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U.S. Market Consequences of Global Climate Change

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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

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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.

10-50 Solution Workshop

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The Pew Center on Global Climate Change and the National Commission on Energy Policy (NCEP) sponsored a workshop entitled “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future.” The goal of this workshop was to articulate a long-term vision for a low-carbon economy within 50 years and to discuss the technologies, industrial processes and policies needed in the short and medium term to achieve it.

The 10-50 Solution: Technologies and Policies for a Low-Carbon Future

A workshop sponsored by the Pew Center on Global Climate Change and the National Commission on Energy Policy

March 25-26, 2004
The St. Regis Hotel, Washington, DC

On March 25-26th, the Pew Center on Global Climate Change and the National Commission on Energy Policy (NCEP) sponsored a workshop entitled “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future.” The goal of this workshop was to articulate a long-term vision for a low-carbon economy within 50 years and to discuss the technologies, industrial processes and policies needed in the short and medium term to achieve it. Over 100 policy-makers, business leaders, NGO representatives, and leading experts participated in the event. 

In preparation for the workshop, the Pew Center and NCEP commissioned background papers on technological advances in five key areas (efficiency, hydrogen, carbon sequestration/coal gasification, advanced nuclear technologies, and renewables) and on policies designed to promote these and other low-carbon  technologies in the marketplace.  Workshop presentations and final proceedings, including a summary of common themes and policies identified during the workshop, and workshop background papers are now available. 

A Climate Policy Framework: Balancing Policy and Politics

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"A Climate Policy Framework: Balancing Policy and Politics"
Proceedings from the joint Aspen Institute/Pew Center Conference,
March 2004

A diverse group of business, government, and environmental leaders, brought together by the Aspen Institute and the Pew Center, recommends a framework for a mandatory greenhouse gas reduction program for the United States. The group started with the premise that, if mandatory action is taken, climate policies should be environmentally effective, economical and fair. After a three-day dialogue, the participants reached consensus on a policy framework that is both effective and politically feasible.

 

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Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases

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Emissions Trading in the U.S.: Experience, Lessons and Considerations for Greenhouse Gases

Prepared for the Pew Center on Global Climate Change
May 2003

By:
A. Denny Ellerman and Paul L. Joskow, Massachusetts Institute of Technology
David Harrison, Jr., National Economic Research Associates, Inc.

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

In recent years, emissions trading has become an important element of programs to control air pollution. Experience indicates that an emissions trading program, if designed and implemented effectively, can achieve environmental goals faster and at lower costs than traditional command-and-control alternatives. Under such a program, emissions are capped but sources have the flexibility to find and apply the lowest-cost methods for reducing pollution. A cap-and-trade program is especially attractive for controlling global pollutants such as greenhouse gases because their warming effects are the same regardless of where they are emitted, the costs of reducing emissions vary widely by source, and the cap ensures that the environmental goal is attained.

Report authors Denny Ellerman and Paul Joskow of the Massachusetts Institute of Technology and David Harrison of National Economic Research Associates, Inc. review six diverse U.S. emissions trading programs, drawing general lessons for future applications and discussing considerations for controlling greenhouse gas emissions. The authors derive five key lessons from this experience. First, emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Second, the use of emissions trading has enhanced—not compromised—the achievement of environmental goals. Third, emissions trading has worked best when the allowances or credits being traded are clearly defined and tradable without case-by-case certification. Fourth, banking has played an important role in improving the economic and environmental performance of emissions trading programs. Finally, while the initial allocation of allowances in cap-and-trade programs is important from a distributional perspective, the method of allocation generally does not impair the program’s potential cost savings or environmental performance.

With growing Congressional interest in programs to address climate change—including the recent introduction of economy-wide cap-and-trade legislation controlling greenhouse gas emissions—the application of lessons learned from previous emissions trading programs is timely. In addition to this review, the Pew Center is simultaneously releasing a complementary report, Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., which examines additional options for designing a domestic climate change program.

The authors and the Pew Center are grateful to Dallas Burtraw and Tom Tietenberg for reviewing a previous draft of this report. The authors also wish to acknowledge Henry Jacoby, Juan-Pablo Montero, Daniel Radov, and Eric Haxthausen for their contributions to various parts of the report, and James Patchett and Warren Herold for their research assistance.

Executive Summary

Emissions trading has emerged over the last two decades as a popular policy tool for controlling air pollution. Indeed, most major air quality improvement initiatives in the United States now include emissions trading as a component of emissions control programs. The primary attraction of emissions trading is that a properly designed program provides a framework to meet emissions reduction goals at the lowest possible cost. It does so by giving emissions sources the flexibility to find and apply the lowest-cost methods for reducing pollution. Emission sources with low-cost compliance options have an incentive to reduce emissions more than they would under command-and-control regulation. By trading emission credits and allowances to high-cost compliance sources, which can then reduce emissions less, cost-effective emission reductions are achieved by both parties. When inter-temporal trading is allowed, sources can also reduce emissions early, accumulating credits or allowances that can be used for compliance in future periods if this reduces cumulative compliance costs. Accordingly, cap-and-trade programs achieve the greatest cost savings when the costs of controlling emissions vary widely across sources or over time. In practice, well-designed emissions trading programs also have achieved environmental goals more quickly and with greater confidence than more costly command-and-control alternatives.

Emissions trading has achieved prominence beyond the United States largely in the context of discussions regarding implementation of the Kyoto Protocol, a proposed international agreement to control emissions of carbon dioxide (CO2) and other greenhouse gases. The Kyoto Protocol provides for the use of various emissions trading mechanisms at the international level. Some countries already are developing emissions trading programs while the process of ratifying the Protocol moves forward. Both the United Kingdom and Denmark have instituted greenhouse gas (GHG) emissions trading programs, and, in December 2002, the European environment ministers agreed on the ground rules for a European Union trading program that would begin in 2005 for large sources of CO2 emissions (and later for other GHG emissions). Indeed, proposals to control GHG emissions in the United States also include the use of emissions trading.

