Climate Change: Conceptual Approaches and Policy Tools
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Climate Change: Conceptual Approaches and
Policy Tools
-name redactedSpecialist in Energy and Environmental Policy
August 29, 2011
Congressional Research Service
7-....
www.crs.gov
R41973
CRS Report for Congress
Prepared for Members and Committees of Congress
Climate Change: Conceptual Approaches and Policy Tools
Summary
Congress has, over the past three decades, authorized and funded federal programs to improve
understanding of climate changes and their implications. Climate changes have potentially large
economic and ecological consequences, both positive and negative, which depend on the rapidity,
size, and predictability of change. Some of the impacts of past change are evident in shifting
agricultural productivity, forest insect infestations and fires, shifts in water supply, recordbreaking summer high temperatures, and coastal erosion and inundation.
People and natural systems respond to climate changes regardless of whether the government
responds. Over time, the consequences of climate change for the United States and the globe will
be influenced by choices made or left to others by the U.S. Congress.
Different factors contribute to climate change, their contributions depending on the time periods
and geographic locations under examination. Current scientific evidence best supports rising
atmospheric concentrations of “greenhouse gases” (GHG) (particularly carbon dioxide, methane,
nitrous oxides) and other air pollutants as having driven the majority of global average
temperature increase since the late 1970s. The increase in concentrations is due almost entirely to
GHG emissions from human activities. Hence, the policy debate has focused on whether and how
to abate GHG emissions from human-related activities. Locally, human-related air pollution,
irrigation, the built environment, land use change, and depletion of ozone in the stratosphere may
be more important but have small overall effect on global average temperature.
Policy proposals take different approaches to setting goals or managing climate change-related
risks. This report describes four strategies for setting climate change policies: (1) research and
wait-and-see, (2) science-based goal setting, (3) economics-based policies, and (4)
incrementalism or adaptive management. Each may take into account the concerns, values, and
skepticisms of some constituencies, but each also has limitations. It is unclear whether any single
conceptual approach could cover all elements of the policy debate, though hybrid approaches may
help to build political consensus over whether and how much policy intervention is appropriate.
If climate change merits federal action, a variety of generic policy tools may be available (some
in use already) to achieve policy goals:
•
regulatory, including market-based, tools to reduce GHGs;
•
distribution of potential revenues from GHG programs;
•
non-regulatory tools that help markets work more efficiently;
•
tools to stimulate technological change;
•
options to ease the economic transition to a lower GHG economy;
•
instruments to encourage international actions; and
•
tools to stimulate adaptation to climate change.
Analysts have elucidated the potential usefulness and limitations of each option. Many experts
have concluded that, to achieve a given policy goal, strategies using complementary policy tools
can increase cost-effectiveness, alleviate burdens on particular constituencies, and address
additional concerns of policy-makers. This report seeks to support Congress as it debates and
modifies the mix of federal programs that may influence the climate or adaptation to its changes.
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Climate Change: Conceptual Approaches and Policy Tools
Contents
Choices Ahead for Policy Makers ................................................................................................... 1
Conceptual Policy Approaches ........................................................................................................ 4
Research and “Wait-and-See”.................................................................................................... 4
Science-Based Goals ................................................................................................................. 5
Economics-Based Approaches ................................................................................................ 10
Hedging or Insurance Policies........................................................................................... 13
Cost-Effectiveness and Other Concepts ............................................................................ 14
Incrementalism,“Muddling Through,” and Adaptive Strategies ............................................. 14
The Policy Tool Box ...................................................................................................................... 16
Regulatory and Market Tools to Reduce Greenhouse Gases................................................... 16
Source-by-Source Regulations.......................................................................................... 17
Market Mechanisms .......................................................................................................... 17
Design Choices in Cap-and-Trade Programs .................................................................... 19
Distributing the Revenues from Emission Fees or Sales .................................................. 21
Market Facilitation Tools......................................................................................................... 21
Tools to Stimulate Technological Change ............................................................................... 22
Options to Ease the Economic Transition................................................................................ 25
International Policy Tools........................................................................................................ 26
Tools to Stimulate Adaptation to Climate Change................................................................... 26
Figures
Figure 1. Rates of Average Annual Temperature Change, 1901-2005............................................. 1
Figure 2. A Science-Centric Approach to Policy ............................................................................. 6
Figure 3. An Economics-Centric Approach to Policy.................................................................... 11
Tables
Table 1. GHG Emissions Levels for Different Levels of Stabilization of Atmospheric
Concentrations and the Associated Equilibrium Global Mean Temperature Increases ................ 7
Contacts
Author Contact Information........................................................................................................... 27
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Climate Change: Conceptual Approaches and Policy Tools
Choices Ahead for Policy Makers
Regardless of the public conversation, the Earth’s climate is changing. Changes are exhibited in
observations of average temperatures over land and in the oceans, melting glaciers and ice caps,
shifting precipitation patterns, modified growing seasons, shifting distributions of plants and
animals, and a variety of additional observations. (Many but not all elements of climate show
distinct trends.) Regional climates in the United States have shifted as well (Figure 1).1
A variety of factors contribute to the changes, their weights differing depending on the time
periods and geographic locations under examination. In public media, the controversy over causes
may appear much greater than the broad scientific agreement that exists: the scientific evidence
best supports rising atmospheric concentrations of “greenhouse gases” (GHG) (particularly
carbon dioxide, methane, nitrous oxides) and other air pollutants as having contributed to the
majority of global average temperature increase since the late 1970s. (See box.) The rise of GHG
concentrations is due to emissions from human-related activities.
Figure 1. Rates of Average Annual Temperature Change, 1901-2005
in degrees Fahrenheit per century
Source: National Climate Data Center, National Oceanic and Atmospheric Administration, Department of
Commerce, as provided by the Environmental Protection Agency at http://www.epa.gov/climatechange/science/
recenttc_tempanom.html.
1
For analysis of climate change observations and science, see Board on Atmospheric Sciences and Climate. Advancing
the Science of Climate Change. Washington DC: National Research Council, 2010, or CRS Report RL33849, Climate
Change: Science and Policy Implications, by (name redacted).
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Other air pollution, irrigation, the built environment, and depletion of ozone in the stratosphere
may be more important for changing temperature and/or precipitation patterns in some locations
over the past 30 years but have small overall effect on global average temperature. For short
periods, such as a few years, volcanic eruptions and solar cycles may have noticeable influence.
Over time scales of hundreds to tens of thousands of years, cycles of the Sun’s radiation and the
features of the Earth’s orbit and wobble have dominated, triggering effects amplified by
feedbacks in the climate system and visible in glacial cycles.
Regardless of causes, climate changes have potentially large economic and ecological
consequences, both positive and negative, which depend on the rapidity, size, and predictability
of change. Some of the impacts of past change are evident in shifting agricultural productivity,
forest insect infestations and fires, shifts in water supply, record-breaking summer high
temperatures, and coastal erosion and inundation.2 People and natural systems respond to climate
changes regardless of whether the government responds. Over time, the consequences of climate
change for the United States and the globe will be influenced by choices made or left to others by
the U.S. Congress.
Sound Science Does Not Offer Proof
As scientists may point out, “there is no such thing as a scientific proof. Proofs exist only in mathematics and logic,
not in science…. The primary criterion and standard of evaluation of scientific theory is evidence, not proof.... The
currently accepted theory of a phenomenon is simply the best explanation for it among all available alternatives.”3
Normal scientific methods aim at disproving a hypothesis; if evidence cannot disprove a hypothesis, it generally
buttresses confidence in that hypothesis. The more a hypothesis has been challenged and remains standing in the face
of growing evidence, the greater the scientific confidence in it.
