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Press Release: Report Suggests New Directions For Economic Analysis of Climate Change

For Immediate Release:
October 13, 2000

Contact: Katie Mandes, 703-516-4146
             Dale Curtis, 202-777-3530

Report Suggests New Directions For Economic Analysis of Climate Change: Four Papers Explore Limitations of Current Models, and Future Possibilities

Washington, DC - The computer models used to analyze the potential effects of climate change policies do not capture key drivers of present and future economic prosperity or current climate science, according to a set of four papers issued by the Pew Center on Global Climate Change.

Computer models that integrate scientific and economic theories and reams of data have become essential tools in climate change policy discussions. These "integrated assessment" (IA) models can be useful for several reasons: they assess specific climate change policies, coordinate multiple issues in a systematic framework, and provide an analytical method for comparing climate policies to other, non-climate-related policies.

However, a great deal of IA analysis is based on questionable assumptions. For example, many models begin with the premise that consumers and firms always succeed in maximizing their "enlightened self-interest" and have complete information about current and future options. The papers released today offer critiques of the assumptions underlying most current IA, and suggest ways that new and improved models could provide greater insights into climate policies.

"All of our work on the economic analysis of climate change indicates that our current analytic tools are inadequate and need improvement," said Eileen Claussen, President of the Pew Center on Global Climate Change. "Despite the obvious need for economic modeling of climate change policies, the findings are often abused by some analysts claiming the 'holy grail' of modeling results. These four reports not only question this often-misplaced confidence, but also identify topics absent in nearly all economic models, such as climate 'surprises' and drivers of technological innovation. Consideration of these important factors could have major repercussions for any climate policy discussion."

Modeling Assumptions Oversimplify The "Real" World

The four papers, written by leading experts and issued together under the title "New Directions in the Economics and Integrated Assessment of Global Climate Change," examine four issues that have major implications for IA.

The first paper, by Alan Sanstad of Lawrence Berkeley National Laboratory, focuses on technological innovation and its treatment in IA models. Most models do not incorporate a realistic assessment of how market forces drive innovation. While innovation would clearly lower the costs of addressing climate change, many modelers focus on the opportunity cost of encouraging climate-friendly technology. The fear is that climate-related R&D will "crowd out" other kinds of R&D. Sanstad's paper shows that policies promoting climate-related R&D may simultaneously encourage, not discourage, R&D in other sectors.

The second paper, by Stephen DeCanio of the University of California, Santa Barbara, discusses how IA models tend to assume that firms focus only on, and are entirely successful in, maximizing profits. This often leads to misunderstandings about how firms innovate, and the kinds of trade-offs they must make between economic and environmental performance. DeCanio's work describes firms as "information networks" with multiple objectives, which leads to a more complete picture of how private-sector organizations innovate. Another finding with major significance for climate policy is that firms can make improvements in environmental performance without sacrificing overall profitability.

The third paper, by Richard Howarth of Dartmouth College, addresses how future generations are depicted in most IA models. Using the so-called "overlapping generations" approach - pioneered by Nobel Laureate Paul Samuelson and used widely in public finance modeling - Howarth compares the potential impacts of three policy regimes on the welfare of present and future generations. The analysis suggests that while rising greenhouse gas emissions are a factor in short-term economic welfare, climate stability can be viewed as an economic asset that would contribute strongly to the welfare of future generations. In other words, even if short-term environmental damages of climate change turn out to be moderate, Howarth finds that near-term emissions control is still consistent with maintaining long-term economic well-being.

In the fourth paper, Stephen Schneider of Stanford University and Starley Thompson of Complex Systems Research, Inc. provide a new model to explore the causes and consequences of one major type of "climate surprise" -- the possible collapse of the "conveyor belt" circulation of the North Atlantic Ocean. Climate "surprises" are the low-probability but high-consequence scenarios driving much of the international concern about climate change. Currently, most IA models assume the climate responds slowly and predictably. The authors conclude that IA models that ignore the possibility of climate surprises probably overestimate the capacity of human society to adapt and underestimate the optimal control rate for greenhouse gas emissions. The implication is that the full range of plausible climatic outcomes needs to become part of climate policy analysis.

Continuation of Economic Series

The four papers released today are the latest in the Pew Center's series of reports on the economics of climate change. "But whereas until now we have focused on what has been done with economic analysis in the past, we are now beginning to focus on what needs to be done in the future," said Claussen. "We must explore new tools and methods to improve our forecasts."

"The aim", Claussen said, "is to suggest several new directions in which IA can and should develop to better enable citizens and policy-makers to grapple with the challenges posed by climate change." For example:

  • IA models that more accurately portray innovation will help policy-makers answer such questions as whether the government should subsidize climate-friendly R&D, or how to phase in emission reductions to take maximal advantage of technological progress.
  • IA models that more realistically portray businesses will make it clear that the challenge for policy-makers is to find ways to encourage businesses to innovate in multiple dimensions to meet multiple objectives.
  • IA models that take into account the standpoint of future generations will enable policy-makers to explicitly consider the implications of policy for equity as well as efficiency. And,
  • IA models that can explore the causes and consequences of "climate surprises" will help policy-makers to understand the implications of speeding up or slowing down the rate of greenhouse gas build-up, which may turn out to be as important as the size of the build-up.

A complete copy of these and other Pew Center reports can be accessed from the Pew Center's web site, www.c2es.org.

About the Pew Center: 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 a nonprofit, non-partisan and independent organization dedicated to providing credible information, straight answers and innovative solutions in the effort to address global climate change. Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs, leads the Pew Center. The Pew Center includes the Business Environmental Leadership Council, a group of large, mostly Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center; it is solely supported by contributions from charitable foundations.

New Directions in the Economics and Integrated Assessment of Global Climate Change

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New Directions in the Economics and Integrated Assessment of Global Climate Change

Prepared for the Pew Center on Global Climate Change
October 2000

By:
Stephen J. DeCanio, University of California, Santa Barbara
Richard B. Howarth, Dartmouth College
Alan H. Sanstad, Lawrence Berkeley National Laboratory
Stephen H. Schneider, Stanford University
Starley L. Thompson, Complex Systems Research, Inc.

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

This report elaborates on four issues - technological innovation, the behavior of firms, intergenerational equity, and climate "surprises" - that have profound implications for the modelers and makers of climate policy. Computer models that integrate climate science, policy, and economic research have become essential to climate change policy discussions. These "integrated assessment" (IA) models are extremely useful for several reasons: they assess specific climate change policies, coordinate the multiple issues in a systematic framework, and provide an analytical method for comparing climate policies to other, non-climate related policies. However, most IA is based largely on economic theories whose simplifications are not always applicable to climate change policy. This paper examines four kinds of assumptions that underlie most IA models, and shows how different approaches more in line with the latest research might change our view of the economics of the climate problem.

The first paper, by Alan Sanstad, focuses on technological innovation and its treatment in IA models. Most models do not incorporate a realistic assessment of how market forces drive innovation. While innovation would clearly lower the costs of addressing climate change, many modelers focus on the opportunity cost of encouraging technological progress on climate-friendly technology. The fear is that climate-related R&D will "crowd out" other kinds of R&D. Sanstad's work examines this question, taking into account that the economy systematically underinvests in R&D, and shows that policies promoting climate-related R&D may simultaneously encourage, not discourage, R&D in other sectors.