The theoretical virtues of emissions trading have been recognized for many decades—the basic elements were outlined in Coase (1960) and elaborated in Dales (1968)—but actual emissions trading programs have been brought from the textbook to the policy arena mostly in the last decade. It is important to recognize, however, that while properly designed emissions trading programs can reduce the cost of meeting environmental goals, experience does not indicate that significant emissions reductions can be obtained without costs. Emissions trading can be an effective mechanism for controlling emissions by providing sources with the flexibility to select the lowest-cost opportunities for abatement, but it does not make costs disappear. Moreover, emissions trading programs must be designed properly in order to realize their potential cost-reduction and environmental compliance goals. As with any emissions control program, poor design is likely to lead to disappointing results.

Experience with emissions trading, including both the design and operation of trading programs, provides a number of general lessons for future applications. This report reviews the experience with six emissions trading programs with which one or more of the authors have considerable experience:

  • The early Environmental Protection Agency (EPA) Emissions Trading programs that began in the late 1970s;
  • The Lead Trading program for gasoline that was implemented in the 1980s;
  • The Acid Rain program for electric industry sulfur dioxide (SO2) emissions and the Los Angeles air basin (RECLAIM) programs for both nitrogen oxides (NOx) and SO2 emissions, all of which went into operation in the mid-1990s;
  • The federal mobile source averaging, banking, and trading (ABT) programs that began in the early 1990s; and
  • The Northeast NOx Budget trading program, which began operations in the late 1990s.

Based on this experience, this report identifies and discusses five general lessons concerning the design and implementation of emissions trading programs, and two considerations of particular relevance for GHG applications.



General Lessons from Experience with Emissions Trading

Emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Experience shows that properly designed emissions trading programs can reduce compliance costs significantly compared to command-and-control alternatives. While it is impossible to provide precise measures of cost savings compared to hypothetical control approaches that might have been applied, the available evidence suggests that the increased compliance flexibility of emissions trading yields costs savings of as much as 50 percent.

The use of emissions trading has enhanced—not compromised—the achievement of environmental goals. While some skeptics have suggested that emissions trading is a way of evading environmental requirements, experience to date with well-designed trading programs indicates that emissions trading helps achieve environmental goals in several ways.

For one thing, the achievement of required emission reductions has been accelerated when emission reduction requirements are phased-in and firms are able to bank emissions reduction credits. The Lead Trading program for gasoline, the Acid Rain program for the electric industry, the federal mobile source ABT programs, and the Northeast NOx Budget programs each achieved environmental goals more quickly through these program design features. Moreover, giving firms with high abatement costs the flexibility to meet their compliance obligations by buying emissions allowances eliminates the rationale underlying requests for special exemptions from emissions regulations based on “hardship” and “high cost.” The reduction of compliance costs has also led to instances of tighter emissions targets, in keeping with efforts to balance the costs and benefits of emissions reductions. Finally, properly designed emissions trading programs appear to provide other efficiency gains, such as greater incentives for innovation and improved emissions monitoring.

Emissions trading has worked best when allowances or credits being traded are clearly defined and tradable without case-by-case pre-certification. Several different types of emissions trading mechanisms have been implemented. Their performance has varied widely, and these variations illuminate the key features of emissions trading programs that are most likely to lead to significant cost savings while maintaining (or exceeding) environmental goals.

The term “emissions trading” is used, often very loosely, to refer to three different types of trading programs: (1) reduction credit trading, in which credits for emission reductions must be pre-certified relative to an emission standard before they can be traded; (2) emission rate averaging, in which credits and debits are certified automatically according to a set average emission rate; and (3) cap-and-trade programs, in which an overall cap is set, allowances (i.e., rights to emit a unit) equal to the cap are distributed, and sources subject to the cap are required to surrender an allowance for every unit (e.g., ton) they emit.

The turnaround in perception of emissions trading over the last decade—from a reputation as a theoretically attractive but largely impractical approach to its acceptance as a practical framework for meeting air quality goals in a cost-effective manner—largely reflects the increased use of averaging and cap-and-trade type programs. The performance of the early EPA reduction credit programs was very poor and gave “emissions trading” a bad name. These early EPA programs emphasized case-by-case pre-certification of emission reductions and were characterized by burdensome and time-consuming administrative approval processes that made trading difficult. The averaging and cap-and-trade programs have been much more successful. While the use of cap-and-trade or averaging does not guarantee success, and the problems with the reduction credit-based approach can be reduced by good design, avoiding high transaction costs associated with trade-by-trade administrative certification is critical to the success of an emissions trading program. The success of any emissions trading program also requires several additional elements: emissions levels must be readily measured, legal emissions rates or caps must be clearly specified, and compliance must be verified and enforced aggressively.

Banking has played an important role in improving the economic and environmental performance of emissions trading programs. Early advocates of emissions trading tended to emphasize gains from trading among participants (i.e., low-cost compliance sources selling credits and allowances to high-cost compliance sources) in the same time period. The experience with the programs reviewed here indicates that inter-temporal trading also has been important. The form that inter-temporal trading most often takes is credit or allowance banking, i.e., reducing emissions early and accumulating credits or allowances that can be used for compliance in future periods. Banking improves environmental performance and reduces cumulative compliance costs. Moreover, it has been particularly important in providing flexibility to deal with many uncertainties associated with an emissions trading market—production levels, compliance costs, and the many other factors that influence demand for credits or allowances. Indeed, the one major program without a substantial banking provision, the Los Angeles RECLAIM program, appears to have suffered because of its absence.

