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
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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 sources / gases are targeted
– When action is undertaken and
– Where (which country)
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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” threatens effectiveness
• Uneven domestic costs can be obstacle
to participation
• Politically, can be more decisive than
aggregate cost
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Cost Certainty
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Certainty promotes participation and
compliance
Governments secure domestic support based
on expectations of cost
When realized cost threatens to exceed
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
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– 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
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Two-way interaction between cost and
participation
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Suggests flexible architecture accommodating
different approaches
Mitigation costs hinge also on domestic
choices
Greater cost certainty can allow a stronger
environmental objective
Uncertainties too great to allow reliable costbenefit analysis -- in the end it is a political
calculation
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For More Information
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www.pewclimate.org