The second paper by Stephen DeCanio discusses how IA models characterize the behavior of firms by assuming they do no more than maximize profits, and that they always succeed perfectly in doing so. This often leads to misunderstandings about: (1) how firms innovate, and (2) the trade-offs firms must make between environmental and economic performance. DeCanio's model describes firms as information networks with multiple objectives, which leads to a more complete picture of how firms innovate. The model also shows that both superior economic and environmental performance can be achieved through technological and organizational innovation.

The third paper by Richard Howarth addresses how future generations are depicted in most IA models. Models typically use a single, simple discount rate to make intertemporal comparisons for anywhere from 50 years to sometimes 300 years into the future. But over very long periods of time, these comparisons involve different generations of people. Howarth accounts for these differences using the so-called "overlapping generations" models - a model that incorporates the detail of IA models while providing a more realistic assessment of each generation's spending and savings behavior. This work indicates that policies inclined towards climate stabilization provide an "insurance" policy that protects future generations against potentially catastrophic costs. Even if damage costs turn out to be moderate, Howarth finds, emissions control is still consistent with maintaining long-term economic well-being.

Stephen Schneider and Starley Thompson, in the final paper, provide a new model to explore the causes and consequences of one major type of "climate surprise" - the collapse of the "conveyor belt" circulation of the North Atlantic Ocean. Climate "surprises" are the low-probability but high-consequence scenarios driving much of the international concern about climate change. Currently, most IA models assume the climate responds slowly and predictably. The authors find IA models that ignore the implications of rapid, non-linear climatic changes or surprises are likely to overestimate the capacity of humans to adapt to climatic change and underestimate the optimal control rate for GHG emissions. The conclusion is that it is critical that the full range of plausible climatic states become part of IA policy analysis.

This report is the latest in the Pew Center's economics series. As with the rest of the series, these reports will help to demystify the models and explain what type of questions they can (and cannot) answer. But whereas until now we have focused on what has been done in the past, we now begin to focus on what needs to be done in the future. This report includes four critiques of the assumptions underlying IA, and suggests ways in which new and improved models could provide greater insights into what policies would be most efficient and effective in reducing greenhouse gas emissions:

  • IA models that more accurately portray innovation will help policy-makers answer questions such as the following: Should the government subsidize climate-friendly R&D? Will increasing carbon prices alone drive sufficient innovation to solve the GHG problem? How should we time and phase emission reductions to take maximal advantage of technological progress?
  • IA models that more realistically portray businesses will make it clear that the challenge for policy-makers is to find ways to encourage businesses to innovate in multiple dimensions to meet multiple objectives.
  • IA models that take into account the standpoint of future generations will enable policy-makers to explicitly consider the implications of policy for equity as well as efficiency.
  • IA models that can explore the causes and consequences of "climate surprises" will help policy-makers to understand the implications of speeding up or slowing down the rate of greenhouse gas build-up, which may turn out to be as important as the size of the build-up.

Earlier versions of the papers in this report were first presented during the Pew Center's July 1999 economics workshop, which convened leading experts to discuss potential improvements to current IA modeling methods. The insights of participants in that workshop were invaluable.

This report benefited greatly from the comments and input from several individuals. The Pew Center and authors would like to thank Kenneth Arrow, Larry Goulder, Robert Lind, Klaus Hasselman, and Bruce Haddad. Special thanks are also due to Ev Ehrlich and Judi Greenwald for serving as consultants on this project.

Introduction

Our knowledge of the global climate system, and of how human actions may be changing it, is the product of a large and expanding body of scientific research. Translation of this knowledge into policies for dealing with the possibility of global climate change, however, has been largely carried out using the concepts and methods of economics. Unique among the social sciences, modern economics provides a set of powerful analytical and computational tools that support quantitative modeling of economy- and society-wide policies over the long run. The formidable challenges posed by the complexity of climate policy have made economic modeling an especially attractive means of organizing and applying a range of scientific, economic, and social research to analyzing how we should respond to the threat of climate change.

In practice, such analysis is typically carried out through the construction and application of large-scale computer models that combine scientific and economic theories and data into unified quantitative frameworks. These "integrated assessment" models have emerged as decision-makers’ primary tool for quantitative climate policy analysis.

In keeping with their origins, integrated assessment models (IAMs) are commonly built on the principles of what is often referred to as "standard" or "conventional" economic theory. The papers in this volume deal with four of the key assumptions underlying this theory as it has typically been applied to climate economics and integrated assessment. The first assumption is that technological change -- increases in outputs of goods and services without increases in productive inputs -- originates outside of the economy itself; in other words, technological progress is "exogenous" with respect to the market economy. The second is rational behavior on the part of consumers and firms. Colloquially, this is usually thought to mean no more than "enlightened self interest." In the theory and its applications, however, "rationality" is a considerably stronger assumption. It means complete optimization by economic agents over all possibilities open to them in the choice of commodities and actions: nothing is ignored or misunderstood, and no mistakes are made. The third assumption is that economic rationality takes into account all future as well as present possibilities: agents have perfect foresight infinitely far into the future. In practice, this assumption is represented by an infinitely-lived decision-maker, a representative consumer, or a social planner, who optimizes over a completely foreseen infinite horizon.

The final assumption has to do with the representation of the "externalities" or deleterious effects that could arise from climate change. The common approach in integrated assessment is to represent climate-related externalities as a function of the total stock of greenhouse gases (GHGs) in the atmosphere. A key conclusion of this method is that the climate problem is fundamentally "slow-moving," and that even "large" anthropogenic emissions constitute only "small" additions to the global GHG stock at any given time, so the total stock changes slowly relative to the time-scales on which policies are usually formulated.

These assumptions -- exogenous technological change, rational behavior, the infinitely-lived agent, and the basic stock externality model of GHGs -- are fundamental design principles underlying standard climate economics and almost all integrated models. The papers here report on the results of research in which these fundamental elements are altered and the resulting implications for climate policy modeling are analyzed. The first paper, by Alan Sanstad, considers the consequences of recognizing that technological change is not typically "exogenous" but rather is strongly influenced by market incentives. In the second paper, Stephen DeCanio explores what happens when the basic rationality assumption as it applies to firms is replaced by a model in which firms are viewed as complex communication networks that do not engage in the fully-informed, optimal decision-making posited in the neoclassical model. In the third paper, by Richard Howarth, the infinitely-lived decision-maker is replaced by a series of distinct demographic generations. In the concluding paper, Stephen Schneider and Starley Thompson describe a model that can display abrupt, non-linear changes in the ocean-atmosphere system as a result of increased carbon dioxide (CO2) concentrations. These particular ideas constitute a sampling, in effect, of important recent developments in economics and climate science that warrant application to climate policy and integrated assessment modeling. The aim is to indicate several directions in which integrated assessment can and should develop in order to better enable policy-makers and citizens to grapple with the daunting risks and challenges posed by global climate change. The sections below provide a brief introduction to these topics.

A. Endogenous Technological Change

The standard models rule out the possibility of entrepreneurial responses to climate policy -- the new innovation aimed at carbon reductions that would arise in response to new incentives. This innovation would be a form of "endogenous" technological change, in that it would occur within the economy in response to market forces. This omission raises the possibility that the models as currently structured systematically overestimate the costs of carbon abatement because they do not account for the accelerated carbon- or energy-saving innovation that would result from price-based carbon reduction policies.

In the past two decades, economists have made considerable strides in modeling the underlying processes of technological change and economic growth, focusing on how technical innovation arises within a market economy in response to economic incentives. This work -- the "new growth theory" or theory of "endogenous technological change" -- has been recognized as potentially significant for climate policy, and in recent years several initial applications have appeared. Sanstad discusses the key ideas of this theory and several of its applications to climate policy in the first paper.