For policy-makers seeking certainty about whether climate change is occurring and how “bad” it may be,
understanding that science will not provide them now or later with “proof” may be an important concept. Decisions
to act or not to act will be made in the context of accumulated and debated evidence of risks and uncertainties.
Congress has engaged, over the past three decades, in authorizing and funding federal programs
to improve understanding of climate changes (past and predicted) and their implications. Science
programs predominated prior to 1990. In 1992, the Senate gave its advice and consent to U.S.
ratification of the United Nations Framework Convention on Climate Change (UNFCCC),4
effectively agreeing to its objective:
... to achieve ... stabilization of greenhouse gas concentrations in the atmosphere at a level
that would prevent dangerous anthropogenic interference with the climate system. Such a
level should be achieved within a time-frame sufficient to allow ecosystems to adapt
naturally to climate change, to ensure that food production is not threatened and to enable
economic development to proceed in a sustainable manner.
2
See, for example, Karl, Thomas R., and Thomas C. Peterson. Global Climate Change Impacts in the United States.
Cambridge University Press, 2009.
3
See, for example, the discussion in Kanazawa, Satoshi. “Common misconceptions about science I: ‘Scientific proof.’”
Psychology Today, November 16, 2008. http://www.psychologytoday.com/blog/the-scientific-fundamentalist/200811/
common-misconceptions-about-science-i-scientific-proof.
4
138 CONG. REC. 33521-27 (Oct. 7, 1992).
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This commitment is legally binding, though not practicably enforceable, and has guided some
subsequent federal actions, including the first U.S. climate action plan in 1992, published under
President George H. W. Bush.5 Since the 1990s, some federal programs and many legislative
proposals have sought to slow greenhouse gas (GHG)-induced climate change through regulatory,
voluntary, and financial efforts to abate emissions. Many such proposals remain controversial and
few have been enacted. In 2007, the Supreme Court ruled in Massachusetts v. EPA that the Clean
Air Act’s (CAA’s) “sweeping” definition of “air pollutant” embraces “any air pollutant ...
including any physical, chemical ... substance or matter which is emitted into or otherwise enters
the ambient air.”6 Also, the Court ruled that EPA could not use policy considerations in deciding
whether to regulate GHG emissions; EPA can avoid taking further action “only if it determines
that greenhouse gases do not contribute to climate change or if it provides some reasonable
explanation as to why it cannot or will not exercise its discretion.” Following this decision, EPA
found that GHG-induced climate change endangers human health and welfare and has acted to
promulgate regulations to control six GHG.7
Most experts, and also the Obama Administration, would prefer new legislation strategically
addressing GHG abatement, rather than authorities under the CAA, as a policy vehicle to address
climate change. The 111th Congress debated bills that would have established comprehensive
climate change policy, and that would have included new regulatory authority to cap emissions of
GHG and to allow emissions sources the flexibility to trade the emissions allowances like a
commodity (“cap-and-trade”). Debate in the 112th Congress has focused more on restricting
authorities of the EPA to control GHG as pollutants under the CAA, or to reduce or eliminate
funding for climate change-related federal programs.
New federal programs (especially in the Department of the Interior) aimed at planning for
adaptation to climate change, regardless of its cause, have emerged in the 2000s. Many agencies
and some in Congress consider projections of impacts and preparation to be among the
stewardship responsibilities of the federal government for publicly held resources that may be
affected by climate change, as well as for protecting human health and general welfare. Some of
those in Congress who consider such programs to be warranted may not, however, fully support
Administrative proposals for funding, in light of budget pressures or concerns about strategies or
program design.8
Underlying efforts explicitly to address climate change are other programs enacted for other
purposes that influence U.S. contributions and vulnerabilities to climate change. For example,
regulations and financial incentives for agriculture, energy, and infrastructure shape these sectors’
emissions of GHG, technological opportunities, and vulnerabilities in the face of changing
seasonality, water availability and temperatures, inundation of flood plains, winds, and other
climate-linked phenomena.
5
Council on Environmental Quality (CEQ). “U.S. National Action Plan for Global Climate Change.” Department of
State Publication 10026, December 1992.
6
See CRS Report R40506, Cars, Trucks, and Climate: EPA Regulation of Greenhouse Gases from Mobile Sources, by
(name redacted) and (name redacted), and CRS Report RS22665,
The Supreme Court’s Climate Change
Decision: Massachusetts v. EPA, by (name redacted).
7
See http://www.epa.gov/climatechange/endangerment.html.
8
See, for example, H.Rept. 112-151 on H.R. 2584 RH (7/22/11), the appropriations bill for Interior and related
agencies, in language concerning appropriations for the Fish and Wildlife Service, p. 25.
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Ongoing public concerns9 and international pressures for U.S. collaboration to mitigate and adapt
to climate change are likely to keep climate change on Congress’s legislative agenda for the
foreseeable future. To support congressional considerations, this report outlines (1) conceptual
approaches to setting goals for policies, and (2) brief descriptions of the principal “policy tools”
that could be wielded to achieve policy goals.10
Conceptual Policy Approaches
Neither domestically nor internationally have policy-makers converged on a common approach to
setting goals or managing climate change-related risks. Some do not consider that there are
sufficient risks of climate change to merit governmental intervention. For policy-makers who
may wish to consider addressing climate change, this section articulates four competing strategies
for setting climate change policies: (1) research and wait-and-see, (2) science-based goal setting,
(3) economics-based policies, and (4) incrementalism11 or adaptive management.
Research and “Wait-and-See”
For several decades, policy-makers have been aware of the large range of projections of GHGinduced climate change and adverse impacts, as well as of the potentially large costs associated
with avoiding GHG-induced climate change. In the face of these uncertainties, arguably the
primary strategy followed by the U.S. federal government has been to support research and to
“wait-and-see.” Proponents assume that scientific research will yield more certainty about climate
change12 that would help make better policy decisions, and yield answers in a timeframe
consistent with making effective policy decisions. They may also assume that investment in
technology research will reduce GHG abatement costs, making it cheaper to reduce emissions
later. Following this approach, the U.S. government has invested many billions of dollars in
climate research and “clean” technologies over the past two decades, with a small fraction
allocated to policies that directly mitigate the risks or promote adaptation to them.13
9
As examples of public opinion and activism, see at Gallup, “In U.S., Concerns about Global Warming Stable at
Lower Levels,” at http://www.gallup.com/poll/146606/concerns-global-warming-stable-lower-levels.aspx; Hubbard,
Howard J., and Ken Hackett. “Letter to Representatives Harold Rogers and Norm Dicks and the House Appropriations
Committee.” Committee on International Justice and Peace, and Catholic Relief Services, July 29, 2011; and U.S.
Chamber of Commerce. “U.S. Chamber Policy Priorities for 2011, Energy and the Environment,” 2011.
10
Most congressional focus has been on policies regarding GHG emissions, and this report gives most emphasis to
corresponding policy options. This emphasis is not intended to suggest relative priorities between GHG mitigation and
adaptation to climate change.
11
Incrementalism is sometimes known as ”muddling through,” characterized in Lindblom’s 1959 “The Science of
‘Muddling Through’” Lindblom, Charles E. “The Science of ‘Muddling Through.’” Public Administration Review 19,
no. 2 (April 1, 1959): 79-88). The term is not meant to be derogatory, though it may be used as such by some people.
12
See, for example, “The Climate Change Research Initiative” at http://www.climatescience.gov/about/ccri.htm. It
says, “On June 11, 2001, the President announced that his administration would ‘establish the U.S. Climate Change
Research Initiative to study areas of uncertainty [about global climate change science] and identify priority areas where
investments can make a difference.’”
