earth has the same effect as a ton
The answer is that for 10,000 years, since
emitted anywhere else. And carbon dioxide
the disappearance of the last ice age, aver-
has a long residence time in the atmo-
age temperature appears never to have var-
sphere: a century or more. There may be
ied over anything like three degrees. A band
ways to remove it, but it doesn't disappear.
of one degree Celsius would cover the cur-
The greenhouse influence on any national.
rent estimates of what average tempera-
territory depends solely on the global con-
tures have been since the dawn of recorded
centration, not in any way on what part of
history. We will be moving into a climatic
the total is due to a nation's own emissions.
regime that has never been experienced in
As I shall detail later, the costs of reduc-
the current interglacial period.
ing carbon emissions will be large compared
"Mankind will undergo greater climate
with any other emissions that have caused
change in the next 100 years than has been
concern. The costs of phasing out CFC's
experienced in the last 10,000. Properly
will be in the billions of dollars per year for
qualified, the statement is true; what it ne-
some years, and complete elimination is ex-
glects is that peoples have been migrating
pected to be feasible. The cost of reducing
over great distances for at least several
sulfuric acid may be in the tens of billions of
thousand years. Goths and Vandals, Huns,
dollars. Proposals to hold emissions of car-
West Europeans who populated North and
bon dioxide constant (with a linear increase
South America, Southerners who went
of concentration in perpetuity) or to reduce
North during the Great Depression. and
emissions by 50 percent below what they
THE AMERICAN ECONOMIC REVIEW
MARCH 1992
VOL. 82 NO
would otherwise be, beginning perhaps in
looking back, all doubt will have been re-
skyscraper:
2010, are expected to cost in the hundreds
moved. I don't know what bets are being
estate. Mc
of billions in perpetuity.
placed by "greenhouse scientists," but they
There are a few numbers worth carrying
expectancy
are cautious in public on the question.
a fifth of u
in mind. There are 700 billion tons of car-
To the second question-do the hot
Anticipati
bon in the atmosphere. (Quotations are
American summers of the past few years
been conc
sometimes in tons of carbon dioxide, rather
announce the arrival of a greenhouse, con-
drier seaso
than carbon; the figure is then 3 / 3 times as
firming predictions?-the answer is in two
large, about 2,600-billion.) Annual emis-
not anticip
parts: maybe it's the greenhouse; but it's not
become th
sions are 6 billion tons. Close to half disap-
what the greenhouse models predict. The
of effects
pears somewhere, and a little over half
global average in the four hot years of the
biotics or
remains in the atmosphere; so the concen-
past seven was only 0.2 degrees above the
most cont
tration is increasing by one-half percent per
level of the preceding 40 years; and sudden
lar image
year. It has increased 25 percent in the last
hot American summers are not what the
think we
hundred years. (Concentration is reported
models predict.
about war
more often than tonnage; it is currently
and earlie
about 350 parts per million.) And there are
III
If the W
upwards of ten trillion tons of carbon fuels
other cont
out there to be burned; if it were all burned
In anticipating the impact on human wel-
in the nex
and half stayed in the atmosphere, the con-
fare or natural systems, two kinds of uncer-
90 just pa:
centration could double at least three times.
tainty are unlikely to be dispelled soon. One
imagine th
If the carbon in the atmosphere has al-
is simply the question of what the changes
Anothe
ready increased by a quarter, has the aver-
will be in each region or locality. Current
kind of c
age temperature gone up as predicted? And
models are severely limited in their agree-
now and,
were the recent hot American summers that
ment with each other, in their handling of
since 190
stirred popular interest harbingers of green-
such topographical variables as mountain
years old
house summers to come?
ranges, and in the fineness of the grids they
when he
To the first question, the answer is that
superimpose on the globe. There is no great
climate ct
average global temperature-summer and
confidence that the models will be greatly
year-old I
winter, both hemispheres, night and
improved within the next decade or two. A
farm whe
day-has apparently risen by half a degree
chaos-like process may defeat efforts to im-
change in
in the last hundred years, but whether "as
prove local predictions; and uncertainties in
matic cha
predicted" depends on what qualifications
gross phenomena, such as the behavior of
their lifest
one reads into the predictions. The pattern
ocean currents under changed climatic con-
to tractor:
differed between the Northern and South-
ditions, may not be much better understood
the arriva
ern Hemispheres. The global average rose
soon.
mobile ar
during the first 40 years of this century, was
Even if we had confident estimates of
opment 0
level for the next 40 years, and rose during
climate change for different regions' of the
the discov
the past decade. This pattern demonstrates
world, there would still be uncertainties
ment of
that, whether or not we are witnessing the
about the kind of world it is going to be 50,
ments in
greenhouse effect, there are other decades-
75, or 100 years from now. Imagine it were
medicine,
long influences that can obscure any smooth
1900 and the climate changes associated
ally woul
greenhouse trend. (The carbon concentra-
with a three-degree average temperature in-
if instead
tion is not at issue; it is well measured and
crease were projected to 1992. On what
we inqui:
shows steady rise on a decade scale.) There
kind of world would we superimpose either
natural e
are known phenomena that could account
a vaguely described potential change in cli-
mates WC
for the irregular temperature increase of
mate or even a specific description of
impact o
the past century, and whether we are wit-
changes in the weather in all the seasons of
and econ
nessing the "signal" probably depends on
the year, even for our own country. There
A con
whether one wants high confidence to reject
would have been no way to assess the im-
climate
a null hypothesis or is about to bet money
pact of changing climates on air travel, elec-
make a V
on whether, another 25 years from now,
tronic communication, the construction of
people Ii
VOL. 82 NO. /
SCHELLING: ECONOMICS OF GLOBAL WARMING
5
куссrарers, or the value of California real
than to the way people live and earn their
estate. Most of us worked outdoors; life
living today. Today very little of our gross
expectancy was 47 years (it is now 75); barely
domestic product is produced outdoors, sus-
a fifth of us lived in cities of 50,000 or more.
ceptible to climate. Agriculture and forestry
Anticipating the automobile, we might have
account for less than 3 percent of GDP, and
been concerned with whether wetter and
little else is much affected. Some activities
drier seasons would bring more or less mud,
-tourism and holidays, professional sports,
not anticipating that the nation's roads would
and school teaching-are seasonal, but
become thoroughly paved. The assessment
many of the seasonalities are conventions
of effects on health would be without anti-
that reflect the influence of climate in ear-
biotics or inoculation. And in contrast to
lier times. (Children were needed in the
most contemporary concern with the popu-
fields in summer and could start school when
lar image of hotter summers to come, I
the harvest was in; hockey and basketball
think we would have been more concerned
used to be winter sports because one de-
about warmer winters, later frost in autumn,
pended on ice and the other could fit in a
and earlier thaw in the spring.
building.)
If the world, both North America and the
Manufacturing rarely depends on climate,
other continents, is going to change as much
and where temperature and humidity used
in the next 90 years as it has changed in the
to make a difference, air conditioning has
90 just past, we are going to be hard put to
intervened. When Toyota chooses among
imagine the effects of climate changes.