The initial allocation of allowances in cap-and-trade programs has shown that equity and political concerns can be addressed without impairing the cost savings from trading or the environmental performance of these programs. Because emissions allowances in cap-and-trade programs are valuable, their allocation has been perhaps the single most contentious issue in establishing the existing cap-and-trade programs. However, the ability to allocate this valuable commodity and thereby account for the economic impacts of new regulatory requirements has been an important means of attaining political support for more stringent emissions caps. Moreover, despite all the jockeying for allowance allotments through the political process, the allocations of allowances to firms in the major programs have not compromised environmental goals or cost savings. The three cap-and-trade programs that have been observed so far all have relied upon “grandfathering,” i.e., distributing allowances without charge to sources based upon historical emissions information, which generally does not affect firms’ choices regarding cost-effective emission reductions and thus the overall cost savings from emissions trading. There are other methods of allocating initial allowances—such as auctioning by the government and distributing on the basis of future information—that can affect cost savings and other overall impacts; but the major effects of the initial allocation are to distribute valuable assets in some manner and to provide effective compensation for the financial impacts of capping emissions on participating sources.



Considerations for Greenhouse Gas Control Programs

Emissions trading seems especially well-suited to be part of a program to control greenhouse gas emissions. The emissions trading programs reviewed for this report generally have spatial or temporal limitations because sources of the pollutants included in these programs—such as lead, SO2, and NOx—may have different environmental impacts depending on the sources’ locations (e.g., upwind or downwind from population centers) and the time of the emissions (e.g., summer or winter). The concerns of trading programs associated with climate change are different because greenhouse gases are both uniformly mixed in the earth’s atmosphere and long-lived. The effects of GHG emissions thus are the same regardless of where the source is located and when the emissions occur (within a broad time band). This means that emissions trading can be global in scope as well as inter-temporal, creating an opportunity for the banking of emission credits, which allows emissions to vary from year to year as long as an aggregate inter-temporal cap is achieved.

Emissions trading is also well suited for GHG emissions control because the costs of reducing emissions vary widely between individual greenhouse gases, sectors, and countries, and thus there are large potential gains from trade. While other market-based approaches, such as emissions taxes, also would provide for these cost savings, the cap-and-trade version of emissions trading has the further advantage of providing greater certainty that an emission target will be met. Moreover, GHG emissions generally can be measured using relatively inexpensive methods (e.g., fuel consumption and emission factors), rather than the expensive continuous emissions monitoring required for some existing trading programs.

Furthermore, emissions trading provides important incentives for low-cost compliance sources initially outside the program to find ways to participate, and thereby further reduce costs. This opt-in feature is useful because an environmentally and cost-effective solution for reducing concentrations of greenhouse gases should be comprehensive and global, whereas initial controls on GHG emissions will—for political reasons—likely be limited, if not to certain sectors and greenhouse gases, then almost certainly to a restricted number of countries. Therefore, an important criterion for initial measures is that they be able to induce participation by sources not yet controlled. The markets created by cap-and-trade programs provide incentives for sources outside the trading program to enter if they can provide reductions more cheaply than the market prices—a common feature of any market. Although, as discussed below, the voluntary nature of these incentives can create some problems, the ability to induce further participation is an important reason to include a market-based approach initially. Indeed, it is hard to imagine how command-and-control regulations or emissions taxes could provide similar incentives to non-participants to adopt new measures to reduce greenhouse gas emissions.

Opt-in or voluntary features have a strategic role that is likely to warrant their inclusion despite the potential problems associated with them. Experience with allowing sources not covered by mandatory emissions trading programs to “opt-in,” i.e., to voluntarily assume emissions control obligations and to participate in the emissions market, has revealed a trade-off. Setting clear baselines for opting-in lowers transactions costs and thus encourages participation; but some of this participation consists of credits for calculated “reductions” that are unrelated to the trading program and actually lead to increased emissions. For example, in the Acid Rain Program, evidence indicates that many of the voluntary participants received credits for having emissions below the pre-specified baseline even though they took no abatement actions. The simple emissions baseline had been set higher than these facilities’ actual emissions, so at least some of the credits they received did not represent real emissions reductions.

This experience suggests that the decision whether or not to include opt-in provisions should be determined by weighing the cost-saving benefits against the emissions-increasing potential. For greenhouse gases, the potential cost-savings benefits of including a voluntary element in the mandatory program are large because initial efforts are not likely to be comprehensive and global, as they must be eventually to achieve their environmental goals and be cost-effective. Opt-in provisions also have value in improving measurement and monitoring techniques, in familiarizing participants with the requirements of emissions trading, and more generally with inducing participation of sources outside the trading program that can offer cheaper abatement. As a result, allowing participants outside the mandatory GHG emissions control program to opt-in has a strategic value that has not been prominent in other opt-in programs. Indeed, it should be possible to learn from existing experience with opt-in programs how to reduce adverse effects while achieving cost-savings.

Viewed from a broad historical perspective, emissions trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago. Although still not the dominant form of controlling pollution in the United States or elsewhere, emissions trading is being included in an increasing number of programs and proposals throughout the world, and its role seems likely to expand in the future.

Conclusions

Emissions trading has emerged as a practical framework for introducing cost-reducing flexibility into environmental control programs and reducing the costs associated with conventional command-and-control regulation of air pollution emissions. Over the last two decades considerable experience with various forms of emissions trading has been gained, and today nearly all proposals for new initiatives to control air emissions include some form of emissions trading. This report has attempted to summarize that experience and to draw appropriate lessons that may apply to proposals to limit GHG emissions. In doing so, we hope that the reader has gained a better understanding of emissions trading and the reasons for its increasing importance as an instrument for addressing environmental problems.

Six diverse programs constitute the primary U.S. experience with air emissions trading. The EPA’s early attempts starting in the late 1970s to introduce flexibility into the Clean Air Act through netting, offsets, bubbles, and banking were not particularly encouraging. Most of the potential trades, and economic gains from trading, in these early systems were frustrated by the high transaction costs of certifying emission reductions. The first really successful use of emissions trading occurred in the mid-1980s when the lead content in gasoline was reduced by 90 percent in a program that allowed refiners to automatically earn credits for exceeding the mandated reductions in lead content and to sell those credits to others or bank them for later use.