As Sanstad describes, economists acknowledge (and partially confirm) the cost-saving potential of endogenous technological change. However, they have also emphasized the losses that would arise from reallocating resources such as human expertise to new carbon- or energy-saving innovation and away from other applications. For example, as engineers turn their attention to energy efficiency and away from other activities, there could be a slow-down of technical innovation in other sectors. Alternatively, there would be costs associated with training new engineers. It has been suggested that such opportunity costs of stimulating new "climate-friendly" technical change would be sufficiently large to nearly or completely offset the benefits.

Sanstad notes, however, that the modeling of technological change as an endogenous phenomenon is closely linked with the finding that the market system may systematically under-invest in innovation. This effect results from the "public good" character of knowledge as an economic commodity: the use of an idea by one does not preclude its use by another. The new growth theory provides tools for the rigorous analysis of this phenomenon in the general equilibrium setting necessary for applications to integrated assessment. Sanstad shows that, when this finding is taken into account, the opportunity cost problem may be substantially mitigated. In fact, it may be the case that policies to speed up one form of innovation would actually also speed up competing forms. These results follow from the fact that the economy’s initial equilibrium may allocate too few resources to innovation overall, so that policies that encourage a specific form of innovation may improve overall economic efficiency. As he discusses, this conclusion rests on the empirical question of the degree to which the new growth theory’s prediction of under-investment in research and development (R&D) is borne out in practice. This question is thus a key priority for further research.

B. The Theory of the Firm

Within the economics community there has been a lively and long running debate on the nature of the firm and assumptions regarding the degree to which the typical firm’s behavior can be characterized as "rational." Beginning with the work of Herbert Simon in the 1940s and 1950s, there has been a steady expansion of theoretical and empirical efforts to open up the "black box" of the profit-seeking private sector firm to better understand how companies actually behave in a market economy. In the second paper, DeCanio summarizes several aspects of the modern critique of the neoclassical theory of the firm that have a bearing on integrated assessment issues. The questionable elements of neoclassical theory include: (1) the assumption that firms have a unitary objective -- profit maximization -- rather than the multiple objectives they are known to pursue; (2) the exclusive focus on the firm’s selection of how much of each aggregate "factor of production" (land, labor, capital, materials) to employ, when these choices actually occupy only a small portion of managers’ time and attention; (3) the assumption that technological change arises from "exogenous" factors, independent of the activity of the firm, instead of its being in large part a product of the procedures and decisions of the firm; and (4) the premise that firms always make optimal decisions, rather than, as in reality, searching for improvements in an environment too complex to allow full optimization.

DeCanio goes on to describe modern advances in the theory of the firm from fields such as the new institutional economics and management science, showing how these ideas could improve the treatment of firms in integrated assessment. He describes how these alternative frameworks call into question the conventionally assumed trade-off between environmental quality and the production of other goods. Instead, he argues for a perspective in which these two objectives are complementary.

DeCanio next presents results from the application of a mathematical "network" model of organizational structure and evolution that contrasts sharply with the neoclassical model. The premise of the network model is that patterns of communication and control within the firm are fundamental to understanding the dynamics of decision-making. Accordingly, the focus is on the behavior of the firm as an information processing system that is capable of "learning" over time in the sense of establishing new internal patterns of communication links. The model is explicitly economic in that it includes the costs associated with establishing and maintaining communications within the firm. This richer representation makes it possible to analyze rigorously phenomena that are essentially ignored in the neoclassical framework.

Among the most important of these phenomena is the manner in which the firm evolves in order to improve its performance on specific tasks -- such as adopting a profitable technological innovation (e.g., in energy efficiency). All else being equal, increasing the density of communication links yields an economic gain to the firm; at the same time, however, it carries a commensurate cost. Thus, the organizational structure arrived at by an evolutionary process will depend on the particular form and parameters of the cost and reward functions. As a result, there will in general be no single "optimal" internal organization for the firm that prevails under all circumstances: the result of evolutionary learning will depend on the changeable nature of the firm’s tasks and opportunities. In addition, the evolutionary course of a firm’s development is likely to depend on the path it takes, with multiple outcomes -- having roughly equal profitability but different organizational structures -- possible. One corollary of these findings with particular significance for environmental policy is that different organizations may be comparable in profitability but can exhibit very different environmental behaviors and impacts. This means that improvement in environmental performance is possible without sacrificing overall profitability. In essence, the trade-off between profitability and environmental protection dissolves.

C. Intergenerational Fairness and Efficiency

One of the most basic features of global climate change is that while the present generation is deciding what if anything to do about it, the impacts of climate change (and hence the consequences of today’s actions or inaction) are likely to be borne by future generations. Cost-benefit analysis that ignores the standpoint of future generations sidesteps some of the issues of fairness and equity associated with climate change, notably including the risks that today’s lifestyles and technologies may be imposing on posterity through GHG emissions.

In the third paper, Howarth conducts a quantitative analysis that emphasizes the differential impacts that climate change response strategies would have on the welfare of present and future generations. This analysis employs a so-called "overlapping generations" (OLG) model, which posits (as the name suggests) a succession of generations. OLG models were pioneered in the 1950s by Paul Samuelson, and have since become a mainstay in the field of public finance, where they are used to study the impacts of taxation and government debt on the distribution of income between generations. This framework, however, has not been widely used in climate policy modeling.

Howarth uses an OLG-based IAM to compare the impacts of three policy regimes on the welfare of present and future generations. In the first scenario -- the laissez faire base-case -- the economy is managed according to free-market political precepts, and no steps are taken to reduce GHG emissions. Over the long-term future, this scenario yields an increase in mean global temperature of 8.0 ºC relative to the pre-industrial norm, which imposes costs on future generations equivalent to 9 percent of economic output. In the second scenario -- cost-benefit analysis -- conventional economic criteria are used to balance the present costs and expected future benefits of climate change mitigation measures. In this scenario, future environmental benefits are discounted relative to the present, so that only modest steps are taken to reduce GHG emissions. Relative to the laissez faire baseline, the emissions control rate rises from 15 to 23 percent between the years 2000 and 2105. These reductions provide relatively small environmental benefits to future generations.

In the third policy scenario -- climate stabilization -- GHG emissions are reduced to the levels required to maintain mean global temperature at its current level, which requires a GHG emissions tax that rises from $560 per metric ton of carbon in the year 2000 to $1,081 in the long-term future. Although critics claim that such aggressive policies might "lock up" the resources required to sustain a productive economy to the detriment of both present and future society, Howarth’s analysis reaches a rather different conclusion. In comparison with the laissez faire and cost-benefit scenarios, climate stabilization reduces short-term consumption by 7 percent. In the long run, however, climate stabilization confers welfare gains of $6.4 trillion per year on members of future generations in comparison with the laissez faire baseline, or $2.4 trillion per year relative to the cost-benefit scenario.

This analysis suggests that although GHG emissions are an important contributor to short-term economic welfare, sustained climatic stability may be viewed as an economic asset that would contribute strongly to the welfare of future generations. The results highlight the importance of moral considerations in the identification of "optimal" policies, finding that conventional cost-benefit analysis tends to favor the interests of present producers and consumers at the expense of future society.