Ohio, Alabama, and Southern California for
Another thought experiment: suppose the
locating an automobile assembly, geographi-
kind of climate change expected between
cal considerations are important, but not
now and, say, 2080 had already taken place
because of climate. Minerals are extracted
since 1900. Ask somebody 50, 60, or 80
where they happen to occur, and oil fields
years old what is different compared with
and coal mines inhabit all kinds of climates
when he or she was a child. Would the
and are little affected. The U.S. Postal Ser-
mate change be noticed? Even ask a 70-
vice's vow that neither snow nor rain nor
,car-old farm couple living on the same
heat nor gloom of night will "stay these
farm where they were born: would the
couriers from the swift completion of their
change in climate be among the most dra-
appointed rounds" sounds quaint in the era
matic changes in either their farming or
of e-mail and fax.
their lifestyle? I expect changing from horses
Finance is little affected by climate; simi-
to tractors and from kerosene to electricity,
larly for health care, or education, or broad-
the arrival of the telephone and the auto-
casting. Transportation can be affected, but
mobile and the paving of roads, the devel-
improvements in all-weather landing and
opment of pesticides and artificial fertilizer,
take-off in the last 30 years are greater than
the discovery of soy beans and the develop-
any differences that climate makes. If the
ment of hybrid corn, and even improve-
average effect is a warming, iced waterways
ments in outdoor clothing, veterinary
and snow removal may decline in impor-
medicine, and agricultural practices gener-
tance. Construction is affected, mainly by
ally would swamp the climate change. And
cold, and if the average effect is in the
if instead of living and working conditions
direction of warming, construction may ben-
we inquire about changes in wildlife and
efit slightly.
natural ecosystems. changes in regional cli-
It is really agriculture that is affected. But
mates would have been competing, in their
even if agricultural productivity declined by
impact on nature, with population growth
a third over the next half century, the per
and economic development.
A conclusion we might reach is that a
climate change would have appeared to
make a vastly greater difference to the way
'An imaginative discussion is in Jesse H. Ausubel
people lived and earned their living in 1900
(1991).
6
THE AMERICAN ECONOMIC REVIEW
MARCH 1992
VOL. 82 NC
capita GNP we might have achieved by 2050
sensitive outdoor activities, 3 percent in the
countries
we would achieve only in 2051. Considering
United States, comprise 30 percent and
hopes for
that in most of the developed countries-the
more of all livelihoods in most of the devel-
terest of
United States, Japan, France, the United
oping world. Reliable forecasts of likely
may prove
Kingdom, the Netherlands, and Israel-the
climate changes in the different areas so
tains a CO!
agricultural problem has been protecting
dependent on agriculture are simply not
oping cou
farmers, that agricultural productivity in
available, so no assessment, region by re-
a disaster
most parts of the world continues to im-
gion, of the effect on productivity can be
What is de
prove, and that many crops and cultivated
provided. There is no strong presumption
by investi
plants will benefit directly from enhanced
that the climates prevailing in different re-
only when
photosynthesis due to increased carbon
gions 50 or 100 years from now will be less
uncertaint
dioxide, one cannot be certain that the net
conducive to food production. But there is
developme
impact on agricultural productivity will be
also no assurance that climate changes will
tive direct
negative or, if negative, will be noticed in
not be harmful, and even if on balance the
not econo
the developed world.
impact is neutral, there may be large areas
is growth
I conclude that in the United States, and
with large populations that suffer severely.
account.
probably Japan, Western Europe, and other
Those people are vulnerable in a way that
A relate
developed countries, the impact on eco-
Americans, Western Europeans, and
portant fc
nomic output will be negligible and unlikely
Japanese are not.
spects. Or
to be noticed. 2 And there is no reason to
Nor can the impact on health be dis-
veloping (
believe that in these countries there could
missed or readily subsumed among gener-
population
be a noticeable impact on health. Any in-
ally improving health conditions, as for the
merely di!
fluence of climate on health in this country
developed world. Numerous parasitic and
but for a
would be more in the regional distribution
other vector-borne diseases affecting hun-
means me
of the population than in changes in local
dreds of millions of people are sensitive to
holding p
and regional climates.
climate. Again, there is no strong presump-
the next C
Comfort is worth considering. Fortu-
tion that malaria mosquitos, to take an ex-
much for
nately, the climate models predict a greater
ample, will on balance benefit from climate
heroic Ch
warming in winter than in summer. Most
changes, but the risk is there.
with 2-per
people in the United States, Japan, and
It is with the less-developed countries that
The oth
Western Europe go south for vacation, both
we have to be most careful about superim-
the most
summer and winter; and when people move
posing the climates of the future on the
change or
upon retiring in the United States they typi-
economies and societies of today. As it was
would be
cally move toward warmer climates. In fu-
in our own country during this century, the
est parts
ture years, elderly people may suffer more
trend in developing countries is to be less
depends
heat stroke in summer in St. Louis, but we
dependent on agriculture and less vulnera-
stomachs.
can hope for fewer broken bones from ice
ble to climate in transportation and other
changes
in Boston. (Inhaling air richer in carbon
activities and health. If per capita income
would be
dioxide has no effect on health.)
growth in the next 40 years compares with
now asso
the 40 years just past, vulnerability to cli-
had popu
IV
mate change should diminish, and the re-
they total
sources available for adaptation should be
world, the
This complacent assessment cannot be
greater. I say this not to minimize concern
ple is pro
extended to the much larger population of
about climate change, but to anticipate the
creasing (
the underdeveloped world. The livelihoods
question of whether developing countries
At this
earned in agriculture and other climate-
should make sacrifices in their development
the concli
to minimize the emission of gases that may
no self-in
change climate to their disadvantage. Their
bon cons
best defense against climate change may be
world ca
²A comprehensive discussion of both impacts and
costs of abatement is provided by William D. Nordhaus
their own continued development.
penalties
(1991a). A carefully argued opposing view is that of
This is a point worth emphasizing. Some
There is
William R. Cline (1992).
environmentalists argue that developing
may be
VOL. 82 NO. 1
SCHELLING: ECONOMICS OF GLOBAL WARMING
7
untries should sacrifice some of their
those who can afford to do anything about
hopes for economic development in the in-
it.
terest of slowing the climate change that
may prove disastrous. But the advice con-
V
tains a contradiction Any disaster to devel-
oping countries from climate change will be
Why should the rich developed countries
a disaster to their economic development.
care enough about climate change to do
What is desired is to optimize development
anything about it? The answer must depend
by investing in greenhouse-gas abatement
partly on how expensive it is going to be to
only when that appears, subject to all the
do anything about it. Abatement programs
uncertainties, to contribute more to their
have been examined in a number of econo-
development in the future than the alterna-
metric models that suggest we might want
tive direct investment in development. It is
to treat:as pertinent the sacrifice of perhaps
not economic growth versus environment; it
2 percent of world GNP in perpetuity.
is growth with the environment taken into
A strong argument for trying seriously to
account.
slow climate change is that the developing
A related point: population growth is im-
countries are vulnerable and we care. De-
portant for the climate change, in two re-
veloped countries are currently providing
spects. One is that carbon emissions in de-
$50 billion per year of assistance to the
veloping countries are positively driven by
developing world; we would be talking about
population; population growth does not
expending or forgoing perhaps 4-8 times
merely dilute carbon emissions per capita,
that much to slow emissions and slow cli-
but for a number of reasons more people
mate change. Whether people in the devel-
means more carbon. If China succeeds in
oped democracies could be mobilized to
holding population growth to near zero for
contribute so much to benefit, half a cen-
the next couple of generations, it may do as
tury from now, the people in the countries
much for the earth's atmosphere as would a
we now call developing I do not know, but I
eroic Chinese anticarbon program coupled
believe that if the developed countries were
with 2-percent annual population growth.
prepared to invest, say, $200 billion per year
The other population effect is simply that
in greenhouse-gas abatement, explicitly for
the most likely adverse impact of climate
the benefit of developing countries 50 years
change on human productivity and welfare
or more from now, the developing countries
would be on food production. In the poor-
would clamor to receive the resources im-
est parts of the world, the adequacy of food
mediately in support of their continued de-
depends on the number of mouths and
velopment. There would undoubtedly be-
stomachs. In a hundred years, adverse
abatement opportunities so cheap that they
changes in climate for food production
could compete with direct aid to developing
would be far more tragic if the countries we
countries, but it would be hard to make the
now associate with the developing world
case that the countries we now perceive as
had populations totaling 12 billion than if
vulnerable would be better off 50 or 75
they totaled 9 billion. For the developing
years from now if 10 or 20 trillions of dol-
world. the increasing concentration of peo-
lars had been invested in carbon abatement
ple is probably more serious than the in-
rather than in their economic development.
creasing concentration of carbon dioxide.
