international energy agency agence internationale de l’energie

At the request of the California Attorney General’s Office, I analyzed the discussion of economic analysis of potential greenhouse gas regulation in EPA’s Advance Notice of Public Rulemaking (ANPRM) and Technical Supporting Document (TSD). Summary: EPA’s ANPRM and TSD display an impressive awareness of most of the major issues concerning the economics of climate change, but stop short of following these issues to their logical implications. A commendable review of the big picture, recognizing several recent developments, is followed by a reliance on a small number of traditional methods and models. EPA should be encouraged to think as creatively about models and policy analysis as it did about the nature of climate crisis. Meanwhile, the numerical estimates and partial literature review in these documents should not be used as the basis for policy. What EPA did right: The TSD (in particular, section 3, pp. 4-9) raises many important theoretical points, echoed briefly in the ANPRM (sections G.1 – G.3, pp. 44414-44415): • the need for a very low discount rate for intergenerational analyses • the centrality of low-probability, catastrophic risks, and the inherent uncertainty in evaluating these threats • the impossibility of monetizing all benefits, and the resulting indeterminacy in any cost-benefit calculations • the absurdity of evaluating U.S. climate policy on the basis of U.S. impacts alone, in isolation from the impacts on the rest of the world Taken together, these points argue for a global analysis, focusing on safe minimum standards and prevention of catastrophe over generations to come, paying little or no attention to the narrowly constrained cost-benefit calculations and marginal cost / marginal benefit estimates that have appeared in a number of past economic analyses. Indeed, EPA’s theoretical framework in these documents suggests, in keeping with much

Economics for Equity and the Environment Network The integrated assessment models (IAMs) that economists use to analyze the expected costs and benefits of climate policies frequently suggest that the “optimal ” policy is to do

An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.org/wpT CESifo Working Paper No. 2458 Bringing the Copenhagen Global Climate Change Negotiations to Conclusion In this paper we discuss the global negotiations now underway and aimed at achieving new climate change mitigation and other arrangements after 2012 (the end of the Kyoto commitment period). These were initiated in Bali in December 2007 and are scheduled to conclude by the end of 2009 in Copenhagen. As such, this negotiation is effectively the second round in ongoing global negotiations on climate change and further rounds will almost certainly follow. We highlight both the vast scope and vagueness of the negotiating mandate, the many outstanding major issues to be accommodated between negotiating parties, the lack

There is growing clamor in industrial countries for additional border taxes on imports from countries with lower carbon prices. The authors confirm the findings of other research that unilateral emissions cuts by industrial countries will have minimal carbon leakage effects. However, output and exports of energy-intensive manufactures are projected to decline potentially creating pressure for trade action. A key factor affecting the impact of any border taxes is whether they are based on the carbon content of imports or the carbon content in domestic production. Their quantitative estimates suggest that the former action when applied to all merchandise imports would address competitiveness and environmental concerns in high income countries but with serious consequences for trading partners. For example, China’s manufacturing exports would decline by one-fifth and those of all low and middle income countries by 8 per cent; the corresponding declines in real income would be 3.7 per cent and 2.4 per cent. Border tax adjustment based on the carbon content in domestic production, especially if applied to both imports and exports, would broadly address the competitiveness concerns of producers in high income countries and less seriously damage developing country trade. This paper—a product of the Trade and Integration Team, Development Research Group—is part of a larger effort in the

Greenhouse gas emissions have grown rapidly in the early 21st century. In the absence of effective mitigation, strong growth is expected to continue for the next two decades and at only somewhat moderated rates beyond. So far, the biggest deviations from earlier expectations are in China. Economic growth, the energy intensity of that growth, and the emissions intensity of energy use are all above projections embodied in earlier expectations. China has recently overtaken the United States as the world’s largest emitter and, in an unmitigated future, would account for about 35 per cent of global emissions in 2030. Other developing countries are also becoming major contributors to global emissions growth, and will take over from China as the main growing sources a few decades from now. Without mitigation, developing countries would account for about 90 per cent of emissions growth over the next two decades, and beyond. High petroleum prices will not necessarily slow emissions growth for many decades because of the ample availability of large resources of highemissions fossil fuel alternatives, notably coal. 3.1 Greenhouse gas emissions by source and country The Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007) estimates that in 2004 greenhouse gas emissions from human activity were about 50 Gt CO

The central policy issue facing the Review can be simply stated: what extent of global mitigation, with Australia playing its proportionate part, provides the greatest excess of gains from reduced risks of climate change over costs of mitigation? The mitigation costs are experienced through conventional economic processes and can be measured through formal economic modelling. Only some of the benefits of mitigation are experienced through conventional market processes (types 1 and 2) and only one is amenable to modelling (Type 1). Others take the form of insurance against severe and potentially catastrophic outcomes (Type 3), and still others the avoidance of environmental and social costs, which are not amenable to conventional measurement (Type 4). The challenge is to make sure that important, immeasurable effects are brought to account. The long time frames involved create a special challenge, requiring us to

median outcomes) costs of climate change in the 21st century are much higher than earlier studies suggested. The Platinum Age emissions grow much faster than earlier studies contemplated. The modelling of the 550 mitigation case shows mitigation cutting the growth rate over the next half century, and lifting it somewhat in the last decades of the century. GNP is higher with 550 mitigation than without by the end of the century. The loss of present value of median climate change GNP through the century will be outweighed by Type 3 (insurance value) and Type 4 (nonmarket values) benefits this century, and much larger benefits of all kinds in later years. Mitigation for 450 costs almost a percentage point more than 550 mitigation of the present value of GNP through the 21st century. The stronger mitigation is justified by Type 3 (insurance value) and Type 4 (non-market values) benefits in the 21st century and much larger benefits

Most economic analyses of climate change have focused on the aggregate impact on countries of mitigation actions. We depart first in disaggregating the impact by sector, focusing particularly on manufacturing output and exports because of the potential growth consequences. Second, we decompose the impact of an agreement on emissions reductions into three components: the change in the price of carbon due to each country’s emission cuts per se; the further change in this price due to emissions tradability; and the changes due to any international transfers (private and public). Manufacturing output and exports in low carbon intensity countries such as Brazil are not adversely affected. In contrast, in high carbon intensity countries, such as China and India, even a modest agreement depresses manufacturing output by 6-7 percent and manufacturing exports by 9-11 percent. The increase in the carbon price induced by emissions tradability hurts manufacturing output most while the Dutch disease effects of transfers hurt exports most. If the growth costs of these structural changes are judged to be substantial, the current policy consensus, which favors emissions tradability

Over the coming decades, the cost of U.S. climate change policy likely will be comparable to the total cost of all existing environmental regulation—perhaps 1–2 percent of national income. In order to avoid higher costs, policy efforts should create incentives for firms and individuals to pursue the cheapest climate change mitigation options over time, among all sectors, across national borders, and in the face of significant uncertainty. Well-designed national greenhouse gas mitigation policies can serve as the foundation for global efforts and as an example for emerging and developing countries. We present six key policy design issues that will determine the costs, cost-effectiveness, and distributional impacts of domestic climate policy: program scope, cost containment, offsets, revenues and allowance allocation, competitiveness, and R&D policy. We synthesize the literature on these design features, review the implications for the ongoing policy debate, and identify outstanding research questions that can inform policy development.