Global Warming Policy: Some Economic Implications
Table of Contents
- The author would like to thank Frank Berger, Sterling Burnett, Mike Canes, Roger Heminghaus, Hill Huntington, Don Norman, Steve Prowse, Cece Smith, Ron Sutherland, Lori Taylor, Mine Yücel, Carlos Zarazaga, John Goodman and Dorman Cordell for helpful comments and discussions without implicating them in the conclusions.
- For a comprehensive treatment of emissions other than CO2, see Darwin C. Hall, "Preliminary Estimates of Cumulative Private and External Costs of Energy," Contemporary Policy Issues, No. 8, July 1990, pp. 283-307; and Darwin C. Hall, "Social Cost of CO2 Abatement from Energy Efficiency and Solar Power in the United States," Environmental and Resource Economics, Vol. 2, No. 5, 1992, pp. 491-512.
- Atmospheric CO2 has increased approximately 36 percent since the beginning of the Industrial Revolution. Other greenhouse gases whose recent increase in the atmosphere is due to human activities include methane, nitrous oxide, chlorofluorocarbons and aerosols. All combined account for 2 to 6 percent of the greenhouse gases in the atmosphere; natural water vapor makes up the other 94 to 97 percent.
- The Department of Energy projection that world CO2 emissions from fossil fuels would increase about 45 percent from 1990 to 2010 anticipates accelerated growth and industrialization in the developing world.
- All of the other greenhouse gases make up such a small percentage of atmospheric greenhouse gas concentrations that they are known collectively as "trace gases." Methane has increased dramatically (150 percent) in the atmosphere over the last 100 years and has 30 times the warming potential of CO2. However, it is short-lived, makes up only 0.00016 percent of the atmosphere by volume and its emissions and concentrations have inexplicably leveled off in the last year. Nitrous oxides are long-lived gases with 200 times the warming potential of CO2 that, with the exception of downturns due to volcanic eruptions, have increased modestly in recent years. However, most atmospheric nitrous oxides have natural sources and they make up less than 0.000001 percent of the atmosphere. Chlorofluorocarbons (CFCs) and aerosols have both increased in recent years, with mixed effects. For instance, in the upper atmosphere CFCs have a cooling effect; in the lower atmosphere they tend to trap heat. On balance, CFCs and aerosols have probably moderated any recent warming. See Intergovernmental Panel on Climate Change (IPCC), Climate Change 1995, Impacts, Adaptations and Mitigation of Climate Change: Scientific-Technical Analyses (Cambridge, Mass.: Cambridge University Press, 1996), pp. 122, 118.
- See, for example, Thomas Gale Moore, "Health and Amenity Effects of Global Warming," Working Paper No. 96-1, January 1996, Hoover Institution; and Sylvan H. Wittwer, "Flower Power: Rising Carbon Dioxide Is Great for Plants," Policy Review, No. 62, Fall 1992.
- In fact nature, through such activities as the decomposition of organic matter on land and in the oceans, contributes 93 to 97 percent of the atmospheric CO2. Out of approximately 160 billion metric tons of CO2 exchanged in the atmosphere every year, humans contribute only 5.6 to 8.6 metric tons. IPCC, Climate Change 1995, Impacts, Adaptations and Mitigation of Climate Change: Scientific-Technical Analyses, p. 77.
- For examples, see Samuel Fankhauser, "The Social Costs of Greenhouse Emissions: An Expected Value Approach," Energy Journal, Vol. 15, No. 2, 1994, pp. 157-84; Chris Hope and Phillip Maul, "Valuing the Impact of CO2 Emissions," Energy Policy, March 1996, pp. 211-19; William D. Nordhaus, "A Sketch of the Economics of the Greenhouse Effect," American Economic Review, Papers and Proceedings, May 1991, pp. 920-37; William D. Nordhaus, "To Slow or Not to Slow: The Economics of Global Warming," Economic Journal, July 1991, pp. 920-37; William D. Nordhaus, "The DICE Model: Background and Structure of a Dynamic Integrated Climate Economy Model of the Economics of Global Warming," Cowles Foundation Discussion Paper No. 1009, New Haven, Conn., February 1992; William D. Nordhaus, "Optimal Greenhouse Gas Reductions and Tax Policy in the 'DICE' Model," American Economic Review, Papers and Proceedings, May 1993, pp. 313-17; Stephen C. Peck and Thomas J. Teisberg, "CO2 Emissions Control: Comparing Policy Instruments," Energy Policy, March 1993, pp. 222-30; and Stephen C. Peck and Thomas J. Teisberg, "Global Warming Uncertainties and the Value of Information: An Analysis Using CETA," Resource and Energy Economics, March 1993, pp. 71-97.
