Too Good To Be True?

Global climate change is a serious environmental threat, and sound public policies are needed to address it effectively and sensibly.

There is now significant interest and activity within both the U.S. Administration and the U.S. Congress to develop a meaningful national climate policy in this country. (If you're interested, please see some of my previous posts: "Opportunity for a Defining Moment" (February 6, 2009); "The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey" (May 27, 2009); "Worried About International Competitiveness? Another Look at the Waxman-Markey Cap-and-Trade Proposal" (June 18, 2009); "National Climate Change Policy: A Quick Look Back at Waxman-Markey and the Road Ahead" (June 29, 2009). For a more detailed account, see my Hamilton Project paper, A U.S. Cap-and-Trade System to Address Global Climate Change.)

And as we move toward the international negotiations to take place in December of this year in Copenhagen, it is important to keep in mind the global commons nature of the problem, and hence the necessity of designing and implementing an international policy architecture that is scientifically sound, economically rational, and politically pragmatic.

Back in the U.S., with domestic action delayed in the Senate, several states and regions in the United States have moved ahead with their own policies and plans. Key among these is California's Global Warming Solutions Act of 2006, intended to return the state's greenhouse gas (GHG) emissions in 2020 to their 1990 level. In 2006, three studies were released indicating that California can meet its 2020 target at no net economic cost. That is not a typographical error. The studies found not simply that the costs will be low, but that the costs will be zero, or even negative! That is, the studies found that California's ambitious target can be achieved through measures whose direct costs would be outweighed by offsetting savings they create, making them economically beneficial even without considering the emission reductions they may achieve. Not just a free lunch, but a lunch we are paid to eat!

Given the substantial emission reductions that will be required to meet California's 2020 target, these findings are ­- to put it mildly - surprising, and they differ dramatically from the vast majority of economic analyses of the cost of reducing GHG emissions. As a result, I was asked by the Electric Power Research Institute - along with my colleagues, Judson Jaffe and Todd Schatzki of Analysis Group - to evaluate the three California studies.

In a report titled, "Too Good To Be True? An Examination of Three Economic Assessments of California Climate Change Policy," we found that although some limited opportunities may exist for no-cost emission reductions, the studies substantially underestimated the cost of meeting California's 2020 target -- by omitting important components of the costs of emission reduction efforts, and by overestimating offsetting savings that some of those efforts yield through improved energy efficiency.

In some cases, the studies focused on the costs of particular actions to reduce emissions, but failed to consider the effectiveness and costs of policies that would be necessary to bring about those actions. Just a few of the flaws we identified lead to underestimation of annual costs on the order of billions of dollars. Sadly, the studies therefore did not and do not offer reliable estimates of the cost of meeting California's 2020 target.

This episode is a reminder of a period when similar studies were performed by the U.S. Department of Energy at the time of the Kyoto Protocol negotiations. Like the California studies, the DOE (Interlaboratory Work Group) studies in the late 1990s suggested that substantial emission reductions could be achieved at no cost. Those studies were terribly flawed, which was what led to their faulty conclusions. I had thought that such arguments about massive "free lunches" in the energy efficiency and climate domain had long since been laid to rest. The debates in California (and some of the rhetoric in Washington) prove otherwise.

While the Global Warming Solutions Act of 2006 sets an emissions target, critical policy design decisions remain to be made that will fundamentally affect the cost of the policy. For example, policymakers must determine the emission sources that will be regulated to meet those targets, and the policy instruments that will be employed. The California studies do not directly address the cost implications of these and other policy design decisions, and their overly optimistic findings may leave policymakers with an inadequate appreciation of the stakes associated with the decisions that lie ahead.

On the positive side, a careful evaluation of the California studies highlights some important policy design lessons that apply, regardless of the extent to which no-cost emission reduction opportunities really exist. Policies should be designed to account for uncertainty regarding emission reduction costs, much of which will not be resolved before policies must be enacted. Also, consideration of the market failures that lead to excessive GHG emissions makes clear that to reduce emissions cost-effectively, policymakers should employ a market-based policy (such as cap-and-trade) as the core policy instrument.

The fact that the three California studies so egregiously underestimated the costs of achieving the goals of the Global Warming Solutions Act should not be taken as indicating that the Act itself is necessarily without merit. As I have discussed in previous posts, that judgment must rest - from an economic perspective - on an honest and rigorous comparison of the Act's real benefits and real costs.

Comments

[research]

"Also, consideration of the market failures that lead to excessive GHG emissions makes clear that to reduce emissions cost-effectively, policymakers should employ a market-based policy (such as cap-and-trade) as the core policy instrument."

The Largest exisint carbon cap and tradeing system just CRASHED!

ACES would be the largest new derivatives market in history, with Credit Default swaps even.

Dump ACES.

1$ per ton carbon tax.

Plow it into 3 cent rooftop solar and Waste BioChar .see my profile.

[Overtone]

The love affair with the automobile may open a surprising path to reducing the need for fossil fuels.

Revolutionary new technology appears to make possible electric cars that need no recharge - as well as hybrid engines that can be fueled with one gallon of water for each thousand miles of driving.

See the article: 4 Steps to Revive the Auto Industry and the Economy on the website: www.aesopinstitute.org

This outlines breakthroughs leading to cars and trucks that need no fossil fuel or recharge. Later, more advanced versions will become power plants when parked, wirelessly selling electricity to the local utility.

The science is not yet in the textbooks and will understandably be greeted with skepticism.

However, independent laboratory validation of one remarkable breakthrough has recently taken place at Rowan University. It produced far more heat than can readily be explained, clearly suggesting a new source of energy is involved. The experiments can readily be repeated at national laboratories and better known universities.

These first steps began the process of proving that new technology can allow a barrel of water to replace 200 barrels of oil!

Radically new technologies will seductively let the love affair with vehicles change much of what is currently believed about energy.

To learn more, see: www.chavaenergy.com Look under the heading HOW? Read about magnetic generators and a Self Powered Internal Combustion Engine - SPICE.

We can leave fossil fuels behind - and at much lower cost than is presently imagined!

[research]

Wait til it's proved.

[PlaceboStudman]

Climate change and Energy are going to be make it or break it issues with me now. With the Health Care battle lost as Obama bows and kisses the feet of Republicans, Blue Dogs, and theiir corporate insurance and BigPharma masters, climate change and energy have now, in my mind, become the essential key in the *TRUE* Health Care debate. These laws and policies nationally and internationally can do one thousand times more to save lives and keep people healthy than all the insurance reform in the world. Removing the silver bullet of many of the reasons people become ill in the first place really is the first step in stopping the bleeding of our economy, and of our very lives

[cybexg]

I linked several studies to a reply to you that showed how many thousands of deaths per year were caused by lack of insurance. Say what you will but only willing to see an issue from one side often precludes seeing the solution.

[PlaceboStudman]

Apples and oranges. Whether its death from lack of insurance or death from good insurance but bad care, it's still death, apples and oranges, but both fruit. The deaths from lack of insurance HAVE voices in this health care fight. The voices of deaths from poor quality care do not have voices speaking on their (and soon to be my) behalf