Economics

Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. Read More
 

Press Advisory: Pew Center Addresses Building Industry at Denver Conference

Media Advisory
November 16, 2006

Contact: Katie Mandes, (703) 516-0606

BUILDING SECTOR IS FOUNDATION OF U.S. CLIMATE CHANGE SOLUTIONS

Pew Center Addresses Building Industry at Denver Conference


Denver, CO- Energy used in residential, commercial, and industrial buildings produces about 43 percent of U.S. emissions of carbon dioxide, and these emissions are growing as Americans build more buildings and bigger homes. This makes the building sector the largest source of American emissions of the greenhouse gases (GHGs) that cause climate change.  Numerous stakeholders have begun acting to address the built environment’s role in climate change, and it is imperative that their commitment to green principles and innovation increases so that the building sector can reduce its contribution to climate change.

During a speech yesterday at the Greenbuild International Conference and Expo in Denver, Colorado, Eileen Claussen, President of the Pew Center on Global Climate Change, called on the building sector to play a more definitive role in America’s efforts to address climate change. “Building standards need to be strengthened and we need to factor the very real threat of climate change into every new building that is constructed.  Low or zero emission buildings should be our goal.”  Ms. Claussen challenged the sector to provide the foundation for U.S. climate solutions. The speech was given in conjunction with the release of a new In-Brief by the Pew Center entitled “Building Solutions to Climate Change.”

The In-Brief describes how the built environment can make an important contribution to climate change mitigation while providing more livable spaces.  It concludes that with current technologies and the expansion of a few key policies, significant reductions in greenhouse gases can be realized in the near term.  Furthermore, combining technology research and development with clear and sustained climate and energy policies would drive more dramatic reductions over time.

Ms. Claussen implored the building community to take the lead in cutting emissions of greenhouse gases. “If we do it right, protecting the climate could mean new industries, new markets, and new jobs for localities, states, and nations that successfully position themselves as centers of innovation and technology development for a low-carbon world.”

A copy of the latest In-Brief, “Building Solutions to Climate Change,” 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: Pew Center Reports Spotlight Role of Farms, Forests in Reducing Global Warming

Press Release
September 21, 2006

Contact: Katie Mandes, (703) 516-0606        

PEW CENTER REPORTS SPOTLIGHT ROLE OF FARMS, FORESTS IN REDUCING GLOBAL WARMING

WASHINGTON, DC – America’s farms and forestlands have a major role to play in reducing the threat of climate change, according to two reports released today by the Pew Center on Global Climate Change.  Changes in agricultural practices coupled with foresting marginal agricultural lands could offset up to one fifth of current U.S. greenhouse gas emissions, while at the same time creating potential new sources of farming income.  In addition, the nation could reduce emissions by 10 to 25 percent by replacing fossil fuels with biofuels made from agricultural crops. 

The two reports being released today are: Agriculture’s Role in Greenhouse Gas Mitigation by Keith Paustian, John M. Antle, John Sheehan, and Eldor A. Paul, and Agricultural and Forestlands: U.S. Carbon Policy Strategies by Kenneth R. Richards, R. Neil Sampson, and Sandra Brown.

The Pew Center reports showcase the unique position of the agriculture and forestry sectors both as sources of greenhouse gas emissions (including carbon dioxide, methane and nitrous oxide) and as “sinks” that can remove carbon dioxide from the atmosphere. The reports also stress that we need to bolster existing programs and develop new ones in order to capitalize on the opportunity to contribute to climate solutions inherent in these two sectors.

“Climate change is the major environmental challenge of our time. In order to address it in the most cost-effective way, we must take advantage of the full range of solutions—and that means rethinking how we manage our forests and farmlands,” said Eileen Claussen, president of the Pew Center on Global Climate Change.

In Agriculture’s Role in Greenhouse Gas Mitigation, the authors make the case for “suitable payments” to encourage farmers to adopt new management practices to store carbon in agricultural soils and reduce agricultural emissions of methane and nitrous oxide. Policy incentives also are needed, the authors say, to reduce costs of producing biofuels and accelerate key technologies. The report notes that climate mitigation could potentially become a source of new income and cost reductions for farmers. However, access to financing, changes in economic conditions and technologies, and policies will be key factors that will affect farmers’ willingness to play a part in climate solutions.

The second Pew Center report, Agricultural and Forestlands: U.S. Carbon Policy Strategies, considers a range of policy approaches that would ensure a prominent role for U.S. agricultural and forestlands in national climate mitigation plans. Among the potential policies: changing practices on public lands; land use regulations for privately owned forestlands; and incentives designed to promote climate-friendly practices on agricultural lands.

“We have always known that America’s farms and forests could play an important part in reducing the risks of climate change,” said Claussen. “But these sectors aren’t going to do this on their own—policymakers need to create the framework for these solutions through vigorous incentives and other policies.”

For more information about global climate change and the activities of the Pew Center, visit 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.

