A U.S. Perspective on Future Climate Regimes

Momentum may be building for federal climate change policy in the United States. Assuming this leads to mandatory greenhouse gas regulations, the door will be open for the United States to constructively re-engage other countries concerning an international climate regime. Such a regime will need to recognize that binding international limits are unlikely to attract U.S. participation and, therefore, will require a different approach than the Kyoto Protocol. In particular, a future regime will need to accommodate and encourage, rather than force or constrain, domestic actions to focus more narrowly on major economies and emitting nations, to balance mitigation and technology objectives, and to engage developing countries on as many levels as possible. In place of a heavy emphasis on negotiating commitments in advance, there likely will need to be greater emphasis on evaluating actions in retrospect. Such an approach not only matches recent trends in the United States but arguably follows from broader experience over the decade since the negotiation of the Kyoto Protocol.climate change, international treaty, Kyoto, emissions trading

The Evolution of a Global Climate Change Agreement

This paper argues that while a long-term solution to climate change may require the global market-based solution envisioned in the Kyoto Protocol, a more flexible near-term approach is necessary. First, a broad range of domestic policies need to be embraced and encouraged by an international agreement, not constrained or discouraged by it. Second, developing countries need to be an increased focus of engagement, with expansion and reform of project-based crediting. Finally, a global agreement needs to recognize both technology and mitigation policies and to develop ways to evaluate efforts along each of these dimensions. Over the longer term, such an agreement should evolve toward greater reliance on global market-based solutions, and therefore near-term steps should be viewed both in terms of their immediate practicality and their potential to be refined over time.climate change, international treaty, Kyoto, emissions trading

Economics versus Climate Change

This paper argues against the common-sense conclusion that climate change demands a global market-based solution, such as international emissions trading. First, current experience suggests global cooperation is not necessary for initial mandatory actions. Second, when domestic targets vary across nations, there are a variety of reasons why international emissions trading, even though it creates aggregate economic gains for all nations, may not be desirable. These reasons include concerns over legitimizing target variations for future negotiations, real and perceived consequences of capital flows across nations, and distributional impacts within nations. Finally, the underlying need for global technology solutions suggests domestic mitigation policies that balance clear emissions price signals, incentives for technology development and deployment, and mechanisms to finance deployment to developing countries. International efforts, in turn, might focus on encouraging these domestic actions, facilitating the developing country investment mechanisms, and providing credible reviews of national action.climate, change, international, treaty, Kyoto, emissions trading

Endogenizing Technological Change: Matching Empirical Evidence to Modeling Needs

Technologies to reduce significantly fossil-fuel emissions currently are unavailable or only available at high cost. In light of this, the amount of research on the pace, direction, and benefits of environmentally friendly technological change has grown dramatically in recent years. This research includes empirical estimates of these effects and modeling exercises designed to simulate endogenous technological change in response to climate policy. Unfortunately, few attempts have been made to connect these two streams of research. This paper attempts to bridge that gap, reviewing both the empirical and modeling literature on technological change. Our goal is to provide an agenda for how both empirical and modeling research in these areas can move forward in a complementary fashion. In doing so, we discuss how models used for policy evaluation can better capture empirical phenomena and how empirical research can better address the needs of models used for policy evaluation.endogenous technological change, climate change, CGE modeling

Endogenizing Technological Change: Matching Empirical Evidence to Modeling Needs

Given that technologies to significantly reduce fossil fuel emissions are currently unavailable or only available at high cost, technological change will be a key component of any long-term strategy to reduce greenhouse gas emissions. In light of this, the amount of research on the pace, direction, and benefits of environmentally-friendly technological change has grown dramatically in recent years. This research includes empirical work estimating the magnitude of these effects, and modeling exercises designed to simulate the importance of endogenous technological change in response to climate policy. Unfortunately, few attempts have been made to connect these two streams of research. This paper attempts to bridge that gap. We review both the empirical and modeling literature on technological change. Our focus includes the research and development process, learning by doing, the role of public versus private research, and technology diffusion. Our goal is to provide an agenda for how both empirical and modeling research in these areas can move forward in a complementary fashion. In doing so, we discuss both how models used for policy evaluation can better capture empirical phenomena, and how empirical research can better address the needs of models used for policy evaluation.

