Economics

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Press Release: New Report Examines Impacts of Storing Carbon

Press Release           
For Immediate Release:  January 19, 2005             

Contact:  Katie Mandes
703.516-0606 

CLIMATE SOLUTIONS AND FORESTS
New report examines the economic and climate impacts of storing carbon in trees

Washington, DC — Cost-effective climate change policies should include storage of carbon dioxide (CO2) in U.S. forests, according to a new report from the Pew Center on Global Climate Change. 

“Climate change is the major global environmental challenge of our time and in order to deal with it in the most cost-effective way, we need to consider the full range of solutions – and that includes carbon storage in forests,” said Eileen Claussen, President of the Pew Center on Global Climate Change.  “If we ignore the potential for forest-based sequestration, any projection of the costs and feasibility of addressing climate change is going to be overly pessimistic and wrong.”

Most analyses of the climate issue have tended to focus on the implications of reducing emissions of carbon dioxide and other greenhouse gases from key industrial and transportation sources. Less attention is paid to the potential for storing (or “sequestering”) carbon in forests and other ecosystems.  Both emissions reduction and carbon sequestration are important strategies for addressing climate change.

The Pew Center report, The Cost of U.S. Forest-based Carbon Sequestration, investigates the potential for incorporating land-use changes into climate policy.  Authored by economists Robert Stavins of Harvard University and Kenneth Richards of Indiana University, the Pew Center report looks at the true “opportunity costs” of using land for sequestration, in contrast with other productive uses. The report also examines the many factors that drive the economics of storing carbon in forests over long periods of time.

Among the authors’ key conclusions: The estimated cost of sequestering up to 500 million tons of carbon per year—an amount that would offset up to one-third of current annual U.S. carbon emissions—ranges from $30 to $90 per ton. On a per-ton basis, this is comparable to the cost estimated for other options for addressing climate change, including fuel switching and energy efficiency.

A sequestration program on the scale envisioned by the authors would involve large expanses of land and significant up-front investment. As a result, implementation would require careful attention to program design and a phased approach over a number of years. Nevertheless, the report offers new evidence that sequestration can and should play an important role in the United States’ response to climate change.

“This report shows that large-scale forest-based sequestration can be a cost-effective tool which should be considered seriously by policymakers,” said the Pew Center's Claussen.

The full text of this and other Pew Center reports is available at http://www.c2es.org.

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The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

The Cost of U.S. Forest-based Carbon Sequestration

US Forestbased Carbon Sequestration Cove

The Cost of U.S. Forest-based Carbon Sequestration

Prepared by the Pew Center on Global Climate Change
January 2005

By:
Robert N. Stavins, Harvard University
Kenneth R. Richards, Indiana University

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Most analyses to date of options for mitigating the risk of global climate change have focused on reducing emissions of carbon dioxide and other greenhouse gases (GHGs). Much less attention has been given to the potential for storing (or “sequestering”) significant amounts of carbon in forests and other ecosystems as an alternative means of offsetting the effect of future emissions on GHG concentrations in the atmosphere. The tendency to overlook sequestration opportunities can lead to incorrect and overly pessimistic conclusions about both the cost and feasibility of addressing global climate change in the decades ahead.

To remedy that gap, and to inform U.S. policymaking, the Pew Center asked economists Robert Stavins of Harvard University and Kenneth Richards of Indiana University to synthesize and expand upon available studies of forest-based carbon sequestration in the United States. They analyze the true opportunity costs of using land for sequestration, in contrast with other productive uses, and examine the multiple factors that drive the economics of storing carbon in forests over long periods of time. These factors include forest management practices for different tree species and geographical regions; the costs of land and competing prices for agricultural products; the ultimate disposition of forest materials, including the potential for fire damage as well as harvesting for use in different kinds of end products; the specific carbon management policy employed; and the effect of key analytical parameters, including in particular the discount rate applied to future costs and benefits. The authors then adjust the findings from major recent studies of forest sequestration to reflect consistent assumptions in each of these areas and use the normalized results to establish a likely range for the overall scope and likely costs of large-scale carbon sequestration in the United States. 

Their conclusions are striking. Estimated costs for sequestering up to 500 million tons of carbon per year—an amount that would offset up to one-third of current annual U.S. carbon emissions—range from $30 to $90 per ton. On a per-ton basis, these costs are comparable to those estimated for other climate change mitigation options such as fuel switching or energy efficiency. A sequestration program on this scale would involve large expanses of land and significant upfront investment; as such, it would almost certainly require a phased approach over a number of years and careful attention to policy details to ensure efficient implementation. Nevertheless, the results of this study indicate that sequestration can play an important role in future mitigation efforts and must be included in comprehensive assessments of policy responses to the problem of global climate change.

The Pew Center and the authors are grateful to Ralph Alig, Ronald Sands, and Brent Sohngen for helpful comments on previous drafts of this report. A future Pew Center domestic policy report will focus on design aspects of a domestic mitigation program that includes sequestration. Insights from this report and from companion papers in the Pew Center’s Economics series are being utilized to develop a state-of-the-art assessment of the costs to the United States of taking action to address climate change.

Executive Summary

When and if the United States decides on mandatory policies to address global climate change, it will be necessary to decide whether carbon sequestration should be part of the domestic portfolio of compliance activities. The potential costs of carbon sequestration policies will presumably be a major criterion, so it is important to assess the cost of supplying forest-based carbon sequestration in the United States. In this report we survey major studies, examine the factors that have affected their carbon sequestration cost estimates, and synthesize the results.

The Earth’s atmosphere contains carbon dioxide (CO2) and other greenhouse gases (GHGs) that act as a protective layer, causing the planet to be warmer than it would otherwise be. If the level of CO2 rises, mean global temperatures are also expected to rise as increasing amounts of solar radiation are trapped inside the “greenhouse.” The level of CO2 in the atmosphere is determined by a continuous flow among the stores of carbon in the atmosphere, the ocean, the earth’s biological systems, and its geological materials. As long as the amount of carbon flowing into the atmosphere (as CO2) and out (in the form of plant material and dissolved carbon) are in balance, the level of carbon in the atmosphere remains constant.

Human activities—particularly the extraction and burning of fossil fuels and the depletion of forests—are causing the level of GHGs (primarily CO2) in the atmosphere to rise. The primary sources of the slow but steady increase in atmospheric carbon are fossil fuel combustion, which contributes approximately 5.5 gigatons (billion metric tons) of carbon per year, and land-use changes, which account for another 1.1 gigatons. In contrast, the oceans absorb from the atmosphere approximately 2 more gigatons of carbon than they release, and the earth’s ecosystems appear to be accumulating another 1.2 gigatons annually. In all, the atmosphere is annually absorbing approximately 3.4 gigatons of carbon more than it is releasing.

While the annual net increase in atmospheric carbon may not sound large compared with the total amount of carbon stored in the atmosphere—750 gigatons—it adds up over time. For example, if the current rate of carbon accumulation were to remain constant, there would be a net gain in atmospheric carbon of 25 percent over the next fifty years. In fact, the rate at which human activity contributes to increases in atmospheric carbon is accelerating. Emissions from land-use change have been growing at the global level, though not nearly as rapidly as emissions from fossil fuel combustion. In the United States, land-use change—which was a substantial source of carbon emissions in the 19th and early 20th centuries—became a sink (or absorber of carbon) by the second half of the 20th century. However, the rate of carbon absorption by terrestrial systems in the United States peaked around 1960 and has been falling since.

It may be possible to increase the rate at which ecosystems remove CO2 from the atmosphere and store the carbon in plant material, decomposing detritus, and organic soil. In essence, forests and other highly productive ecosystems can become biological scrubbers by removing (sequestering) CO2 from the atmosphere. Much of the current interest in carbon sequestration has been prompted by suggestions that sufficient lands are available to use sequestration for mitigating significant shares of annual CO2 emissions, and related claims that this approach provides a relatively inexpensive means of addressing climate change. In other words, the fact that policy makers are giving serious attention to carbon sequestration can partly be explained by (implicit) assertions about its marginal cost, or (in economists’ parlance) its supply function, relative to other mitigation options.

The economist’s notion of cost, or more precisely, opportunity cost, is linked with—but distinct from—everyday usage of the word. Opportunity cost is an indication of what must be sacrificed to obtain something. In the environmental context, it is a measure of the value of whatever must be sacrificed to prevent or reduce the chances of a negative environmental impact. Opportunity cost typically does not coincide with monetary outlays—the accountant’s measure of costs. This may be because out-of-pocket costs fail to capture all of the explicit and implicit costs that are incurred, or it may be because the prices of the resources required to produce an environmental improvement are themselves an inaccurate indication of the opportunity costs of those resources. Hence, the costs of a climate policy equal the social benefits that are foregone when scarce resources are employed to implement that policy, instead of putting those resources to their next best use.

