Improving Climate Change Policy

1. Improving Climate Change Policy RAYMOND de Oliveira; Andy Zhang; Francesca Audia

2. Climate Change Science Indicators Emissions Scenario Climate model Economic costs Cost uncertainties

3. “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) Indicators of Climate Change

4. 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. Emission Scenarios

6. Climate Model Calculates atmospheric greenhouse gas concentrations from emission scenarios Calculates radiative forcing from concentrations Calculates global temperature increase from radiative forcing

7. 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. Radiative Forcing

8. IPCC 2007 Climate Model Prediction

9. IPCC 2007 Prediction of Climate Change Impacts on Disasters

10. 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

11. 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

12. Political Failures Cost Analysis BIAS Kyoto Protocol CDM SCM JCM

13. Cost Analysis Bias • Ambiguous abatement benefits leads to policymakers only accepting monetary cost analysis • Much less consideration for threats such as increased infectionsdue to ambiguous monetary quantification • Some nations (e.g. U.S. and China) better off than others (higher infrastructural resilience) from climate change

14. 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

15. 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 goalwhile 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

16. 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)

17. 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 (Guigon2010)

18. 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

19. 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

20. Market Failures Greenhouse Gas Externality Tragedy of the Global Commons the Free-Rider issue Inter-temporal decision making Technological Growth Theory

21. 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

22. 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

23. 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

24. Policy Options Marginal analysis model Cap and trade Carbon tax research tax incentives

25. 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

26. 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

27. 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: • Shifts right, along the MACC curve. Not socially optimum • Effectiveness debated. Emissions grew in EU despite ETS • Higher energy cost; increased cost of living • Affects export competitiveness • Bigger companies can emit more; centralizes emissions

28. 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: • GHG heavy production may simply go to countries without a carbon tax and with less environmental regulations, resulting in carbon leakage over 100%. • Carbon tax loopholes may significantly reduce tax efficiency • Political hindrances to a new tax. • Moves along the MACC curve instead of shifting it. • A global carbon tax would significantly impact small developing countries and their development. “International fairness” • But one country’s carbon tax is ineffectual in terms of the world’s climate change.

29. 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 technologyresearch • 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

30. 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

31. Policy Suggestion Policy aim Policy theory Part 1: JCM Part 2: abatement research tax credit Policy effects Obstacles to implementation Policy flexibility

32. 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

33. 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

34. Policy Solution– Joint Credit Mechanism • Improvement over CDM, addressing concerns • Decentralized, 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

35. Joint Credit Mechanism potential concerns • Some CDM projects have been exploitative or harmful. • Industrial agriculture, large scale tree plantations • High transaction costs lower abatement efficiency • Additionality ambiguity: • must measure amount of emissions abated due to project that would not have been abated under “business as usual” circumstances. • Lack of CDM projects in Africa • Lack of US international commitment to abatement

36. Addressing Concerns & Implementation • Japan’s model of decentralized JCM allows for local control over what ventures are validated and authorized through the Joint Committee (JC) mechanism. • Local authorities can change or modify a hazardous project • JC sets rules and guidelines and manages the entire process. Contains representatives from developed and developing country. • Circumvents UN processes, thereby reducing transaction and opportunity costs, improving policy efficiency. • 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) • 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.

37. 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

38. 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

39. 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 fuelrevolution. • Exporting of Clean Air Act standards • Indirectly influence other nationalities • Lead by example • Increases the indirect abatement effect of our policy

40. 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

41. 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.