13
CRS Report RL33817, Climate Change: Federal Program Funding and Tax Incentives, by (name redacted).
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Some scientists and advocates for emissions abatement action have welcomed the resources for
research, but also expressed the likelihood that research may well widen, not narrow,
uncertainties. No matter how much is invested in research, critical uncertainties are likely to
remain. Some people have argued that research cannot provide “right” policy answers and that
this strategy constitutes avoidance of difficult decisions. In contrast, others have pointed to
analysis that wrong actions taken in the context of uncertainties may result in unnecessary costs.
Some have suggested that economic conditions in the future may make addressing climate change
more affordable than the present: increasing incomes and improving technologies could make it
easier for future generations to pay to address climate change than for people today.
Research has made significant scientific progress over the past three decades. Still, it may be
easier to argue that uncertainties may now be better characterized but not narrowed; some may
have widened. It is unclear that further research within the next decade or two will significantly
narrow crucial uncertainties, such as prediction of precipitation patterns over the next 50 years
(needed to estimate climate change risks, such as impacts on costs of agricultural production or
flood control, as examples). If over that period GHG emissions continue to rise, future GHG
policies would need to make greater and more rapid reductions in order to avoid any particular
level of risk reduction. Federally supported research also has made new technologies available
and reduced the costs of others. The lowering of technology costs during that period may or may
not offset the added costs of starting later, with greater, more rapid GHG reductions to achieve a
given level of risk reduction.
Science-Based Goals
Some advocates propose a science-centric approach, looking to physical or biological criteria to
identify appropriate policy goals. This assumes that science alone can provide an objective
standard of a “safe” or “tolerable” level or rate for climate change, or at least an inflection point
beyond which the projected damages of climate change may rise more steeply. Proponents of this
approach may look to past rates of temperature change, past (i.e., pre-industrial) atmospheric
concentrations of GHG, or indicators of ecosystem adaptability, for identifying the policy goal.
Typically, the science-based approach draws on the estimated relationships between GHG
emissions, GHG atmospheric concentrations, global average temperature changes, and projected
impacts of climate change for identifying equivalent targets across these different parameters
(Figure 2 and Table 1).
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Figure 2. A Science-Centric Approach to Policy
Source: CRS.
Note: This is a simple model of a far more complex process.
Table 1 summarizes estimates of the amount that climate would change (Column 3, measured as
the increase in the global mean temperature above the preindustrial levels) if GHG concentrations
in the atmosphere were to rise to different levels (Column 1) and then stabilize there. CO2
concentrations in 2011 are about 392 parts per million (ppm). GHG levels (Column 2, converted
to CO2-equivalents and added) are about 450 ppm. Today’s concentrations (Columns 1 and 2) are
comparable to the first level, but are projected to continue to rise indefinitely unless strong policy
inducements reduce emissions eventually to net zero.14 The estimates indicate that
•
higher GHG concentrations would be associated with higher projected
temperature increases;
•
allowing GHG concentrations to rise higher would allow later abatement
action—a delay in the years by which emissions would have to peak and then
decline in order to stabilize concentrations at a given level;
•
allowing higher GHG concentrations would allow high GHG emissions
compared to emissions in the year 2000.
14
In other words, emissions could rise as long as removals from the atmosphere increase to compensate, making
emissions minus removals net out to zero.
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Table 1. GHG Emissions Levels for Different Levels of Stabilization of Atmospheric
Concentrations and the Associated Equilibrium Global Mean Temperature Increases
(using one “best estimate” of “climate sensitivities,” not a range )
Global mean
temperature
increase above
pre-industrialb
(degrees F)
Peak Year of
CO2
emissionsc
Change in
global CO2
emissions in
2050 (as % of
2000
emissions)d
CO2
concentration
(ppm)a
CO2equivalent
concentration
(ppm)
Global mean
temperature
increase above
pre-industrialb
(degrees C)
350-400
445-490
2.0-2.4
3.6-4.3
2000-2015
-85 to -50
400-440
490-535
2.4-2.8
4.3-5.0
2000-2020
-60 to -30
440-485
535-590
2.8-3.2
5.0-5.8
2010-2030
-30 to +5
485-570
590-710
3.2-4.0
5.8-7.2
2020-2060
+10 to +60
570-660
710-855
4.0-4.9
7.2-8.8
2050-2080
+25 to +85
660-790
855-1130
4.9-6.1
8.8-11.0
2060-2090
+90 to +140
Source: IPCC, Working Group 1 Report, Table SPM.5: “Characteristics of post-TAR stabilization scenarios.”
Notes: The IPCC notes that, due to expected positive feedbacks in the climate system, stimulated by initial
temperature increases, the emission reductions to meet a given stabilization target may be under-estimated.
CO2 concentrations in 2010 reached about 390 ppm.
a.
ppm means parts per million of volume.
b.
Assuming a “best estimate” climate sensitivity of 3oC. In other words, these estimates use a relationship
that a doubling of CO2 concentrations would result in a long-term equilibrium increase of 3oC (5.4oF) of
global mean temperature above pre-industrial temperature. The climate sensitivity is usually derived from
the output of different climate models, as a means of comparison, not as an assumed input to the models.
(Some simple models use this parameter as an input, in order quickly to replicate the results of the very
complex climate models used for the IPCC scientific assessments, which can take months for one
simulation.) Using the range of estimated climate sensitivities of 2o to 4.5o would yield a much wider range
of emissions, concentrations, and temperature increases. Some climate “skeptics” argue that the climate
sensitivity is more like 1oC, due to stronger negative feedbacks than in climate model processes. Also, the
timeframe in which a projected temperature increase would occur varies. Generally, the lowest CO2
concentrations may occur within a few years and the resulting temperature increase within a few decades,
while the higher CO2 concentrations and temperature increases would likely take decades to occur.
c.
The “peak year” for CO2 emissions is from models that try to estimate a “least cost” pathway for reducing
GHG emissions to achieve a given long-term target (i.e., for the year 2050). These modeled pathways are
based on input assumptions of how quickly economies may grow, amounts and types of fuel use, efficiencies
of technologies, etc. The assumption is that later peaking would raise costs of achieving a target, if the target
remains achievable.
d.
Ranges correspond to the 15th and 85th percentiles of the distribution of scenarios.
Based on the kinds of estimates in Table 1, recent policy debates have included the following
proposals for science-centric policy targets:
•
preventing increases of global temperature that exceed 1.5oC or 2oC above 1990
levels;
•
stabilizing atmospheric GHG concentrations at or below 350, 450, or 550 ppm
(with current CO2 concentrations at about 392 ppm);
•
setting maximum GHG emission levels or “caps” (typically with an implicit
concentration or temperature target) that would be progressively reduced, such as
a cap by 2020 on the GHG emissions of industrialized countries at 30% below
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their 1990 levels, or a global GHG emissions cap at 50% below 1990 levels by
2005; or
•
setting years by which the emissions or some or all countries would peak and
then decline.
A science-centric approach is embedded in the international negotiating framework. Countries
agreed in the United Nations Framework Convention on Climate Change to an objective of
avoiding “dangerous” climate change, often characterized as avoiding a particular temperature
increase (first bullet above); negotiations have tended to focus on reducing emissions to levels
compatible with achieving that objective of avoiding “dangerous” change. The U.S. congressional
debate on climate change strategy has focused most strongly on percentage-reduction targets for
GHG emissions and on which policy tools to use rather than debating what science-based policy
goals might be.15
There are many challenges to using primarily science to set climate change policy targets. First,
differing degrees of confidence in scientific findings affects different peoples’ willingness to take
actions. Arguably, much of the U.S. public debate has been about whether to have confidence in
the consensus16 of climate change scientists.