The costs of carbon sequestration are typically expressed in terms of monetary amounts (dollars) per ton of carbon sequestered—that is, as the ratio of economic inputs to carbon mitigation outputs for a specific program. The denominator, carbon sequestered, is determined by forest management practices, tree species, geographic location and characteristics, and disposition of forest products involved in a hypothetical policy or program. The costs reflected in the numerator include the costs of land, planting, and management, as well as secondary costs or benefits such as non-climate environmental impacts or timber production. Well-developed analytical models include landowners’ perceptions regarding all relevant opportunity costs, including costs for land, conversion, plantation establishment, and maintenance.

Among the key factors that affect estimates of the cost of forest carbon sequestration are: (1) the tree species involved, forestry practices utilized, and related rates of carbon uptake over time; (2) the opportunity cost of the land—that is, the value of the affected land for alternative uses; (3) the disposition of biomass through burning, harvesting, and forest product sinks; (4) anticipated changes in forest and agricultural product prices; (5) the analytical methods used to account for carbon flows over time; (6) the discount rate employed in the analysis; and (7) the policy instruments used to achieve a given carbon sequestration target.

Given the diverse set of factors that affect the cost and quantity of potential forest carbon sequestration in the United States, it should not be surprising that cost studies have produced a broad range of estimates. This report identifies eleven previous analyses that are good candidates for comparison and synthesis. Results from these studies were made mutually consistent, or normalized, by adjusting for constant-year dollars, identical discount rates, identical geographic scope, and reporting in equivalent annual costs. This normalization narrows the range of results considerably; for a program size of 300 million tons of annual carbon sequestration, nearly all estimated supply functions (or marginal costs) fall within the range of $25 - $75 per short ton of carbon ($7.50 - $22.50 per metric ton of CO2-equivalent). This range increases somewhat—to $30 - $90 per ton of carbon—for programs sequestering 500 million tons annually. In addition, econometric methods were used to estimate the central tendency (or “best-fit”) of the normalized marginal cost functions from the eleven studies compared here; this is presented as an additional result of the analysis and as a rough guide for policy makers of the projected availability of carbon sequestration at various costs.

Three major conclusions emerge from our survey and synthesis:

1) There is a broad range of possible forest-based carbon sequestration opportunities available at various magnitudes and associated costs.

This range depends upon underlying biological and economic assumptions, as well as the analytical methods employed. Several factors affect estimates of cost: forest species and practices; the value of land for alternative uses; the disposition of biomass, forest and agricultural product prices; methods used to account for carbon flows over time; the discount rate employed; and the policy instruments used.

2) A systematic comparison of sequestration supply estimates from national studies produces a range of $25 to $75 per ton for a program size of 300 million tons of annual carbon sequestration.

The range increases somewhat—to $30 - $90 per ton of carbon—for programs sequestering 500 million tons annually. This range is obtained from a synthesis of eleven national studies of U.S. sequestration opportunities in the forestry sector, where each study was adjusted for use of equivalent annual costs in constant-year dollars, together with identical discount rates and identical geographic scope. This approach allows for consistent comparisons across a variety of studies and narrows the range of estimated supply functions considerably.

3) When a transparent and accessible econometric technique is employed to estimate the central tendency (or “best-fit”) of costs estimated in these eleven studies, the resulting supply function for forest-based carbon sequestration in the United States is approximately linear up to 500 million tons of carbon per year, at which point marginal costs reach approximately $70 per ton.

A 500-million-ton-per-year sequestration program would be very significant, offsetting approximately one-third of annual U.S. carbon emissions. At this level, the estimated costs of carbon sequestration are comparable to typical estimates of the costs of emissions abatement through fuel switching and energy efficiency improvements. This result indicates that sequestration opportunities ought to be included in the economic modeling of climate policies. It further suggests that if it is possible to design and implement a domestic carbon sequestration program, then such a program ought to be included in a cost-effective portfolio of compliance strategies when and if the United States enacts a mandatory domestic GHG reduction program.

Conclusions

When and if the United States chooses to implement a domestic GHG reduction program and/or joins in any international efforts to mitigate climate change, it will be necessary to decide whether carbon sequestration policies should be part of the domestic portfolio of compliance activities. The potential opportunities and associated costs of carbon sequestration will presumably be a major criterion in determining its role and so it is important to assess the cost of supplying forest-based carbon sequestration in the United States. Failure to include carbon sequestration as a mitigation option in economic models will lead to over-estimation of the cost of reducing net GHG emissions. However, including carbon sequestration in a naïve manner could produce misleading results as well.

In this report, we have surveyed major previous studies of sequestration, examining the factors that have affected their cost estimates and synthesizing their results. The assumptions that stand out as being particularly important in previous cost estimates include those concerning biological factors such as species, forestry practices, and carbon yield patterns; the opportunity cost of land; management practices; methods of disposition of biomass; relevant prices; and policy instruments used to achieve carbon sequestration.

We identified eleven previous analyses of carbon sequestration costs in the United States as particularly good candidates for comparison and synthesis and normalized their findings to narrow the useful range of estimated costs and allow for consistent comparisons. The normalization included adjustments for constant year dollars, use of identical discount rates, adjustments to scale for identical (national) geographic scope, and consistent reporting in equivalent annual costs. As anticipated, normalizing results across studies led to a significant narrowing of the range of estimated marginal cost functions (Figure 4). This range was subsequently narrowed further by excluding regional studies, since we judged the extrapolation from regional results to national estimates to be problematic. After excluding the three regional studies, our analysis shows that at 300 million tons of annual carbon sequestration nearly all supply functions fall within a marginal cost range of $25 - $75 per short ton of carbon ($7.50 - $22.50 per metric ton of CO2-equivalent). Not surprisingly, the range increases somewhat—to $30 - $90 per ton—for programs sequestering 500 million tons annually (Figure 5).

To make our results more transparent and accessible, we also used econometric techniques to estimate the central tendency of these marginal cost functions; the resulting “best fit” cost curve is presented as an additional output of our analysis. Graphically (Figure 6), it approximates a straight line up to 500 million tons of annual sequestration at which point each additional ton of carbon sequestration costs a bit more than $70 per ton.

Three conclusions emerge from our analysis:

(1) there is a broad range of possible forest-based carbon sequestration supply functions whose shape and magnitude depend on what is assumed about underlying biological and economic factors, as well as on the analytical methods used to estimate costs and supply;

(2) by limiting the set of supply functions to those that come from national studies and that lend themselves to quantitative normalization, the results from previous analyses can be rendered more comparable and the range of estimated supply functions can be narrowed considerably;

(3) when a transparent and accessible approach is employed to estimate econometrically the central tendency of the individual studies making up this range of results, the resulting marginal cost function indicates that the cost of supplying forest-based carbon sequestration in the United States is nearly, though not exactly, linear up to 500 million tons per year, where marginal costs reach a bit more than $70 per ton.

The results presented in this report represent a synthesis of the best existing cost studies, not the final word on the topic. Future research could benefit from further attention to important issues of programmatic leakage (or countervailing forces) that might diminish the positive impacts of a program and thus raise the social cost of sequestration, the impermanence or reversibility of forest carbon sequestration, the broader impacts of a forest carbon sequestration program on the agriculture and forestry sectors and on public finance and tax systems, and the potential secondary costs and benefits of a carbon sequestration program with respect to, for example, natural resources such as water quality and wildlife habitat. Moreover, additional exploration is needed of the interaction between different policy mechanisms to promote sequestration (whether offset trading, agricultural subsidies for specific practices, command-and-control, or direct government production) and the ultimate opportunity costs of sequestration. In general, there may be a tradeoff between the power of incentives directly linked to desired outcomes (in this case the quantity of carbon sequestered) and the costs of implementing and monitoring a program. The optimal program design for promoting sequestration, and how that design affects the issues delineated above, merits more attention.

It is important to understand the magnitude of the hypothetical programs under consideration in this study. The amount of agricultural land involved is huge—approximately 27 million acres for a program achieving 50 million tons of sequestration per year and 148 million acres for a program achieving 300 million tons of sequestration per year. Total annual costs, based on the cost estimates developed here, would be approximately $840 million and $7.2 billion, respectively, for 50 and 300 million ton programs. Because much of this cost would occur upfront, the total social cost in present value terms may be thought of as similar to incurring a one-time cost of $17 billion to $143 billion. Needless to say, this would be a large amount for the U.S. or any other economy to absorb—financially, physically, and administratively—and so a program of this size would probably need to be implemented gradually over many years.

