RAYMOND DE OLIVEIRA; ANDY ZHANG; FRANCESCA AUDIA Improving Climate Change Policy.

R AY M O N D D E O L I V E I R A ; A N D Y Z H A N G ; F R A N C E S C A A U D I A

Improving Climate Change Policy

I N D I C ATO R S

E M I S S I O N S S C E N A R I O

C L I M AT E M O D E L

E C O N O M I C C O S T S

C O S T U N C E R TA I N T I E S

Climate Change Science

Indicators of Climate Change

“Warming of the climate

system is unequivocal,

and since the 1950s,

many of the observed

changes are

unprecedented over

decades to millennia. The

atmosphere and ocean

have warmed, the

amounts of snow and ice

have diminished, sea

level has risen, and the

concentrations of

greenhouse gases have

increased” (IPCC 2013)

Emission Scenarios

Emission scenarios calculate

CO2 emissions by taking into

account a range of driving

forces, including socio-political

considerations, population,

and technology. The IPCC

Special Report Graph to the

right shows several CO2

emission scenario predictions

The chart on the following

slide presents the predicted

concentration of various GHG

in the atmosphere under

several different scenarios.

Produced by the IPCC.

Climate Model

Calculates atmospheric greenhouse gas

concentrations from emission scenarios

Calculates radiative forcing from

concentrations

Calculates global temperature increase from

radiative forcing

Radiative Forcing

Radiative Forcing (RF)

describes the change in

energy fluxes for one

date relative to a pre-

Industrial date. A

positive RF leads to

surface warming, while

a negative RF leads to

surface cooling.

IPCC 2007 Climate Model Prediction

IPCC 2007 Prediction of Climate Change Impacts on Disasters

Key Economic Costs

Uneven impact across geography and demographics

Costs in billions seen in all economic sectors Agriculture – pests, aquifers, droughts and floods

Energy – heating demand increases

Industrial – water and energy price increases

Public and private capital will depreciate from more extreme

disasters

Higher public infrastructure maintenance costs

Lower job security

Cost-Analysis Uncertainty

Lack of quantitative studies for indirect and induced

climate change impacts

Climate Model ambiguity leads to ambiguous

marginal analysis

Uncertain of how high temperatures will rise given an

emissions scenario

Even with current error margins, economic cost of climate

change is likely understated

C O S T A N A LY S I S B I A S

K Y O TO P R O TO C O L

C D M

S C M

J C M

Political Failures

Cost Analysis Bias

Ambiguous abatement benefits leads to

policymakers only accepting monetary cost analysis

Much less consideration for threats such as increased

infections due to ambiguous monetary quantification

Some nations (e.g. U.S. and China) better off than

others (higher infrastructural resilience) from climate

change

U.S. Rejects Kyoto Protocol

The perceived monetized cost vastly dwarfed the perceived monetized benefits for

the U.S.

Even if all parties complied, U.S. perceived itself losing

Therefore, complying to ensure everyone else complied was also not justified in the

U.S. domestic sphere

No Prisoners’ Dilemma, best scenario for binding international agreements

Senate Resolution 98: U.S. will not commit unless developing nations also commit to

abatement within the same time frame, or unless commitment did not weaken

competitiveness

But promoting industrial policy (e.g. production subsidy) is more effective in

increasing competitiveness than weakening environmental policy

Ineffective 1997 Goals

Goals for specific nations were set with recent ‘90s one-off abatements in mind

Germany committed to 8% below 1990 levels by 2012, but was already 10% below at time of

treaty due to reunification

Russia set to 1990 levels by 2012, but was already 30% below due to recent collapse

U.K. subsidized natural gas by 1997, leading to already 5% out of 8% reduction goal while

producing more unregulated methane.

U.S. had no recent one-offs, so a comparable 8% goal would have required

more effort than required of the other nations

Fewer one-off opportunities in the future necessitates higher abatement costs

for all countries

Clean Development Mechanism (CDM)

Kyoto Treaty: committed developed countries can meet their abatement goals by reducing emissions in developing countries through sustainable development projects

Project judged by host country to be sustainable or not Inefficient and rhetorical; less than 1% of projects contribute significantly to

sustainable development Some host countries biased towards national economic welfare (e.g. China)

Most ventures favor pure carbon abatement and sidelines local sustainability South African landfill kept open to generate methane for electricity

generation at the expense of locals’ health & environment (Boyd et. Al. 2009).

Majority of projects centered on countries with low abatement costs (e.g. China) Africa and Middle East receive much less (Boyd et. Al. 2009).