Second, policy targets are easiest to communicate with simple metrics, but simple metrics may
not clearly reflect the many complex dimensions of climate science. For example, although global
average temperature is a common proxy for climate change (“global warming”), many risks may
be more closely tied to other dimensions, such as changes in local temperature extremes, time of
last frost, maximum spring river flow, storm severity, or sea levels. Other impacts may depend
strongly on the changing character of precipitation, which may increase or decrease at different
locations and times, more than on temperature change. Metrics alternative to global average
temperature change are more difficult to characterize as policy targets, and averages may not
correlate with adverse impacts.
Third, scientists, economists, and other experts differ in their views of which climate changes and
impacts are important for setting policy. For example, should decisions emphasize what is
happening (or not happening) now, or give weight to the distant impacts over many centuries of
possible melting of most of Antarctica? Or, is it practical to consider that the Earth’s biomes17
may shift and reorganize substantially over coming decades, when the full impacts of such
changes may be impossible to predict? Some people may not weigh impacts occurring outside
their state or country as heavily as those at home. Some may give more weight to impacts on
humans than on other species or landscapes. Science does not offer tools for handling such policy
considerations.
15
Occasionally, alternative policy formulations have surfaced in domestic and international proposals, such as
technology performance standards or levying equivalent carbon fees across countries, though support for these
generally has been low.
16
According to several dictionaries, “consensus” may mean “general agreement” or “judgment arrived at by most of
those concerned,” or may mean unanimity. (Merriam-Webster Dictionary, online. 2011.)
17
“Biomes” are the scientific classification of the Earth’s major ecological communities, “classified according to the
predominant vegetation and characterized by adaptations of organisms to that particular environment” according to
Campbell, N.A. 1996. Biology, 4th Edition. The Benjamin/Cummings Publishing Company, Inc., Menlo Park,
California.
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Fourth, policy-makers and stakeholders have very different preferences for accepting different
risks and their willingness to accept risks.18 As a 2011 National Research Council report states:
It should be emphasized that choosing among different targets is a policy issue rather than a
strictly scientific one, because such choices involve questions of values, e.g., regarding how
much risk to people or to nature might be considered too much.19
Sometimes, scientific guidance for limits is available if there are thresholds above which adverse
effects begin to occur or the rate of increase of adverse effects becomes more rapid or
irreversible. These are called “critical thresholds” or “tipping points.” Scientists have been
examining a host of potential critical thresholds in the climate system: they exist in many
ecological systems and could be catastrophic for some populations or systems, or possibly on a
global scale (e.g., if the Amazon rainforest were to collapse and shift to a deciduous forest or
savannah system). The effects of CO2 emissions on ocean acidification, though not “climate
change,” may present thresholds with greater scientific certainty for setting policies than CO2
effects on temperature. (See text box.20)
Ocean Acidification as a Possible Scientific Guide for CO2 Limits
The chemistry of the oceans is also being modified by GHG emissions. The oceans absorb 25%-40% of the carbon
dioxide (CO2) emitted annually. This helps remove CO2 from the atmosphere, but has led to an increase of the
oceans’ acidity by about 30% over the past 150 years. This unprecedented trend, if it continues, could lead to
profound biological and physical impacts—with implications for human dependence on the oceans for food and
livelihoods. The U.S. Congress has not addressed CO2 emissions abatement specifically to avoid ocean acidification,
though the relationship between emissions and acidification is clear and the risks potentially easier to quantify than
climate change.
For some, appropriate GHG emissions limits may be tied to assessment of technological
feasibility (and technology costs). While technologies exist today to begin a trajectory of major
GHG reductions, targets that would stabilize GHG concentrations would require development and
deployment of new technologies over the longer term. Some congressional proposals have aimed
at promoting new technology development and market penetration, though not with a stated
quantitative objective.
An emissions-denoted policy target21 may be easier than concentrations or temperature targets,
given the range of climate changes that could occur with a given increase in GHG emissions.
Also, the United States could not unilaterally achieve a federally set concentration or temperature
target; it would require a global effort. Further, only emission limits are viewed as a practical
basis for allocating responsibilities to the sources of emissions (i.e., private businesses), and for
enforcing those limits.
18
Views on appropriate targets may also be partially explained by different perceptions of the challenges and costs of
reducing GHG emissions.
19
Board on Atmospheric Sciences and Climate. Climate Stabilization Targets: Emissions, Concentrations, and Impacts
over Decades to Millennia. Washington DC: National Research Council, 2011. http://www.nap.edu/catalog.php?
record_id=12877.
20
See also CRS Report R40143, Ocean Acidification, by (name redacted) and (name redacted), or Kerr, Richard A. “The
Many Dangers of Greenhouse Acid.” Science 323, no. 5913 (January 23, 2009): 459a.
21
For example, a target of a percentage reduction of emissions by some date relative to the level of another date.
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Economics-Based Approaches
While many scientists, environmentalists, and other stakeholders may advocate scientifically
determined policy goals, other stakeholders frequently advocate that policies should be designed
to maximize economic efficiency (or to maximize economic growth measured as Gross Domestic
Product, GDP).
There are several economic approaches that could help define climate change policy, including
cost-effectiveness analysis, cost-benefit analysis, or hedging.22 This section focuses on a costbenefit approach, which seeks to maximize the economic efficiency of policy.
Cost-Benefit Approach
Intuitively, many people only take actions when they perceive that the benefits of the action
exceed its costs, though the important benefits and costs may be qualitative, not monetary.23 For
decisions of public policy, many economists and business stakeholders advocate that formal
assessment of the costs and benefits of a proposed policy (or policy alternatives) should be
performed and that the only options selected should be those wherein the benefits exceed the
costs. This preference is predicated on the principle that policies should seek to be efficient,
making best use of private and public resources available. Indeed, in 1981, President Ronald
Reagan issued Executive Order 12291 (46 FR 13193 3 CFR, 1981).24 E.O. 12291 requires that
regulatory objectives seek to the maximize net benefits to society, although some legislative
authorities direct other considerations to be paramount (e.g., protecting the most vulnerable
populations).
22
There are additional economic decision frameworks that may be useful for climate change questions, including Value
at Risk, which aims to maximize income subject to explicit limits on tolerable risks of the decision agent. Though VaR
and others are not discussed in this paper, they may merit further development, especially as tools for managing risks in
the context of persistent uncertainties.
23
For example, a consumer may purchase an automobile that costs more and has higher fuel efficiency than others,
though the “payback” may seem long compared to other market opportunities. The consumer may be responding to
such perceived benefits as contributing to oil independence, reducing air pollution, trying the latest technology, or other
factors that typically are not quantified.
24
http://www.archives.gov/federal-register/codification/executive-order/12291.html.
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Figure 3. An Economics-Centric Approach to Policy
Economics seeks “efficient” policy
by trying to equate the marginal
costs of GHG abatement with its
marginal benefits
Balance Costs and
Benefits of
Reducing GHG
Costs of Reducing
GHG
Emissions
Atmospheric
Concentrations
Temperature
Change
Impacts
Benefits of Avoiding
Economic Losses +
Adaptation Costs
Assigning values to diverse costs
and trade-offs, across cultures and
generations, is challenging and
controversial
Source: CRS.
Note: This is a simplified depiction of a complex approach, and many variations exist.