The estimate of carbon sequestration potential discussed in this report (i.e., up to 500 million tons per year) would require a very significant sequestration program, equivalent to about one-third of annual U.S. carbon emissions. Given that available sequestration cost estimates (at these quantity levels) are not very far above typical cost estimates for emissions abatement through fuel switching and energy efficiency improvements, it follows that a domestic carbon sequestration program (assuming such a program can be designed and implemented) ought to be included in a cost-effective portfolio of compliance strategies if and when the United States chooses to implement a domestic GHG reduction program.

 

 

Kenneth R. Richards
Robert N. Stavins
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Taking The Long View

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by Elliot Diringer

This article appeared in Environmental Finance, Dec/Jan 2004 Issue

 

by Elliot Diringer, Director of International Strategies— Appeared in Environmental Finance, Dec/Jan 2004 Issue
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An Effective Approach to Climate Change

POLICY FORUM: CLIMATE POLICY

An Effective Approach to Climate Change

By Eileen Claussen

Enhanced online at www.sciencemag.org/cgi/content/full/306/5697/816
Originally published October 29, 2004: VOL 306 SCIENCE

The Bush Administration’s “business as usual” climate change policy (1), with limited R&D investments, no mandates for action, and no plan for adapting to climate change, is inadequate. We must start now to reduce emissions and to spur the investments necessary to reduce future emissions. We also need a proactive approach to adaptation to limit the severity and costs of climate change impacts.

Science and Economics

Those who are opposed to national climate change policies make much of the uncertainties in climate models, specifically the rate and magnitude of global warming. The Climate Change Science Program’s plan, points out Secretary Abraham, would address these uncertainties, although he offers no assurances that the program will be adequately funded. However, the scientific community already agrees on three key points: global warming is occurring; the primary cause is fossil fuel consumption; and if we don’t act now to reduce greenhouse gas (GHG) emissions, it will get worse.

Yes, there are uncertainties in future trends of GHG emissions. However, even if we were able to stop emitting GHGs today, warming will continue due to the GHGs already in the atmosphere (2).

National climate change policy has not changed significantly for several years. The first President Bush pursued a strategy of scientific research and voluntary GHG emissions reductions. The new Climate Change Science Program has a budget comparable, in inflation-adjusted dollars, to its predecessor, the Global Climate Research Program, during the mid-1990s. The Administration’s current GHG intensity target will increase absolute emissions roughly 14% above 2000 levels and 30% above 1990 levels by 2010 (3). These increases will make future mitigation efforts much more difficult and costly.

While reducing uncertainty is important, we must also focus on achieving substantial emissions reductions and adapting to climate change.

Low-Carbon Technology Development

The Administration’s more substantive R&D initiatives, such as Hydrogen Fuels and FutureGen (clean coal) are relatively modest investments in technologies that are decades away from deployment. We need a far more vigorous effort to promote energy efficient technologies; to prepare for the hydrogen economy; to develop affordable carbon capture and sequestration technologies; and to spur the growth of renewable energy, biofuels, and coal-bed methane capture.

Equally important, we need to encourage public and private investment in a wide-ranging portfolio of low-carbon technologies. Despite the availability of such technologies for energy, transportation, and manufacturing, there is little motivation for industry to use them. Widespread use of new technology is most likely when there are clear and consistent policy signals from the government (4).

One-fifth of U.S. emissions comes from cars and trucks (5). The Administration’s targets to improve fuel economy for light trucks and “sports utility” vehicles (SUVs) by 1.5 miles per gallon over the next three model years fall far short of what is already possible. California is setting much more ambitious emission standards for cars and light trucks. Current efficiency standards can be improved by 12% for subcompacts to 27% for larger cars without compromising performance (5).Hybrid vehicles can already achieve twice the fuel efficiency of the average car.

About one-third of U.S. emissions results from generating energy for buildings (6). Policies that increase energy efficiency using building codes, appliance efficiency standards, tax incentives, product efficiency labeling, and Energy Star programs, can significantly reduce emissions and operating costs. Policies that promote renewable energy can reduce emissions and spur innovation.Sixteen states have renewable energy mandates (7).

The Power of the Marketplace

Policies that are market driven can help achieve environmental targets cost-effectively. A sustained price signal, through a cap-and-trade program, was identified as the most effective policy driver by a group of leaders from state and local governments, industry, and nongovernmental organizations (NGOs) (8).

Senators Lieberman (D–CT) and McCain’s (R–AZ) 2003 Climate Stewardship Act proposes a market-based approach to cap GHG emissions at 2000 levels by 2010. The bill, opposed by the Administration, garnered the support of 44 Senators. Nine Northeastern states are developing a regional “cap-and-trade” initiative to reduce power plant emissions. An important first step would be mandatory GHG emissions reporting.

Adapting to Climate Change

An important issue that Secretary Abraham failed to address is the need for anticipating and adapting to the climate change we are already facing. Economic sectors with long-lived investments, such as water resources, coastal resources, and energy may have difficulty adapting (9). A proactive approach to adaptation could limit the severity and costs of the impacts of climate change.

By limiting emissions and promoting technological change, the United States could put itself on a path to a low-carbon future by 2050, cost-effectively. Achieving this will require a much more explicit and comprehensive national commitment than we have seen to date. The rest of the developed world, including Japan and the European Union, is already setting emission-reduction targets and enacting carbon-trading schemes. Far from “leading the way” on climate change at home and around the world, as Secretary Abraham suggested, the United States has fallen behind.

References and Notes

1. S. Abraham, Science 305, 616 (2004). |
2. R. T. Wetherald, R. J. Stouffer, K. W. Dixon, Geophys. Res. Lett. 28, 1535 (2001).
3. “Analysis of President Bush’s climate change plan” (Pew Center on Global Climate Change,Arlington,VA, February 2002); available at www.c2es.org.
4. J. Alic, D. Mowery, E. Rubin, “U.S. technology and innovation policies: Lessons for climate change” (Pew Center on Global Climate Change,Arlington,VA, 2003).
5. National Research Council, “The effectiveness and impact of corporate average fuel economy (CAFÉ) standards” (National Academies Press, Washington, DC, 2002).
6. “U.S. greenhouse gas emissions and sinks: 1990–2002”(EPA/430-R-04-003, Environmental Protection Agency, Washington, DC, 2002), Table 3–6.2002.
7. Workshop proceedings, “The 10-50 solution: Technologies and policies for a low-carbon future,”Washington, DC, 25 and 26 March 2004 (The Pew Center on Global Climate Change and the National Commission on Energy Policy, Arlington,VA, in press).
8. J. Smith, “A synthesis of potential climate change impacts on the United States” (Pew Center on Global Climate Change, Arlington,VA, 2004). Published by AAAS

by Eileen Claussen, President— Appeared in Science, October 29, 2004
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Induced Technological Change and Climate Policy

ITC Cover

Induced Technological Change and Climate Policy

Prepared for the Pew Center on Global Climate Change
October 2004

By Lawrence H. Goulder, Stanford University

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Over the upcoming decades, large-scale reductions in emissions of carbon dioxide (CO2) and other greenhouse gases (GHGs) will be required to reduce the risks of global climate change.  In order to achieve this transformation, the development and diffusion of new technologies to reduce GHG emissions will be critical.  As the world’s largest and most inventive economy, the United States must play a decisive role in the discovery, innovation, and marketing of these new technologies, and climate policies can be influential drivers in this process.

Technological change occurs for a variety of reasons as firms compete in existing and new markets.  However, climate policies can spur additional or “induced” technological change (ITC).  This can be achieved through technology “push” policies that boost the invention and innovation processes (such as funding for R&D), and through direct emissions control policies that “pull” new technologies into the market (such as a GHG cap-and-trade program). 

In this report, Lawrence Goulder of Stanford University explores the role of induced technological change (ITC), and examines the implications of ITC for the effective design of climate policy.  These implications fall into four main categories: (1) how much ITC can lower the costs of climate policies, (2) what this means for the timing of policies, (3) the value of announcing policies well in advance of enactment, and (4) the most appropriate use of various policy instruments to boost technological change.  Until recently, economic models of climate change could not address these issues.  However, state-of-the-art modeling now treats ITC as an integral or “endogenous” component in calculations, thus providing new insights into this critical topic.
 
This report finds that all economic models that include ITC produce lower overall cost estimates for GHG reductions, especially when the climate policy is announced in advance.  Goulder also concludes that in order to reduce GHG emissions most cost-effectively, both technology-push and emissions reduction policies are required.  In addition, although studies show different implications of ITC on the overall timing of climate policy, all find that some abatement must begin now in order to jump-start the critical process of technological change.