Managing Costs in a U.S. Greenhouse Gas Trading Program: A Workshop Summary

Cost containment has emerged as a major point of contention in the current congressional debate about designing a cap-and-trade program to limit future U.S. greenhouse gas (GHG) emissions. This paper reviews basic concepts and policy options for cost management, drawing on a March 2008 workshop sponsored by Resources for the Future (RFF), the National Commission on Energy Policy, and Duke University’s Nicholas Institute for Environmental Policy Solutions. The different sources and temporal dimensions of cost uncertainty are explored, along with possible mechanisms for addressing short- and long-term cost concerns, including banking and borrowing, emissions offsets, a price cap (or safety valve), quantity-limited allowance reserve, and the concept of an oversight entity for GHG allowance markets modeled on the Federal Reserve. Recognizing that the inherent trade-off between environmental certainty and cost certainty has no perfect solution, the paper nonetheless concludes that numerous options exist for striking a reasonable and politically viable balance between these two objectives. In the effort to forge consensus around a particular set of options, it will be important for policymakers to strive to fit the remedy to the problem they are trying to solve and to preserve the underlying integrity of the overall program in terms of its long-term ability to sustain meaningful market incentives for low-carbon technologies.cost containment, greenhouse gases, cap-and-trade, safety valve, allowance reserve, uncertainty, banking and borrowing, offsets, price volatility, carbon Fed

The Competitiveness Impacts of Climate Change Mitigation Policies

In order to clarify ongoing debates over the competitiveness impacts of climate change regulation, we develop a precise definition that can be estimated with available domestic production, trade, and energy price data. We use this definition and a 20+ year panel of 400+ U.S. manufacturing industries to estimate and predict the effects a U.S.-only $15 per ton CO2 price. We find competitiveness effects on the order of a 1.0 to 1.3 percent decline in production among energy-intensive manufacturing industries, representing about one-third of the policy’s impacts on these firms’ output.

The Economics of Climate Change

Global climate change poses a threat to the well-being of humans and other living things through impacts on ecosystem functioning, biodiversity, capital productivity, and human health. This paper briefly surveys recent research on the economics of climate change, including theoretical insights and empirical findings that offer guidance to policy makers. Section 1 frames the climate change problem and indicates the ways that economic research can address it. Section 2 describes approaches to measuring the benefits and costs associated with reducing greenhouse gas emissions. In Section 3 we discuss the implications of uncertainty for the timing and stringency of policies to address possible climate change. We then present issues related to policy design, including instrument choice (Section 4), flexibility (Section 5), and international coordination (Section 6). The final section offers general conclusions.

Indexed Regulation

Seminal work by Weitzman (1974) revealed that prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables’ coefficients of variation divided by their correlation is less than two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to the case of climate change, we find that quantities indexed to GDP are preferred to fixed quantities for about half of the 19 largest emitters, including the United States and China, while (consistent with previous work) prices dominate for all countries.price, quantity, regulation, uncertainty, policy, environment, climate change

The Competitiveness Impacts of Climate Change Mitigation Policies

The pollution haven hypothesis suggests that unilateral domestic emission mitigation policies could cause adverse "competitiveness" impacts on domestic manufacturers as they lose market share to foreign competitors and relocate production activity--and emissions--to unregulated economies. We construct a precise definition of competitiveness impacts appropriate for climate change regulation that can be estimated exclusively with domestic production and net import data. We use this definition and a 20+ year panel of 400+ U.S. manufacturing industries to estimate the effects of energy prices, which is in turn used to simulate the impacts of carbon pricing policy. We find that a U.S.-only $15 per ton CO2 price will cause competitiveness effects on the order of a 1.0 to 1.3 percent decline in production among the most energy-intensive manufacturing industries. This amounts to roughly one-third of the total impact of a carbon pricing policy on these firms' economic output.