There are limitations of formal cost-benefit analysis (CBA), however, and particularly as applied
to climate change policy-making. First is the consideration that CBA addresses efficiency, but
typically not other policy considerations, such as “fairness” (although some economists are
testing methods to address some equity issues). Additionally, problems to applying CBA to
climate change have been established by a variety of researchers:25
1. Climate change decisions will be made (or not made) by many disparate people
and organizations, public and private, in the context of multiple goals,
constraints, and secondary effects; the sum of their decisions (and their costs and
benefits) would necessarily differ from the options and valuations considered in a
cost-benefit analysis.
2. Estimates of costs and of benefits may be unreliable. Several studies following
completion of projects or after implementation of policy decisions have shown
that prospective estimates may be very inaccurate.26 Decisions based on
inaccurate estimates may be inefficient. Some researchers have found that
25
See, among other critiques: Morgan, M. Granger, Milind Kandlikar, James Risbey, and Hadi Dowlatabadi. “Why
Conventional Tools for Policy Analysis Are Often Inadequate for Problems of Global Change.” Climatic Change 41,
no. 3 (March 1, 1999): 271-281-281; or Adler, Matthew D., and Eric A. Posner. “Rethinking Cost-Benefit Analysis.”
The Yale Law Journal 109, no. 2 (November 1, 1999): 165-247. One ongoing debate among analysts is whether CBA is
neutral or whether it has an anti-regulation bias. A useful distinction may be made between criticisms of problems
inherent to CBA versus those in the methods and ways CBA has been applied.
26
Harrington, W., R. D Morgenstern, and P. Nelson. “On the accuracy of regulatory cost estimates.” Journal of Policy
Analysis and Management 19, no. 2 (2000): 297–322; Sherrington, Chris, and Dominic Moran. “The accuracy of
regulatory cost estimates: a study of the London congestion charging scheme.” European Environment 17, no. 2
(March 1, 2007): 106-123; Flyvbjerg, Bent, Mette Skamris Holm, and Soren Buhl. “Underestimating Costs in Public
Works Projects: Error or Lie?” (n.d.). http://flyvbjerg.plan.aau.dk/JAPAASPUBLISHED.pdf; or Thompson, Kimberly
M, Maria Segui Gomez, and John D Graham. “Validating Benefit and Cost Estimates: The Case of Airbag
Regulation.” Risk Analysis 22, no. 4 (August 1, 2002): 803-811. As a general matter, there are few analyses of the
accuracy of ex ante economic analyses of regulations or other public decisions.
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retrospective evaluations of actual costs or benefits may reveal them to be very
different, at least in some cases, than pre-decision projections.
3. CBA methods assume that a policy decision is “marginal,” that it can be made in
clearly ordered increments from some baseline level, and that the choice can be
isolated from significant changes in the structure and output of the entire
economy.27 However, some analysts contend that human-induced climate change
is a “non-marginal” problem: decisions to address it or not would alter the
structure, the path of growth, and even the existence of some economies.28 At
least one study has shown that applying marginal analysis to non-marginal policy
questions can produce both quantitatively and qualitatively “wrong” decisions.29
4. The outcomes of CBA for choices having long-term effects can be strongly
determined by the choice of “discount rates” to reflect the “time value of
money”—that is, the observation that people typically would prefer to get a given
amount of money today rather than a year from now. Respected economists
disagree over what the appropriate discount rate should be for climate change
decisions, and even whether discounting should be used at all when choices
affect unborn generations. This discounting controversy remains unresolved
despite decades of discourse.30
5. CBA, at least as practiced, typically uses single point estimates whereas many
values important in climate change analysis are uncertain—sometimes widely
uncertain. Few, if any, researchers have conducted analyses in ways that
adequately reflect the distributions of uncertainties and the interactions of
uncertain variables in their analyses.
6. Moreover, the “average” values used frequently assume that people are neutral to
risks (they equally weight higher versus lower risks), while empirical data
indicate that most people seem to be “risk averse”31 (i.e., they would make lower27
Three ways in which the choice of the United States to abate GHG emissions may considered non- marginal are that
(1) U.S. choices are not independent of the choices that other countries may make; and (2) the underlying reference
baseline is projected to shift in unpredictable ways depending on the policy choices of the United States and other
countries/emitters, and (3) the changes affected by climate change policy decisions could be very large, so that prices
(set by markets at the margin of supply and demand) may not be a good representation of non-marginal values. For
example, if a shift of more than a couple percent from the baselines were to occur in incomes or consumption (e.g., the
existence of biodiversity), then the values derived used in the baseline conditions would no longer be valid to use with
the changed baseline. To make this example more specific, the value estimated for the willingness to pay of people to
save, say, one species given current biodiversity, might be very different from the value per species that same person
might have if the choice were to save 3000 species. While improved physical and economic models could help address
this analytical problem, with non-marginal changes there would be only weak empirical evidence to support the
valuations used in the models.
28
See, for example, Prest, A. R., and R. Turvey. “Cost-Benefit Analysis: A Survey.” The Economic Journal 75, no. 300
(December 1, 1965): 683-735, or more recently, Dietz, Simon, and Cameron Hepburn. “On non-marginal cost-benefit
analysis.” Centre for Climate Change Economics and Policy, 2010. http://74.125.127.132/scholar?q=
cache:7nOfPnry1B4J:scholar.google.com/&hl=en&as_sdt=0,9.
29
Dietz, Simon, op. cit.
30
See, for example, Oates, Wallace E. The RFF Reader in Environmental and Resource Policy. Washington DC:
Resources for the Future, 2006.
31
Tom, Sabrina M., Craig R. Fox, Christopher Trepel, and Russell A. Poldrack. “The Neural Basis of Loss Aversion in
Decision-Making Under Risk.” Science 315, no. 5811 (January 26, 2007): 515-518. Interestingly, recent research
indicates that many people will accept higher risk to avoid ambiguity. Rustichini, Aldo. “Emotion and Reason in
Making Decisions.” Science 310, no. 5754 (December 9, 2005): 1624 -1625. Neutral economic assumptions do not
(continued...)
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risk choices even in instances where their expected payoffs on average would be
greater with the higher-risk choice). Arguably, differences among people in their
aversions to particular kinds of risks in climate change policy choices—whether
more attuned to risks of energy cost increases or to employment, or whether more
to health and ecological stability—make it more difficult to build consensus on
policy.
7. Some critics suggest that CBA does not support an appropriate decision rule.
CBA assumes a “Kaldor-Hicks” rule—that the optimal public decision should
make everyone in aggregate better off, even if those who are made worse off are
not compensated by those made better off. Some economists have pointed out
theoretical problems in applying the Kaldor-Hicks rule, for example, that it can
result in inconsistent decisions. In addition, one economist notes that “social
decision-making necessarily is about weighing up gains and losses and deciding
on the relative importance of different individuals’ gains and losses.” CBA
typically does not assist in making those trade-offs. Proponents point out that
CBA provides one type of information—not that it is the only and exclusive
criterion for public policy decisions.
Economic analyses would be, at best, incomplete and likely biased because of the current state of
information and methods. Many values that should be included in a rigorous CBA are unknown,
and even unimagined at this stage of understanding. The direction of bias most often is posited to
undercount benefits of mitigation policies, though there are reasons that omissions could
overstate climate damages as well (e.g., by missing low-cost adaptations that people might make).
Despite these challenges, formal CBA arguably provides one of the most complete frameworks
for organizing and presenting a vast array of incommensurate impacts for decision-makers.
However, CBA is unlikely in the near term to yield a simple or objective “answer” on optimal
policy for decision-makers.
