Climate Policy

Kyoto's unfinished business

The authors offer a provisional assessment of where the Kyoto negotiations have left the climate change issue. They present a few widely divergent assesments of what the Kyoto Protocol on Climate Change will accomplish, and describe some differing interpretations of its text in the context of the underlying international disagreement, as well as in differing perceptions of the underlying science and economics. The paper includes a brief but up-to-date summary of what we know and don't know about human influences on climate, and what it might take to restrain them. © 1998 Council on Foreign Relations

Kyoto's Unfinished Business

  The authors offer a provisional assessment of where the Kyoto negotiations have left the climate change issue. They present a few widely divergent assesments of what the Kyoto Protocol on Climate Change will accomplish, and describe some differing interpretations of its text in the context of the underlying international disagreement, as well as in differing perceptions of the underlying science and economics. The paper includes a brief but up-to-date summary of what we know and don't know about human influences on climate, and what it might take to restrain them.

Laissez faire: Collective control or nationalization of the global commons

About the book: This book covers some of the most relevant issues in the new environmental economics. Its main emphasis is on the international dimension of environmental phenomena, which implies the necessity of designing properly coordinated economic/environmental policies. The issue of policy coordination is analysed both in the case where environmental externalities arise because of cross-country and global pollution flows, and in the case where trade and competitiveness effects induced by environmental regulation affect countries' relative economic performance. The context in which these issues are analysed relies on recent developments of game theory, industrial economics, international trade where imperfect competition and governments' strategic interactions are accounted for. Recognizing that traditional environmental policy tools are not sufficient to regulate the present environment--economy interactions leads to appraise the effects of more sophisticated policy mixes. In particular, policies to stimulate technological innovation, to regulate industrial markets, to offset negative trade effects are examined. Attention is also devoted to the issue of economic growth. Under which conditions is endogenous growth consistent with environmental protection? Which policy mix can loosen the traditional tradeoff between environment and growth? These are two of the many critical questions which are addressed, and which find very interesting, albeit preliminary, answers.

Learning about climate change and implications for near-term policy

Climate change is an issue of risk management. The most important causes for concern are not the median projections of future climate change, but the low-probability, high-consequence impacts. Because the policy question is one of sequential decision making under uncertainty, we need not decide today what to do in the future. We need only to decide what to do today, and future decisions can be revised as we learn more. In this study, we use a stochastic version of the DICE-99 model (Nordhaus WD, Boyer J (2000) Warming the world: economic models of global warming. MIT Press, Cambridge, MA, USA) to explore the effect of different rates of learning on the appropriate level of near-term policy. We show that the effect of learning depends strongly on whether one chooses efficiency (balancing costs and benefits) or cost-effectiveness (stabilizing at a given temperature change target) as the criterion for policy design. Then, we model endogenous learning by calculating posterior distributions of climate sensitivity from Bayesian updating, based on temperature changes that would be observed for a given true climate sensitivity and assumptions about errors, prior distributions, and the presence of additional uncertainties. We show that reducing uncertainty in climate uncertainty takes longer when there is also uncertainty in the rate of heat uptake by the ocean, unless additional observations are used, such as sea level rise.

© 2008 Springer

Lessons from Phase 2 compliance with the U.S. Acid Rain Program

The acid rain provisions of the 1990 Clean Air Act Amendments, included in Title IV, required fossil-fuel-fired electricity generating units to reduce sulfur dioxide (SO2) emissions by 50% in two phases. In the first, known as Phase I and extending from 1995 through 1999, generating units of 100 MWe of capacity and larger, having an SO2 emission rate in 1985 of 2.5 lbs. per million Btu (#/mmBtu) or higher, were required to take a first step and to reduce SO2 emissions to an average of 2.5 #/mmBtu during these transitional years. Phase II, which began in 2000 and continues indefinitely, expanded the scope of the program by including all fossil-fuel-fired generating units greater than 25 MWe and increased its stringency by requiring affected units to reduce emissions to an average emission rate that would be approximately 1.2 #/mmBtu at average annual heat or Btu input in 1985-87, and that would be proportionately lower for increased total fossil-fuel fired heat input.

Lessons from Phase 2 Compliance with the U.S. Acid Rain Program

The acid rain provisions of the 1990 Clean Air Act Amendments, included in Title IV, required fossil-fuel-fired electricity generating units to reduce sulfur dioxide (SO2) emissions by 50% in two phases. In the first, known as Phase I and extending from 1995 through 1999, generating units of 100 MWe of capacity and larger, having an SO2 emission rate in 1985 of 2.5 lbs. per million Btu (#/mmBtu) or higher, were required to take a first step and to reduce SO2 emissions to an average of 2.5 #/mmBtu during these transitional years. Phase II, which began in 2000 and continues indefinitely, expanded the scope of the program by including all fossil-fuel-fired generating units greater than 25 MWe and increased its stringency by requiring affected units to reduce emissions to an average emission rate that would be approximately 1.2 #/mmBtu at average annual heat or Btu input in 1985-87, and that would be proportionately lower for increased total fossil-fuel fired heat input.2

Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model

Marginal abatement cost (MAC) curves, relationships between tons of emissions abated and the CO2 (or GHG) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) are MAC relationships independent of what happens in other regions? (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from them? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO2-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. It would be a great convenience if a reduced-form response of a more complex model could be used to reliably conduct empirical analysis of climate change policy, but it appears that, at least as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated. Care is needed to derive MACs under conditions closely related to the policy under consideration. In such a circumstance they may provide approximate estimates of CO2 or GHG prices for a given policy constraint. They remain a convenient way to visualize responses to a range of abatement levels.

Appendix A: Data Tables (MS Excel file: 340 kB)
Appendix B: A Comparison of U.S. Marginal Abatement Cost Curves from a McKinsey & Co. Study with Results from the MIT EPPA Model

Market Power in International Carbon Emissions Trading: A Laboratoy Test

The prospect that governments of one or a few large countries, or trading blocs, would engage in international greenhouse gas emissions trading has led several policy analysts to express concerns that trade would be influenced by market power. The experiment reported here mimics a case where twelve countries, one of which is a large buyer (the mirror-image of a large seller), trade carbon emissions on an emissions exchange (a double-auction market) and where traders have quite accurate information about the underlying net demand. The findings deviate from those of the standard version of market power effects in that trade volumes and prices converge on competitive levels.

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