The Pew Center and the author are grateful to Ian Parry, Richard Newell, Ev Ehrlich, Alan Manne, and Koshy Mathai for helpful comments on previous drafts of this report, and to Mark Jacobsen for his research assistance.  Previous Pew Center reports have addressed the role of technology in economics modeling (Edmonds et al.) and lessons for climate change from other U.S. programs in technology and innovation (Alic et al.). Insights from this report, together with companion papers in the Pew Center’s Economics series, are being utilized in the development of a state-of-the-art assessment of the costs to the United States of climate change mitigation.

Executive Summary

A central goal of climate policy is to avoid potential changes in climate and associated adverse biophysical impacts by slowing or avoiding the atmospheric build-up of greenhouse gases (GHGs).  Technological change will crucially influence the extent to which nations achieve this goal.  The direction and extent of technological change over the next century has profound implications for emissions and atmospheric concentrations of GHGs over time, the extent of future climate change, and associated impacts on human welfare. 
Climate policy can alter the future by influencing the rate and direction of technological change.  “Induced technological change” (ITC) here refers to the additional technological change that is brought about by policy.  This report explores how climate policy can induce technological change and examines the implications of ITC for the effective design of climate policy.

Some of the main findings are:

1.  The presence of ITC lowers the costs of achieving emissions reductions. By stimulating additional technological change, climate policy can reduce the costs of meeting a given target for reductions in GHG emissions or concentrations.  Until recently, most economy-wide climate change policy studies ignored ITC.  Models that disregard policy-induced technological advances will tend to overestimate policy costs. 


2.  The presence of ITC justifies more extensive reductions in GHGs than would otherwise be called for. Because ITC lowers the costs of achieving emissions reductions, the optimal extent of GHG reduction is greater than would be predicted by models that ignore ITC.  The net benefits from climate policy are larger as well.


3.  The presence of ITC alters the optimal timing of emissions abatement. Although considerable technological change occurs in the absence of policy intervention, climate policy can induce additional technological change by providing incentives for additional research and development (R&D) and by stimulating additional experience with alternative technologies or processes, thereby generating “learning-by-doing.”  Analysts offer contrasting views as to how ITC alters the optimal timing of emissions abatement compared to a case where climate policy does not affect the rate of technological change (that is, the case with no ITC).  Does ITC justify more extensive near-term emissions reductions, or does it justify postponing reductions?  Recent analyses indicate that insofar as technological change results from R&D, the presence of ITC justifies somewhat less abatement in the near-term, and more abatement in the future (when technological change has lowered the costs of abatement).  On the other hand, if ITC primarily results from learning-by-doing, greater emphasis on abatement in the short term may be called for, since early abatement efforts accelerate the learning process and can thereby lower costs.


4.  In the presence of ITC, announcing climate policies in advance can reduce policy costs. Announcing policies in advance can lower the cost of meeting given targets for cumulative abatement or reductions in GHG concentrations.  Illustrative results indicate that announcing a $25 per ton carbon tax 10 years in advance can reduce discounted economic costs (as measured by changes in gross domestic product or GDP) by about a third, compared to the same climate policy imposed with no prior notice.


5.  Economic analysis offers a justification for public policies to induce technological change, even when the returns are highly uncertain. Uncertainties surround many aspects of ITC.  Neither the returns to a given investment in R&D nor the extent of future learning-by-doing can be precisely predicted.  As a result, one cannot estimate with precision the cost savings from ITC or pinpoint the optimal timing of abatement.  Moreover, while prior announcements of climate policies will yield cost-savings, uncertainties about costs of adjustment make it impossible to accurately forecast these savings.  Despite these uncertainties, two key market failures provide a strong rationale for public policy to stimulate ITC.  These are: (1) the “spillover benefits” to society as a result of R&D investments by individual firms and (2) the presence of negative “externalities” – adverse impacts that are not accounted for in the market prices of carbon based fuels.


6.  To promote ITC and reduce GHG emissions most cost-effectively, two types of policies are required:  policies to reduce emissions and incentives for technological innovation. This study emphasizes that two types of policies are necessary to address the two market failures noted above and to achieve, at least-cost to society, a given target for cumulative reductions in emissions or GHG concentrations.  Technology incentives can deal with the market failure created by firms’ inabilities to capture all the returns on their R&D investments.  Direct emissions policies (such as carbon caps or carbon taxes) can deal with the market failure created by climate-related externalities.  Attempting to address the climate change problem with only one of these policy approaches cannot fully correct both market failures.  As a result, adopting one approach is likely to involve higher costs than utilizing the two approaches in tandem.  To date, direct GHG emissions policies have had little political success at the federal level.  But there is a strong need for these policies, along with technology incentives, to deal with the prospect of climate change in a cost-effective manner.

Lawrence Goulder
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Press Release: New Report Examines How Cimate Policies Affect the Cost of Greenhouse Gas Mitigation

For Immediate Release: 
October 13, 2004     

Contact:
Katie Mandes 703-516-4146        

CLIMATE POLICY AND TECHNOLOGICAL CHANGE

New Report Examines How Cimate Policies Affect the Cost of Greenhouse Gas Mitigation

Washington, DC — With Russian ratification of the Kyoto Protocol now likely, the development and deployment of technologies to reduce global emissions is more critical than ever. While technological change occurs naturally as companies compete in the marketplace, climate policies can spur additional or “induced” technological change (ITC).

Induced Technological Change and Climate Policy, by Larry Goulder of Stanford University, explores the use of ITC in climate policy, using state-of-the-art economic modeling and analysis. Goulder finds that models that include ITC produce lower cost estimates for GHG reductions, and that costs are lowest when climate policies are announced in advance.  Furthermore, he finds that to reduce greenhouse gas emissions most cost-effectively, both policies that boost technological innovation, such as R&D funding, and policies that limit emissions, such as a GHG cap-and-trade program, are required.

“This research shows us that the costs of meeting a long-term CO2 emissions target using both R&D subsidies and a carbon tax (or cap-and-trade) is roughly 10 times less than with R&D subsidies alone,” said Eileen Claussen, President of the Pew Center on Global Climate Change.

A crucial point is that although studies show different implications of ITC on the overall timing of climate policy, all find that some abatement must begin now in order to jumpstart the critical process of technological change.  “Timing is crucial for dealing with this issue in a cost-effective manner; the longer we wait, the more expensive it will be,” said the Pew Center’s Claussen.

The full text of this and other Pew Center reports is available at http://www.c2es.org.  


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The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment.  The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change.  The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

Global Climate Change and Coal's Future

Global Climate Change and Coal's Future

Remarks by Eileen Claussen
President, Pew Center on Global Climate Change

Spring Coal Forum 2004 - American Coal Council

May 18, 2004

It is a pleasure to be here in Dallas.  And I want to thank the American Coal Council for inviting me to address this forum. 

I thought I would open my remarks today with some commentary on the upcoming FOX movie about climate change—it is entitled “The Day After Tomorrow.”  It is not often, after all, that I get to talk about the movies in my speeches.  And I suppose that’s because there are not a lot of movies on the topic of climate change—of course, I am not counting “Some Like It Hot.”

In case you haven’t already heard, “The Day After Tomorrow” comes out Memorial Day weekend.  It is a movie that tries to show the consequences of climate change by letting loose tornadoes in Los Angeles, dropping grapefruit-sized hail on Tokyo, and subjecting New York City to a one-day shift from sweltering-to-freezing temperatures.

The only thing I can say is it’s a dream scenario for the people at The Weather Channel. 

Actually, the reason I bring this up is because we are bound to be hearing a great deal about the issue of climate change over the next several weeks.  This is a major motion picture with a major marketing push behind it. 

And, while I know of no one in the scientific community who believes climate change will unfold in the way it is portrayed in the film, I also know this: If this movie sounds far-fetched, it is frankly less of a distortion—much less—than the argument that climate change is a bunch of nonsense.  It is not.  Climate change is a very real problem with very real consequences for our way of life, our economy and our ability to ensure that future generations inherit a world not appreciably different from our own. 

I strongly believe it is time for some straight talk about the problem of climate change and what it means for you  - the coal industry.   So while my remarks here today are also relevant to the oil and gas industry, I believe coal to be in a more precarious position, and I believe that for 2 reasons:  1) I think coal is an easier target politically and 2) oil and gas are already involved in the policy process.    So despite the current outlook for coal in the United States, I am here to say that a robust future for coal is not a sure thing, particularly if we do not find environmentally acceptable and cost-effective ways to use it. 

So let’s look at some facts. 