A second argument for an expensive pro-
At this point. I appear to have reached
gram of carbon abatement is that, while our
the conclusion that the developed world has
production of material goods and services
no self-interest in expensively curtailing car-
may not suffer from climate change, our
bon consumption and that the developing
natural environment may be severely dam-
world cannot afford to incur economic
aged. Natural ecosystems will be destroyed;
penalties to slow the greenhouse effect.
plant and animal species will become ex-
There is a mismatch between those who
tinct. Places of natural beauty will be de-
may be vulnerable to climate change and
graded. Valuable chemistries of plant and
8
THE AMERICAN ECONOMIC REVIEW
MARCH 1992
VOL. 82
animal life will be lost before we learn their
sea level were to happen it would take at
change,
genetic secrets. And the earth itself de-
least a few hundred years and be gradual,
money.
serves our respect. For many people, some-
not sudden. But there isn't any scientific
I have
thing close to religious values are at stake.
principle according to which all alarming
ing to in
This issue is doubly difficult to assess. It is
possibilities prove to be benign upon further
countrie:
difficult to know how to value what is at
investigation.
ment in
risk, and it is difficult to know just what is at
A currently discussed likely source of dis-
wilderne
risk. Even-if climate changes at each point
continuous change is in the way oceans be-
ecosystei
in time could be predicted accurately, the
have. Amsterdam is north of Newfound-
climate I
impacts on natural ecosystems could not yet
land, yet is warmer, courtesy of the Gulf
there ha
be determined. And the benefits of slowing
Stream. There is some indication that in
might be
climate change by some particular amount
earlier interglacial periods ocean currents
ecosyster
would be even more uncertain. We know
may have pursued different courses. If a
10 trillic
that carbon fuels are not going to be discon-
current like the Gulf Stream, or the
carbon e
tinued; the issue is the marginal gains, from
Japanese Current for the United States,
carbon abatement and a slowing of climate
switched into an alternative pattern, the cli-
change, in the survival of species and
matic consequences might be both sudden
ecosystems and the preservation of enjoy-
and severe. (Paradoxically, global warming
What
able environments. This is an issue that
might freeze Western Europe.)
carbon e
simply has not been addressed.
Insurance against catastrophes is thus an
the carb
The third argument for spending heavily
argument for doing something expensive
I believe
to slow climate change is that the conclu-
about greenhouse emissions. But to pay a
especiall
sions I reported earlier may be quite wrong.
couple percent of GNP as insurance pre-
are other
I said that the climate models predict that
mium, one would hope to know more about
Trees
climates will change slowly and not much;
the risk to be averted. I believe research to
it out of
the models do not produce discontinuities,
improve climate predictions should be con-
burn it {
surprises, catastrophes. What is known about
centrated on the extreme possibilities, not
new fore:
weather and climate constitutes an equilib-
on modest improvements to median projec-
maturity
rium system.
tions.
75 or 10
The possibility has to be considered that
I said that current estimates suggest that
ishes itse
if global temperature increases, not by the
it might cost a couple percent of GNP to
oxidized
median estimate of three degrees Celsius
postpone the doubling of carbon in the at-
does not
for a doubling of carbon in the atmosphere,
mosphere by several decades. Is 2 percent a
vested,
but by four or five degrees and continues to
big number or a small one?
frames 01
rise beyond the doubling because carbon
That depends on your perspective and on
or more;
fuels are still in use worldwide, some atmo-
what the comparison is. In recent years 100
them an
spheric or oceanic circulatory systems may
billion dollars per year in budgets or taxes
sive. The
switch to alternative equilibria, producing
has been a politically unmanageable magni-
Academy
regional changes that are both sudden and
tude in the United States. On the other
estation
extreme.
hand, subtracting 2 percent from GNP in
quester
Have any such possibilities been thought
perpetuity lowers the GNP curve by not
carbon C
of? One that was thought of but diminished
much more than the thickness of a line
for that ]
upon further investigation was the possibil-
drawn with a number-two pencil, or to for-
the work
ity that the west Antarctic ice sheet might
mulate it as I did earlier, it postpones the
glaciate into the ocean and raise the sea
GNP of 2050 until 2051. I say this not to
level by 20 feet. As recently as 15 years ago,
belittle the loss of 10 trillion dollars from
1 Their e
the best scientific judgment was that this
the American GNP over the next 60 years,
"low to me
could happen within 75 years as a result of
but only to point out that the insurance
mentally m.
global warming. This prospect naturally at-
premium, if we choose to pay it, will not
cral forest
tracted attention, and further investigation
send us to the poorhouse. The proper ques-
Academy (
issues in
with the help of newly available satellite
tion is whether, if we were prepared to
Andrew PI
sensing of glacial movement led to reassur-
spend 2 percent of our GNP in the interest
optimistic c
ing estimates that if that catastrophic rise in
of protecting against damage due to climate
Robert J. 1
VOL. 82 NO. /
SCHELLING: ECONOMICS OF GLOBAL WARMING
9
change, we might find better use for the
we should conclude that reforestation can
money.
contribute, but not greatly.
I have mentioned one use: directly invest-
Stopping or slowing deforestation is im-
ing to improve the economies of the poorer
portant for reasons other than carbon emis-
countries. Another would be direct invest-
sions but is quantitatively more important
ment in preserving species, ecosystems, or
than reforestation. Reforestation is unlikely
wilderness areas. There is concern that many
to take up as much as 100 billion tons of
ecosystems could not migrate as rapidly as
carbon; deforestation, in areas where defor-
climate may change in the coming century;
estation is likely, could contribute several
there has been little investigation of what
hundred billion tons of carbon, partly be-
might be done to facilitate the migration of
cause forest subsoils contain carbon typi-
ecosystems if the alternative is to invest 5 or
cally greater than the amount in the trees
10 trillions of dollars in the reduction of
themselves, and this carbon is subject to
carbon emissions.
oxidation when the trees are removed.
Carbon can be "scrubbed" from stack
VI
gases, probably not with any known technol-
ogy that would make such removal econom-
What can be done to reduce or offset
ically competitive with reducing emissions.
carbon emissions? Reducing energy use and
(Part of the expense is disposing of sludge;
the carbon content of energy have received,
where gaseous carbon might be pumped
I believe properly, most of the attention,
into the ocean or into underground cavities,
especially the attention of economists. There
economical disposal may prove feasible.)
are other possibilities to mention.
Parallel to reforestation is the idea of en-
Trees store carbon. In growing, they take
hancing oceanic photosynthesis, by "fertiliz-
it out of the atmosphere. When they rot or
ing" the oceans, possibly with iron, if enough
burn it goes back into the atmosphere. A
of the carbon residues from the enhanced
new forest will absorb carbon until it reaches
growth will sink rather than remain near the
maturity (i.e., maximum carbon density) in
surface. Experiments would probably be re-
75 or 100 years. If it then merely replen-
versible and modest in scale; their political
ishes itself, with new growth replacing the
acceptability may be tested in the near fu-
oxidized dead trees, it holds its carbon but
ture.
does not absorb more. If trees are har-
Finally-although nothing is final in a
vested, the lumber that becomes house
subject as new as the one we are talking
frames or furniture may last a hundred years
about-there are numerous possibilities for
or more; removing mature trees and storing
putting substances or objects in orbit or in
them anaerobically is possible but expen-
the stratosphere to reflect something like 1
sive. The most recent report of the National
percent of incoming sunlight to offset a large
Academy of Sciences considered that refor-
part of the radiation imbalance caused by
estation in the United States might se-
greenhouse gases. Some of these are as
quester 2-3 percent of current global
apparently innocuous as stimulating cloud
carbon dioxide emissions. 3 The prospects
formation, and some are as dramatic as
for that kind of reforestation in the rest of
huge mylar balloons in low earth orbit. Un-
the world are not nearly so promising, and
til very recently these possibilities were
nearly unmentionable, but they have re-
cently been dignified by inclusion, along with
Their estimate is 10 percent of U.S. emissions at
caveats about "large unknowns concerning
"low to moderate cost" on economically or environ-
possible environmental side effects," in the
mentally marginal crop and pasture lands and nonfed-
1991 report of the National Academy of
eral forest lands in the United States (National
Sciences. I shall not pursue them here, ex-
Academy of Sciences. 1991 p. 57). A review of the
issues in both afforestation and deforestation by
cept for two observations. First, if in decades
Andrew Plantinga is in Joel Darmstadter (1991); an
to come the greenhouse impact begins to
optimistic estimate of the afforestation option is that of
confirm the more alarmist expectations, and
Robert J. Moulton and Kenneth R. Richards (1990).
