Costs of Greenhouse Gas Emission Reduction

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Costs of Greenhouse GasEmission Reduction

• Richard S.J. Tol
• Hamburg, Vrije, Carnegie
• Mellon Universities

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Marginal damage costs of carbon dioxide emissions
11 (37) /tC or 4 (14) /CO2 for a 5 discount
rate 49 (194) /tC or 18 (71) /CO2for a 3
discount rate 433 (2244) /tC or 158 (821)
/tCfor a 2 discount rate
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Cost estimates Kyoto

• No international trade (but within EU)
• Carbon tax 20-966 /tC or 7-354 /tCO2
• GDP loss 0.31-2.08
• Annex I trade (EU)
• Carbon tax 20-224 /tC or 7-82 /tCO2
• GDP loss 0.13-0.81
• Without the US, and with the more lenient targets
  of Marrakech, everything depends on Russias
  ability to use its monopoly power costs may fall
  to close to zero
• With other greenhouse gases, costs fall, but
  adding sulphates, costs rise

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Costs will rise if time gets shorter!
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Source

• Intergovernmental Panel on Climate Change
• IPCC chapters are written by teams of 10-20
  experts, twice reviewed and revised
• Energy Modeling Forum
• A Stanford based model comparison network, with
  significant input from the USA, Australia, Japan
  and Europe
• Open process Anyone who can do the work is
  welcome, but all models and all results are
  reviewed in public by tough peers (e.g.,
  macroeconometrics)
• Scenario selection by group

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Costs are not negligible

• Bottom up studies look at direct costs only,
  ignore wider economic implications (which would
  increase costs in most cases, but may also reduce
  costs)
• Bottom up studies ignore management costs,
  reputation effects
• Bottom up studies use discount rates that are too
  low
• Top down studies are based on models that assume
  that the unregulated economy is at its optimum
  if you are at the top, the only way is down

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Costs are not negligible -2

• (Bottom up models often compare a sub-optimal
  situation before regulation to an optimal
  situation after)
• CO2 emissions were free before regulation they
  are not after there must a cost somewhere
• Economies with distorted markets are not optimal
  there is a way up as well as down
• If new regulation reduces the overall level of
  distortion, than this saves money, that offsets
  (or more) the above resource cost

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Costs are not negligible -3

• However, current and planned regulation is
  unlikely to reduce the overall level of
  distortion in the economy
• In fact, climate regulation does not replace
  existing regulation, but adds to it
• An example is emissions trading, which will exist
  next to taxes, subsidies, technology standards,
  and voluntary agreements
• The permit market is so fragmented, and rules so
  complicated, that the potential cost savings will
  not be realised

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Secondary benefits

• Some claim that reducing CO2 emissions would
  bring large gains in reducing conventional air
  pollution
• This is true if energy is saved or fossil fuels
  replaced the opposite would happen if CO2 is
  captured and stored
• Besides, more expensive energy would increase the
  costs of filtering
• CO2 emission reduction is a clumsy and costly way
  to combat air pollution

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The real issue

• The real issue is what will replace conventional
  oil and gas as energy source
• If unconventional oil and gas (tar sands,
  clathrates), then large climate change or
  emission reduction costs
• If coal, then very large climate change or
  emission reduction costs
• If renewables, then small climate change and
  negligible costs
• This choice has not been made climate policy
  should focus on ensuring that the right choice is
  made, rather than on short term emission
  reduction and accounting