Hedging or Insurance Policies
An alternative economic approach is “hedging” or insurance, by adopting policies that would
reduce the risks of losses, without certainty of what those risks are.32 This approach can be similar
to buying homeowners’ insurance even though the likelihood of fire or other losses is unknown.
In this approach, policy-makers might enact some low-cost measures or measures that serve other
policy goals. (Sometimes these are called “no regrets” measures.) If long-term restructuring of the
energy economy might be needed in the future, hedging policies might initiate measures in that
direction (such as research support for some new technologies) while further information on risks
evolves. Hedging as a strategy does not provide objective guidance on the “right” level or kinds
of measures. In some senses, “clean energy” development may be a primary hedging strategy,
proposed by some Members of Congress.
(...continued)
reflect these kinds of preferences against risk and uncertainty.
32
See, for example, Yohe, Gary, Natasha Andronova, and Michael Schlesinger. “To Hedge or Not Against an
Uncertain Climate Future?” Science 306, no. 5695 (October 15, 2004): 416 -417.
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Cost-Effectiveness and Other Concepts
Economics offers additional approaches, such as estimating the most efficient policy design once
the objective has been established (cost-effectiveness analysis). In other words, if policy-makers
agree on a policy goal, such as a limit on GHG emissions, cost-effectiveness analysis is one
means to evaluate alternative policy designs to achieve the goal in the least costly way.
Conversely, cost-effectiveness analysis may seek the policy design with greatest effectiveness
(e.g., the lowest level of GHG concentration stabilization, or greatest risk reduction comparing
GHG mitigation and adaptation to climate) for a given cost.
A broader critique of using economics to recommend policies, and in favor of “muddling
through” (next section), questions several of the fundamental assumptions of most current
economic analysis:
[T]here is a change occurring in formal theorizing in which the holy trinity—rationality,
greed, and equilibrium—is being abandoned as required aspects of any model, and being
replaced with a slightly broader trinity—purposeful behavior, enlightened self interest and
sustainability.33
In essence, CBA grew from the “economics of control.” It assumed that “infinitely bright
economists with full knowledge of the system” could optimize the economy. More contemporary
examination of the quality of information (frequently poor) and seemingly “irrational” behavior
evidenced by peoples’ actions has led some economists to “search for understanding a system in
which the blueprints are missing, nonexistent, or so far beyond our analytic capabilities that we
might as well forget about them.”34
Incrementalism,“Muddling Through,” and Adaptive Strategies
Political scientist Charles Lindblom argued that neither drastic policy change nor carefully
planned giant steps are usually possible in policy-making. Rather, only “small or incremental
steps—no more than muddling—is ordinarily possible.”35 He argued that “No person, committee,
or research team, even with all the resources of modern electronic computation, can complete the
analysis of a complex problem. Too many interacting values are at stake, too many possible
alternatives, too many consequences to be traced through an uncertain future—the best we can do
is achieve partial analysis.”36 In other words, particularly in cases where decision-makers cannot
agree on the objective of policy, the best that policies can achieve is making agreed incremental
policy changes with ad hoc adjustments as conditions evolve and agreements arise.
As a variant of “muddling through,” some experts advocate an adaptive approach to climate
change decision-making (both public and private). An adaptive approach entails setting an initial
policy, then monitoring and evaluating progress toward the stated goal, and making adjustments
33
Colander, David. “Muddling Through and Policy Analysis.” Keynote Address presented at the New Zealand
Economic Association, June 2003. http://sandcat.middlebury.edu/econ/repec/mdl/ancoec/0317.pdf.
34
Ibid. p. 8.
35
Lindblom, Charles E. “Still Muddling, Not Yet Through.” Public Administration Review 39, no. 6 (November 1,
1979): 517-526.
36
Ibid.
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as knowledge is gained and new opportunities become available. Two proponents of adaptive
strategies argue:
[C]limate change presents a problem of decision-making under conditions of deep
uncertainty. We begin with the premise that while we know a great deal about the potential
threat of climate change and the actions we might take to prevent it, we cannot now, nor are
we likely for the foreseeable future [to], answer the most basic questions, such as is climate
change a serious problem and how much would it cost to prevent it? We argue that in the
face of this uncertainty, we should seek robust strategies. Robust strategies are ones that will
work reasonably well no matter what the future holds.... [R]obust strategies for climate
change are possible by means of adaptive-decision strategies, that is, strategies that evolve
over time in response to observations of changes in the climate and economic systems.
Viewing climate policy as an adaptive process provides an important reconfiguration of the
climate-change policy problem.37
Several concerns about adaptive approaches may be raised. First, while an adaptive approach may
achieve overall efficiencies compared to less flexible strategies, the efficiencies come at a cost of
lessened certainty for investors that a policy will remain fixed (e.g., for investment on long-lived
infrastructure). This can raise the risks of certain investments and add to their costs.
Second, some people conclude that abating climate change would require radical technological
change, and perhaps changes in social and economic structures, which cannot be achieved with
incremental changes. Experts point to “path dependence” of economic structures and
technological evolution, in which initial conditions set a trajectory or “path” that becomes
increasingly difficult to modify as investments build on one another. “Muddling through” follows
that path dependence, almost by definition. Others propose that successfully addressing climate
change requires “transformational change,” a change in state that is not merely an extension of
the past.
Also, pursuing adaptive strategies, Lempert and Schlesinger have argued that “the real measure of
... success” should not be near-term GHG reductions, but “rather the new potential for large-scale
emissions reductions society has created for the years ahead.”38 Though this point may be valid, it
may be, alternatively, that expanding the potential for emissions reductions requires incentives to
shift from a “business-as-usual” path that may not be provided by incrementalism.
Transformational change frequently alters power relationships, and may be obstructed by a
human tendency to ignore or reject information that does not conform with one’s existing beliefs
or prior decisions.39 This leaves open the question of whether muddling through would serve to
maintain the status quo or to serve the “creative destruction” that “incessantly revolutionizes the
economic structure from within, incessantly destroying the old one, incessantly creating a new
one.”40
37
Lempert, Robert J., and Michael Schlesinger. “Adaptive Strategies for Climate Change.” In Innovative Energy
Strategies for CO2 Stabilization, 48-85. Cambridge, UK: Cambridge University Press, 2002.
38
Ibid.
39
See, for example, Jonas, Eva, Stefan Schulz-Hardt, Dieter Frey, and Norman Thelen. “Confirmation bias in
sequential information search after preliminary decisions: An expansion of dissonance theoretical research on selective
exposure to information.” Journal of Personality and Social Psychology 80, no. 4 (2001): 557-571.
40
Joseph Schumpeter, in Capitalism, Socialism, and Democracy (1942), as quoted in W. Michael Cox and Richard
Alm, “Creative Destruction” The Concise Encyclopedia of Economics. The authors interpret:
Herein lies the paradox of progress. A society cannot reap the rewards of creative destruction
(continued...)
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The Policy Tool Box
Public and political interest in addressing climate change has cycled up and down over the past
three decades. Although no comprehensive or cohesive strategy exists at the federal level, many
existing programs and measures (including tax incentives)—and uncertainty about what future
science and policy will bring—create a context that influences private and governmental
decision-making. Some in the public and 112th Congress may seek to eliminate climate changerelated programs and policies, while others may seek to modify, reorganize, or enhance them.
