Download Addressing Cost

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Beyond Kyoto
Addressing Cost:
The Political Economy of Climate Change
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Prepared for the Pew Center on Global
Climate Change by
Joseph E. Aldy, Richard Baron and
Laurence Tubiana
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Cost – A Central Issue
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GHG mitigation affects broad range of
economic activity
Two broad perspectives on cost:
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Efficiency – whether in the long term benefits of
action exceed the costs
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Cost-effectiveness – achieving maximum GHG
reduction for every $ invested
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Cost – A Central Issue
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Cost concern reflected in UNFCCC, and in
Kyoto architecture and compromises
Yet primary obstacle to U.S., Australian ratification
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Will become only more critical as parties
seek to deepen and broaden commitments
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Managing cost is important in its own right,
but also is essential to achieving participation
and compliance
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Two Overarching Issues
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Timing
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Long time lags between
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Timing of target critical to its cost
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emissions/impacts
costs/benefits of mitigation
Costs will be higher if target is too near, or too far
No matter how distant the goal, near-term
action is needed to promote technologies that
can achieve it at lowest cost
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Two Overarching Issues
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Uncertainty
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Over climate impacts/benefits of action
Over costs of action
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Future economic, population, emission trends
Response to mitigation measures
Rate of technology development, diffusion
Models can compare costs of alternative
strategies, but provide only crude estimate of
long-term costs and benefits
Uncertainty another reason to act now
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3 Critical Cost Dimensions
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• Aggregate cost
• Relative Cost
• Cost certainty
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Aggregate Cost
• Hinges on:
– Stringency of goal (magnitude and timing)
– Cost-effectiveness of mitigation measures
• Minimized with flexibility on what, when
and where of mitigation action
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Relative Cost
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• Uneven distribution of costs creates
competitiveness concerns:
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– Among countries with targets
– Between those with and without targets
• “Leakage” undermines effectiveness
• Uneven domestic costs can be obstacle
to participation
• Politically, can be more decisive than
aggregate cost
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Cost Certainty
• Certainty promotes participation and
compliance
• Governments secure domestic support
based on expectations of cost
• When realized cost exceeds expected
cost, risk of noncompliance rises
• Certainty may be more critical for
marginal cost than aggregate cost
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Alternative Approaches
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International emissions trading
Quantitative target with safety valve
Indexed targets
Sectoral targets
No-lose targets
Emission taxes
Technology standards
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Synthesizing the Options
• Aggregate cost
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Emissions trading most effective
Tax implementation hard to monitor
Technology standards not cost-minimizing
Sectoral target can contain cost, no-lose
target can eliminate it
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Synthesizing the Options
• Relative cost
– Emissions trading can reduce differences
in marginal cost
– Emission taxes can also, but only if
governments do not “cushion”
– Technology standards likely widen cost
variations across industries and countries
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Synthesizing the Options
• Cost certainty
– Depending on where price set, safety valve
can provide cost “insurance” or undermine
environmental objective
– Indexed targets limit uncertainty over
economic growth
– No-lose target can eliminate downside risk
of emissions commitment
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Conclusions
• Two-way interaction between cost and
participation
– Suggests flexible architecture
accommodating different approaches
• Greater cost certainty can allow a
stronger environmental objective
• Uncertainties too great to allow reliable
cost-benefit analysis -- in the end it is a
political calculation
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For More Information
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www.pewclimate.org