The Acid Rain or SO2 allowance trading program for electricity generators, which has become by far the most prominent experiment in emissions trading, was adopted in 1990 and implemented beginning in 1995. This innovative program introduced a significantly different form of emissions trading, known as cap-and-trade, in which participants traded a fixed number of allowances—or rights to emit—equal in aggregate number to the cap, instead of trading on the differences from some pre-existing or external standard as had been the case in the early EPA trading programs and the lead phase-down program.

Another cap-and-trade program, the RECLAIM program for both SO2 and NOx emissions, was developed and implemented at the same time as the Acid Rain program by the regulatory authority in the Los Angeles Basin as part of its efforts to bring that area into attainment with National Ambient Air Quality Standards. The RECLAIM program is the first instance of emissions trading both supplementing and supplanting a pre-existing command-and-control structure that theoretically was capable of achieving the same environmental objective. The standards of the pre-existing command-and-control system largely determined the level of the cap, and the program’s ten-year phase-in design and trading provided the flexibility that led to the achievement of environmental goals that had been previously elusive. RECLAIM also introduced trading among different sectors.

The 1990 Amendments to the Clean Air Act also provided enabling legislation for two other emissions trading programs. Emissions from mobile sources were more effectively and efficiently controlled by the introduction of mobile source averaging, banking, and trading programs. The mobile source programs followed the example of the lead phase-down program by allowing firms to create credits automatically for any reductions beyond a required uniform emission standard and to use these credits in lieu of more costly reductions elsewhere or later within the company and to sell them. The 1990 Amendments also provided the mechanism that encouraged states in the Northeastern United States to adopt cap-and-trade programs to control NOx emissions that contributed to ozone non-attainment in that region of the country. As was the case in the RECLAIM program, emissions trading was adopted as a means to attain environmental objectives more quickly and cost-effectively than had proved possible through conventional command-and-control regulation.

There are many lessons to be gained from the experience with these six programs, but the five most important lessons can be summarized as follows. First, the major objective of emissions trading, lowering the cost of meeting emission reduction goals, has been achieved in most of these programs. Second, emissions trading has not compromised the achievement of the environmental goals embodied in these programs. If anything, and this is perhaps surprising, the achievement of those goals has been enhanced by emissions trading. Third, emissions trading has worked best in reducing costs and achieving environmental goals when the credits being traded are clearly defined and readily tradable without case-by-case certification. Fourth, temporal flexibility, i.e., the ability to bank allowances, has been more important than generally expected, and the ability to bank has contributed significantly to accelerating emission reductions and dampening price fluctuations. Fifth, the initial allocation of allowances in cap-and-trade programs has shown that equitable and political concerns can be met without impairing either the cost savings from trading or the environmental performance of these programs. In addition, the success of any emissions trading program requires that emissions levels can be readily measured and compliance verified and enforced.

All of these five lessons are relevant when considering the use of emissions trading in a program aimed at reducing GHG emissions. In fact, emissions trading seems especially appropriate for this environmental problem. Greenhouse gas emissions mix uniformly and remain in the atmosphere for a long time. Thus, it matters little where or when the emissions are reduced, as long as the required cumulative reductions are made. These specific characteristics of GHG emissions eliminate two of the concerns that have limited the scope of emissions trading in many other programs.

Although an effective GHG mitigation program must eventually be global in scope and comprehensive in its coverage of pollutants and economic sectors, the likelihood that control efforts will be limited initially to the richer countries, the more easily measurable gases, and perhaps to certain sectors of the economy introduces another consideration. The ability to induce initially uncapped sources to participate voluntarily in the early efforts will reduce costs and prepare the way for extending the caps. Thus, providing opportunities to opt-in for uncapped sources that can reduce emissions at lower cost than those within the cap has a strategic value beyond the potential cost savings. Although some existing programs with voluntary provisions have revealed opportunities for misuse, these problems can be managed more successfully now with the benefit of experience. The strategic value of opt-in provisions in any GHG emission control program makes their inclusion highly desirable.

Emissions trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago. Since then, the use of emissions trading has expanded steadily and significant experience has been gained. Although not the dominant form of controlling pollution in the United States or elsewhere, emissions trading now seems firmly established as a valuable instrument and its future use seems sure to increase. Our review of experience over the past quarter century suggests that this trend toward greater use of emissions trading will improve the performance of environmental regulation, including efforts to control GHG emissions.

About the Authors

A. Denny Ellerman, Massachusetts Institute of Technology

Dr. Ellerman is a Senior Lecturer with the Sloan School of Management at the Massachusetts Institute of Technology, where he also serves as the Executive Director of the Center for Energy and Environmental Policy Research and of the Joint Program on the Science and Policy of Global Change. His former employment includes Charles River Associates, the National Coal Association, the U.S. Department of Energy, and the U.S. Executive Office of the President. He served as President of the International Association for Energy Economics for 1990. Dr. Ellerman received his undergraduate education at Princeton University and his Ph.D. in Political Economy and Government from Harvard University. His current research interests focus on emissions trading, climate change policy, and the economics of fuel choice, especially concerning coal and natural gas.


Paul L. Joskow, Massachusetts Institute of Technology

Paul L. Joskow is Elizabeth and James Killian Professor of Economics and Management at MIT and Director of the MIT Center for Energy and Environmental Policy Research. He received a B.A. from Cornell University in 1968 and a Ph.D. in Economics from Yale University in 1972. Professor Joskow has been on the MIT faculty since 1972 and served as Head of the MIT Department of Economics from 1994 to 1998.

At MIT he is engaged in teaching and research in the areas of industrial organization, energy and environmental economics, and government regulation of industry. Professor Joskow has published five books and over 100 articles and papers in these areas. He has been studying the behavior and performance of the SO2 allowance trading program created by the Clean Air Act Amendments of 1990 for several years and is a co-author of the book Markets for Clean Air: The U.S. Acid Rain Program (Cambridge University Press).