if the economic sacrifices required to reduce
10
THE AMERICAN ECONOMIC REVIEW
MARCH 1992
VOL. 82
emissions prove unmanageable for eco-
of emissions now and would be expected to
The
nomic or political reasons, some of these
account for half by the middle of the next
of the
"geoengineering" options will invite atten-
century.
been (
tion. Second, if they do, and especially if
Any estimate of the cost of abatement
availab
they prove to be within the budgetary capa-
needs therefore to specify at least half a
bulbs t.
bilities of individual nations, international
dozen target assumptions. Furthermore, the
dows a
greenhouse diplomacy will be transformed.
estimates are produced by people and insti-
gines,
tutions that do not simultaneously estimate
success
VII
the costs associated with climate change,
ues, ar
either damages or costs of adapting; the
Science
What remains nearly certain is that the
estimates do not optimize the combined
but no
main responses to the greenhouse threat
costs of abatement and climate change. A
for res
will be adapting to climate as climate
"not unreasonable" target for reduction
transp
changes and reducing carbon emissions.
might be delaying a doubling by, say, four
improv
(CFC's are potent greenhouse gases and, if
decades. One decade might be too trivial, a
supply
unchecked, might rival carbon dioxide in
century too ambitious, and four decades an
tions i
decades to come; but international actions
objective in which most audiences would be
reduce
are making good progress and are among
interested. But nobody who makes such an
sions t
the cheapest ways of reducing greenhouse
estimate wishes to be interpreted as propos-
levels
emissions.)
ing that when all the uncertainties about
the pr
Like estimates of warming, estimates of
climate changes and their impacts have been
p. 73).
the costs of reducing emissions require some
resolved, if they ever are resolved, the opti-
All (
common but arbitrary objective to be com-
mum reduction in emissions will be found
nal to
parable. A doubling of carbon became the
to retard doubling by 40 years, or any other
Acade
conventional benchmark for warming esti-
specified period of time.
was un
mates; no such benchmark for reduced car-
All I can do to summarize a multitude of
these
bon emissions has been adopted for estimat-
estimates is to specify an order of magni-
have T
ing costs. (In principle, the estimates could
tude that many economists and the Con-
ment,
adopt that doubling: the issue could be for-
gressional Budget Office would not consider
tion o
mulated as the cost of retarding the dou-
outrageous. That is the figure I mentioned
percer
bling time by a decade, two decades, or half
earlier, possibly 2 percent of GNP for the
U.S. e
a century.) Most estimates take as their
developed countries and a similar, but even
possib
target a reduction of emissions either to a
much more uncertain, percentage of GNP
What
specified fraction of what they would be in
for the developing world. The uncertainty
a onc
the absence of controls, or to some fixed
for the developing world is partly due to the
techn
ratio to the emissions of 1990 or the pro-
estimates being mainly derived from the
perm:
jected emissions of 2000 or 2010. The esti-
American economy.4
strong
mates examine minimum-cost trajectories,
Two characteristics of these' estimates
accon
implicitly or explicitly assuming something
need to be emphasized. One is that they
decad
like a uniform tax on the carbon content of
tend to assume optimal technological ad-
fuel as the policy instrument. They typically
justment, as in response to a carbon tax. To
make some assumption about a "fallback"
the extent that carbon emissions are con-
energy technology, at least for electricity,
trolled by direct regulatory measures, there
Wi
available at some price in some decade of
may be the usual expected inefficiencies,
that
the next century. They have to project esti-
and I leave the reader to make his own
reduc
mates of non-price-induced improvements
adjustment.
sider
in the use or avoidance of energy by indus-
velop
tries and households. And if they deal with
deca
global emissions, they have to make some
in the
assumption about the distribution of abate-
I ad
ment efforts among nations, especially
"Several critiques and surveys of different abate-
Anyti
ment-cost estimates are available (see Congressional
among the developing countries, which, in-
India
Budget Office, 1990; Joel Darmstadter, 1991; William
cluding China, account for about a quarter
D. Nordhaus, 1991b; Energy Modeling Forum, 1992).
the r
VOL. 82 NO. /
SCHELLING: ECONOMICS OF GLOBAL WARMING
11
The second is that, since the early years
Financing energy conservation, energy
of the energy crisis in the 1970's, there have
efficiency, and switching from high-carbon
been enthusiastic portrayals of currently
to lower-carbon or noncarbon fuels in Asia
available technologies, ranging from light
and Africa would not only be a major eco-
bulbs to electric motors, double-glazed win-
nomic enterprise but a complex effort in
dows and improved internal-combustion en-
international diplomacy and politics. If suc-
gines, that for some reason have not been
cessful, it would increase the costs to the
successfully marketed. The interest contin-
developed world by at least another percent
ue's, and the recent National Academy of
or two on top of the 2 percent I mentioned.
Sciences study gave sympathetic attention,
It is furthermore not easy to hide the trans-
but no analysis, to a number of proposals
fer of resources on the order of a couple of
for residential, commercial, industrial, and
hundred billion dollars, dollars "budgeted"
transportation energy management and for
somehow or other, compared with hiding
improved electricity production and fuel
some of the costs due to regulation, such as
supply and concluded that, including reduc-
automobile fuel-efficiency standards in the
tions in CFC's, "The United States could
United States. The kind of thing we are
reduce or offset its greenhouse gas emis-
talking about is inducing the Chinese,
sions by between 10 and 40 percent of 1990
through our somehow offsetting their cost,
levels at low cost or at some net saving, if
to forgo a massive electrification based on
the proper policies are implemented" (1991
coal and the cheapest coal-combustion tech-
p. 73).
nology. Without engaging in blackmail, the
All of these ideas are completely orthogo-
Chinese can assert that it is not in their
nal to the econometric estimates. The
interest to do that at their own expense,
Academy panel that produced the report
even if they are the keystone of a "social
was unable to offer an explanation for why
contract" and no other nation will do any-
these low-cost or negative-cost technologies
thing unless the Chinese fully participate.
have not caught on. Its quantitative assess-
I shall sketch what I can imagine as a
ment, including an allowance for elimina-
major attack on the greenhouse problem.
tion of CFC's, ranged from as little as 10
And I should be explicit about what I can-
percent to as much as 40 percent of current
not imagine. For reasons that I would be
U.S. emissions; CFC's aside, their range of
delighted to elaborate but for which I can-
possibility is from zero to about 30 percent.
not take space here, a universal uniform
Whatever the correct figure, this is probably
carbon tax is not a solution that I can imag-
a once-and-for-all backlog of accumulated-
ine. My reason is simple. A carbon tax suf-
technologies, which once exploited may be
ficient to make a big dent in the greenhouse
permanent but not progressive. But the
problem would have to be roughly equiva-
strong suggestion is that there is a lot to be
lent at least to a dollar per gallon on motor
accomplished in the next two or three
fuel, and for the United States alone such a
decades.
tax on coal, petroleum, and natural gas
would currently yield close to half a trillion
VIII
dollars per year in revenue. No greenhouse
taxing agency is going to collect a trillion
With these qualifications, let us look at
dollars per year in revenue; and no treaty
that 2 percent of GNP as a permanent
requiring the United States to levy internal
reduction over the coming century. I con-
carbon taxation at that level, keeping the
sider it altogether improbable that the de-
proceeds, would be ratified by the Senate.
veloping world, at least for the next several
Reduce the tax by an order of magnitude
decades. will incur any significant sacrifice
and it becomes imaginable, but then it be-
in the interest of reduced carbon (nor would
comes trivial as greenhouse policy. 5
I advise developing countries to do so).