Market Mechanisms for Greenhouse Gas Emissions Reductions: Lessons for California

Market Mechanisms for Greenhouse Gas Emissions Reductions: Lessons for California

Prepared by the Pew Center on Global Climate Change
August 2006 

California is currently considering legislation that would establish state-wide caps on greenhouse gas emissions. This paper is based on extensive research by the Pew Center and others on the use of market mechanisms to reduce greenhouse gas emissions. It begins with a summary of possible solutions for the state, and then provides more detailed background on market mechanisms, with particular attention to relevant lessons for California.

Download the full working paper (pdf)

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Additional topic 1 - Cost containment

Our Response to:

"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"

Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
February 2006

Additional Topic #1
Download Additional Topic #1 (pdf)
Download Cost Containment Chart (pdf)

Cost containment: A function of the whole package

The Center and most of the over 30 large corporations surveyed by the Center believe that, rather than focusing on any one design element in isolation, any bill must be evaluated as a whole, especially in minimizing the costs to covered entities and the economy.  The issue is raised by a design question not specifically mentioned in the White Paper: the concept of a “safety valve.”  Under a safety valve provision, exemplified by the recommendation of the National Commission on Energy Policy (NCEP), covered entities would be allowed to pay the implementing agency a specified amount per ton of GHG instead of submitting emissions allowances, thus capping the cost per ton at the specified “safety valve” level.  In fact, a safety valve is only one tool for providing cost containment.  Moreover, it is one that could limit environmental effectiveness of the program and present complications for linking to other trading programs (as discussed in response to Question 3).  A GHG cap-and-trade program can be designed to minimize costs using a variety of other approaches:

  • selection of moderate targets and timetable;
  • advanced notice of policy;
  • banking of allowances and offsets;
  • borrowing of allowances;
  • staggering compliance deadlines;
  • extending compliance deadlines;
  • providing consumer dividends (payments made to energy consumers to compensate them for any increased energy costs);
  • providing relief for individual emitters;
  • inclusion of offsets;
  • linkage with other trading systems; and
  • complementary policies that drive energy efficiency and technological innovation

Additionally, low price caps act as a tax.  Taxes have been shown to be fairly ineffective in the short term at eliciting significant results. (See attached chart on cost containment mechanisms.)

The companies surveyed by us hold a wide range of opinions about the policy benefits of a safety valve, though most say that a safety valve may be politically necessary. Of companies that favor a safety valve, or at least think it might be politically necessary, several note that $7/ton of CO2 (the initial level recommended by NCEP) is too low to achieve significant emissions reductions or to drive market-based transition to a wide range of low-carbon technologies. If a safety valve is used, it should be set high enough to encourage meaningful change. For instance, integrated gasification combined cycle (IGCC) coal or supercritical pulverized coal electric power generation combined with carbon capture and sequestration (CCS) may only become economically viable on a self-sustaining basis (without continued government subsidy) with CO2 values at or above $25-35 per ton. This does not necessarily mean the safety valve should be set immediately at $25-$35 per ton. Rather, the starting point and growth curve of the safety valve must be such that the net present value of paying it will be more than what companies project will be that of investment in IGCC-CCS.

One company notes that mere inclusion of some reasonable cost limit may be more important for getting legislation enacted than the limit’s specific level. The presence of a safety valve, even at a high dollar level, could undercut assertions that GHG regulation will bring about the “end of the economy,” since it would remove from consideration the modeling results that posit extreme cases of unlimited cost. Another company notes that, when GHG regulation is viewed as inevitable and may affect upstream energy producers, financial structuring for large new oil and gas production projects may not be possible without a price cap, since otherwise these projects would involve a large unknown liability that constrains equity value and cash flows.

A few companies opposea safety valve altogether because of its distortionary effect on the market, or only favor a safety valve with a sunset clause. Companies express concern that a safety valve would complicate linkage between the U.S. carbon trading market and the cap-and-trade programs of other countries, which likely would increase the cost of U.S. reductions and reduce the economic efficiency of the system. Some companies point out that the market, left to develop without interference, will develop a range of financial products and services that provide cost certainty to firms but are less distortionary than safety valves. Under a mature carbon emissions trading market with adequate certainty about cap levels beyond the short term, financial services firms will offer hedging products such as forward call options that allow companies to lock in a maximum cost.

Press Release: Agenda for Climate Action

Press Release
February 8, 2006

Contact: Katie Mandes, (703) 516-0606

PEW CENTER ON GLOBAL CLIMATE CHANGE RELEASES FIRST COMPREHENSIVE APPROACH TO CLIMATE CHANGE

All Sectors Must Share in Solution

WASHINGTON, D.C. – The Pew Center on Global Climate Change released the first comprehensive plan to reduce greenhouse gas emissions in the United States.  The Agenda for Climate Action identifies both broad and specific policies, combining recommendations on economy-wide mandatory emissions cuts, technology development, scientific research, energy supply, and adaptation with critical steps that can be taken in key sectors.  The report is the culmination of a two-year effort that articulates a pragmatic course of action across all areas of the economy.  