CDM Projects last 5 – 7 years, not long enough to incentivize large infrastructural change (e.g. renewable energy grids)

Post-2012 CDM

Needs to provide long-term stable and transparent market for

investors

Simplify and standardize procedure to reduce transaction costs

and improve transparency for stakeholders

Expand project scale to incentivize both smaller and larger,

sectoral-level projects

Learn from Voluntary Carbon Markets (e.g. Climate Action

Reserve in North America), a source of CDM-related innovation (

Guigon 2010)

EU SCM Alternative

EU proposes new Sectoral Crediting Mechanism (SCM) to

replace CDM

Focuses on sectoral-scale projects

Credits not given to private companies but to governments

(Stoft 2009)

Under UNFCC instead of Kyoto Protocol

Will give CDM more freedom to meet sustainability and abatement

goals through not requiring strict national emission targets

JCM Alternative

Japan replaces CDM with Joint Crediting Mechanism

(JCM) alternative

A national level policy; Japan works with participating

developing countries

More decentralized, broader project coverage, more

empirical validation/verification

Quality of abatement per credit not regulated by UNFCC

G R E E N H O U S E G A S E X T E R N A L I T Y

T R A G E D Y O F T H E G L O B A L C O M M O N S

T H E F R E E - R I D E R I S S U E

I N T E R - T E M P O R A L D E C I S I O N M A K I N G

T E C H N O L O G I C A L G R O W T H T H E O RY

Market Failures

The Greenhouse Gas Externality

Firms consider only direct costs and profit

Indirect pollution costs not paid by producer or consumer

Typical Externalities:

Quality of life

Higher health care costs

Forgone economic opportunities (e.g. tourism)

Climate Change has been an externality

More extreme disasters

Water scarcity

Labor insecurity

Tragedy of the Global Commons / Free Rider issue

Climate change policy benefits everybody, but not

everyone will pay the abatement price

If U.S. enacts de-growth movement to reduce climate change, the

economic costs would only affect the US.

2- Level Game theory model of international

negotiations.

(Putnam 1988, “Diplomacy and Domestic Politics”)

Carbon leakage and the lack of international authority

Inter-temporal Decision making

Individual utility function model:

Care about current generation utility more than future generation utility Salience of the present

Society cares about all generations equally But current generation represented more in policymaking than future

generations

M A R G I N A L A N A LY S I S M O D E L

C A P A N D T R A D E

C A R B O N TA X

R E S E A R C H TA X I N C E N T I V E S

Policy Options

Marginal Analysis

Quantity of CO2 abated on X-axis, abatement cost on the Y axis

The cost to abate increases as more abatement is achieved.

“No regrets region”: When the MACC is below the X axis, abatement of CO2 has a

negative cost to the economy. Building Industry

Marginal Analysis cont.

Optimal abatement quantity represented by the intersection of cost and benefit curve

Differing calculations for MACC depending on climate and economic sensitivity to carbon abatement and different MACC measurement

methods Simplified model frames

climate change policy analysis

Cap and Trade

A limit on emissions is set by a governmental authority

companies are free to trade the unused portion of their limits

Increases emission price

Problems:

1. Shifts right, along the MACC curve. Not socially optimum

2. Effectiveness debated. Emissions grew in EU despite ETS

3. Higher energy cost; increased cost of living

4. Affects export competitiveness

5. Bigger companies can emit more; centralizes emissions

Carbon Tax

A pre-specified tax rate per GHG emitted. More transparent and and simpler than a cap and trade policy like the ETS.

Revenue from a carbon tax can be used for further abatement Success in Australia despite slight (0.68%) GDP drop Problems:

1. GHG heavy production may simply go to countries without a carbon tax and with less environmental regulations, resulting in carbon leakage over 100%.

2. Carbon tax loopholes may significantly reduce tax efficiency

3. Political hindrances to a new tax.

4. Moves along the MACC curve instead of shifting it.

5. A global carbon tax would significantly impact small developing countries and their development. “International fairness”

6. But one country’s carbon tax is ineffectual in terms of the world’s climate change.

Tax Incentives for Green R&D and innovation

Market amount of R&D implemented is less than socially desirable Market-level R&D is costly, difficult to appropriate, and may spill over to other firms,

countries, and individuals.

The US currently has tax credits for R&D in general, but not for green technology research Tax credits less risky (for firms) than tax reductions on clean tech production; research

may fail but loss taken by government if using tax credits.

South Korea: provides tax credit of 20 percent (30 percent for small and medium-sized companies) for R&D activities in four key areas Electric, hybrid, plug-in or clean diesel vehicles; solar batteries; wind and geothermal

energy; and carbon capture and storage. South Korea ranks first in the green innovation category; tax credits rather than

deductions

Problem: The tax incentives result in patented clean technology.