A variety of generic policy tools may be in use already or be potentially available to address
climate change concerns. This section is intended to introduce the rationales, designs, and
applicability of options, to assist Members’ deliberations. The order of the following policy tools
is not intended to represent any order of priority:
•
regulatory, including market-based, tools to reduce GHGs;
•
distribution of potential revenues from GHG programs;
•
non-regulatory tools that help markets work more efficiently;
•
tools to stimulate technological change;
•
options to ease the economic transition to a lower GHG economy;
•
instruments to encourage international actions; and
•
tools to stimulate adaptation to climate change.
The following sections summarize some potentially applicable instruments in each of these
categories that have been proposed or may be in use now. Many of these tools are seen as
complementary, and proponents often contend that results can be achieved more efficiently with a
carefully matched combination of policy tools than by wielding any one alone.41
Regulatory and Market Tools to Reduce Greenhouse Gases
Most experts believe that the most economically efficient way to reduce GHG emissions is to put
a price on emissions that reflects the costs (or risks) of those emissions to others. Putting a price
(...continued)
without accepting that some individuals might be worse off, not just in the short term, but perhaps
forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to
preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of
progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably
linked. The process of creating new industries does not go forward without sweeping away the
preexisting order.
41
See, for example, Acemoglu, Daron, Philippe Aghion, Leonardo Bursztyn, and David Hemous. “The Environment
and Directed Technical Change.” National Bureau of Economic Research Working Paper Series No. 15451 (October
2009). The modeling in this paper indicates that, among alternative policy designs, “optimal” policy results with both
carbon pricing and research subsidies; or, Goulder, Lawrence H., and Ian W. H. Parry. “Instrument Choice in
Environmental Policy.” Review of Environmental Economics and Policy 2, no. 2 (July 1, 2008): 152 -174. See also,
Fischer, Carolyn, and Richard G. Newell. “Environmental and technology policies for climate mitigation.” Journal of
Environmental Economics and Management 55, no. 2. Journal of Environmental Economics and Management (2008):
142-162.
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on GHG emissions can be done with traditional source-by-source regulation, and/or with market
mechanisms.
Source-by-Source Regulations
From the earliest decades of air pollution controls, emission reductions have often been achieved
by setting emission performance standards on each source of pollution, or requiring that sources
use a particular type of technology, such as the “best available control technology.” These may be
applied for sectors as a whole, or varying with individual source permits. Practice has sometimes
successfully included “technology-forcing” regulation, as well, that sets future performance
standards well beyond contemporaneously achievable levels.
Many regulatory controls have been effective through decades of experience,42 though studies
contend that the compliance costs might be reduced if strategies give greater priority to costeffectiveness and flexibility. Even when U.S. regulators have been allowed by law to consider
costs in setting emission regulations, they have had additional factors to consider and often have
had weak information about the costs of compliance for each individual source. Also, regulations
can be difficult to adjust as circumstances evolve. Although in some circumstances source-bysource regulation may be most effective and efficient,43 it often cannot achieve, by itself, a
desired emission reduction target at the least possible cost.
Market Mechanisms
An approach that utilizes aspects of commodity markets can achieve, in some cases, emission
reductions similar to a source-by-source regulatory approach but at lower overall cost.44 Though
none to reduce GHG emissions have been proposed in the 112th Congress, several bills introduced
in the 111th Congress proposed such “market mechanisms” because, for some sources, they can
increase the efficiency of regulation by allowing the least costly reductions first.
Two principal types of market mechanisms pertinent to GHG reductions are GHG or carbon fees,
or cap-and-trade systems. The key contrast between these two mechanisms is that
•
GHG emission fees would provide certainty about the prices paid by sources, but
uncertainty concerning how much GHGs would be reduced;
•
conversely, cap-and-trade systems provide certainty in how much GHGs would
be reduced, but not regarding the prices paid by sources.
42
See, for example, Freeman III, A. Myrick. “Environmental Policy since Earth Day I: What Have We Gained?” The
Journal of Economic Perspectives 16, no. 1 (January 1, 2002): 125-146.
43
In some instances, performance standards can be very efficient, for example, when transaction costs are high
compared to the incremental cost of control.
44
It may be worth exercising caution, however, regarding the actual performance of real programs versus the
theoretical gains analyzed by scholars in hypothetical markets. As economist Robert Hahn has pointed out, “a
competitive market actually must exist for the results to hold true. Perhaps more importantly, the results assume that it
is possible easily monitor and enforce a system of permits or taxes....the capacity to monitor and enforce can
dramatically affect the choice of instruments.” in Hahn, Robert W. “Economic Prescriptions for Environmental
Problems: How the Patient Followed the Doctor’s Orders.” The Journal of Economic Perspectives 3, no. 2 (April 1,
1989): 95-114.
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Both emission fees and cap-and-trade systems potentially generate revenues—potentially in the
hundreds of billions of dollars annually.
Another important difference between cap-and-trade and other policy tools is that it can separate
who pays for emissions reductions from where the reductions occur, as discussed below. This can
allow the program design to accomplish both efficiency and equity objectives simultaneously.
GHG Fees or “Carbon Taxes”
Fees could be charged to a source of emissions according to its total emissions. Theoretically, a
source would reduce its emissions down to the level where it is no longer cheaper to make the
reductions (per ton) than to pay the tax (per ton). There could be many variations on this basic
model, including charging fees only on emissions above rates designated by source types. Aside
from possible tax exemptions, emission fees would not allow flexibility in who takes action or
where GHG reductions would occur. A system might be designed to allow flexibility in when
GHG reductions are made, though the principal flexibility would be the source’s decision whether
to make the reductions or pay the taxes. Many economists believe that emission fees or taxes
would be the most economically efficient way to reduce emissions, though this might depend on
micro-economic factors (such as availability of accurate information on response options), and it
would not guarantee an overall level of effectiveness for the program.
In the context of possible, broader tax reform in the 112th Congress, some experts might argue in
favor of shifting existing taxes from “goods” to “bads”45 like pollution, since taxes raise prices
and tend to decrease demand for the taxed product or service. A number of studies have examined
the implications of replacing existing taxes by GHG taxes: though not conclusive, several studies
suggest that such a tax shift, depending on its structure, could have positive or negative impacts
on economic growth and/or employment.46 (The actual results would depend on the particular
size and structure of a tax shift.) One concern about pollution taxes is that they would tend to be
regressive; another is that to the degree that carbon fees are effective in reducing the emissions,
they also reduce the revenue base.
“Cap and Trade”
One type of market mechanism begins with regulations on emission sources to reduce their
emissions, but then may allow flexibility in who makes the emission reduction, when the
reductions are made, and/or where the emission reductions occur (outside of the regulated
sources, or even internationally).
In a cap-and-trade program, the regulator sets an overall cap on emissions. It must allocate
responsibility for achieving the cap to individual sources, frequently termed “allowances” to emit.
These may be allocated by giving away allowances and/or selling them at prices at fixed rates or
45
Taxes on goods or services that have adverse effects on people beyond the buyers and sellers (“negative
externalities”) are called Pigouvian taxes. This economic approach is a basis for taxes on, among other items, sales of
tobacco products.
46
See, for example, Aldy, Joseph E., Eduardo Ley, and Ian W. H. Parry. “A Tax-Based Approach to Slowing Global
Climate Change.” SSRN eLibrary (July 15, 2008) pp. 9-10; or, Nordhaus, William D. “To Tax or Not to Tax:
Alternative Approaches to Slowing Global Warming.” Review of Environmental Economics and Policy 1, no. 1
(January 1, 2007): 26-44.
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set by auctions (discussed in a later section). The allocation mechanism essentially establishes
who pays or potentially benefits from the cap-and-trade system.