- In "The Social Costs of Greenhouse Emissions: An Expected Value Approach," Fankhauser did a comprehensive survey of the studies predicting the costs of carbon abatement policies to develop his range of estimates. In a more recent survey of the literature, Hope and Maul, "Valuing the Impact of CO2 Emissions," confirmed Frankhauser's original range of estimates. None of these analyses considers increased CO2 beneficial.
- These estimates of benefits (damages avoided) are adapted from Stephen P. A. Brown and Hillard G. Huntington, "Some Implications of Increased Cooperation in World Oil Conservation," Federal Reserve Bank of Dallas Economic Review, Second Quarter 1998, pp. 2-9. Previous analysis suggests a flat marginal benefit curve. Summarizing the previous literature, Stephen C. Peck and Thomas J. Teisberg, "CETA: A Model for Carbon Emissions Trajectory Assessment," Energy Journal, Vol. 13, No. 1, 1992, pp. 55-77, explain that marginal benefit costs are essentially unaffected by the emissions levels in any given decade. This conclusion rests on the finding that temperature change depends on gas concentration, which is not greatly affected by emissions levels in any given decade. I follow this characterization by assuming horizontal benefit curves that depict a constant level of benefits for any level of CO2 abatement. Brown and Huntington derived the $2.86 (in 1995 dollars) mean estimate per barrel of oil equivalent from Fankhauser, "The Social Costs of Greenhouse Emissions: An Expected Value Approach."
- The author developed the analytical framework and simulation model with Hillard G. Huntington of Stanford University. Many analysts use U.S. Department of Energy (DOE) projections as a reference standard for analysis, and the simulation model is calibrated to reproduce DOE's 1997 projections for world energy market conditions in 2010. The DOE projections represent one of many possible world energy outlooks for 2010. Additional parameters for the model were adapted from a variety of sources including an Energy Modeling Forum study, "International Oil Supplies and Demands," EMF Report 11, 1991, Stanford University, that compared 10 major world oil market models, as well as Douglas Bohi, Analyzing Demand Behavior: A Study of Energy Elasticities (Baltimore, Md.: The Johns Hopkins University Press for Resources for the Future, 1981); Brown and Huntington, "Some Implications of Increased Cooperation in World Oil Conservation," Stephen P. A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Federal Reserve Bank of Dallas Economic Review, Second Quarter 1995, pp. 13-21; James M. Griffin, "OPEC Behavior: A Test of Alternative Hypotheses," American Economic Review, December 1985, pp. 945-63; Carol Dahl and Mine K. Yücel, "Testing Alternative Hypotheses of Oil Producer Behavior," Energy Journal, Vol. 12, No. 4, 1991, pp. 117-38. Hillard G. Huntington, "Inferred Demand and Supply Elasticities from a Comparison of World Oil Models," in Thomas Sterner, ed., International Energy Economics (London: Chapman and Hall, 1992), pp. 239-61; and Hillard G. Huntington, "OECD Oil Demand: Estimated Response Surfaces for Nine World Oil Models," Energy Economics, January 1993, pp. 49-66, provide an overview of the Energy Modeling Forum study. The projected energy demand conditions depend on a variety of assumptions about economic growth and the extent of energysaving technological change in the absence of price change. Cost estimates are obtained by computing the welfare costs of policies under which the United States works in concert with other developed nations to reduce global CO2 emissions through fossil fuel conservation. The modeling framework allows world energy prices to adjust to the conservation of fossil energy to restore a balance between supply and demand conditions in each market. Analytically, carbon taxes are used to reduce the consumption of fossil fuels in the developed economies. The tax approach implies that an incentive to conserve is applied across all uses of fossil energy. Values from these simulations are used to construct marginal cost curves for U.S. abatement of CO2 emissions. This method-ology follows the welfare-theoretic approach previously employed by Stephen P. A. Brown and Hillard G. Huntington in "The Economic Cost of U.S. Oil Conservation," Contemporary Economic Policy, July 1994, pp. 42-53; "LDC Cooperation in World Oil Conservation," Energy Journal, Special Issue, 1994, pp. 310-28; and "Some Implications of Increased Cooperation in World Oil Conservation," and in Stefan Felder and Thomas F. Rutherford, "Unilateral CO2 Reductions and Carbon Leakage: The Consequences for International Trade in Oil and Basic Materials," Journal of Environmental Economics and Management, September 1993, pp. 162-76. The resulting cost curves take