Professor Joskow has served as a consultant on regulatory and competitive issues to organizations around the world. He served on the EPA’s Acid Rain Advisory Committee from 1990-1992 and was a member of the Environmental Economics Advisory Committee of the EPA’s Science Advisory Board from 1998-2002. He is a Director of the National Grid Transco Group and the Whitehead Institute for Biomedical Research and a Trustee of the Putnam Mutual Funds. He is a Fellow of the Econometric Society and the American Academy of Arts and Sciences.


David Harrison, Jr. , National Economic Research Associates, Inc.

David Harrison is a Senior Vice President at National Economic Research Associates (NERA), an international firm of 500 consulting economists operating in 16 offices on five continents and a Marsh & McLennan company. Dr. Harrison is co-chair of NERA’s energy and environmental economics practice.

Before joining NERA in 1988, Dr. Harrison was an Associate Professor at the John F. Kennedy School of Government at Harvard University, where he taught microeconomics, environmental and energy policy, transportation policy, and benefit-cost analysis. He was a member of the Faculty Steering Committee of Harvard’s Energy and Environmental Policy Center. Dr. Harrison earlier served as a Senior Staff Economist on the President’s Council of Economic Advisors, where his areas of responsibility included environmental regulation, natural resource policy, transportation policy, and occupational health and safety.

Dr. Harrison has consulted for private firms, trade associations, and government agencies in the U.S. and abroad on many energy and environmental issues. Dr. Harrison has been active in the development of major emissions trading programs, including serving on the advisory committee to develop RECLAIM, an author of proposals for averaging, banking, and trading programs for mobile sources and for NOx trading proposals for the Northeast, and a consultant to the European Commission (EC) with regard to aspects of its proposed greenhouse gas emissions trading program. He is currently advising the UK government with regard to aspects of its EU program and the EC with regard to trading programs for non-greenhouse gas emissions.

Dr. Harrison holds a Ph.D. in Economics from Harvard University, a M.Sc. in Economics from the London School of Economics, and a B.A. in Economics from Harvard University.

 

A. Denny Ellerman
David Harrison, Jr.
Paul L. Joskow
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Press Release: New Report: Climate Change Poses Challenges for U.S. Forestry

For Immediate Release: 
February 26, 2003

Contact:  Katie Mandes
(703) 516-0606

NEW REPORT: Climate Change Poses Challenges for U.S. Forestry


Washington, DC - One-third of U.S. lands are covered by forests, making forest ecosystems one of the nation's most prominent natural resources. In addition to their contribution to biodiversity, water quality, and recreation, forests also play a significant role in the U.S. economy, and forestry or forestry-related enterprises are the dominant industries in many U.S. communities. According to a new study by the Pew Center on Global Climate Change, the U.S. forestry sector will face a number of challenges in the next century due to the impacts of climate change.

The Pew Center report, Forests and Global Climate Change: Potential Impacts on U.S. Forest Resources, explores the challenges climate change will pose to forest ecosystems and related economic enterprises over the next century.

"Changes in forest productivity, the migration of tree species, and potential increases in wildfires and disease could cause substantial changes to U.S. forests," said Eileen Claussen, President of the Pew Center on Global Climate Change. "Moreover, these ecological impacts will have direct implications for our economy. The timber industry in the southern United States is particularly vulnerable."

The key conclusions of the report include:


Forest location, composition, and productivity will be altered by changes in temperature and precipitation. Climate change is virtually certain to drive the migration of tree species, resulting in changes in the geographic distribution of forest types and new combinations of species within forests. In addition, climate change is likely to alter forest productivity depending upon location, tree species, water availability, and the effects of carbon dioxide (CO2) fertilization.


Changes in forest disturbance regimes, such as fire or disease, could further affect the future of U.S. forests and the market for forest products. Increased temperatures could increase fire risk in areas that experience increased aridity, and climate change could promote the proliferation of diseases and pests that attack tree species.


U.S. economic impacts will vary regionally. Overall, economic studies indicate that the net impacts of climate change on the forestry sector will be small, ranging from slightly negative to positive impacts; however, gains and losses will not be distributed evenly throughout the United States. The Southeast, which is currently a dominant region for forestry, is likely to experience net losses, as tree species migrate northward and tree productivity declines. Meanwhile, the North is likely to benefit from tree migration and longer growing seasons.


As a managed resource, the implications of climate change for the forestry sector are largely dependent upon the actions taken to adapt to climate change. The United States currently has vast forest resources, and more timber grows within the United States than is consumed each year. If professional foresters take proactive measures, the sector may minimize the negative economic consequences of climate change.


A number of challenges currently limit our understanding of the effects of climate change on forestry. Existing projections for future changes in temperature and precipitation span a broad range making it difficult to predict the future climate that forests will experience, particularly at the regional level. Thus, current projections could fail to accurately predict the actual long-term impacts of climate change for the forestry sector.

Part of "Impacts" Series

Forests and Global Climate Change: Potential Impacts on U.S. Forest Resources, was prepared for the Pew Center by Herman Shugart (University of Virginia), Roger Sedjo (Resources for the Future), and Brent Sohngen (The Ohio State University). It is the ninth in a series of Pew Center reports examining the potential impacts of climate change on the U.S. environment. Other Pew Center reports focus on domestic and international policy issues, climate change solutions, and the economics of climate change.

Click here for a complete copy of this report and previous Pew Center reports.