D. Climatic Nonlinearities

The standard assumption in most IAMs is that the climate responds slowly and predictably, gradually warming as atmospheric GHG concentrations increase. Recent research on the long run behavior of the climate, however, has focused attention on the possibility of quite different climate dynamics. It is possible that, in fact, the climate may be subject to very rapid changes or "nonlinearities." An important example of this kind of behavior has to do with the Atlantic thermohaline circulation, or "conveyor belt." This is the natural process by which warm water moving northward from the Gulf stream into the Atlantic Ocean transports heat from more southerly latitudes, thereby increasing the temperature of the North Atlantic region. It is now thought possible that this conveyor belt might collapse under certain scenarios of anthropogenic CO2 emissions, rapidly altering the global climate and profoundly changing the climate in western Europe.

Determining how climate policies should take into account this possibility is clearly a high priority for integrated assessment modeling. Full computer models of the global climate system are far too large and complex to be embedded in IAMs containing economic detail. Indeed, the trend in climate modeling is toward super-computer-run models with integrated atmosphere, land, and ocean sub-models. Thus, economic IAMs have generally incorporated highly simplified representations of the global climate. The immediate challenge is thus to capture these more complicated dynamics in a simplified form that is amenable to linkages with economic models. In the fourth paper, Schneider and Thompson describe the results of such an effort, a "Simple Climate Demonstrator" (SCD) model. Technically, SCD is a simplified model of the northern hemisphere atmosphere-land-ocean system. Overall, the model replicates the behavior of more elaborate climate models. Schneider and Thompson study the conditions under which a conveyor belt collapse would occur, and find that the probability of this event is increased by: (1) greater CO2 concentrations, (2) higher rates of increase in CO2 concentrations, (3) greater sensitivity of the climate to CO2 concentrations, and (4) assumption of a weaker initial circulation. These findings confirm that IAMs with simpler representations of the climate may not be appropriate for studying the policy implications of rapid climate shifts. It also provides an alternative means of representing such shifts that is sufficiently complex to capture the behavior of more complex climate models while being sufficiently simple for applications to integrated assessment. Preliminary analyses coupling the SCD model to the Nordhaus 1992 Dynamic Integrated Climate Economy (DICE) model demonstrate that the potential for severe climatic damages as a result of non-linear climatic behavior in the twenty-second century and beyond can have a substantial influence on present climate policy decisions if discount rates are below 2 percent (Mastrandrea and Schneider, submitted).

E. Summary Remarks

Integrated assessment modeling is still in its early stages. Because it is by nature an interdisciplinary endeavor, it is ultimately based on the ideas and methods of its constituent disciplines. To date, IAMs have drawn most heavily on neoclassical economics, which is well developed and lends itself to this kind of application. As integrated assessment matures, it will need to broaden its scope to incorporate key ideas at the frontiers of research in economics and in other fields. In this volume, several such ideas are presented. The hope is that these papers will serve to advance discussion and applications that will contribute to the evolution of the integrated assessment modeling of global climate change.

 

Alan H. Sanstad
Richard B. Howarth
Starley L. Thompson
Stephen H. Schneider
Stephen J. DeCanio
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Technology and the Economics of Climate Change Policy

Technology and the Economics of Climate Change Policy

Prepared for the Pew Center on Global Climate Change
September 2000

By:
Jae Edmonds, Joseph M. Roop, and Michael J. Scott of Battelle, Washington, DC

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Climate change policy analysis is fraught with uncertainty and controversy, but at least one thing is perfectly clear: technological innovation is the key to addressing climate change. Moving the economy to a greenhouse - friendly future will necessitate a profound economic transition - a transition that simply cannot come to pass without technological progress.

In this report, an impressive team of economists led by Jae Edmonds and Joe Roop explains how economic models of climate change take technological innovation into account. The authors demystify a highly technical subject that is essential to sound policy formulation, raising five central insights:

  • All future projections of technological change are a matter of assumption. Much is known about how technological change has occurred in the past and what will drive it in the future. However, all projections require assumptions about the future role of technological change in the way the economy grows, in the way energy is used, and in the options available as alternatives to fossil fuels.
  • Technological progress reduces the cost of climate change mitigation. This result is robust across a broad range of model types and assumptions.
  • Significant technological progress occurs over long time horizons. This fact should be taken into account in establishing lead times for climate policies.
  • Policies and prices can "induce" technological change. Thus both policy-makers and businesses play a major role in fostering technological change.
  • Modeling "induced" technological change (that is, change stimulated by climate policies or price changes) is important because it more closely reflects reality. However, modeling this phenomenon is in its infancy.

This report on technological change addresses one of the factors identified by the Pew Center as having the largest influence on economic modeling results. An earlier Center report, "An Introduction to the Economics of Climate Change Policy," by John Weyant describes the five factors, which include: how baseline greenhouse gas projections are measured, what climate policies are considered, how the substitution of goods and services by producers and consumers is represented, and whether and how GHG reduction benefits are addressed. Two other Pew Center reports explore in detail the role of climate policies, with an emphasis on international emissions trading, and the role of substitution in determining the outcome of economic modeling.

The Center and the authors appreciate the valuable insights of several reviewers of early drafts of this paper, including Nebojsa Nakicenovic, Ian Parry, and Alan Sanstad. Special thanks are due to Ev Ehrlich for serving as a consultant for the Center's economics series and to Judi Greenwald for her editorial assistance.

Jae Edmonds
Joseph M. Roop
Michael J. Scott
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The Role of Substitution in Understanding the Costs of Climate Change Policy

The Role of Substitution in Understanding the Costs of Climate Change Policy

Prepared for the Pew Center on Global Climate Change
September 2000

By:
Dale W. Jorgenson, Harvard University
Richard J. Goettle, Northeastern University
Peter J. Wilcoxen, University of Texas at Austin
Mun Sing Ho, Harvard University

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

The U.S. economy has proven both resilient and adaptive over the past century. From the "bust" of the Great Depression to the current "boom" associated with information technology, the economy's ability to adapt stems largely from the substitution possibilities within it — that is, how businesses and households alter their behavior when a major economic change occurs.

Reducing greenhouse gases could alter future economic conditions, largely through increased energy prices. While these changes could be significant, the economy is rapidly becoming even more flexible and responsive as technology changes the way things are invented, produced, and distributed. Accordingly, the damages to the economy might be less. Yet, many economic models used in predicting the future costs of climate change policies do not adequately capture the economy's full range of substitution possibilities. A recent Pew Center report entitled, An Introduction to the Economics of Climate Change Policy, identified substitution assumptions as one of five key factors having the largest influence on modeling results. The other factors are: how baseline greenhouse gas (GHG) projections are measured; what policy regime is considered; how technological progress is represented; and whether GHG reduction benefits are included.

This analysis by Dale Jorgenson, Richard Goettle, Peter Wilcoxen and Mun Sing Ho explores the role of substitution in adapting to economic change. It begins with what is considered a "flexible" model (a top-down, computable general equilibrium model of the U.S. economy) and then constrains the flexibility parameters within this model to observe its new results. In essence, the authors use the same model to behave both "flexibly" and "inflexibly" in order to observe the effect of this pivotal assumption on model outcomes.

The most striking conclusion of this work is that the failure to depict the full range of historically-observed substitution possibilities (as many economic models do) can lead to as much as a doubling of the estimated costs of a climate change policy, an overestimate that is wholly attributable to this one pivotal assumption. This overestimation may be even more pronounced since the economy appears more flexible today than in the post-war period when these observations were made. Another interesting finding is that v a rying the flexibility households have in choosing to work more or fewer hours can be as important in predicting carbon prices and economic outcomes as the assumptions about flexibility in all of production. In summary, economic models of climate change must represent the full range of flexibility that is achievable or risk significant errors in estimating economic benefits and costs.