Here in this country, as all of you know very well, coal provides 52 percent of all electricity, more than double the amount of any other fuel source and five times more than gas, oil or hydro-electric power.  Coal is the most abundant energy source today, it is dispersed throughout the world, and it is available at a relatively low cost.  Worldwide coal consumption, according to the U.S. Energy Information Administration, is expected to grow by more than 40 percent between 2001 and 2025, with China and India accounting for three-fourths of that increase. 

Given these facts, a scenario in which we meet the world’s various energy challenges without coal seems to me highly unlikely. 

At the same time, however, I cannot imagine—or, rather, I fear to imagine—what will happen if over the next 50 years we do not get serious about reducing worldwide emissions of carbon dioxide and other greenhouse gases that we know contribute to climate change. 

Coal alone is responsible for 37 percent of CO2 emissions in the United States.  Thirty-seven percent.  Worldwide, the EIA projects that coal will continue as the second largest source of carbon dioxide emissions after petroleum, accounting for 34 percent of the total in 2025. 

Coal’s dominant role in the global energy mix, together with its responsibility for a large share of CO2 emissions, suggests it is high time to figure out how to continue using coal in a way that results in the least amount of harm to the global climate. 

I am not going to tell you that we can address this problem with no costs.  Our goal must be to ensure that the costs themselves do not become a barrier to action.  I believe we can manage those costs in a way that enables continued economic growth and, equally important, in a way that causes the least amount of harm to the environment.

And finally, we must acknowledge the very real costs of not acting to address the problem of climate change.  I will talk more about that later. 

And so today I want to lay out for you how important it is for this industry—your industry—to become a part of the solution to climate change.  I also want to talk about your role in helping to shape the policies and in developing the technologies that will allow us to reduce greenhouse gas emissions from coal generation and other sources. 

But before that, I need to address the question of why I am here and why we are having this discussion in the first place.  And the answer is because the threat of climate change, as I have already noted, is very real.  If you still have any doubts about this, then I refer you to the findings of a special, well-balanced panel put together by the National Academy of Sciences at the request of President George W. Bush. The panel’s conclusion: the planet is warming and human activities are largely to blame.  And, of course, the human activity that is most responsible is the burning of fossil fuels.

Let's get one other thing out of the way  -- the Kyoto Protocol.  I am not here to argue the merits of the Protocol.  And I'm certainly not here to argue for ratification of Kyoto.  Because I think it's pretty clear that, at least as far as the United States is concerned, the Kyoto Protocol is a dead issue.  So, let's agree on that, and let's move beyond Kyoto, and talk about what really needs to happen.

This is what we know. The 1990s were the hottest decade of the last millennium.  The last five years were among the seven hottest on record. Yes, the earth's temperature has always fluctuated, but ordinarily these shifts occur over the course of centuries or millennia, not decades.

Now I know there are skeptics on this issue - there might even be a few here today, so let me take a minute to talk about some of the more common misconceptions I hear.

A common one is to point to the satellites circling our planet overhead and to note that these precision instruments show no warming of our atmosphere.  Global warming, some skeptics say, is therefore just an artifact of urbanization or some other miscalculation here on the ground. 

All I can say about these claims is that they are dead wrong.  As early as 2000, the National Academy of Sciences concluded that the warming observed on the ground was real, despite what the satellites might tell us.  What’s more, since that time estimates of warming from satellites have progressively increased.  Just this month, in fact, a new study in the journal Nature took a fresh look at the satellite data and found that the so-called “missing warming” had been found, bringing the satellite estimates more in line with temperatures observed on the ground.        

Warming by itself, of course, is not proof of global warming.  Climate conditions vary naturally, as we all know, and I am sure you have heard arguments that such natural variability, whether caused by volcanoes or the sun, can account for the climate change we’ve seen in recent decades.  But, when scientists actually take a look at the relative importance of natural vs. human influences on the climate, they consistently come to the same conclusion.  And that is this: observed climate change, particularly that of the past 30 years, is outside the bounds of natural variability.  Atmospheric concentrations of carbon dioxide are more than 30 percent higher now than they were just a century ago.  Despite what you may hear, this increase in carbon dioxide is undeniably human in origin, and it is the only way to explain the recent trends in the global climate. 

Scientists project that over the next century, the average global temperature will rise between two and ten degrees Fahrenheit. A ten-degree increase would be the largest swing in global temperature since the end of the last ice age 12,000 years ago.  And the potential consequences of even gradual warming are cause enough for great concern.

What will those consequences be?  We can expect increased flooding and increased drought.  Extended heat waves, more powerful storms, and other extreme weather events will become more common.  Rising sea level will inundate portions of Florida and Louisiana, while increased storm surges will threaten communities all along our nation’s coastline, including the Texas coast.

Looking beyond our borders, we can see even broader, more catastrophic effects.  Imagine, for example, what will happen in a nation such as Bangladesh, where a one-meter rise in sea level would inundate 17 percent of the country.  

In addition to the obvious threat to human life and natural systems, climate change poses an enormous threat to the U.S. and world economies.  Extreme weather, rising sea level and the other consequences of climate change will result in substantial economic losses. 

We cannot allow the argument that it will cost too much to act against climate change to prevail in the face of the potentially devastating costs of allowing climate change to proceed unchecked.

Furthermore, the longer we wait to address this problem, the worse off we will be.  The Pew Center in 2001 held a workshop with leading scientists, economists and other analysts to discuss the optimal timing of efforts to address climate change.  They each came at it from a different perspective, but the overwhelming consensus was that to be most effective, action against climate change has to start right now. 

Among the reasons these experts offered for acting sooner rather than later was that current atmospheric concentrations of greenhouse gases are the highest in more than 400,000 years.  This is an unprecedented situation in human history, and there is a real potential that the resulting damages will not be incremental or linear, but sudden and potentially catastrophic.  Acting now is the only rational choice. 

But what can we do?  The Pew Center on Global Climate Change was established in 1998 in an effort to help answer this very question.  We are non-profit, non-partisan and independent.  Our mission is to provide credible information, straight answers and innovative solutions in the effort to address global climate change.  We consider ourselves a center of level-headed research, analysis and collaboration.   We are also a center in another sense–a much-needed centrist presence on an issue where the discussion too often devolves into battling extremes where the first casualty is the truth.

The Pew Center also is the convenor of the Business Environmental Leadership Council.   The group’s 38 members collectively employ 2.5 million employees and have combined revenues of $855 billion.  These companies include mostly Fortune 500 firms that are committed to economically viable climate solutions.  And I am pleased to say that they include firms that mine coal and firms that burn it—some of whom are represented here today.  As members of the Business Environmental Leadership Council, all of these companies are working to reduce their emissions and to educate policy makers, other corporate leaders and the public about how to address climate change while sustaining economic growth. 

And, if their work with the Pew Center proves anything, it is this:  Objecting to the overwhelming scientific consensus about climate change is no longer an acceptable strategy for industry to pursue. 

We need to think about what we can realistically achieve in this country and around the world and begin down a path to protecting the climate.  And that means making a real commitment to the full basket of technologies that can help to reduce the adverse environmental effects of coal generation.  The most promising of these technologies, of course, are: carbon capture and storage; and coal gasification, or IGCC.

Carbon capture and storage, or CCS, holds out the exciting prospect for all of us that we can continue using proven reserves of coal even in a carbon-constrained world.  In only the last three decades, CCS has emerged as one of the most promising options we have for significantly reducing atmospheric emissions of greenhouse gases.  Today, 1 million tons of CO2 are stored annually in the Sleipner Project in the North Sea, and several more commercial projects are in various stages of advanced planning around the world.  Between off-shore, saltwater-filled sandstone formations, depleted oil and gas reservoirs, and other potential storage locations, scientists say we have the capacity to store decades worth of CO2 at today’s emission rates.  

Of course, it will still take a great deal more effort before CCS is ready for prime time.  In a paper prepared for a recent Pew Center workshop held in conjunction with the National Commission on Energy Policy, Sally Benson of the Lawrence Berkeley National Laboratory identified several barriers to the implementation of carbon capture and storage, or CCS.  They include:

  • The high costs and quote-unquote “energy penalties” of post-combustion CCS.
  • The high capital costs of gasification, as well as a lack of experience with the technology in the utility sector.
  • Limited experience with large-scale geologic storage.
  • Uncertainty about public acceptance of CO2 storage in geologic formations.
  • A lack of legal and regulatory frameworks to support widespread application of CCS.
  • And, last but not least, a lack of financial resources to support projects of a sufficient scale to evaluate the viability of CCS. 

Yet another technology that could potentially help to reduce the climate impact of coal generation is IGCC.   Of course, IGCC’s principal benefit from a short-term environmental perspective is a significant reduction in criteria air pollutant emissions  and in solid waste.  But, over the long haul, IGCC has great potential to reduce CO2 emissions as well, both because, compared to pulverized coal combustion, it could result in significant improvements in efficiency, because it can be much more easily combined with CCS, and because it enables hydrogen production from coal. 

