Report 173

The Cost of Climate Policy in the United States

by Paltsev, S., J.M. Reilly, H.D. Jacoby and J.F. Morris (April 2009; Appendix C added September)
Joint Program Report Series, 55 pages, 2009

Report 173: Main report plus Appendices B & C
Appendix B: Measuring the Cost of Climate Policy (PDF: 83 kB)
Appendix C: Cost of Climate Policy and the Waxman-Markey American Clean Energy and Security Act of 2009 (H.R. 2454) (PDF: 260 kB)
MIT News Release: November 5, 2009


Main Report: We consider the cost of meeting emissions reduction targets consistent with a G8 proposal of a 50 percent global reduction in emissions by 2050, and an Obama Administration proposal of an 80 percent reduction over this period. We apply the MIT Emissions Prediction and Policy Analysis (EPPA), modeling these two policy scenarios if met by applying a national cap-and-trade system, and compare results with an earlier EPPA analysis of reductions of this stringency. We also test results to alternative assumptions about program coverage, banking behavior, and cost of technology in the electric power sector. Two main messages emerge from the exercise. First, technology uncertainties have a huge effect on the generation mix but only a moderate effect on the emissions price and welfare cost of achieving the assumed targets. Measured in terms of changes in economic welfare, the economic cost of 80 percent reduction by 2050 is in the range of 2 to 3% by 2050, with CO2 prices between $48 and $67 in 2015 rising to between $190 and $266 by 2050. Second, implementation matters. When an idealized economy-wide cap-and-trade is replaced by coverage omitting some sectors, or if the credibility of long-term target is weak (limiting banking behavior) prices and welfare costs change substantially.

Appendix B: This note provides an overview of different measures of costs of climate policy. While in our studies we stress emissions prices and welfare changes, here we illustrate the measures in most common use, showing results for the 167 bmt scenario from the main report (MIT Joint Program Report 173). Similar results for the other scenarios can be derived from Appendix A. These are studies of mitigation costs only and do not consider climate benefits and potential ancillary non-climate benefits of greenhouse gas mitigation, e.g., through reduced urban air pollution.

Appendix C: The American Clean Energy and Security Act (H.R.2454) passed the House of Representatives after the completion of the main report (MIT Joint Program Report 173). In this Appendix we provide an analysis of the Act's provisions as they relate to key features governing the cap-and-trade system, the renewable electricity standard (RES), limits on new coal power plants and support for carbon capture and storage(CCS), applying the Emissions Prediction and Policy Analysis (EPPA) model used in the main report. While the overall economy-wide target in H.R. 2454, of no more than 161 billion metric tons of CO2-equivalent released through 2050, is similar to the 167 bmt case analyzed in the main report, other features of the Bill significantly affect projections of its cost. We find that the large allowance for outside credits could reduce the cost if indeed these are forthcoming (and inexpensive). Other provisions, such as how the revenue and allowances will be distributed, will have important distributional consequences as well, but their analysis is beyond the scope of the study presented here.
  Our central estimate shows the CO2-e price starting at $21 per ton in 2015 and rising to about $84 by 2050. We decompose the welfare costs into a total cost including H.R. 2454 and recent legislation that was motivated in part for its GHG benefits (the Energy Independence and Security Act of 2007 and American Recovery and Reinvestment Act of 2009) vs. the additional cost of H.R 2454 itself given these preexisting measures. The national welfare cost of reaching the emissions targets outlined in H.R. 2454, attributable to the bill itself, rise from about 0.1 percent to 1.45 percent over the period 2015-2050. We estimate average annual net present value cost of H.R. 2454 of about $400 per household over this horizon, but given different assumptions about the availability of offsets this estimate ranges from as low as $180 to as high as $470. A rough comparison of costs with analyses by the CBO, EIA and EPA shows results in the same general range, though our estimates are higher. [Appendix C issued: September 2009]

Appendix A: Data Tables (MS Excel file: 88 kB)
Appendix B: Measuring the Cost of Climate Policy (PDF: 83 kB)
Appendix C: Cost of Climate Policy and the Waxman-Markey American Clean Energy and Security Act of 2009 (H.R. 2454) (PDF: 260 kB)

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