This paper would not have been possible without the comments and support from several individuals. The Pew Center and authors would like to thank Larry Goulder, Jeffrey Frankel, and Hadi Dowlatabadi for their thoughtful comments on early drafts of this report. Special thanks are due to Ev Ehrlich for serving as a consultant on this project, and to Judi Greenwald for her editorial assistance.

Executive Summary

The U.S. economy's reaction both to climate change itself and to the policies designed to avoid climate change depends largely upon the abilities of consumers and producers to adapt to these changes and move forw a rd under new conditions. In turn, these abilities depend on the ease with which consumers and producers can alter their purchasing behavior without sacrificing welfare, income, and production. This ease is reflected largely in the economy's "substitution possibilities" — the options available to con-sumers and producers to change what they buy and sell in response to changes in the prices of particular goods and services. If the cost of economic substitution is low, and the range of substitution possibilities is wide, then mitigation costs — the damages to welfare, income and production — are likely to be low and the burden on the economy is likely to be small. If the cost of substitution is high, and range of substitutability is narrow, then mitigation costs are likely to be high. The purpose of this paper is to examine the economy-wide impacts of reduced substitution opportunities when the economy must adjust to a constraint on carbon emissions.

This analysis uses an economic model that, compared to other models, depicts a relatively complete set of substitution possibilities for consumers and producers. Simulation results from the model portray the economy's response to an emissions reduction schedule that is implemented through a system of tradable emissions permits. The first model simulation used substitution possibilities that were estimated from historical data. Next, the authors systematically replaced key parameters (i.e., coefficients or multipliers of selected mathematical relationships embedded in the model) in a manner that drastically reduced the substitution possibilities of producers and consumers. Each of these simulations defined a different world or economy. The authors then simulated each economy's reaction to proportionally identical emissions constraints. In this manner, the model produced measures of the economic responsiveness both with and without flexibility and the analysis quantified the benefits and costs of substitution.

Three areas of substitution are most important to the overall economic reaction to climate change. These are:

  • flexibility in production, meaning the ability of firms to substitute labor, capital, or other materials for energy or each other when the price of energy rises;
     
  • flexibility in consumption, meaning the ability of households to change the mix of goods and services they buy in response to higher energy prices; and
     
  • flexibility between labor (and, hence, income and consumption) and leisure, as households allocate their scarce time between the two.
     

The principal conclusions emerging from this analysis are:

1. When allow able substitutions reflect the observed behavior of the past , constraining carbon emissions to around 70 percent of their projected base-case levels costs the economy about a one and one-quarter percent loss in real Gross Domestic Product (GDP) and a one-tenth of one percent loss in economic welfare. For perspective, at current levels, this loss in GDP corresponds to an annual loss in income of $430 per person living in the United States and the welfare loss is equivalent to a tax, payable today, of $3,175 per person.


2. Constraining carbon emissions is generally more costly when substitutability in consumption or production is restricted. Thus, flexibility within the economy significantly reduces the adverse impacts of climate change and climate change policies. Real GDP losses are slightly larger when consumption is less flexible, and are doubled when production is less flexible. Failing to account for the full range of substitution possibilities in consumption and production will lead to overestimation of the negative effects of climate change policy.


3. Just as "rigidity" magnifies economic costs, it can also magnify economic benefits under certain circumstances. For example, inflexibility in consumption or production is beneficial to economic performance when: (a) climate change policies lead to additional tax revenues, and (b) the tax policy for reusing these additional revenues is economically advantageous.


In fact, the benefit is magnified the more inflexibility is introduced (assuming a and b hold).

4. Differences among models' treatment of the substitutability between consumption and leisure are likely to be every bit as important in predicting emissions permit prices and economic outcomes as are the models' underlying details of technology, consumption, or production. The more inflexible households are with respect to their consumption-leisure tradeoff, the lower the costs of reducing emissions. Contrary to what occurs when substitution is constrained in production or consumption, rigidity in this instance appears beneficial. However, this rigidity can also prove harmful. The combination of an emissions constraint, inflexibility in consumption and production, and more favorable tax treatment leads to economic benefits (point 3 above). Add inflexibility in consumption and leisure, and the combination leads to economic costs. Rigidities in household choices between consumption and leisure substantially limit the observed economic outcomes from climate change policy: either the adverse impacts are smaller or the potential benefits never materialize.


This analysis is important not only because of its results, but also because it explores this topic in a detailed and systematic manner within a single methodology. It is among but a few efforts to fundamentally change the character of a model in developing a sensitivity analysis. The numerous and well-documented outcomes of other policy experiments have informed the policy process. There now are fewer surprises when a particular policy design is subjected to the scrutiny of a broad range of models. But the quest for understanding does not end here. A model's outcomes depend on interactions among the various components that govern its behavior, and thus analysts need to identify and examine these components in both isolation and combination. The intent of this exercise is to increase understanding of the nature and magnitude of the benefits and costs of substitution by exploring the key features of one particular model and the economy it can portray. The hope is that this exercise makes a modest contribution to the formulation of environmental and economic policies that are beneficially robust over the broadest possible range of economic circumstances. 

Dale W. Jorgenson
Mun Sing Ho
Peter J. Wilcoxen
Richard J. Goettle
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Press Release: New Reports Demystify Two Central Drivers Of Economic Analyses of Climate Change Policy

For Immediate Release:
September 7, 2000

Contact: Katie Mandes (703-516-0606)
             Dale Curtis (202-777-3530)

New Reports Demystify Two Central Drivers Of Economic Analyses of Climate Change Policy:
Technological Change and the Economy's Flexibility Examined

Washington, DC - Computer models that predict the costs and benefits of climate change policies do not adequately capture the economy's flexibility or the dynamics of technological change, according to two new reports from the Pew Center on Global Climate Change.

The reports examine two of the most important variables driving economic analyses of climate mitigation policies: (1) "substitution" effects, or producers' and consumers' spending and purchasing flexibility in response to external shocks such as changing energy prices; and (2) the rate and drivers of technological innovation.

"These reports show that two significant factors underlying the current U.S. economic boom - the level of flexibility and technological progress in the economy - are not fully represented in most current economic analyses of climate change policy," said Eileen Claussen, President of the Pew Center on Global Climate Change. According to Claussen, "This finding should cause us to be skeptical in our review of model results that do not depict this flexibility."

Models with "Inflexible" Assumptions Can Double Predicted Economic Costs

In the first paper, entitled "The Role of Substitution in Understanding the Costs of Climate Change Policy," the authors analyze the economic impacts of imposing a climate policy on a relatively "flexible" economy, then compare the same climate policy on a relatively "inflexible" economy that restricts substitution away from, for example, more to less energy-intensive goods. These "inflexible" assumptions are similar to those used in many existing economic models, which analyze the effects of climate change policies.

The most striking conclusion is that the inflexible model scenario can lead to as much as a doubling of the estimated costs of any particular climate change policy. This pattern of overestimation may be even more exaggerated in today's high-tech economy, which appears to be growing much more flexible. Therefore, many model results may overstate the costs of climate change mitigation.

Dale Jorgenson of Harvard University, Richard Goettle of Northeastern University, Peter Wilcoxen of the University of Texas, and Mun Sing Ho of Harvard University wrote this report.