Developing countries, in where abatement is often most cost effective, do not have access to clean tech. for decades afterwards

Review of Problems of policy options

Carbon Pricing: movements along the MAC curve

deviates from socially optimal abatement, MACC = MBC.

Over 100% Carbon leakage or “pollution havens”

Solely domestic policies often globally insignificant

Political aversions to international treaties

Developing countries’ inaccessibility to innovative green

tech. due to patenting and market failure

P O L I C Y A I MP O L I C Y T H E O R Y

PA R T 1 : J C MPA R T 2 : A B AT E M E N T R E S E A R C H TA X C R E D I T

P O L I C Y E F F E C T SO B S TA C L E S T O I M P L E M E N TAT I O N

P O L I C Y F L E X I B I L I T Y

Policy Suggestion

Policy Aim

Promote green technology exchange

Incentivize domestic green technology R&D

Circumvent international political game

Keep carbon leakage below 100%

Fix loopholes in existing policy; higher transparency

Inhibit “carbon colonialism” and perverse incentives

Policy Theory

The MB curve cannot shift

Shifts of MACC are superior to shifts along MACC

Technological growth provides superior shifting

E.g. more efficient carbon capture and sequestration (CCS) tech. & more

efficient photovoltaic cells

Decreases marginal abatement cost at all quantities abated, shifting

MACC downward.

Or increases quantity abated at all costs, shifting MACC right.

Our policy: Incentivize green tech R&D and usage

Policy Solution– Joint Credit Mechanism

Improvement over CDM, addressing concernsDecentralized, agreements on a country pair basis.Skips reporting to opaque and removed international institutions

entirely. Easier and more transparent system for firms and local communities

Joint Credit Mechanism potential concerns

1. Some CDM projects have been exploitative or harmful.

1. Industrial agriculture, large scale tree plantations

2. High transaction costs lower abatement efficiency

3. Additionality ambiguity:

1. must measure amount of emissions abated due to project that would

not have been abated under “business as usual” circumstances.

4. Lack of CDM projects in Africa

5. Lack of US international commitment to abatement

Addressing Concerns & Implementation

1. Japan’s model of decentralized JCM allows for local control over what ventures are validated and authorized through the Joint Committee (JC) mechanism.

1. Local authorities can change or modify a hazardous project

2. JC sets rules and guidelines and manages the entire process. Contains representatives from developed and developing country.

2. Circumvents UN processes, thereby reducing transaction and opportunity costs, improving policy efficiency.

3. The JCM “ensures robust methodologies, transparency, and environmental integrity; aims to avoid double-counting with regard to GHG emission reductions or removal” (Japanese Government JCM Presentation)

4. Senate Resolution 98 does not restrict national-level abatement goals. Japan rejected Kyoto Protocol’s commitment goals in favor of more rigorous, self-set commitments. President Obama also has set national goals despite rejecting international treaties.

Further Tax incentives

Current technology can already reduce emissions

One-off clean capital investments in developing countries

E.g. installing N2O filters in existing coal factories

Manufacturing increases, but research?

Solution: tax credits for green technology research

and development

Similar to South Korea

Direct emphasis on research, not just clean tech production

Socioeconomic Effects of Policy

Domestic Changes

Labor Markets

A better educated workforce required

Emission

Little to no short-run changes in emissions

Long run reduction in emissions from manifestation of R&D

Technology

Reach parity faster from more R&D

Federal Revenue

Slight decrease from tax credits/tax deductions

Macroeconomic Trend

Long-run economic boom from emerging green sector

Socioeconomic Effects of Policy cont.

International Changes

Marginal Analysis Change

Shifts MAC curve to the right

Higher optimum abatement quantity

Sustainable Development

Help nations skip fossil fuel revolution.

Exporting of Clean Air Act standards

Indirectly influence other nationalities

Lead by example

Increases the indirect abatement effect of our policy

Obstacles to Implementation

Lack of Congressional abatement commitment

20 states already have an abatement goal

Lack of federal precedent for carbon markets

Precedent already set for green technology tax credit

Policy “riders” that distort effectiveness of bill

Riders used to gain votes and special interest support

Political polarization resulting in weak bills and gridlock

Flexibility

Gives U.S. control over which countries to work with

Enables market-distortion techniques to promote other objectives

E.g. allow projects that provide local benefits beyond abatement (such as jobs,

pollution reduction, job training) to earn 2x or 3x the amount of abatement

credits of a pure abatement project.

Linkable to other carbon markets already in place

Percentage of abatement credits from JCM is adjustable

All abatement policies will require an economic cost, but developing

technology and promoting investment will likely cost the least.