Anything done to reduce emissions in China,
India. or Nigeria will be at the expense of
⁵A careful treatment of the universal carbon tax is
the richer countries.
provided by James M. Poterba (1991).
12
THE AMERICAN ECONOMIC REVIEW
VOL. 82 NO
Tradable permits have been proposed as
Marshall Plan dollars; there was
difficult to
an alternative to the tax. There are two
explicit criterion, such as equalizing
can comm
main possibilities: (i) estimating "reasona-
standards, equalizing growth rates. maximiz-
utilities W!
ble" emissions country by country and es-
ing aggregate output or growth, or establish-
now. The
tablishing commensurate quotas or (ii) dis-
ing a floor under levels of living. Baseline
mandate f
tributing tradable rights in accordance with
dollar-balance-of-payments deficits
mobiles, b
some "equitable" criterion, such as equal
point of departure, but the negotiations took
dards to W
emissions per capita (a possibility that has
into account investment needs. traditional
fleet, and
actually been discussed). Depending on how
consumption levels, war-induced capital
that will e
restrictive the aggregate of such tradable
needs, opportunities for import substitution
consumptio
emission rights might be, the latter is tanta-
and export promotion, and opportunities to
efficiency i
mount to distributing trillions of dollars in
substitute intra-European trade for trade
The cur
discounted value and making, for a country
with hard-currency countries.
participatic
like Nigeria, the outcome of its population
The United States insisted that the recip-
take the f
census the country's major economic policy.
ients argue out and agree on shares. In the
percentage
If, instead, quotas are negotiated to corre-
end, they did not quite make it, the United
those of SI
spond to every country's currently "reason-
States having to make the final allocation.
2000. I car
able" emissions level, they will surely be
But all the submission of data and open
of such a
renegotiated every 5 or 10 years, and selling
argument led, if not to consensus, to a rea-
insincerity.
an emissions right will be perceived as evi-
sonable appreciation of each nation's needs.
ify policies
dence that a quota was initially too gener-
The negotiations were professional: they
sidies and
ous. It is unlikely that governments will en-
were assisted by a proficient secretariat. The
search and
gage in trades that acknowledge excessive
resources involved for most recipient coun-
very uncer
initial quotas.
tries were immensely important. Good rela-
feet on em
I do not foresee negotiated national quo-
tions were observed throughout; and profi-
forum, go'
tas subject to serious enforcement, espe-
ciency in debate, acceptance of criteria. and
what acco
cially enforcement through financial penal-
negotiating etiquette steadily improved.
or had not
ties. I think any international regime for
That is the only model I find plausible,
for the em
carbon abatement can seriously include only
and I believe distribution of Marshall Plan
Such a
the developed countries, and I exclude from
and defense-support funds to Europe is the
finding a и
this category the countries that we used to
only model of multilateral negotiation in-
national e
call the Eastern Bloc. I can easily imagine
volving resources commensurate with the
greenhous
institutional arrangements that are univer-
cost of greenhouse abatement. (In the first
rangement
salist, some kind of "framework agreement"
year, Marshall Plan funds were about 1.5
mittal whe
to which every country subscribes, with spe-
percent of U.S. GNP and-adjusting for
ronment i
cific commitments to be negotiated later.
overvalued currencies-probably 5 percent
June. Thi:
But I expect serious commitments to be
of OEEC GNP).
among the
undertaken only by the countries that can
What that model suggests is that the main
initially up
afford to, and I am undecided whether an
participating countries in a greenhouse-
their popi
institutional pretense of a universalist sys-
abatement regime would submit for each
greenhous
tem has advantages or, instead, the devel-
other's scrutiny and cross-examination plans
oped world should proceed independently
for reducing carbon emissions. The plans
and unencumbered with the need for a uni-
would be accompanied by estimates of
versalist facade.
emissions or emissions reduction from some
A major
The model that I find most helpful in
projected level, but any commitments un-
sions abat
conceptualizing a greenhouse regime among
dertaken would be to the policies, not the
surely too
emissions. And not all of the plans would
now. A de
the richer countries is the negotiations
effort wou
among the countries of Western Europe for
necessarily be commitments.
The United States, for instance, could
ferent fror
distributing Marshall Plan dollars among
themselves and the negotiations, beginning
present a plan for the introduction of a new
since Wor!
be direct
in 1951, on "burden sharing" in NATO.
generation of nuclear power reactors begin-
There was never a formula for distributing
ning sometime in the next century, but it is
through V
VOL. 82 NO. I
SCHELLING: ECONOMICS OF GLOBAL WARMING
13
difficult to see how the federal government
that same global common. There would be,
can commit itself to what reactors public
for the first time, a single criterion: econo-
utilities will be purchasing 20 years from
mizing carbon. In the abstract, aid recipi-
now. The United States can have a plan to
ents in the war on greenhouse gases would
mandate fuel-efficiency standards for auto-
not compete; they would not make India-
mobiles, but it takes 10 years for the stan-
Pakistan comparisons, or Arab-Israel, or
dards to work their way into the automobile
Poland-Czechoslovakia All would in prin-
fleet, and there is no accounting procedure
ciple benefit equally from maximum carbon
that will estimate the effect on motor-fuel
conservation, wherever it could be achieved.
consumption of any level of average fuel
Trees may grow more rapidly, in carbon
efficiency a decade from now.
content, in Madras or Szechuan or Borneo
The current popular expectation is that
or Alaska or South Carolina, but if someone
participation in any greenhouse regime will
were willing to finance the growth of a tree
take the form of commitments to specified
to absorb carbon dioxide, the citizens of
percentage reductions of emissions below
those states should not have the slightest
those of some specified year, like 1990 or
care where the tree were to be planted; they
2000. I cannot help believing that adoption
all benefit solely from the carbon fixed in
of such a commitment is an indication of
the tree and benefit more, the faster the
insincerity. A serious proposal would spec-
tree grows, no matter where it grows.
ify policies, like taxes, regulations, and sub-
It wouldn't work that way, of course.
sidies and would specify programs (like re-
Somebody gets the shade, or leases land for
search and development), accompanied by
the tree; and if it's not a tree but a nuclear
very uncertain estimates of their likely ef-
power plant to supplant coal, there are local
feet on emissions. In an international public
impacts that make huge differences, and
forum, governments could be held some-
negotiations over sharing the cost differen-
what accountable for the policies they had
tial between the coal and the nuclear plants.
or had not put into effect, but probably not
But it is worth noticing that if there were a
for the emissions levels achieved.