Defining What Drives Technological Innovation is the Final Frontier for Modelers

Moving the economy to a future with reduced greenhouse gas emissions (GHG) will necessitate a profound economic transition in which new GHG-friendly technologies and approaches will be necessary. The second report - "Technology and the Economics of Climate Change Policy" - identifies how economic models of climate change currently address technological innovation and where gaps still exist in their analysis.

The paper finds that all model results show technological progress reduces the cost of climate change mitigation. Specifically, this result is true in both the two broad model categories designated as "Top-down" and "Bottom-up" models. Top-down models often reduce technological change to a single rate at which energy efficiency improves throughout the economy, based on past experience. Bottom-up models focus on the cost and performance of emissions-reducing equipment, comparing today's world to the world that would exist if new technologies were widely used.

However, all models fail to capture the full process of how technological innovation can be "induced" by policies such as R&D expenditures, energy prices, taxes, and subsidies. While some models capture different parts of this innovation process well, modeling this "induced" technological change is in its infancy. Improving modeling to reflect induced technological change is an important area for future research.

The technology report authors are Jae Edmonds, Joseph Roop, and Michael Scott of the Battelle.

"All models agree that technological progress reduces the cost of climate change mitigation," Claussen said. "This is why it is important to improve our understanding and modeling of this key variable."

Continuation of Economic Series

A Pew Center report published in July entitled, "An Introduction to the Economics of Climate Change Policy" identified the five most important drivers in economic models of climate policies. The two reports released today provide greater detail regarding two of these determinants. A complete copy of these and other Pew Center reports can be accessed from the Pew Center's web site, www.c2es.org.

About the Pew Center: 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 a nonprofit, non-partisan and independent organization dedicated to providing credible information, straight answers and innovative solutions in the effort to address global climate change. Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs, leads the Pew Center. The Pew Center includes the Business Environmental Leadership Council, a group of large, mostly Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center; it is solely supported by contributions from charitable foundations.

Press Release: Report Helps Readers Understand Economic Analyses of Climate Policies

For Immediate Release:
July 17, 2000

Contact: Katie Mandes, 703-516-0606
             Dale Curtis, 202-777-3530

Report Helps Readers Understand Economic Analyses of Climate Policies
Stanford Professor Identifies Five Key Variables And How They Are Manipulated

Washington, DC — Some analysts say measures to address global climate change will have dire effects on the economy, while others foresee net benefits. How can policy makers, journalists and others determine who is right -- or even assess such claims?

A new report commissioned by the Pew Center on Global Climate Change explains how economic analysts use computer models to predict the costs and benefits of proposed policies, and why the predictions vary so widely.

"This report should be extremely helpful to those involved in the climate policy debate," said Eileen Claussen, President of the Pew Center. "The number of economic analyses of climate policy options has grown rapidly in recent years. The variations among them are significant, and without a better understanding of the variables, it is virtually impossible to make informed policy decisions."

Five Variables Explain Majority of Model Differences

The report identifies five variables that explain the majority of differences in the results of economic modelling of climate policy. Two of the key variables involve how the economy adjusts to fluctuating energy prices. Energy is a central issue because the combustion of fossil fuels -- such as oil, coal and gas -- produces carbon dioxide, one of the key greenhouse gases. Energy price changes may cause producers to develop new technologies or substitute different inputs when providing goods and services. Price changes may also spur consumers to shift their buying patterns. Hence, how a computer model handles these substitution and innovation effects will have a large impact on the resulting cost predictions.

The other three variables operate independently of how the economy might respond to certain policy measures. For example, the third variable involves "baseline" emissions trends, or the expected path of emissions in the absence of any new climate policies. Generally, a higher baseline projection will produce higher estimates of the economic impacts of achieving any emissions reduction target.

A fourth variable is the policy environment that governs what adjustments the economy might make. Other things being equal, the more flexibility provided in the policy regime, the smaller the economic impacts of achieving a particular emissions target. The final factor concerns whether the benefits of reducing GHG emissions are explicitly considered. Many studies ignore the benefits of reducing GHG emissions, resulting in an upward bias in cost estimates.

Varying Assumptions Cause Large Swings In Results

Because of the differences in the way these five variables are defined, cost projections for a given set of assumptions can vary by a factor of two to four across models. Within individual models, differences in assumptions about the baseline level of GHG emissions, the policy regime and emissions reduction benefits can cause estimates to vary by a factor of ten or more.

"A clear understanding and interpretation of these determinants will help explain nearly all of the differences in climate policy cost estimates," said Claussen.

Professor John P. Weyant of Stanford University is the author of the report, entitled "An Introduction to the Economics of Climate Change Policy." Professor Weyant serves as Director of the Energy Modelling Forum of Stanford University, which convenes the world's leading energy and climate modellers to discuss issues in the field.

A complete copy of the report is available on the Pew Center's web site, www.c2es.org.

The Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the nation's largest philanthropies and an influential voice in efforts to improve the quality of America's environment. The Pew Center produces analytical reports on the science, economics, and policies related to climate change; conducts public education efforts; works with businesses to develop market-oriented solutions to reduce greenhouse gases; and promotes better understanding of market mechanisms globally. Eileen Claussen, former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs, is the President of the Pew Center. The Pew Center includes the Business Environmental Leadership Council, which is composed of 21 major, largely Fortune 500 corporations, all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center — it is solely supported by contributions from charitable foundations.

An Introduction to the Economics of Climate Change Policy

An Introduction to the Economics of Climate Change Policy

Prepared for the Pew Center on Global Climate Change
July 2000

By:
John P. Weyant , Stanford University

Press Release

Download Entire Report (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

What are the potential costs of cutting greenhouse gas emissions? Can such reductions be achieved without sacrificing economic growth or the standard of living we have come to enjoy? These are important questions, and they come up again and again as the United States and other nations consider what actions are needed in response to climate change.

Many participants in the climate change debate — in government, industry, academia, and non-governmental organizations — have conducted economic assessments to determine the costs of taking various actions to address climate change, with the number of economic assessments increasing exponentially in recent years. Differences among their quality and predicted cost of action, or inaction, have also grown, making it difficult to have faith in any one analysis.

The primary example of varying model results can be seen among the numerous reports predicting the domestic costs of complying with the Kyoto Protocol. Some have concluded the United States can reduce its emissions significantly below its Kyoto target (7 percent below 1990 levels), with net economic savings. Others have predicted dire effects on the U.S. economy. The truth most likely lies somewhere in-between.

Behind each analysis is an economic model with its own set of assumptions, its own definitions of how the economy works, and its own data sets. Unfortunately, these models often seem to be impenetrable "black boxes" allowing only a select few to decipher and interpret their results.

Fortunately, along with the rise in economic modeling there has also been a focus on identifying the differences among models. Professor John Weyant of Stanford University, the author of this report, has been at the forefront of these efforts as Director of the Energy Modeling Forum of Stanford University (EMF). His EMF working group convenes the world’s leading energy and climate modelers to discuss and model current energy policy topics.

In this report, Professor Weyant identifies the five determinants that together explain the majority of differences in modeling cost estimates. This is great news for those engaged in the climate change policy arena who are consumers of economic modeling results. Five key questions can be raised to help policy-makers understand the projected costs of climate change policy: What level of greenhouse gas emissions are projected under current policies? What climate policies are assumed to be put in place to achieve emissions reductions? What assumptions are made about how advances in technology might affect these emissions? To what extent are environmental impacts of climate change included? And is the full set of choices that firms and consumers have when presented with rising energy prices accounted for?