But, as with CCS, IGCC still has a ways to go before it can deliver on its enormous promise.  As of today, there are only two real IGCC plants in operation in the United States, but neither is operating fully on coal.  Yes, the Bush administration has made a big splash with its announcement of the $1 billion FutureGEN project—which, as you know, would build the world’s first integrated sequestration and hydrogen production research power plant.  But no specific plans have yet been announced.

The bottom line: these technologies—both CCS and IGCC—are nowhere near prime time.  Right now, to stretch the analogy further, they are far enough from prime time to be on the air around 3 a.m. with a bunch of annoying infomercials.  And they won’t get any closer to prime time without substantial investment in research and development, as well as a major policy commitment to these technologies. 

The potential rewards are great.  If we make the necessary commitment to CCS and IGCC, these technologies could make an important contribution to the United States’ efforts to control greenhouse gas emissions in the decades ahead.  And the potential for coal to become a source of hydrogen for transportation could revolutionize the industry and our energy future.

But we need to make a commitment. 

Investing in the development of these technologies, in fact, may be the only way for coal to have a long-term future in the U.S. energy mix.  There will be a time in the not-too-distant future when the United States and the world begin to understand the very real threat posed to our economy and our way of life by climate change. 

When that happens, those industries that are perceived as part of the problem and not part of the solution are going to have a difficult time.  Allow me to put it another way: if current trends continue, there is a strong possibility that, at some point, policymakers and the public are going to see the need for drastic reductions in our emissions of carbon dioxide and other greenhouse gases.  The coal industry—because of its responsibility for such a large share of those emissions—may find itself the focus of intense scrutiny and finger-pointing.  And it will need to demonstrate that it is making steady and significant progress in reducing its emissions—or else face draconian policy measures.

The coal industry, of course, cannot tackle this challenge alone. Government, too, must become a part of the solution, and this is not just a matter of technology policy; there is a need for a broader climate policy.  I mean a policy that sets a national goal for greenhouse gas emissions from ALL important sectors - including transportation, utilities and manufacturing - and then provides companies and industries with the flexibility to meet that goal as cost-effectively as possible.  This is the approach taken in the Lieberman-McCain Climate Stewardship Act.

The need for a broader climate policy was the key conclusion of a recent Pew Center study that looked at three future energy scenarios for the United States.  Even in the most optimistic scenario where we develop a range of climate-friendly technologies such as CCS and IGCC, the study projected that we will achieve no net reduction in U.S. carbon emissions without a broader policy aimed at capping and reducing those emissions.

So the challenge before us is clear: we need to craft a wide-ranging set of policies and strategies to reduce humanity’s impact on the global climate.  And coal needs to be proactively and positively engaged—much more so than has been the case thus far.

I am pleased to report that there are elected leaders at the state level and in Congress who understand the importance of government action.  In Congress, of course, last year we saw the Climate Stewardship Act introduced by Senators Joseph Lieberman and John McCain.  This measure, which would establish modest but binding targets for reducing U.S. greenhouse gas emissions, attracted the support of 43 senators—a respectable number and an indication of growing support for U.S. action on this issue.  A companion measure to the Senate bill was introduced in the House of Representatives earlier this year.

Policymakers, particularly at the state level are moving beyond debate to real action on this issue.  Among the examples:

  • Thirteen states, including Texas, now require utilities to generate a specified share of their power from renewable sources.  
  • New York and nine other mid-Atlantic and northeastern states are discussing a regional “cap-and-trade” initiative aimed at reducing carbon dioxide emissions from power plants.  
  • And, last September, the governors of three Pacific states—California, Oregon, and Washington—announced that they will be working together to develop policies to reduce emissions from all sources. 

So the fact is, we have a lot of people in government at the state and federal levels who are beginning to look seriously at this issue and who are trying to figure out how best to respond.  So the coal industry needs to be at the table now, because the policy discussion has begun.  

But understand - getting to the table is not just a matter of showing up and saying, “Let’s talk.”  To earn a seat at the table, coal is going to have to demonstrate that it is committed to real and serious action on this issue. And as you are probably aware, some of your competitors from a climate change perspective - the gas, oil and renewable industries are already there.

The benefits of active involvement by industry in environmental policy became clear to me during negotiations on the Montreal Protocol. 

An important reason for the success of that agreement, I believe, is that the companies that produced and used ozone-depleting chemicals—and that were developing substitutes for them—were very much engaged in the process of finding solutions.  As a result, there was a factual basis and an honesty about what we could achieve, how we could achieve it, and when. And there was an acceptance on the part of industry, particularly U.S. companies, that the depletion of the ozone layer was an important problem and that multilateral action was needed. 

In the same way, industry involvement was an important part of the process that developed the Acid Rain Program created under the Clean Air Act Amendments of 1990.  And, once again, those with a seat at the table, by and large, came out with a policy they could live with.  Those who were not at the table were not as happy with the outcome. 

It is a basic principle of democratic governance: the more you get involved in the process and in shaping solutions, the more likely it will be that those solutions are agreeable to you.  Or, as the Chinese proverb puts it, “Tell me, I forget.  Show me, I remember.  Involve me, I understand.”  For those of you who think there is no possible configuration that would allow the coal industry, government and environmental advocates to sit around one table—I am here to tell you that I for one am willing to make the seating arrangements work.  Because we need them to work.
Whether the issue is public-private partnerships, incentives for technology development, or the level and timing of reductions in emissions, coal has a chance to shape the right solutions. 

What are the right solutions?  A lot of it has to do with technology—and, more specifically, with the policies needed to push and pull solutions such as CCS and IGCC to market.  (Let me say here that I don’t want to leave the impression that these are the only technologies we need to look at because there are others, such as coalbed methane, that show enormous promise as well.) 

I will say it one more time: coal’s place in the U.S. and global energy mix in the decades to come will depend largely on the industry’s ability, in concert with government, to develop the technologies that will allow us to achieve dramatic reductions in carbon emissions from coal generation.  Without those technologies, coal loses out when the United States and the world finally appreciate the need for serious action to address this very serious problem. 

In closing, I want to note that the promotional materials for the film, “The Day After Tomorrow,” ask the question: “Where will you be?”  It is my sincere hope that, whether you go and see the movie or not, this industry will be on the side of solutions to this very urgent problem. 

I honestly believe you don’t have much of a choice.  After all, a mine is a terrible thing to waste. 

Thank you very much. 

Press Release: Market and Non-Market Impacts From Climate Change

For Immediate Release:
April 28, 2004
                                                             
Contact:  Katie Mandes
703.516.0606 

MARKET AND NON-MARKET IMPACTS FROM CLIMATE CHANGE
Two New Reports Detail the Implications for the Economy and Natural Resources of the U.S.

Washington, DC — Over the next century, global climate change is expected to have substantial consequences for the United States.  While scientists continue to narrow remaining uncertainties about the magnitude and timing of future warming, these two new reports detail likely impacts on the U.S. economy, its diverse natural resources and the welfare of its citizens.

The first report, A Synthesis of Potential Climate Change Impacts on the United States, by Joel Smith of Stratus Consulting Inc., concludes a series of Pew Center reports examining the impacts of climate change on several economic sectors and natural resources in the United States.  The companion report, U.S. Market Consequences of Global Climate Change, by a team of authors led by Dale Jorgenson of Harvard University and Richard Goettle of Northeastern University used analysis by Stratus Consulting based on the published literature to offer an in-depth analysis of the effects of climate change on the U.S. economy.

These studies find that natural systems are more vulnerable to climate change than societal systems.  Any species or ecosystem that is less able to adapt?for example, coral reefs, coastal wetlands, already endangered species, and alpine forests?is at the greatest risk. In contrast to natural systems, economic sectors that are managed— for example, forestry and agriculture— may be less vulnerable to the effects of climate change provided that timely and potentially substantial investments are made.

The U.S. economy as a whole appears to be resilient to a gradual change in climate for a moderate increase in temperature (up to 2-4ºC).  For a range of scenarios of climate change and related impacts, the U.S. may experience a 0.7-1.0% gain (under optimistic assumptions), or a 0.6-3.0% loss (under pessimistic assumptions) in GDP by year 2100.  However, the economic impact on individual sectors are far more pronounced.

A critical finding in these reports is that as climate change continues past critical thresholds, any benefits diminish and, ultimately, reverse as the U.S. economy struggles to adapt to the changing climate.  While some sectors may enjoy gains at low levels of warming (for example improvements in agriculture), beyond critical temperature thresholds, these benefits diminish and eventually become costs.