"pure" carbon-abatement or carbon-absorb-
Such a modest beginning will require
ing technology, one that accomplished noth-
finding a way to sublimate the current inter-
ing else, there should be no dispute about
national enthusiasm for a new universalist
locating it wherever it would be most effec-
greenhouse regime into institutional ar-
tive. That is new in foreign aid and foreign
rangements that are helpful but noncom-
investment.
mittal when the U.N. Conference on Envi-
If the developed countries ever manage
ronment and Development convenes next
to act together toward the developing coun-
June. This will require an understanding
tries, their bargaining position is probably
among the developed countries that it is
enhanced by the fact that cleaner fuels and
initially up to them to find a way to mobilize
more efficient fuel technologies bring a
their populations in support of national
number of benefits other than reduced car-
greenhouse policies.
bon, and recipients of greenhouse aid will
be actively interested parties, not merely
IX
neutral agents attending to the global atmo-
sphere. At the same time, large nations like
A major commitment to financing emis-
India and China will be aware of the extor-
sions abatement in the developing world is
tionate power that resides in ambitious
surely too far away to need specific plans
coal-development projects.
now. A developing-world carbon-abatement
On a greatly reduced scale, there may be
effort would. in principle, be altogether dif-
something constructive to do more immedi-
ferent from foreign aid as we have known it
ately. There is a huge difference between
since World War II. In principle it would all
transferring "technology" and transferring
be directed. from whatever sources and
capital goods that embody technology or,
through whatever channels, to protecting
going further, financing entire investments
14
THE AMERICAN ECONOMIC REVIEW
MARCH 1992
(local construction, etc.) in which the tech-
Moulton, Robert J. and Richards, Kenneth R_
nology is embedded. The difference in cost
"Costs of Sequestering Carbon Through
is at least an order of magnitude. While the
Tree Planting and Forest Management in
developed countries are feeling their way
the United States," General Technical
into some common attack on their own car-
Report WO-58, Forest Service, U.S. De-
bon emissions, a tangible expression of their
partment of Agriculture, Washington,
interest and an effective first step would be
DC, December 1990.
to establish a permanent means of funding
Nordhaus, William D., (1991a) "Economic
technical aid and technology transfer for
Approaches to Greenhouse Warming," in
developing countries, as well as research,
Rudiger Dornbusch and James M.
development, and demonstration in
Poterba, eds., Global Warming: Economic
carbon-saving technologies suitable to those
Policy Responses, Cambridge, MA: MIT
countries. Eventually the rural Chinese
Press, 1991, pp. 33-66.
household may cook more efficiently with
, (1991b) "The Cost of Slowing Cli-
nuclear-powered electricity, but for another
mate Change: A Survey," Energy Journal,
generation or two what is important is less
1991, 12 (1), 37-66.
carbon-wasteful ways of cooking and heat-
Poterba, James M., "Tax Policy to Combat
ing.
Global Warming: On Designing a Carbon
Maybe there is a role here for the carbon
Tax," in Rudiger Dornbusch and James
op:
tax. Western Europe, North America, and
M. Poterba, eds., Global Warming: Eco-
lov
Japan will be burning 3 or 4 billion tons of
nomic Policy Responses, Cambridge, MA:
inc
carbon per year for the next decade. Taxing
MIT Press, 1991, pp. 71-97.
fro
themselves, that is, contributing in propor-
Congressional Budget Office, Carbon Charges
an
tion to the carbon they consume, at one,
as a Response to Global Warming: The
be
two, or three dollars per ton, they could
Effects of Taxing Fossil Fuels, Washington,
tio
contribute to a fund that might begin at $3
DC: U.S. Government Printing Office,
the
billion per year and grow to $10 billion. The
1990.
ins
carbon tax is a little arbitrary here, and a
Energy Modeling Forum, "Global Climate
off
U.S. administration may be wary about a
Change: Energy Sector Impacts of Green-
ab
precedent that carries over when the tax
house Gas Emission Control Strategies,"
flu
rises an order of magnitude, but compared
ati
Energy Modeling Forum Report No. 12,
with alternative criteria for sharing costs it
for
Stanford University, 1992 (forthcoming).
might not even be a bad precedent.
nc
Intergovernmental Panel on Climate Change,
cr
Climate Change: The IPCC Scientific As-
REFERENCES
sessment, J. T. Houghton, G. J. Jenkins,
ho
and J. J. Ephraums, eds., Cambridge:
hc
Ausubel, Jesse H., "Does Climate Still Mat-
Cambridge University Press, 1990.
TI
ter?" Nature, 25 April 1991, 350, 649-52.
National Academy of Sciences, Carbon Dioxide
CO
Cline, William R., The Greenhouse Effect:
and Climate: A Scientific Assessment,
fa
Global Economic Consequences, Washing-
Washington, DC: National Academy of
IS
ton, DC: Institute for International Eco-
Sciences, 1979.
nomics, 1992 (forthcoming).
, Carbon Dioxide and Climate: A
Darmstadter, Joel, "The Economic Cost of
Second Assessment, Washington, DC: Na-
CO₂ Mitigation: A Review of Estimates
tional Academy Press, 1982.
W
for Selected World Regions," Discussion
,
Policy Implications of Greenhouse
sit
Paper ENR91-06, Resources for the Fu-
Warming, Washington, DC: National
"I
Sh
ture, Washington, DC, 1991.
Academy Press, 1991.
Dr
Br
M
tic
Jc
sc
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4
Divider Title:
A Brief History of the Administration Position on Global Climate Change
1.
Global Climate Change. Growing concentrations of greenhouse gases are believed to
result in global climate change. The possible risks include loss of coastal areas from rising sea
levels; changes in rainfall and agricultural productivity; and an increased incidence of diseases
such as malaria, yellow fever, and cholera. Carbon dioxide (CO2) accounts for approximately
86% of the total global warming potential of all U.S. anthropogenic emissions not covered by the
Montreal Protocol to protect stratospheric ozone. Combustion of fossil fuels, primarily coal and
oil, is the main source (85% of all emissions).
2.
Climate Change Action Plan. In June 1992, the United States signed the Framework
Convention on Climate Change whose primary objective is to stabilize "greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous anthropogenic
interference with the climate." In October 1993, President Clinton announced the
Administration's Climate Change Action Plan (CCAP) with a goal of stabilizing U.S.
anthropogenic emissions of greenhouse gases at 1990 levels by 2000 The plan blends market
incentives, voluntary initiatives, research and development, improved regulatory frameworks.
Voluntary programs include the Green Lights program to improve lighting efficiency and Climate
Challenge program to inventory emissions by utilities. The US is not on target to achieve this
CCAP goal, emissions are predicted to be about 200 million metric tons (mmt) over 1990 levels
by 2000.
3.
Wirth's Statement. In July 1996, Under Secretary of State Tim Wirth expressed concern
that the Convention goals were not being met and announced that the "United States recommends
that future negotiations focus on an agreement that sets a realistic, verifiable and binding medium-
term emissions target." Wirth also called for the use of "market -based solutions that are flexible
and cost-effective." The Administration also stated at this time that the call for binding targets
does not imply that it is abandoning voluntary programs under the CCAP.
4.
The Kyoto Treaty. Negotiations to amend the Rio Treaty or to sign a protocol are
scheduled for completion by December 1997. The U.S. issued a position paper for the latest
preparatory meeting (December, 1996) which expands on the Wirth's July 1996 statement. The
major points were:
(1)
The need to examine an international greenhouse gas emissions trading system
among annex I (OECD plus former Soviet block) countries.
(2)
Joint implementation (projects that reduce emissions below baseline in host
country which are credited to the target of the partner country) between annex I
and the rest of the world.
(3)
The need for a concerted global effort that eventually would mean targets for all
countries.
(4)
Support for multi-year, rather than single year, targets.
(5)
Urge consideration of a right to bank and borrow permits.
5.
Interagency Analysis Team (IAT). Since last fall the Interagency Analysis Team
(IAT), chaired by Ev Ehrlich, Undersecretary of Commerce, has been modeling the economic
impacts of alternative options for the Kyoto treaty. Three models were used to compare two
basic cases:
The base case i.e., with no new policies.
or
The climate treaty case, in which the U.S. caps total greenhouse emissions, and
then allows domestic firms to trade rights to emit carbon ("cap and trade"), with
(-
auctin
several variations.
Permit!
Variations examined to date include:
--cap U.S. emissions at 1990 levels by 2010; hold emissions constant after that;
--cap U.S. emissions at 1990 levels by 2010, plus or minus 10 percent;
--cap U.S. emissions at 1990 levels by 2020;
--auction permits, or give them to existing emitters ("grandfathering");
yes
--use auction proceeds to reduce the deficit or to reduce business and personal taxes;
--allow no trading, trading only within Annex 1, or worldwide trading.