This paper would not have been possible without the assistance of numerous individuals. The author and the Pew Center would like to thank Ev Ehrlich, Judi Greenwald, Larry Goulder, Henry Jacoby, Rich Richels, Dick Goettle, Bill Nordhaus, and Bob Shackelton for their thoughtful comments on previous drafts of this paper.

We acknowledge the use of material from a background paper prepared by Robert Repetto, Duncan Austin and Gwen Parker at World Resources Institute.

Executive Summary

This paper is an introduction to the economics of climate change policy. The goal is to help the reader understand how analysts use computer models to make projections of mitigation costs and climate change impacts, and why projections made by different groups differ. In order to accomplish this goal, the paper will describe five key determinants of greenhouse gas (GHG) mitigation cost estimates.

The paper starts with a discussion of how the economy would adjust to restrictions on GHG emissions, especially carbon dioxide, the dominant, and easiest to measure GHG produced in the United States. Combustion of fossil fuels — oil, gas, and coal — produces large amounts of carbon dioxide. Central to this discussion is the role of energy price increases in providing the incentives for corporations and individuals to reduce their consumption of these fuels.

Energy price increases cause producers to substitute among the inputs they use to make goods and services, and consumers to substitute among the products they buy. Simultaneously, these price increases provide incentives for the development of new technologies that consume less energy in providing the goods and services that people desire. How a model represents these substitution and innovation responses of the economy are important determinants of the economic impacts of restrictions on GHGs.

Three other factors are crucial to economic impact projections.

First, the projected level of baseline GHG emissions (i.e., without any control policies) determines the amount of emissions that must be reduced in order to achieve a particular emissions target. Thus, other things being equal, the higher the level of base case emissions, the greater the economic impacts of achieving a specific emissions target. The level of base case emissions depends, in turn, on how population, economic output, the availability of energy fuels, and technologies are expected to evolve over time without climate change policies.

The second factor is the policy regime considered, i.e., the rules that govern the possible adjustments that the economy might make. International or domestic trading of GHG emissions rights, inter-gas trading among all GHGs, inclusion of tree planting and carbon sequestration as mitigation options, and complementary economic policies (e.g., using carbon tax revenues to reduce the most distortionary taxes in the economy) are all elements of the policy regime. Other things being equal, the more flexibility provided in the policy regime under consideration, the smaller the economic impacts of achieving a particular emissions target.

The third factor is whether the benefits of reducing GHG emissions are explicitly considered. An analyst may subtract such benefits from the mitigation cost projection to get a “net” cost figure or produce a “gross” cost figure that policy-makers can weigh against a benefit estimate. The kind of cost figure produced often depends on whether the analyst is trying to do a cost-benefit analysis or an analysis focused on minimizing the cost of reaching a particular emissions target.

Thus, this paper will describe the major input assumptions and model features to look for in interpreting and comparing the available model-based projections of the costs and benefits of GHG reductions. Two of the five key determinants — (1) substitution, and (2) innovation — are structural features of the economic models used to make emissions projections. The other three determinants are external factors, or assumptions. They are: (3) the base case projections, (4) the policy regime considered, and (5) the extent to which emissions reduction benefits are considered.

The results summarized in this paper illustrate the importance of these five determinants and the large role played by the external factors or assumptions. Cost projections for a given set of assumptions can vary by a factor of two or four across models because of differences in the models’ representation of substitution and innovation processes. However, for an individual model, differences in assumptions about the baseline, policy regime, and emissions reduction benefits can easily lead to a factor of ten or more difference in the cost estimates. Together these five determinants explain the majority of differences in economic modeling results of climate policy.

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Press Release: New Studies Highlight Opportunities for Reducing Emissions While Maintaining Economic Growth

For Immediate Release:
May 23, 2000

Contact: Juan Cortinas (202-777-3519)
             Katie Mandes (703-516-4146)

New Studies Highlight Opportunities for China, Brazil and Argentina to Reduce Emissions While Maintaining Economic Growth

WASHINGTON, D.C. — The Pew Center on Global Climate Change released today three new studies that outline realistic opportunities for China, Brazil and Argentina to address the challenge of climate change. The reports are part of a six report series that examines ways to reduce emissions in developing countries without compromising economic growth.

China, Brazil and Argentina are becoming leaders among developing nations in the international climate change debate and the case studies demonstrate the effectiveness of different policy approaches to emission reductions. In the latest reports, the authors use a linear programming model to conduct an assessment of the technological options available to each country for supplying new electric power generation through 2015.

"These reports are particularly noteworthy because of the geographical and economic importance of each nation examined. They highlight the different challenges and circumstances that developing nations face in addressing environmental problems," said Eileen Claussen, President of the Pew Center on Global Climate Change.

The three previous reports released in the series included an overview piece entitled Developing Countries and Global Climate Change: Electric Power Options for Growth and an examination of the electric power sectors of India and Korea.

Following is a brief overview of each report's findings, recommendations and conclusions:

China

The Developing Countries and Global Climate Change: Electric Power Options in China report was completed by the Beijing Energy Efficiency Center and the Battelle Advanced International Studies Unit. With annual releases of over 918 million metric tons of carbon dioxide into the atmosphere, Chinese decisions affecting energy development and emissions mitigation will significantly impact world climate. The report assesses the current and future state of the power sector to meet projected demand through 2015 under several scenarios

The Chinese analysis yielded several insights:

  • Due to the heavy reliance on coal-fired power generation, baseline carbon dioxide and sulfur dioxide emissions from thermal plants will more than double by 2015.
  • Increasing demand-side energy efficiency by 10 percent could reduce carbon dioxide and sulfur dioxide emissions by 19 and 13 percent, respectively, in 2015, while lowering costs.
  • Expanding the availability of low-cost natural gas through market reforms could reduce emissions of carbon dioxide and sulfur dioxide in the power sector by 14 and 35 percent, respectively, by 2015, and increase costs by only 4 percent compared to the baseline.
  • Accelerating the penetration of cleaner coal technologies could help China reduce sulfur dioxide and particulate emissions, but the associated impact on carbon emissions would be minimal and the cost would increase by 6 percent.

Brazil

Developing Countries and Global Climate Change: Electric Power Options in Brazil, was developed by the Federal University of Rio de Janeiro, Energy Planning Program, Center for Technology, and the Battelle Advanced International Studies Unit. The study points out that Brazil produces relatively few greenhouse gas emissions relative to its size and population. This is mainly due to the dominant role of hydropower in electricity generation. Yet its greenhouse gas emissions could be expected to quadruple, as it changes its fuel mix over the next 20 years.

The Brazilian case study also revealed that:

  • Many new investors may favor natural gas-fired combined-cycle plants that would increase carbon dioxide emissions from 3.4 million tons in 1995 to 14.5 million tons in 2015.
  • Further tightening of local environmental regulations and adoption of renewable energy policies could reduce carbon dioxide and sulfur dioxide emissions by 82 percent and 75 percent, respectively, by 2015.
  • Creating a carbon-free power sector would require an additional $25 billion in cumulative costs by 2015.

Argentina

The last report in the series is entitled Developing Countries and Global Climate Change: Electric Power Options in Argentina and was developed by the Bariloche Foundation also working with Battelle. The report finds that the market reforms the country has been implementing since the early 1990's provided mixed, but on balance, positive environmental results. The country's electric power demand is expected to more than triple over the next 15 years, yet its emissions of greenhouse gases, do not have to increase at the same rate. It finds that investments in natural gas combined-cycle plants and renewable energy sources could provide a prudent path for energy development and environmental protection.

