Climate Policy

Absolute vs. Intensity-Based Emission Caps

Cap-and-trade systems limit emissions to some pre-specified absolute quantity. Intensity-based limits, that restrict emissions to some pre-specified rate relative to input or output, are much more widely used in environmental regulation and have gained attention recently within the context of greenhouse gas (GHG) emissions trading. In this paper we provide a non-technical introduction to the differences between these two forms of emission limits. Our aim is not to advocate either form, but to elucidate the properties of each in a world where future emissions and GDP are not known with certainty. We argue that the two forms have identical effects in a world where future emissions and economic output (i.e., GDP) are known with certainty, and show that outcomes for marginal costs, abatement, emissions and welfare diverge only because of the variance of actual future GDP relative to its forecast expectation.

Achieving a Low Carbon Society

Climate change is perhaps the central challenge that faces humanity. If the concept of green growth is to be anything more than a mere rebranding of the concept of sustainability, then it must elucidate the relationship between economic activity and pollution and provide a more detailed economic account of it. The articles in this Special Issue focus on ways in which GHG emissions may be reduced while satisfying the increasing demand for energy: from global, technological or economic solutions, to sub-national, ï¬nancial or regulatory ones. Although the wide disparity in income between the least and most wealthy makes it difï¬cult to reach a consensus on the best way to achieve a low-carbon society, the scale and potential effects of climate change make it imperative that one is reached.

Adjusting to Policy Expectations in Climate Change Modeling: An Interdisciplinary Study of Flux Adjustments in Coupled Atmosphere-Ocean General Circulation Models

This paper surveys and interprets the attitudes of scientists to the use of flux adjustments in climate projections with coupled Atmosphere Ocean General Circulation Models. The survey is based largely on the responses of 19 climate modellers to several questions and a discussion document circulated in 1995. We interpret the responses in terms of the following factors: the implicit assumptions which scientists hold about how the environmental policy process deals with scientific uncertainty over human-related global warming; the different scientific styles that exist in climate research; and the influence of organisations, institutions, and policy upon research agendas. We find evidence that scientists' perceptions of the policy process do play a role in shaping their scientific practices. In particular, many of our respondents expressed a preference for keeping discussion of the issue of flux adjustments within the climate modeling community, apparently fearing that climate contrarians would exploit the issue in the public domain. While this may be true, we point to the risk that such an approach may backfire. We also identify assumptions and cultural commitments lying at a deeper level which play at least as important a role as perceptions of the policy process in shaping scientific practices. This leads us to identify two groups of scientists, 'pragmatists' and 'purists,' who have different implicit standards for model adequacy, and correspondingly are or are not willing to use flux adjustments.

Adjustment time, capital malleability, and policy cost

The cost of meeting Kyoto-style emissions reductions is heavily dependent on the malleability of an economy's stock of capital and the number of years available for adjustment. Each year of delay introduces more emission-producing activities that must be squeezed out of the system and shortens the time horizon for change, raising the carbon price required to produce the needed changes in capital structure. The MIT Emissions Prediction and Policy Assessment model is used to explore the effects of uncertainty in the degree of capital malleability in the short run, and to analyze how implied carbon prices vary depending on the time of credible commitment to emissions targets.

Air Quality Improvements and Carbon Dioxide Reduction Policies: A Method for Assessing Secondary Benefits

Allocation in the European Emissions Trading Scheme: Rights, Rents, and Fairness

A critical issue in dealing with climate change is deciding who has a right to emit carbon dioxide. Allocation in the European Emissions Trading Scheme provides the first in-depth description and analysis of the process by which rights to emit carbon dioxide were created and distributed in the European Union. This is the world's first large-scale experiment with an emission trading system for carbon dioxide and is likely to be copied by others if there is to be a global regime for limiting greenhouse gas emissions. The book consists of contributions from those who were responsible for putting the allocation into practice in ten representative member states and at the European Commission. The problems encountered in this process, the solutions found, and the choices they made, will be of interest to all who are concerned with climate policy and the use of emissions trading to combat climate change.