The report calls for a combination of technology and policy and urges action in six key areas:  (1) science and technology, (2) market-based programs, (3) sectoral emissions, (4) energy production and use, (5) adaptation, and (6) international engagement.  Within these six areas, the Agenda outlines fifteen specific recommendations that should be started now, including U.S. domestic reductions and engagement in the international negotiation process.  All the recommendations are capable of implementation in the near-term. 

The report concludes that there is no single technology fix, no single policy instrument, and no single sector that can solve this problem on its own.  Rather, a combination of technology investment and market development will provide for the most cost-effective reductions in greenhouse gases, and will create a thriving market for GHG-reducing technologies.  To address climate change without placing the burden on any one group, the report urges actions throughout the economy. 

“Some believe the answer to addressing climate change lies in technology incentives.  Others say limiting emissions is the only answer.  We need both,” said Eileen Claussen, President of the Pew Center.

Emissions in the United States continue to rise at an alarming rate.  U.S. carbon dioxide emissions have grown by more than 18% since 1990, and the Department of Energy now projects that they will increase by another 37% by 2030. 

Joining the Pew Center at the announcement were representatives from the energy and manufacturing sectors.  Speaking at the release were:  David Hone, Group Climate Change Adviser, Shell International Limited; Melissa Lavinson, Director, Federal Environmental Affairs and Corporate Responsibility, PG&E Corporation; Bill Gerwing, Western Hemisphere Health, Safety, Security, and Environment Director, BP; John Stowell, Vice President, Environmental Strategy, Federal Affairs and Sustainability, Cinergy Corp., Ruksana Mirza, Vice President, Environmental Affairs, Holcim (US) Inc.; and Tom Catania, Vice President, Government Relations, Whirlpool Corporation.

Recommendations:

While actions are needed across all sectors, some steps will have a more significant, far-reaching impact on emissions than others and must be undertaken as soon as possible. 

  • A program to cap emissions from large sources and allow for emissions trading will send a signal to curb releases of greenhouse gases while promoting a market for new technologies.
  • Transportation is responsible for roughly one-third of our greenhouse gas emissions, and this report addresses this sector through tradable emissions standards for vehicles.
  • Because energy is at the core of the climate change problem, the report makes several recommendations in this area: calling for increased efficiency in buildings and products, as well as in electricity generation and distribution.  Incentives and a nationwide platform to track and trade renewable energy credits are recommended to support increased renewable power.  In recognition of the key role that coal plays in U.S. energy supply, the report calls for the capture and sequestration of carbon that results from burning coal. Nuclear power currently provides a substantial amount of non-emitting electricity, and is therefore important to keep in the generation mix. The report recommends support for advanced generation of nuclear power, while noting that issues such as safety and waste disposal must also be addressed.
  • While most of the recommendations focus on mitigation efforts, the report acknowledges that some impacts are inevitable and are already being seen. As a result, it proposes development of a national adaptation strategy to plan for a climate-changing world. 
  • Finally, despite the importance of efforts by individual countries on this issue, climate change cannot be addressed without engagement of the broader international community.  The report recommends that the U.S. participate in international negotiations aimed at curbing global greenhouse gas emissions by all major emitting countries.

Other recommendations include: long-term stable research funding, incentives for low-carbon fuels and consumer products, funding for biological sequestration, expanding the natural gas supply and distribution network, and a mandatory greenhouse gas reporting program that can provide a stepping stone to economy-wide emissions trading. 

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

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

Political Climate Change

Full Article (PDF)

by Truman Semans, Director for Markets and Business Strategy at the Pew Center--Appeared in Petroleum Economist, September 2005
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Press Release: New Report Examines Impacts of Storing Carbon

Press Release           
For Immediate Release:  January 19, 2005             

Contact:  Katie Mandes
703.516-0606 

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

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

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

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

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

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

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

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

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

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

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

US Forestbased Carbon Sequestration Cove

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

Prepared by the Pew Center on Global Climate Change
January 2005

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

Press Release

Download Report (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

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

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

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

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

Executive Summary

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

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

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

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

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

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

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

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

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

Three major conclusions emerge from our survey and synthesis:

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

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

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

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

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

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

Conclusions

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

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

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

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

Three conclusions emerge from our analysis:

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

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

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

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

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

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

 

 

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

Read the full article (pdf)

by Elliot Diringer

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

 

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

POLICY FORUM: CLIMATE POLICY

An Effective Approach to Climate Change

By Eileen Claussen

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

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

Science and Economics

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

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

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

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

Low-Carbon Technology Development

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

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

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

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

The Power of the Marketplace

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

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

Adapting to Climate Change

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

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

References and Notes

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

by Eileen Claussen, President— Appeared in Science, October 29, 2004
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