The report also found several key opportunities, including:

  • Adopting policies that favor renewable energy sources and nuclear power would cost $32 billion by 2015 and would decrease carbon dioxide emissions from 14 million tons in the baseline to 11 million tons in 2015.
  • Increasing energy efficiency would reduce total costs by $6.3 billion and carbon dioxide, sulfur dioxide and nitrogen oxide emissions would all decline 20 percent compared to the baseline.

A complete copy of each report is available on the Pew Center's web site, www.c2es.org.

The Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the nation's largest philanthropies and an influential voice in efforts to improve the quality of America's environment. The Pew Center supports businesses in developing marketplace solutions to reduce greenhouse gases, produces analytical reports on the science, economics and policies related to climate change, launches public education efforts, and promotes better understanding of market mechanisms globally. Eileen Claussen, former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs, is the President of the Pew Center.

The Pew Center includes the Business Environmental Leadership Council, which is composed of 21 major, largely Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center - it is solely supported by contributions from charitable foundations.  

Press Release: Climate Change Conference Reveals Innovation and Progress

For Immediate Release :
April 25, 2000

Contact: Katie Mandes (703-516-4146)
             Kelly Sullivan (202-289-5900)

Climate Change Conference Reveals Innovation and Progress Across The Private Sector Worldwide and In Many Governments

WASHINGTON, D.C. — The opening of a two-day international conference today, sponsored by the Pew Center on Global Climate Change and the Chatham House/Royal Institute of International Affairs, served as a showcase for many of the most far-reaching innovations that businesses and governments are undertaking to address the challenge of global climate change.

"In the United States, climate change policies have been hotly debated but little action has been taken," said Eileen Claussen, President of the Pew Center on Global Climate Change. "Fortunately, there is substantial progress being made — by governments abroad, businesses here and around the world and by state and local governments here at home."

To complement the conference, the Pew Center on Global Climate Change also is publishing a special supplement on climate change in tomorrow's Washington Post. Significantly, the piece includes statements by 13 Chief Executive Officers (CEOs) of some of the world's leading companies, all members of the Pew Center on Global Climate Change's Business Environmental Leadership Council (BELC), acknowledging that climate change is a real problem that demands action by the public and private sector.

Among these statements are:

"Enron supports market-based initiatives that create efficient, cost-effective and environmentally sound energy systems," says Dr. Kenneth L. Lay, Chairman and CEO, ENRON. "As a company, we are taking steps to provide the world with clean energy solutions and implementing systems to manage greenhouse gas emissions. Our belief in the synergies between state of the art energy management practices and sound environmental policies have translated into effective pre-construction measures for our new headquarters building, which we expect will save $10 million and reduce greenhouse gas emissions by 34,000,000 lbs (or 17,000 tons) per year."

"Technology and innovation move us forward as people on earth," says George David, Chairman and CEO, United Technologies Corporation. "Environmentally benign fuel cells, built by United Technologies for every American space mission ever, may be the next great innovation to power our cars and our homes. A concerted public and private effort will make huge reductions in global climate change impacts for our nation and our world. All we need is the will."

Additional statements by the following CEOs are included in the supplement:

Göran Lindahl, President and CEO ABB Group, Dr. E. Linn Draper, Jr. Chairman of the Board, President and Chief Executive Officer American Electric Power, Harry M. Jansen Kraemer, Jr. Chairman and Chief Executive Officer Baxter International Inc., Ralph Peterson President and Chief Executive Officer CH2M Hill, Charles O. Holliday Chief Executive Officer DuPont, J. Wayne Leonard Chief Executive Officer, Entergy, Paul A. Yhouse President and CEO Holnam Inc., Robert D. Glynn, Jr. Chairman, CEO and President PG&E Corporation, Tag Taguchi, President, Toyota Motor North America, David R. Whitwam Chairman and CEO Whirlpool Corporation, Steven R. Rogel Chairman, President and CEO Weyerhaeuser Company Profiles.

Also included in the supplement are examples from these corporations highlighting their actions to mitigate climate change. Some examples include:

BP Amoco
BP Amoco believes in adopting a precautionary approach to climate change. BP Amoco intends to reduce its greenhouse gas emissions by 10 percent of 1990 levels by 2010 and has implemented a greenhouse gas emissions trading system across all its businesses to achieve this target cost effectively. Its portfolio of activities includes collaboration in research and policy development, growing its solar business and promoting flexible market instruments.

DuPont
By 2010 DuPont intends to reduce global carbon equivalent greenhouse gas emissions by 65 percent and hold energy use flat - in both instances using 1990 as a base year. The company also plans to be using renewable resources for ten percent of global energy use by 2010.

Featured speakers at the conference include:

  • John Prescott, Deputy Prime Minister, United Kingdom
  • Jan Pronk, Minister of Housing, Spatial Planning and the Environment, The Netherlands
  • Robert Hill, Minister for the Environment and Heritage, Australia
  • Theodore Roosevelt, IV, Managing Director, Lehman Brothers, Inc.
  • Rodney Chase, Deputy Group Chief Executive, BP Amoco

T he Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the nation's largest philanthropies and an influential voice in efforts to improve the quality of the U.S. environment. The Pew Center is conducting studies, launching public education efforts, promoting climate change solutions globally and working with businesses to develop marketplace solutions to reduce greenhouse gases. 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 Pew Center includes the Business Environmental Leadership Council, which is composed of 21 major, largely Fortune 500 corporations working with the Center to address issues related to climate change. The companies do not contribute financially to the Center, which is solely supported by charitable foundations.

More information on climate change and the Pew Center on Global Climate Change, can be found at www.c2es.org.

Innovative Policy Solutions to Global Climate Change Conference

Promoted in Energy Efficiency section: 
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April 25-26, 2000 - Washington, D.C.

This conference featured high-level speakers presenting innovative policy measures being implemented by industrialized country governments and the private sector. Conference topics were common policy approaches (taxes, trading, negotiated agreements), cross-cutting issues (competitiveness and trade), energy and transportation sector policies, and state and local programs.  A conference summary is available in PDF format.

Featured speeches are available in PDF format:

  • John Prescott, Deputy Prime Minister, United Kingdom
  • Jan Pronk, Minister of Housing, Spatial Planning and the Environment, The Netherlands
  • Robert Hill, Minister for the Environment and Heritage, Australia
  • Theodore Roosevelt, IV, Managing Director, Lehman Brothers, Inc.
  • Rodney Chase, Deputy Group Chief Executive, BP Amoco

Conference Press Release

Hosts:

The conference was co-hosted by the Pew Center on Global Climate Change and the Chatham House / Royal Institute of International Affairs (RIIA), a leading institute for the analysis of international issues, based in London. The Royal Institute of International Affairs (RIIA), also known as Chatham House, is a leading institute for the analysis of international issues. Founded in 1920 in London, RIIA stimulates debate and research on political, business, security, and other key issues in the international arena, such as energy and environmental policy issues, primarily through its research, meetings, conferences, and publications. Visit http://www.riia.org for more information.

Roundtable Sponsors:

The Developing Country Perspectives Roundtable was co-sponsored by the Pew Center and the Shell Foundation Sustainable Energy Programme. The Sustainable Energy Programme (SEP) is the major grant-making programme of the Shell Foundation, both of which will be formally launching on June 5th, 2000. SEP provides grants to groups working in the public interest on projects that tackle two fundamental energy-related issues: the environmental impact of our dependence on fossil fuels, and the link between energy and poverty in developing countries. More information can be found at www.shellfoundation.org.

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