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

For Immediate Release:
July 17, 2000

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

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

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

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

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

Five Variables Explain Majority of Model Differences

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

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

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

Varying Assumptions Cause Large Swings In Results

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

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

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

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

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