Just as with individual sectors, different U.S. regions will experience different impacts.  The Southeast and the Southern Great Plains are at most risk due to their low-lying coasts and the impacts of warmer conditions on agriculture. Sectors with long-lived infrastructure and investments, such as water resources and coastal communities, will have the most difficulty adjusting.

"What is important to keep in mind about these studies, said Eileen Claussen, President of the Pew Center on Global Climate Change, “'is that ultimately all credible scenarios lead to negative impacts and costs.  Taken together, these reports build the case that when it comes to climate change, policy inaction is costly?costly to certain sectors and regions of our economy, and costly to our environment,” said Claussen.  “And without near-term action to address climate change, the U.S. is likely to face the need for more expensive and dramatic measures in the future.”

U.S. Market Consequences of Global Climate Change

US Market Consequences small cover

U.S. Market Consequences of Global Climate Change

Prepared for the Pew Center on Global Climate Change
April 2004

By:
Dale W. Jorgenson, Harvard University
Richard J. Goettle, Northeastern University
Brian H. Hurd, New Mexico State University
Joel B. Smith, et al, Stratus Consulting, Inc.



Press Release

Download Report (pdf)
Download Appendix A (pdf)
Download Appendix B (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Over the next century, global climate change is likely to have substantial consequences for the economy of the United States and the welfare of its citizens. As scientists work to narrow remaining uncertainties about the magnitude and timing of future warming, it is becoming increasingly important that we improve our understanding of the likely implications for human and natural systems.

In this report, a team of authors led by Dale Jorgenson of Harvard University developed an integrated assessment of the potential impacts of climate change on the U.S. market economy through the year 2100. The analysis combines information about likely climate impacts in specific market sectors with a sophisticated computable general equilibrium model of the U.S. economy to estimate effects on national measures of productivity, investment, consumption and leisure. To account for uncertainties— both in the trajectory of future climate change and in the ability of different sectors to adapt—a variety of scenarios were modeled to characterize a range of possible outcomes.

The results indicate that climate change could impose considerable, lasting costs or produce smaller, temporary benefits for the U.S. market economy in coming decades. Importantly, potential costs under pessimistic assumptions are larger and persist longer than potential benefits achieved under optimistic assumptions. Because of “threshold effects” in key sectors like agriculture, initial benefits from a moderate amount of warming begin to diminish and eventually reverse as temperatures continue to rise toward the end of the century and beyond. These findings suggest that near-term action to limit the pace and scale of future climate change would be warranted not only because the potential damages outweigh potential benefits (which are transient in any case), but because early intervention would reduce the long-term damage under either set of assumptions, and reduce the need for more costly measures if pessimistic scenarios materialize.

This study makes an important contribution to our current understanding of the potential impacts of climate change, but it represents at best a partial assessment of the full range of those impacts. Certain market sectors (e.g., tourism) and a variety of indirect effects (e.g., climate change induced healthcare expenditures) could not be included because of a lack of data. Even more significantly, the analysis does not account for critical non-market impacts such as changes in species distributions, reductions in biodiversity or loss of ecosystem goods and services. These types of effects are described in a companion Pew Center report—A Synthesis of Potential Impacts of Climate Change on the United States—but remain extremely difficult to value in economic terms. Their inclusion in a more complete evaluation of both market and non-market impacts would almost certainly offset any temporary market benefits and add to the negative impacts, thereby underscoring the case for mitigative action.

The Pew Center and the authors are grateful to Henry Jacoby and Billy Pizer for helpful comments on previous drafts of this report.

Executive Summary

The continued accumulation of heat-trapping gases in the atmosphere is projected to have far reaching consequences for earth’s climate in coming decades. For example, in 2001, the Intergovernmental Panel on Climate Change (IPCC) predicted that average global temperatures could rise anywhere from 1.4oC to 5.8oC (2.5-10.4oF) over the 21stcentury, with warming for the United States as much as 30 percent higher. Climatic shifts of this magnitude would affect human and natural systems in many ways. Therefore, quantifying these impacts and their likely costs remains a critical challenge in the formulation of appropriate policy responses.

This study aims to advance understanding of the potential consequences of global climate change by examining the overall effect on the U.S. economy of predicted impacts in key market activities that are likely to be particularly sensitive to future climate trends. These activities include crop agriculture and forestry, energy services related to heating and cooling, commercial water supply, and the protection of property and assets in coastal regions. Also considered are the effects on livestock and commercial fisheries and the costs related to increased storm, flood and hurricane activity. Finally, the analysis accounts for population-based changes in labor supply and consumer demand due to climate-induced mortality and morbidity. Impacts in each of these areas were modeled to estimate their aggregate effect on national measures of economic performance and welfare, including gross domestic product (GDP), consumption, investment, labor supply, capital stock and leisure.

At present, our knowledge of the direct or indirect impacts of climate change on a broad range of economic activities is incomplete. Accordingly, there are important sectors and activities—such as tourism—that are omitted from this effort. Similarly, there is little information concerning possible interactions among the benefits and costs in different sectors. For example, the impacts on crop and livestock agriculture may have consequences for human health. Given the absence of reliable insights into such externalities or spillovers, these effects are also excluded from consideration. These limitations suggest that the results of this analysis are likely to understate the potential market impacts of climate change.

More importantly, this analysis does not consider the non-market impacts of climate change such as changes in species distributions, reductions in biodiversity, or losses of ecosystem goods and services. These considerations are essential to a complete evaluation of the consequences of climate change but are very difficult to value in economic terms. A companion report, A Synthesis of Potential Impacts of Climate Change on the United States, provides more detail on the relative vulnerability of different U.S. regions to both the market and non-market impacts of climate change.

To capture the range of market consequences potentially associated with climate change in the United States and to address the considerable uncertainties that exist, several distinct scenarios were developed for this analysis. Each incorporates different assumptions about the magnitude of climate change over the next century and about the direction and extent of likely impacts in the market sectors analyzed. Specifically, three different levels of climate change (low, central and high) were considered in combination with two sets of market outcomes (optimistic and pessimistic) for a total of six primary scenarios. In terms of climate, the low, central and high scenarios encompass projected increases in average temperature ranging from 1.7oC to 5.3oC (3.1-9.5oF) by 2100, together with precipitation increases ranging from 2.1 to 6.6 percent and sea-level rise ranging from 17.2 to 98.9 cm (7-40 inches) over the same period. In terms of impacts, the optimistic and pessimistic  scenarios reflect a spectrum of outcomes from the available literature concerning the sensitivity of each sector to climatic shifts and its ability to adapt. As one would expect, the optimistic scenarios generally project either smaller damages or greater benefits for a given amount of climate change compared to the pessimistic scenarios.

Because several of the market sectors included here are especially sensitive to changes in precipitation, two additional scenarios were analyzed. The first assumes the high degree of temperature change combined with lower precipitation (“high and drier”) while the second assumes the low level of temperature change combined with higher precipitation (“low and wetter”).

By introducing the sector-specific damages (or benefits) associated with each of these scenarios into a computable general equilibrium model that simulates the complex interactions of the U.S. economy as a whole, the combined effect of climate impacts across multiple sectors could be assessed in an integrated fashion. Detailed results are described in the body of this report, but five principal conclusions emerge:

1) Based on the market sectors and range of impacts considered for this analysis, projected climate change has the potential to impose considerable costs or produce temporary benefits for the U.S. economy over the 21st century, depending on the extent to which pessimistic or optimistic outcomes prevail. Under pessimistic assumptions, real U.S. GDP in the low climate change scenario is 0.6 percent lower in 2100 relative to a baseline that assumes no change in climate; in the high climate change scenario, the predicted reduction in real GDP is 1.9 percent. Under the additional “high and drier” climate scenario, however, real GDP is reduced more dramatically—by as much as 3.0 percent by 2100 relative to baseline conditions. Furthermore, under pessimistic assumptions negative impacts on GDP grow progressively larger over time, regardless of the climate scenario. In contrast, under optimistic assumptions real U.S. GDP by 2100 is 0.7 to 1.0 percent higher than baseline conditions across the low, central and high climate scenarios, but these benefits eventually diminish over time. Nevertheless, to the extent that responses in certain key sectors conform to the optimistic scenarios, there is a distinct possibility that some degree of climate change can provide modest overall benefits to the U.S. economy during the 21st century.

