Costs and Benefits of Greenhouse Gas Emission Reduction

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Costs and Benefits ofGreenhouse Gas Emission
Reduction

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

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Outline

• Options for emission reduction
• Costs of emission reduction
• Policy instruments
• Impacts of climate change
• Background Kyoto will enter into force
• Main issue What to do for the next commitment
  periods?

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Options

• In order to reduce the accumulation of carbon
  dioxide and other greenhouse gases in the
  atmosphere, one can
• Slow population growth
• Slow economic growth
• Increase energy efficiency
• Switch fuels
• Capture and store
• Enhance sinks
• Otherwise increase the price of energy (e.g., by
  starting a war in the Middle East)

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Costs

• In all of these cases, one would force the market
  to do things it would not do otherwise
• This necessarily implies a cost
• These costs cannot be observed, as it is the
  difference between the case with and the case
  without policy
• Moreover, there has been very little policy
  implementation to date
• So, one has to rely on models

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Interpretation

• The model results show that atmospheric
  stabilisation at a reasonable level can be
  achieved at a small sacrifice of economic growth
  and a minor increase in fuel and electricity
  prices ...
• ... but that costs rapidly increase as targets
  tighten
• ... provided that the policies are right
• The models also show that inefficient policies
  can send the costs through the roof
• How efficient and effective are current policies?

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Cost-effectiveness

• Economists have preached the cost-saving virtues
  of tradable permits (where flexibility), and this
  seems to have been taken up by the EU and in the
  Kyoto Protocol
• However, the Kyoto Protocol does not foresee one
  international market, but three, where AIJ and
  CDM are hampered by too much red tape
• The ETS is incomplete in coverage, while the
  allocation is such that most of the abatement
  will be outside of the market

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Taxes and tradable permits

• By choosing grandfathered tradable permits over
  auctioned ones or taxes, the EU has also given up
  the revenues that could have been used to reform
  labour taxes (an almost sure way to reduce costs)
  or to counteract the negative distributional
  consequences
• Furthermore, economic theory says that costs will
  be minimal if the new regulation replaces the old
  regulation, but this is not the case

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The costs of a 25 emission reduction from
baseline, decomposed
Japan EU USA Canada
C-price 323 205 231 127
Loss () 15 2.2 0.5 1.1
Loss (bln ) 48 160 43 7
Direct 11 23 43 3
Distortion 28 109 0 3
Oil markets 0 -1 -3 0
Other goods 0 -2 -1 0
Capital 1 0 -1 0
Other 10 20 5 1
Paltsev et al., 2004
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Summary

• Greenhouse gas emission reduction need not be
  expensive, if policies are right and targets are
  sensible
• If not, emission reduction can be quite costly
• Unfortunately, we seem to be closer to the latter
• One question remains What are we doing this for?

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A Meta-Analysis of the Marginal Damage Costs