The modelers have produced comparisons of several variables: levels of GDP, of real
consumption, fuel consumption and price by fuel type, and price of carbon permits. The variable
most likely to be displayed is the price of carbon permits (the implicit tax on carbon), together
with changes in price of different fuels.
For example, to stabilize emissions at 1990 levels in 2010, one of the models (SGM) calculated
the following permit prices ($1995) per ton of carbon for the year 2010:
---rate of energy efficiency improvement
case
base case claimants
very fast
U.S. stabilizes without trading
110
57
with Annex 1 trading only
96
55
with worldwide trading
19
Not
The same model calculates that permit prices in Western Europe would be about three times as
high for each variation.
Speed of technical change. CEA and Treasury have been concerned for some time that the IAT
is assuming very fast technical change in its modeling of climate control costs. We believe the
chosen range is much higher than the historical evidence can support. In the base case, the
energy/GDP ratio improves at one percent annually, which we believe is on the high side of
historical experience; econometric estimates of the rate of energy efficiency improvement, apart
from price effects, range from 0.5 to 1.0 percent annually. In the policy cases, the energy/GDP
ratio improves at 1.25 to 1.75 percent annually.
Announcement effect. The IAT asserts that the rate of energy efficiency improvement will jump
from 1 percent to 1.25 percent annually solely because of the "announcement effect"--i.e., merely
from the government's announcement of a policy. The idea is that once the U.S. signs a treaty
limiting carbon emissions, more money will flow into R&D on energy efficiency. This assumption
means that we will reach one-third of our reduction goal for free. Most economists, however,
would say that people will not respond to an announcement unless they believe it would be costly
not to. People may very well invest more in innovation, but at some cost. Treasury and CEA staff
have sent a memo to Ev Ehrlich asking that the models also be run using rates of technical change
consistent with historical evidence.
Emission banking and borrowing. An efficient trading program requires when and where
flexibility. This means emission banking, allowing firms save or borrow emission credits. A
minimum-cost control path would allow higher emissions in the near term in exchange for lower
emissions later. In contrast, an early-action control path is expensive for three reasons: it requires
the premature retirement of the capital stock, it fails to take advantage of technological changes,
and it crowds out other productive investment. Unfortunately, intertemporal trading has not been
discussed recently, and no longer seems to be on the agenda. Jeff Frankel has pressed the idea of
emissions windows rather than single-year targets. If the window is wide enough, this is
equivalent to emissions banking.
6.
Statement by Arrow, Solow, Nordhaus, et al. During the IAT modeling effort, on
February 13, the press carried a story that 2000 economists, including six Nobel laureates, signed
a statement supporting measures to reduce the threat of climate change. The statement endorses
conclusions from last year's report by the Intergovernmental Panel on Climate Change (IPCC),
that governments should take steps to reduce the threat of damage from global warming, that
proper policies can significantly reduce greenhouse gas emissions without harming the American
economy, and that market-based policies can significantly lower the costs of control. Some
within the Administration have claimed that this statement endorses the Administration's position.
In fact, the statement is far more general than the Administration's position.
marl ex-oneura
ECONOMISTS' STATEMENT ON CLIMATE CHANGE
"We the undersigned agree that:
I. The review conducted by a distinguished international panel of scientists
under the auspices of the Intergovernmental Panel on Climate Change has
determined that "the balance of evidence suggests a discernible human
influence on global climate." As economists, we believe that global climate
change carries with it significant environmental, economic, social, and
geopolitical risks, and that preventive steps are justified.
II. Economics studies have found that there are many potential policies to
reduce greenhouse-gas emissions for which the total benefits outweigh the
total costs. For the United States in particular, sound economic analysis
shows that there are policy options that would slow climate change without
harming American living standards, and these measures may in fact improve
U.S. productivity in the longer run.
III. The most efficient approach to slowing climate change is through
market-based policies. In order for the world to achieve its climatic
objectives at minimum cost, a cooperative approach among nations is required
--- such as an international emissions trading agreement. The United States
and other nations can most efficiently implement their climate policies
through market mechanisms, such as carbon taxes or the auction of emissions
permits. The revenues generated from such policies can effectively be used to
reduce the deficit or to lower existing taxes."
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Divider Title:
Economic Impacts
NO TREATY. Briefly, the short-term US economic impacts of NO treaty will not be that large--
only 3% of US livelihoods are earned in agriculture and other climate-sensitive outdoor activities.
Nordhaus estimated that there would be a 1% drop in US GNP for a 3°C warming. Agriculture
and forestry have been estimated to benefit from climate change. The impact on developing
countries would be larger given that their economies are much more dependent on agriculture.
TREATY. The short-term economic impacts of a treaty could be significant (0.5 - 1.5% annual
drop in GDP) if the US gets locked into a tight emissions budget without flexibility (i.e., no
emission trading, no joint implementation). [This estimate is based on the more objective-results
from the Energy Modeling Forum (EMF) in Stanford. The percentage result is robust across
different modeling runs. The IAT results are within the lower range]. In the medium term, the
worst-case scenarios predict a 2.6% drop in GDP by the year 2020. CEA prepared a review of
published literature indicating the estimated range of impacts. The median price of carbon in these
studies was $82 per ton. The median impact on GDP by 2020 was -0.6% of GDP.
Schmalensee back of the envelope-- take the EMF results and make two adjustments--add in the
costs of short term transition costs and the costs associated with the fact that we are not likely to
have very efficient regulatory regime. The likely costs could double.
Overestimation of costs. Some proponents of a tight emissions budget will claim that
economists always overestimate the costs of compliance (e.g., the SO2 market where current
permit prices ($120) are considerably less than predicted prices ($750-500)). It is often true--
estimates of economic costs of tighter environmental protection are often too high relative to
actual costs. Usually this is due to a combination of factors including changing market
fundamentals (e.g., lower energy prices), changes in the actual design of the program. While
control costs may not be as high as predicated, these people ignore the fact that environmental
regulation has still been a significant drag on the US economy (about 0.2% annual decline).
Innovation and technological solutions. Some will argue that the costs of carbon policy will
not be significant because tighter environmental regulations will induce innovative technological
silver bullets that will reduce overall costs. But these innovative offsets do not cover the costs of
the extra compliance. While case studies can be found to support the innovation offset argument,
the real question is whether there is a ubiquitous free lunch across the smorgasbord of US firms?
The evidence suggests the answer is "no." US firms and the federal government currently spend
at least $100 billion on pollution abatement and control. The magnitude of the cost offsets, as
measured by the Commerce Department's Bureau of Economic Analysis, is about $2 billion, less
than 2 percent of estimated environmental expenditures. Even if the cost offsets are doubled,
tripled, or quadrupled to account for unreported benefits, net annual spending on environmental
protection is still about $100 billion (in 1992).
Another counter to the claim is that technological solutions are also exaggerated. Recall the days
of nuclear power when the slogan was that with nuclear power electricity would be "too cheap to
meter."
What actions will decrease the costs of any given emission budget.
Flexibility through carbon trading systems and joint implementation.
CEA has fought hard for flexibility so that the most cost-savings can be attained.
Faster technological change.
Increased capital investment.
EPA's strategy. In the Domestic meetings, the EPA argues that the costs of a carbon policy will
be low given the existence of flexible programs such as emission trading and JI. In the
International meetings, EPA then argues for overly strict standards for trading and JI; these high
transaction costs will prevent the substantial potential costs reductions to go unrealized because
few nations will want to participate. In effect, they say "look the costs will be low if flexibility
exists", but their actions are to restrict flexibility. The EPA is saying let's have a policy but let's
keep the carbon reductions at home--make the US economy pay its own way.
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Remard (A7 Reft
5/19 drift 6x4
A Technical Point on Technological Change
30 May 97
There is a key technical assumption embedded in the IAT modeling efforts---the assumed
autonomous rate of technological change. Firms are assumed to adopt more energy-
efficient, less carbon-intensive production activities (e.g., use less coal and more natural
gas); consumers are assumed to adopt more energy-efficient, less-carbon intensive
consumption patterns (e.g., electric cars that get 55 mpg). This autonomous rate is often
measured by the energy-to-GDP ratio (E/GDP); it is also measured by the carbon-to-GDP
ration (C/GDP).