Multi-Gas Contributors to Global Climate Change

multigas7

Multi-Gas Contributors to Global Climate Change: Climate Impacts and Mitigation Costs of Non-CO2 Gases

Prepared for the Pew Center on Global Climate Change
February 2003

By:
John M. Reilly, Henry D. Jacoby, and Ronald G. Prinn
Massachusetts Institute of Technology

Press Release

Download Entire Report (pdf)

 

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

In the effort to understand and address global climate change, most analysis has focused on rapidly rising emissions of carbon dioxide (CO2) and options for reducing them. Indeed, carbon dioxide, a byproduct of fossil fuel combustion, is the principal greenhouse gas contributing to global warming. However, other greenhouse gases including methane, nitrous oxide, and a number of industrial-process gases also are important contributors to climate change. From both an environmental and an economic standpoint, effective climate strategies should address both carbon dioxide and these other greenhouse gases.

Non-CO2 gases account for 17 percent of total greenhouse gas emissions in the United States and a much larger percentage in developing countries such as India and Brazil. In addition, a host of local and regional air pollutant emissions interact in the atmosphere’s complex chemistry to produce either additional warming or cooling effects. Understanding how these gases interact—and how to craft policies that address a range of environmental impacts—is vital to addressing both local and global environmental concerns.

In this report, authors John Reilly, Henry Jacoby, and Ronald Prinn of M.I.T. unravel some of the complexities associated with analyzing the impacts of these multiple gases and opportunities for reducing them. Emissions originate from a wide range of sectors and practices. Accurate calculation of emissions and emission reductions is easier for some sources than for others. For policy purposes, various greenhouse gases are compared on the basis of “global warming potentials,” which are based on the atmospheric lifetime of each gas and its ability to trap heat. However, these do not yet accurately capture the climatic effects of all the substances contributing to climate change and so must be used with some caution. While scientists have recognized the various roles of non-CO2 gases and other substances that contribute to climate change for some time, only recently have the various pieces of the puzzle been fit together to provide a more complete picture of the critical role these gases can play in a cost-effective strategy to address climate change.

Using M.I.T.’s general equilibrium model, the authors demonstrate that including all greenhouse gases in a moderate emissions reduction strategy not only increases the overall amount of emissions reductions, but also reduces the overall cost of mitigation: a win-win strategy. In fact, due to the high potency of the non-CO2 gases and the current lack of economic incentives, this analysis concludes that control of these gases is especially important and cost-effective in the near term. The policy implications are clear: any attempt to curb warming should include efforts to reduce both CO2 and non-CO2 greenhouse gases.

The Center and the authors are grateful to James Hansen, Keith Paustian, Ev Ehrlich, Francisco Delachesnaye, and Dina Kruger for their helpful comments on previous drafts of this report. The authors also acknowledge support, through the M.I.T. Joint Program on the Science and Policy of Global Climate Change, and the research assistance provided by Marcus Sarofim.

Executive Summary

 

Most discussions of the climate change issue have focused almost entirely on the human contribution to increasing atmospheric concentrations of carbon dioxide (CO2) and on strategies to limit its emissions from fossil fuel use. Among the various long-lived greenhouse gases (GHGs) emitted by human activities, CO2 is so far the largest contributor to climate change, and, if anything, its relative role is expected to increase in the future. An emphasis on CO2 is therefore justified, but the near-exclusive attention to this single contributor to global warming has had the unintended consequence of directing attention away from the other GHGs, where some of the most cost-effective abatement options exist. The non-CO2 GHGs emitted directly by human activities include methane (CH4) and nitrous oxide (N2O), and a group of industrial gases including perfluorocarbons (PFCs), hydrofluorocarbons (HFCs), and sulfur hexafluoride (SF6). When taken together with the already banned chlorofluorocarbons (CFCs), their climate significance over the past century is roughly equivalent to that of CO2. Looking to likely emissions over the next half-century, it is also the case that feasible reductions in emissions of methane and other non-CO2 gases can make a contribution to slowing global warming that is as large as or even larger than similar reductions in CO2 emissions. To effectively limit climate change, and to do so in a cost-effective manner, thus requires that climate policies deal with CO2 and non-CO2 gases alike.

There are several reasons why attention has been focused so heavily on CO2 even though the full list of GHGs has been targeted for control under international climate agreements. Emissions of CO2 from fossil sources can be readily estimated from market data on fuel use, whereas the other gases present measurement difficulties. Also, the analysis of abatement options for fossil emissions benefits from decades of research on energy markets, energy efficiency, and alternative energy supply technologies—work that was spurred by concerns about the security of supply and prices of fossil fuels. The analytical capability developed to study energy markets was then readily applied to the climate issue. Now that the capability to measure and assess the non-CO2 GHGs has improved, it is clear that their control is also an essential part of a cost-effective climate policy.

In addition to the main non-CO2 GHGs identified above, there are other emissions from human activities that are not included in existing climate policy agreements but that nonetheless retard or enhance the greenhouse effect. Tropospheric ozone (O3) is a natural greenhouse constituent of the atmosphere. Emissions of carbon monoxide (CO), nitrogen oxides (NOX), aerosols, non-methane volatile organic compounds (NMVOCs), and ammonia (NH3) all affect the chemistry of tropospheric ozone and methane. Black carbon or soot, though not well-understood, is thought to contribute to warming as well. Other human emissions have the opposite of a greenhouse effect. Sulfur dioxide (SO2) and nitrogen oxides (NOx), mainly from fossil fuel combustion, are converted by chemical processes in the atmosphere into cooling aerosols. These various gases and aerosols are related to one another by their common generation in industry and agriculture as well as by their interaction in the chemistry of urban areas, the lower atmosphere, and the stratosphere. Thus, policies that reduce CO2 also may affect emissions of SO2, NOx, and CO, as well as the non-CO2 greenhouse gases.

Designing a cost-effective approach for control of these multiple substances requires some way of accounting for the independent effects of each on climate. The current method for doing so is a set of indices or weights known as global warming potentials (GWPs). These have been developed for the main GHGs, but not for SO2 and other local and regional air pollutants. By design, the GWP for CO2 is 1.0 and the values for other GHGs are expressed in relation to it. These indices attempt to capture the main differences among the gases in terms of their instantaneous ability to trap heat and their varying lifetimes in the atmosphere. By this measure, for example, methane is ton for ton more than 20 times as potent as CO2, while N2O is about 300 times as potent, and the industrial gases are thousands of times as potent when taking into account the atmospheric effects of these gases over the next 100 years.