2) Due to threshold effects in certain key sectors, the economic benefits simulated for the 21st century under optimistic assumptions are not sustainable and economic damages are inevitable. In contrast to the pessimistic scenarios which show increasingly negative impacts on the economy as temperatures rise, the economic benefits associated with optimistic scenarios ultimately peak or reach a maximum. Specifically, the agriculture and energy sectors initially experience significant cost reductions, but only so long as climate change remains below critical levels. Once temperature and other key climate parameters reach certain thresholds, however, benefits peak and begin to decline—eventually becoming damages. Different thresholds apply in different sectors and the time required to reach them depends on the rate at which warming occurs. In the high climate change scenario, the trend toward economic benefits under optimistic assumptions slows and peaks around mid-century, whereas, in the central climate case, this transition appears toward century’s end. In the optimistic, low climate change scenario, benefits continue to accrue throughout the 21st century. Nevertheless, the existence of these thresholds means that continued climate change—even if it proceeds slowly—eventually reverses market outcomes so that predicted economic benefits are only transient and temporary.

3) The effects of climate change on U.S. agriculture dominate the other market impacts considered in this analysis. Currently, the agriculture, forestry and fisheries industries represent about 2.0 percent of total U.S. industrial output and about 3.5 percent of real GDP. However, agriculture accounts for a much larger share of the overall climate-related economic impact estimated in this analysis. For example, across the low, central and high climate change scenarios, field crop and forestry impacts account for over 70 percent of the total predicted effect of climate change on real GDP under optimistic assumptions and almost 80 percent of the total GDP effect under pessimistic assumptions. These figures rise to 75 and 85 percent, respectively, if one includes climate effects on livestock and commercial fisheries. Clearly, significant impacts in relatively small sectors can exert a disproportionate influence on the overall economic consequences of a given climate change.

4) For the economy, wetter is better. All else being equal, more precipitation is better for agriculture —and hence better for the economy—than less precipitation. Not surprisingly, reductions in precipitation are costlier at higher temperatures than at lower temperatures and the negative impacts of drier climate conditions are greater under pessimistic assumptions than they are under optimistic assumptions. These results are driven by model assumptions about the relationship between agricultural output and different levels of precipitation; they do not consider regional or seasonal variability nor do they account for possible changes in the incidence of extreme events such as drought and flooding. To date, variations in precipitation have not been routinely incorporated in assessments of the agricultural impacts of climate change; nevertheless, they are potentially quite important and could  significantly affect actual benefits or damages associated with climate change in this sector of the economy. Therefore, in future assessments, more attention should be paid to the specific effects of precipitation under different climate scenarios.

5) Changes in human mortality and morbidity are small but important determinants of the modeled impacts of climate change for the U.S. economy as a whole. An increase in climate-induced mortality or illness reduces the population of workers and consumers available to participate in the market economy, in turn leading to a loss of real GDP. In this analysis, mortality and morbidity effects alone account for 13 to 16 percent of the aggregate predicted effect of climate change on the economic welfare of U.S. households. Failure to include such effects therefore understates the potential market impacts of climate change as well as the likely benefits of climate-mitigating policies. Furthermore, the economic consequences of the mortality and morbidity effects arising from a given change in temperature are at the low end of mortality valuations found in the reported literature. Hence, the contribution of health effects to the aggregate market impacts of climate change could be even higher than these results suggest.

Taken together, these findings have important implications for current policy debates and for ongoing efforts to further refine our understanding of the likely impacts of global climate change. From a policy standpoint their primary relevance lies in the extent to which they support (or diminish) the case for intervention to avoid or mitigate the impacts being evaluated. Specifically, does the analysis suggest that the likely consequences of future climate change will be sufficiently negative as to warrant near-term actions aimed at reducing greenhouse gas emissions? This question is all the more difficult to answer because the benefits of policy intervention tend to accrue slowly, over a long period of time, while the costs of mitigative action must be borne in the near term.

On the one hand, the results of this analysis clearly point to the possibility that climate change could produce measurable negative impacts on the U.S. economy within this century that might justify anticipatory policy responses. On the other hand, the fact that some of the scenarios analyzed produce positive, albeit temporary, benefits for the U.S. economy in the same timeframe might seem to weigh in favor of forgoing, or at least delaying, such actions.

A number of nuances in these results—together with several larger considerations related to limitations inherent in the study’s design—argue against the latter conclusion. Within the scope of this analysis, perhaps the most important point is the fact that most, if not all, potentially positive impacts of climate change under optimistic assumptions are likely to be transient and unsustainable over the long run in the face of steadily rising temperatures. If, on the other hand, pessimistic assumptions prove to be more correct, the economic impacts of climate change are not only immediately negative, but worsen steadily over time. Thus, the potential for temporary economic benefits must be balanced against the potential for immediate and lasting economic damages.

A second important point is that the modeling results reveal asymmetries in the magnitude of potential benefits versus potential damages. Specifically, the economic losses estimated under pessimistic assumptions are generally larger than the transient benefits gained under optimistic assumptions in all but the low climate change scenarios. Moreover, the asymmetry becomes more pronounced with rising temperatures as certain types of costs—such as those associated with extreme weather events—increasingly offset possible benefits to other sectors of the economy.

A further caution relates to the partial and incomplete nature of the analysis itself. This effort was limited from the outset to considering only market impacts of global climate change within the United States. As has already been noted, it was not possible to include all potentially climate-sensitive market sectors in the analysis; nor was it possible to account for all externalities or spillover effects. Moreover, the results of this analysis are not likely to be representative of other parts of the world, especially for those countries whose overall economic well-being is more closely tied to sectors like agriculture. For these countries, the potential damages associated with future climate change could be a much larger proportion of GDP than in the United States and the downside risks under pessimistic assumptions—especially in regions where climate change is likely to cause increasingly warmer and drier conditions—could be far more substantial.

Even more significant, in terms of drawing policy conclusions from these results, is the fact that the underlying analysis does not address a host of potential non-market impacts associated with climate change. These include shifts in species distribution, reductions in biodiversity, losses of ecosystem goods and services and changes in human and natural habitats. Such impacts—many of which are explored in other Pew Center reports—are probably of great concern to the public and could carry substantial weight in future policy deliberations. They are, however, extremely difficult to value in economic terms. To the extent that they have been assessed—even qualitatively—the results suggest that climate-related impacts on natural systems are far more likely, on the whole, to be negative rather than positive. As such they would tend to add to any negative market impacts associated with future climate change, while offsetting potential market benefits of the kind simulated in this study under optimistic assumptions.

In sum, the disparity in results between optimistic and pessimistic scenarios—and the likelihood that a consideration of non-market impacts would tend to exacerbate this disparity—highlights the continuing uncertainty associated with quantifying climate change impacts. The fact that the economic losses associated with pessimistic scenarios are both larger and more continuous than the transient benefits gained under optimistic scenarios would seem, by itself, to provide some support for cautionary action on climate change. In fact, such action—by slowing the pace and magnitude of temperature increases in the U.S. market consequences of global climate change coming decades—actually could forestall any damages or even improve the odds that optimistic rather than pessimistic outcomes prevail. If, on the other hand, worst-case scenarios appear more likely over time and ultimately justify more dramatic intervention, early efforts to achieve moderate near-term emissions reductions may help avoid the need for more costly measures later on. Meanwhile, high priority should be given to improving and integrating future assessments of market and non-market outcomes and to refining our understanding of the probabilities associated with varying degrees of climate change and the positive or negative responses that follow.

Brian Hurd
Dale W. Jorgenson
Joel Smith
Richard J. Goettle
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Press Advisory: New Reports on the Impacts and Market Consequences of Climate Change

Press Advisory
April 16, 2004                                              

Contact: Katie Mandes (703) 516-4146
         


The Impacts and Market Consequences of Global Climate Change

Two new reports from the Pew Center on Global Climate Change

Washington, DC — Over the next century, global climate change may have serious consequences for the economy of the United States and the health and welfare of its citizens, according to two new reports by the Pew Center on Global Climate Change.

The first report, A Synthesis of Potential Climate Change Impacts on the United States by Joel B. Smith of Stratus Consulting, Inc., is the final in a series of Pew Center reports chronicling the possible national and regional effects of global climate change on important economic sectors, health, and natural resources.

The second report, U.S. Market Consequences of Global Climate Change, presented by lead author Dale Jorgenson of Harvard University, provides an in-depth analysis of the potential effects of climate change on the U.S. economy.

Anyone interested in global climate change or climate change policy is invited to attend.

WHEN:    Wednesday, April 28, 2004 at 10 A.M.

WITH:     Eileen Claussen, President, Pew Center on Global Climate Change;
              Joel B. Smith, Vice President, Stratus Consulting, Inc.;
              Dale W. Jorgenson, Professor, Harvard University; and
              Richard J. Goettle, Professor, Northeastern University

WHERE:  National Press Club, First Amendment Room
              529 14th Street, N.W.
              Washington, DC 20045

All materials pertaining to this press briefing are embargoed until April 28, 2004 at 10 A.M.

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