Allocation Issues in Greenhouse Gas Cap and Trade Systems

Prof. Gilbert Metcalf, a Research Associate of the MIT Global Change Program, testifies that enacting a carbon price through a greenhouse gas emissions cap and trade system will help the United States move to a carbon free economy in the most efficient manner possible. He argues that passing cap and trade legislation should be at the top of the political agenda for Congress and the Administration. (Hearing Schedule)

An Analysis of the European Emission Trading Scheme

An international emissions trading system is a featured instrument in the Kyoto Protocol to the Framework Convention on Climate Change, designed to reduce emissions of greenhouse gases among major industrial countries. The US was the leading proponent of emissions trading in the negotiations leading up to the Protocol, with the European Union initially reluctant to embrace the idea. However the US withdrawal from the Protocol has greatly changed the nature of the agreement. One result is that the EU has moved rapidly ahead, establishing in 2003 the Emission Trading Scheme (ETS) for the period of 2005-2007. This Scheme was intended as a test designed to help its member states transition to a system that would lead to compliance with their Kyoto Protocol commitments, which cover the period 2008-2012. The ETS covers CO2 emissions from big industrial entities in the electricity, heat, and energy-intensive sectors. It is a system that itself is evolving as allocations, rules, and registries were still being finalized in some member states late into 2005, even though the system started in January of that year. We analyze the ETS using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that a competitive carbon market clears at a carbon price of about 0.6 to 0.9 €/tCO2 (~2 to 3 €/tC) for the 2005-2007 period in a base run of our model in line with many observers' expectations who saw the cuts required under the system as very mild, but in sharp contrast to the actual history of trading prices, which have settled in the range of 20 to 25 €/tCO2 (~70 to 90 €/tC) by the middle of 2005. In various comparison exercises the EPPA model's estimates of carbon prices have been similar to that of other models, and so the contrast between projection and reality in the ETS raises questions regarding the potential real cost of emissions reductions vis-á-vis expectations previously formed based on results from the modeling community. While it is beyond the scope of this paper to reach firm conclusions on reasons for this difference, what happens over the next few years will have important implications for greenhouse gas emissions trading and so further analysis of the emerging European trading system will be crucial.

An Analysis of US Greenhouse Gas Cap-and-Trade Proposals Using a Forward-Looking Economic Model

We develop a forward-looking version of the recursive dynamic MIT Emissions Prediction and Policy Analysis (EPPA) model, and apply it to examine the economic implications of proposals in the US Congress to limit greenhouse gas (GHG) emissions. We find that shocks in the consumption path are smoothed out in the forward-looking model and that the lifetime welfare cost of GHG policy is lower than in the recursive model, since the forward-looking model can fully optimize over time. The forward-looking model allows us to explore issues for which it is uniquely well suited, including revenue-recycling and early action crediting. We find capital tax recycling to be more welfare-cost reducing than labor tax recycling because of its long-term effect on economic growth. Also, there are substantial incentives for early action credits; however, when spread over the full horizon of the policy they do not have a substantial effect on lifetime welfare costs.

An Approximate dynamic programming framework for modeling global climate policy under decision-dependent uncertainty

Analyses of global climate policy as a sequential decision under uncertainty have been severely restricted by dimensionality and computational burdens. Therefore, they have limited the number of decision stages, discrete actions, or number and type of uncertainties considered. In particular, two common simplifications are the use of two-stage models to approximate a multi-stage problem and exogenous formulations for inherently endogenous or decision-dependent uncertainties (in which the shock at time t+1 depends on the decision made at time t). In this paper, we present a stochastic dynamic programming formulation of the Dynamic Integrated Model of Climate and the Economy (DICE), and the application of approximate dynamic programming techniques to numerically solve for the optimal policy under uncertain and decision-dependent technological change in a multi-stage setting. We compare numerical results using two alternative value function approximation approaches, one parametric and one non-parametric. We show that increasing the variance of a symmetric mean-preserving uncertainty in abatement costs leads to higher optimal first-stage emission controls, but the effect is negligible when the uncertainty is exogenous. In contrast, the impact of decision-dependent cost uncertainty, a crude approximation of technology R&D, on optimal control is much larger, leading to higher control rates (lower emissions). Further, we demonstrate that the magnitude of this effect grows with the number of decision stages represented, suggesting that for decision-dependent phenomena, the conventional two-stage approximation will lead to an underestimate of the effect of uncertainty.

Search form

Pages