Press Release: New Reports Demystify Two Central Drivers Of Economic Analyses of Climate Change Policy

For Immediate Release:
September 7, 2000

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

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

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

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

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

Models with "Inflexible" Assumptions Can Double Predicted Economic Costs

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

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

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

Defining What Drives Technological Innovation is the Final Frontier for Modelers

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

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

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

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

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

Continuation of Economic Series

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

About the Pew Center: The Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is a nonprofit, non-partisan and independent organization dedicated to providing credible information, straight answers and innovative solutions in the effort to address global climate change. Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs, leads the Pew Center. The Pew Center includes the Business Environmental Leadership Council, a group of large, mostly Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center; it is solely supported by contributions from charitable foundations.