The autonomous rate of technological change is assumed to be independent of the
relative prices in the model. This is the so called "announcement effect," where people
change their preferences in light of the global climate change treaty. I have dubbed this
behavior the "theory of non-price policy response." People see the light once they have
been awakened by the Kyoto treaty. And they then lower their marginal rates of time
preference or lower their risk aversion, thus causing them to use more energy-efficient
technologies that they would have otherwise ignored because they were too costly.
announcemy effec: we shouldri acquiesce.
The faster the rate of this autonomous technological change the softer the blow to the
economy when the regulator introduces a carbon tax. The autonomous progress pushes
the economy into more energy-efficient, less carbon intensive activities for free.
Therefore, the higher the rate the lower the price shock from a carbon policy. The price
shock is lower because the economy has already been moving toward the goal of less
carbon on its own. The more people adjust independent of price, the smaller the blow
when the carbon policy pushes the economy the rest of the way to the goal by changing
relative prices. If we assume people are already on board, they do not need as big of a
push. This is a critical assumption because it can be manipulated to reduce the estimated
GDP losses from alternative emission budgets.
The historical rate of autonomous technological change is between -0.1 and -0.5% drop
in E/GDP per year. Note that the historical total rate of change (price-induced and non-
price induced) ranges between +0.2 to -2.9% drop in E/GDP per year. Most of this rate
is price-driven around the time of the two oil crises in the 1970s. Some researchers have
explained all the variation in the E/GDP ratio by price and input substitution, implying that
the autonomous rate is near zero.
The IAT modelers have assumed two autonomous rates of change: -1.25% and -1.75%
drop in E/GDP once the Kyoto treaty is announced. CEA and Treasury have argue
from the beginning that these autonomous rates are too large; and do not match up with
historical rates. We have dubbed this the "great leap forward." In effect what these rates
do is push a larger fraction of the economy into more energy-efficiency for free than we
should expect given historical evidence. Therefore, when we introduce the carbon policy,
the shock to the system is softened.
For example, consider the Markal-Macro model. The table below shows that the "starting
point" assumption of 1.25 E/GDP yields an implied carbon tax of $145 in 2010 (which
translates into a 39 cent gas tax). If a very faster autonomous rate is assumed (1.75), the
carbon tax falls to $77 in 2010 (21 cent gas tax). Now if we go the other way and
assume an autonomous rate (0.75) closer to historical non-price rates (0.1 to 0.5), carbon
tax increases to $162 (45 cent gas tax). This is a significant range.
Markal-Macro Model (stabilize at 1990 levels in 2010 without international emission trading)
Autonomous
technological
change
Carbon price in
Equivalent
Carbon price in
Equivalent
(E/GDP)
2010 (per ton)
gas tax (2010)
2020 (per ton)
gas tax (2020)
High (0.75)
$162
$0.45
$192
$0.52
Higher (1.25)
$145
$0.39
$130
$0.35
Very high (1.75)
$77
$0.21
$35
$0.09
The other two models, DRI and SGM, have even lower carbon prices because they have
also presumed that the economy is shifting toward more energy-efficiency independent of
price. In fact, the DRI model reduces its energy use by about 10% in 2010 independent of
price. Therefore, it should be no surprise that when the carbon policy shifts relative
prices, the shock to the economy is smaller than would otherwise be expected. EPA has
started to rationalize this autonomous rate as a "change due to expected price increases."
If that is the case, the models are double counting the price effect--once with the
expected-price-autonomous change and once with the actual price effect. They cannot
have it both ways.
Clinton Presidential Records
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Clinton Presidential Records
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Glossary
Activities Implemented Jointly
A pilot program to test the feasibility of joint
implementation projects.
Annex C Gases
A list of greenhouse gases, their global warming potential (GWP), and
sources and sinks of those gases. (e.g. carbon dioxide, methane, nitrous oxide) This list will
exclude those gases for which there is insufficient information on GWPs or monitoring and
measurement methods do not exist.
Annex I Countries Nations listed in Annex I of the FCCC; includes countries who were
members of the OECD in 1992, 11 countries in transition to a market economy, and the
European Economic Community.
Australia
Austria
Belarus
Belgium
Bulgaria
Canada
Czechoslovakia
Denmark
European Economic Community
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Latvia
Lithuania
Luxembourg
Netherlands
New Zealand
Norway
Poland
Portugal
Romania
Russian Federation
Spain
Sweden
Switzerland
Turkey
Ukraine
United Kingdom of Great Britain and Northern Ireland
United States of America
Autonomous Energy Efficiency Index (AEEI)
Rate of technology progress independent of
energy prices.
Budgets
National budgets would determine total allowable emissions over a fixed multi-
year period. Each nation would have an initial allocation which could be added to or subtracted
from through emissions trading, joint implementation projects, or banking between budget
periods.
Banking and Borrowing
If a nation does not use all of its emissions permits in a budget
period, they may be applied to the next budget period (saved). Alternatively, if a nation exceeds
its budgeted amount, it must borrow emissions credits from its next budget allocation.
Carbon Emission Trading A program (international or domestic) to allow the trading of
emissions credits between entities -- the tradeable unit would be a "tonne of carbon equivalent
emissions allowed."
Climate Change Action Plan (CCAP)
The US plan (announced Oct. 1993) to respond to
climate change, coordinated through the EPA, DOE, etc.. Goal is to stabilize U.S. anthropogenic
emissions at 1990 levels by 2000.
Early Credit When actions taken prior to the first budget period receive credit against
obligations in that period.
Energy/GDP Ratio Energy intensity, the ratio of total domestic primary energy consumption
or final energy consumption to GDP.
Evolution
Process by which non-Annex I (developing) nations are brought into the formal
binding portion of the regime.
Framework Convention on Climate Change
UN convention to coordinate an
international response to global climate change. Signed in Rio during the "Earth Summit," the
convention entered into force in March 1994, and has been ratified by nearly 160 countries.
Global Warming Potential (GWP) The potential of a given greenhouse gas to cause global
warming relative to a ton of carbon dioxide over a 100 year period.
Imputed Value of Carbon The implicit carbon tax.
Intergovernmental Panel on Climate Change (IPCC) An assessment group of international
experts brought together by the World Meteorological Organization (WMO) and the United
Nations Environment Program (UNEP) to assess scientific information on climate change and
the environmental and socio-economic impacts of climate change.
Joint Implementation (JI) A system for granting emissions credits to a country for
implementing emissions reductions projects in other countries. This differs from emissions
trading in that credits are generated through specific projects and can be carried out between
parties with budgets and those without budgets. Activities Implemented Jointly (AIJ) is a current
pilot test of such a system.
Paper Tons In a cap and trade system, nations whose annual emissions have gone down since
the base year would have immediate surplus emissions credits. These credits are called paper
tons.
When & Where Flexibility Refers to the choices nations will have to reduce emissions
geographically (where) and temporally (when).
Revenue Recycling Using revenues generated through carbon taxes or permit programs to
reduce the federal deficit, or business or personal taxes.
Sinks Processes, such as forest growth, that absorb greenhouse gases.
Acronyms
AIJ
Activities Implemented Jointly
AEEI
Autonomous Energy Efficiency Index
CCAP
Climate Change Action Plan
AHBM
FCCC
Framework Convention on Climate Change
GHG
Greenhouse gases
GWP
Global Warming Potential
IPCC
Inter-Governmental Panel on Climate Change
IAT
Interagency Analysis Team
MMTCE
Million Metric Tonnes of Carbon Equivalent
)1
PPM
Parts Per Million
TCE
Tonne of Carbon Equivalent
UCE
Units of Carbon Equivalent