into account a number of factors, including the direct welfare costs of U.S. conservation efforts, transfers of wealth between countries, the effect lower energy prices would have in stimulating energy consumption in nonparticipating countries and the economic cost of OPEC cartelization. The present analysis abstracts from a number of considerations featured in other studies of energy conservation. Michael Hoel, "Efficient International Agreements for Reducing Emissions of CO2," Energy Journal, Vol. 12, No. 2, 1991, pp. 93-107; and David M. Newberry, "Should Carbon Taxes Be Additional to Other Transport Fuel Taxes?" Energy Journal, Vol. 13, No. 2, 1992, pp. 49-60, consider the effects of other taxes and redistributive policies. Peter Bohm, "Incomplete International Cooperation to Reduce CO2 Emissions: Alternative Policies," Journal of Environmental Economics and Management, May 1993, pp. 258-71; Brown and Huntington, "LDC Cooperation in World Oil Conservation;" Johan Eyckmans, Stef Proost and Erik Schokkaert, "Efficiency and Distribution in Greenhouse Negotiations," Kyklos, Vol. 46, No. 3, 1993, pp. 363-97; Michael Hoel, "Global Environmental Problems: The Effects of Unilateral Actions Taken by One Country," Journal of Environmental Economics and Management, January 1991, pp. 55-70; Michael Hoel, "Efficient Climate Policy in the Presence of Free Riders," Journal of Environmental Economics and Management, November 1994, pp. 259-74; Alan S. Manne and Thomas F. Rutherford, "International Trade in Oil, Gas and Carbon Emission Rights: An Intertemporal General Equilibrium Model," Energy Journal, Vol. 15, No. 1, 1994, pp. 57-76; Heinz Welsch, "Incentives for Forty-Five Countries to Join Various Forms of Carbon Reduction Agreements," Resource and Energy Economics, November 1995, pp. 213-37; and John Whalley and Randall Wigle, "Cutting CO2 Emissions: The Effects of Alternative Policy Approaches," Energy Journal, Vol. 12, No. 1, pp. 109-24, consider alternative policies for distributing conservation goals across countries and gains from cooperation. Felder and Rutherford, "Unilateral CO2 Reductions and Carbon Leakage: The Consequences for International Trade in Oil and Basic Materials," and John Pezzey, "Analysis of Unilateral CO2 Control in the European Community and OECD," Energy Journal, Vol. 13, No. 3, pp. 159-71, allow for different types of goods.
- This conservative assumption yields lower estimates of the costs than assuming the United States acts independently.
- A policy is risk-neutral when the risks of overestimating the cost are equal to the risks of underestimating.
- By 2010, if the U.S. takes no carbon abatement actions (a business-as-usual scenario), U.S. carbon emissions are expected to be 384 million metric tons greater than in 1990. Since under the Kyoto Protocol the U.S. is required to cut carbon emissions to 7 percent below 1990 levels, the U.S. would have to cut more than 478 million metric tons to meet Kyoto's requirements.
- A recent report issued by the U.S. General Accounting Office found that the Department of Energy's Five-Lab Study, on which the Clinton administration based its free lunch negotiating strategy in Kyoto, was flawed. The GAO found that the study relied on unsubstantiated assumptions concerning the future competitiveness of wind and solar power and solar- and battery-powered vehicles. In addition, the study did not consider the full costs to the economy of the energy taxes that it suggested. Finally, it relied on implausible scenarios concerning the feasibility of near-term replacement of power plants and other capital. In short, all of the study's major assumptions were either unrealistic or overly optimistic. See "Climate Change, Information on Limitations and Assumptions of DOE's Five-Lab Study," GAO, Washington, D.C., September 1998.
- See Stephen P. A. Brown, "Directions for U.S. Energy Conservation and Independence," Business Economics, October 1996, pp. 25-30.
- Gordon Tullock, "The Welfare Costs of Tariffs, Monopolies, and Theft," Western Economic Journal, June 1967, pp. 224-32.
- GDP loss estimates are obtained through elasticities that measure the sensitivity of aggregate economic activity to energy prices (i.e., the rise or fall of economic activity as energy prices rise and fall). The elasticities were chosen to represent the range of estimates from a number of prominent economic studies. See Bert G. Hickman, Hillard G. Huntington and James L. Sweeney, eds., The Macroeconomic Impacts of Energy Shocks (Amsterdam: Elsevier, North-Holland, 1987). Real GDP in 2010 (1992 dollars) is forecast to be $9,171.9 billion. Population is forecast to be 298.9 million. Energy Information Administration, U.S. Department of Energy (1997), Annual Energy Outlook, U.S. Government Printing Office, Washington, D.C.