The relative value of controlling non-CO2 gases, as expressed by these GWPs, is one key reason that inclusion of the non-CO2 gases in policies to address climate change can be so effective in lowering implementation costs, particularly in the early years. Given the high carbon-equivalent values of the non-CO2 gases, even a small carbon-equivalent price on these gases would create a huge incentive to reduce emissions. Another reason is that, historically, economic instruments (i.e., prices, taxes, and fees) have not been used to discourage or reduce emissions of non-CO2 gases, whereas price signals via energy costs exist to curb CO2 emissions from fossil fuels.

If, for example, the total GHG emissions reduction required to meet a target were on the order of 10 or 15 percent, as would be the case if total GHG emissions in the United States were held at year 2000 levels through 2010, nearly all of the cost-effective reductions would come from the non-CO2 greenhouse gases. Compared to a particular reduction achieved by CO2 cuts alone, inclusion of the non-CO2 abatement options available could reduce the carbon-equivalent price of such a policy by two-thirds. This large contribution of the non-CO2 gases, and their potential effect on lowering the cost of a climate policy, is particularly surprising because it is disproportionate to their roughly 20 percent contribution to total U.S. GHG emissions. In developing countries like India and Brazil, non-CO2 gases currently account for well over one-half of GHG emissions. Any cost-effective effort to engage developing countries in climate mitigation will, therefore, need to give even greater attention to the non-CO2 gases.

Of course, these gases are only part of an effective response to the climate threat. Even if they were largely controlled, we would still be left with substantial CO2 emissions from energy use and land-use change. Over the longer term, and as larger cuts in GHGs are required, the control of CO2 will increase in its importance as an essential component of climate policy.

There remain a number of uncertainties in calculating the climatic effects of non-CO2 gases, and one is the accuracy of global warming potentials. Analysis has shown that the GWPs currently in use significantly underestimate the role of methane, and any correction of this bias would amplify the importance of the non-CO2 greenhouse gases. This error is due in part to omitted interactions, such as the role of methane in tropospheric ozone formation. The GWPs also fail to adequately portray the timing of the climate effects of abatement efforts. Because of its relatively short lifetime in the atmosphere, abatement efforts directed at methane have benefits in slowing climate change that take effect over the next few decades, whereas the benefits of CO2 abatement are spread out over a century or more. To the extent one is concerned about slowing climate change over the next 50 years, therefore, the control of methane and HFCs—the gases that last a decade or so—has an importance that is obscured when 100-year GWPs are used to compare the contributions of the various gases. Economic formulations of the GWP indices have been proposed that would address these concerns, but calculations using these economic-based formulae are bedeviled by a variety of deeper uncertainties, such as how to monetize the damages associated with climate change.

A still more difficult issue is whether and how to compare efforts to control other substances that affect the radiative balance of the atmosphere, such as tropospheric ozone precursors, black carbon, and cooling aerosols. The main issue with these substances is that, even though their climatic effects are important, a more immediate concern is that they cause local and regional air pollution that affects human health, crop productivity, and ecosystems. Moreover, their climatic effects are mainly regional, or even local, and this feature creates difficulties for the use of a single index to represent their effects across the globe. In the end, it is essential to consider these substances as part of climate policy, but more research and analysis is needed to quantitatively establish their climate influence and to design policies that take account of their local and regional pollution effects.

Putting aside the local and regional air pollutants, the quantitative importance of the other non-CO2 greenhouse gases has now been relatively well-established. One of the major remaining concerns in including them in a control regime is whether their emissions can be measured and monitored accurately so that, whatever set of policies are in place, compliance can be assured. In fact, the ability to monitor and measure has less to do with the type of greenhouse gas than with the nature of its source. It is far easier to measure and monitor emissions from large point sources, such as electric power plants, than from widely dispersed non-point sources, such as automobile and truck tailpipes or farmers’ fields. Methane released from large landfills can be easily measured, and is in the United States. But, it is impractical to directly measure the methane emitted from each head of livestock, or the N2O from every farmer’s field. The difficulty of monitoring and measuring emissions implies that a different regulatory approach may be desirable for different sources, at least initially.

Scientists have long recognized the various roles of non-CO2 greenhouse gases and other substances that contribute to climate change. It is only in the past few years, however, that the various pieces of this complex puzzle have been fit together to provide a more complete picture of just how critical the control of these gases can be in a cost-effective strategy to slow climate change. Control of non-CO2 greenhouse gases is a critical component of a cost-effective climate policy, and particularly in the near term these reductions can complement early efforts to control carbon dioxide.

Henry D. Jacoby
John M. Reilly
Ronald G. Prinn
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Press Release: New Report Examines Climate Impacts and Mitigation Costs of Non-CO2 Gases

For Immediate Release: 
February 11, 2003

Contact:  Press, 703-516-4146
 

CLIMATE CHANGE AND THE OTHER GASES
New Report Examines Climate Impacts and Mitigation Costs of Non-CO2 Gases


Washington, DC - To effectively limit climate change, and to do so in a cost-effective manner, climate policies must address emissions of both carbon dioxide (CO2) and the other greenhouse gases, according to a new report from the Pew Center on Global Climate Change. Although CO2 is the principal greenhouse gas contributing to global warming, other gases-including methane, nitrous oxide, and a number of manmade, industrial-process gases (such as hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride)-are also important contributors to climate change.

"The non-CO2 gases contribute a great deal to climate change, yet there is currently little or no incentive to control these emissions," explained Eileen Claussen, President of the Pew Center on Global Climate Change. "Curbing emissions of these greenhouse gases is both environmentally important and cost-effective."

Multi-Gas Contributors to Global Climate Change: Climate Impacts and Mitigation Costs of Non-CO2 Gases discusses the sources and amounts of these emissions, the atmospheric interactions of the various gases, and the relative costs of reducing them. Report authors John Reilly, Henry Jacoby, and Ronald Prinn of Massachusetts Institute of Technology use a general equilibrium modeling framework to analyze the costs and climate impacts of controlling various greenhouse gas emissions. The report discusses opportunities and difficulties associated with incorporating non-CO2 greenhouse gases into a climate policy framework.

The authors demonstrate that including all greenhouse gases in a moderate emissions reduction strategy not only increases the overall amount of emissions reductions, but also reduces the overall cost of mitigation: a win-win strategy. If, for example, total greenhouse gas emissions in the United States were held at year 2000 levels through 2010, many cost-effective reduction opportunities would come from the non-CO2 greenhouse gases.

In developing countries like India and Brazil, non-CO2 gases currently account for more than half of total greenhouse gas emissions. Thus, any cost-effective effort to engage developing countries in climate change mitigation should also include these other gases.

"The reduction of non-CO2 greenhouse gas emissions is a critical component of a cost-effective climate policy, so any efforts to reduce emissions of carbon dioxide should proceed hand-in-hand with reductions of the other gases," said Claussen.

Click here for a complete copy of this report and previous Pew Center reports.

Press Release: New Report Examines Patterns of Capital Equipment Investment and Retirement

For Immediate Release:  
November 18, 2002

Contact: Katie Mandes, 703-516-4146

New Report Examines Patterns of Capital Equipment Investment and Retirement

Washington, DC - Patterns of capital investment by businesses can have a major impact on the success and cost-effectiveness of climate change policies, according to a new report from the Pew Center on Global Climate Change. Capital equipment, such as electricity generation plants, factories, and transportation infrastructure, is a major source of greenhouse gas emissions. "Due to the high cost of new capital, firms often are reluctant to retire old, less efficient facilities and equipment," explained Eileen Claussen, President of the Pew Center on Global Climate Change. "Replacing existing capital stock with more efficient technologies will take time, but that process can be encouraged by certain policies."

Capital Cycles and the Timing of Climate Change Policy examines patterns of capital investment and retirement, or "capital cycles," and discusses implications for climate change policy. Report authors Robert Lempert, Steven Popper, and Susan Resetar of RAND, with Stuart Hart of the Kenan-Flagler Business School at UNC-Chapel Hill, combined analysis of the literature on investment patterns with in-depth interviews of top decision-makers in leading U.S. firms. Their work provides insights into the differing patterns of capital investment across firms and sectors.

The authors found that capital has no fixed cycle. Firms often invest in new capital to capture new markets. In the absence of policy or market incentives, expected equipment lifetimes and the availability of more efficient technologies are not significant drivers of capital stock decisions.

The report suggests certain policies that can stimulate more rapid turnover of existing capital stock. These include: (1) Putting in place early and consistent incentives that would assist in the retirement of old, inefficient capital stock; (2) Making certain that policies do not discourage capital retirement; and (3) Pursuing policies that shape long-term patterns of capital investment.

"It is crucial for policy-makers to understand the market factors and policies that drive capital investment patterns, and to start designing climate change policies accordingly," said Claussen.

A complete copy of this report -- and previous Pew Center reports -- is available on the Pew Center's web site, 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.

Press Release: Report Shows Emerging Greenhouse Gas Market

For Immediate Release:
March 19, 2002

Contact: Katie Mandes
703-516-4146

Report Shows Emerging Greenhouse Gas Market

Washington, DC - Emissions trading has become the "policy of choice" for addressing climate change, according to a new report from the Pew Center on Global Climate Change that documents the emergence of a market for greenhouse gas emissions.

While the market remains fragmented, the report concludes that trading activity has increased around the world over the last five years. Among the forces bringing trading to the fore are progress in the international climate talks, new carbon trading systems in Europe, and private sector trading initiatives in the United States and elsewhere.

The Pew Center report, The Emerging International Greenhouse Gas Market, describes the characteristics of the market to date and key features of early trades. In the absence of a ratified international agreement, the report's authors conclude that the new market is evolving in a fragmented way. Regional, national, and subnational trading programs are operating under different rules, which could inhibit "market convergence" and increase the costs of trading.

"Despite the United States' inaction, it is abundantly clear that we are beginning to see the outlines of a genuine greenhouse gas market," said Eileen Claussen, President of the Pew Center on Global Climate Change. "Governments and businesses around the world understand that emissions trading is essential if we're going to address this issue in the most cost-effective way possible".

"The challenge now is to forge links between these emerging regimes in order to ensure that trading systems are compatible, " Claussen said. "We are already beginning to see interest in the U.S. Congress, and private sector efforts to build a trading system are even farther along. The need for certainty, consistency, and a level playing field will encourage a merging of trading regimes.

The report also evaluates the potential evolution of the greenhouse gas market, particularly in light of recent developments in climate change policy in the United States and internationally.

The report's conclusions are based on a review of greenhouse gas transactions to date, including case studies of two transactions between four utilities: TransAlta and HEW, and PG&E and Ontario Power Generation. According to the authors of the report, the experiences of these companies illustrate the benefits of trading, as well as the challenges of conducting trades in a nascent market that is lacking in clear rules.

Part of "Solutions" Series
The Emerging International Greenhouse Gas Market was authored by Richard Rosenzweig and Matthew Varilek of Natsource, LLC, and Josef Janssen of the University of St. Gallen in Switzerland. It is the latest report in the Pew Center's Solutions series, which is aimed at providing individuals and organizations with tools to evaluate and reduce their contributions to climate change. Other Pew Center series focus on domestic and international policy issues, environmental impacts, and the economics of climate change.

A complete copy of this report -- and previous Pew Center reports -- is available on the Pew Center's web site, www.c2es.org/projects.

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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 conducting studies, launching public education efforts and working with businesses to develop market-oriented 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 36 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.

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