In a cap-and-trade program, the trade component allows entities to sell their unneeded emission
“allowances,” while emission sources that emit more than their allocation of allowances may
comply by reducing their emissions and/or buying additional allowances.47 Emissions trading
establishes a market, creating incentives to reduce emissions below required levels in order to sell
the extra allowances to sources who may have higher costs of control. “Cap-and-trade is the free
market based approach to complex multilateral problems like climate change,” say proponents.48
Cap-and-trade programs allow flexibility in who makes the required emission reductions. While
the allocation of allowances determines who pays to reduce emissions, trading allows the
regulated sources to pay for reductions elsewhere at lower cost. Thus, cap-and-trade can address
both efficiency and equity considerations.
Within cap-and-trade systems are two additional types of flexibility:
•
Emission reduction credits or offsets: Flexibility in where reductions occur—in
the United States or internationally—can also minimize costs, although some
questions arise about enforceability, loss of program effectiveness, and financial
flows. Allowing international credits or offsets, to the degree that GHGs could be
reduced reliably at lower cost in other countries, could help reduce costs of
complying with any U.S. GHG requirements.
•
Banking and borrowing: When flexibility could allow entities to save or “bank”
unneeded allowances until they need them, or to “borrow” against their future
allocations of allowances (with a charge for borrowing). Banking and borrowing
could apply to source-by-source regulation as well as to cap-and-trade programs.
Design Choices in Cap-and-Trade Programs
Although there are numerous questions to resolve in designing a cap-and-trade program,49 such as
the level at which to set the cap, which sources to cover under the cap, whether to allow offsets
from non-covered sources and other countries, etc., this section discusses two: how to allocate the
GHG reduction requirements, and whether to set a ceiling or floor on the prices a source must pay
for any allowances it wishes to purchase.
Allocating the GHG Reduction Requirements
Policy makers would have to decide who would be responsible for reducing GHG emissions—
this determines who pays for the reductions, not who actually makes the reductions. The first
decision is what the emissions limit or performance standards may be across categories of GHG
sources. Certain types of sources, by sector or size, may be excluded from GHG reduction
47
More detailed descriptions of how cap and trade programs may work are discussed in a later section on program
design, and in several CRS reports, including CRS Report RL33799, Climate Change: Design Approaches for a
Greenhouse Gas Reduction Program, by (name redacted).
48
Spencer Banzhaf “The Case for Cap-and-Trade” PERC in The Touch Questions for Free Market Environmentalism,
Reports for Free Market Environmentalism Vol. 29: 2 (Summer 2011).
49
Ibid.
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requirements, such as in EPA’s “tailoring rule,” which proposes not to require GHG permits for
sources that emit less than 25,000 tons of CO2 annually.50 Frequently, this step is among the most
controversial in establishing control policy. (Alternatively, the policy-makers may not set a
particular limit or standard, but require all regulated sources to buy emissions permits.) Typically,
at the end of a compliance period (e.g., a year), a source must turn in to the regulating authority a
number of allowances at least equal to the tons emitted in that period.
The second decision is how emissions sources will get their emission allowances. The regulator
may give away or sell permits to cover all or some of each source’s emissions. In many systems,
these permits are called “allowances” and one allowance equals a permit to emit one ton of a
pollutant. In a cap-and-trade system, allowances can be
•
given away (e.g., “grandfathered” to existing GHG sources, or given to nonsource entities51),
•
sold at a fixed price,
•
auctioned, or
•
a combination of these techniques.
Allowances are a valuable commodity (because they can be sold). How this valuable commodity
is allocated could potentially transfer billions of dollars of wealth across different groups. This
transfer of wealth (from entities who need to buy allowances to entities that sell them) could be
many times greater than the economic cost of the GHG reductions. How to allocate allowances is
therefore an important component—and among the most controversial—in the GHG reduction
debate. Giving allowances to particular groups may be a tempting way to increase the
acceptability of a GHG control program, or to improve the “fairness” of the program, but it could
distort incentives and reduce the efficiency of the program. One way (among others) to minimize
the transfer of wealth in a GHG control program would be to sell allowances rather than to give
them away. Sales, including auctions, would increase the efficiency of an overall GHG reduction.
Selling the allowances at a fixed price becomes very much like an emission fee or tax program.
Many past proposals would give away some allowances to both sources of emissions and other
entities (e.g., states, other sectors) and would auction some allowances.
“Safety Valves” and Allowance Price Floors
GHG allowances under a cap-and-trade program become a market commodity; the prices of most
commodities rise and fall—sometimes with great volatility—as daily, seasonal or annual
conditions vary. Variance would be expected with GHG allowance prices.
Prices could rise above anticipated levels if reducing GHGs turns out to be more difficult than
projected, or if speculators bid up prices, or under other conditions. Some people concerned about
the costs of GHG reduction programs advocate setting a ceiling on the maximum price a source
might have to pay for allowances it may need to comply; some have termed this a “safety valve”
on prices. If prices were to exceed a designated level for some period of time, either the
50
See EPA, Fact Sheet—Proposed Rule: Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring
Rule, at http://www.epa.gov/NSR/fs20090930action.html.
51
In other words, emission allowances can be given to entities that are not sources of emissions. Recipients may hold,
sell, or retire these allowances.
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regulatory authority could release additional allowances into the market through an auction, or
sell them at a fixed fee. While this would limit the overall cost of the program, it would also limit
the overall GHG reductions (although these could be “borrowed” from future years’ caps). It also
would reduce incentives for technological innovation by limiting the price rise that could occur,
limiting the profit potential that could stimulate some investors to finance technological research.
Some researchers note that the positive potential effects on technology innovation resulting from
price volatility is one reason policy-makers might favor emissions caps over emission fees.52
Other stakeholders argue that, to stimulate technological advance, a floor should be set on the
prices for allowances in the market (i.e., the regulator sets a “reserve price” for allowances sold at
auction, or would buy allowances in the market until the prices rise to the minimum acceptable
level). While constraining how little the GHG program may cost, a price floor assures investors
there is a minimum value for the services their technologies could provide.
Distributing the Revenues from Emission Fees or Sales
If emissions are taxed, or allowances are sold to sources at flat fees or by auction, public revenues
could be generated—as much as hundreds of billions of dollars per year (depending on the size of
the tax or the quantity of reductions required). A key policy issue associated with taxes, sales, or
auctions is what to do with the revenues. Revenues can be used to
•
offset reductions of other taxes, sometimes called “revenue recycling” (e.g., labor
taxes);
•
rebate to sources to help defray compliance costs of covered sources (e.g.,
according to their production levels);
•
fund programs (or provisions) that could reduce transition costs, such as worker
retraining and relocation programs, market facilitation programs, technology
development programs, tax credits, loan guarantees, etc.;
•
provide payments to address distributional concerns (e.g., production-based
rebates to energy-intensive sources; tax credits to low-income consumers); or
•
fund programs that may have little to do with reducing GHG emissions but that
garner wider support for the legislation.
As discussed in a later section, how any revenues are used may help to minimize the overall costs
of the GHG reductions, or, conversely, may lead to higher costs.
Market Facilitation Tools
Even when market mechanisms are used to help control emissions, markets do not work
perfectly; complementary, typically non-regulatory, policies may help to achieve reductions at the
lowest possible costs. Public or targeted information programs can help prepare people for the
changes a GHG control policy may demand, and gain their support for it. Providing public
information about climate change risks would likely induce some voluntary action—an approach
52
Weber, Thomas A., and Karsten Neuhoff. “Carbon markets and technological innovation.” Journal of Environmental
Economics and Management 60, no. 2 (September 2010): 115-132.
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used to promote anticipatory adaptation, for example. Information about government programs,
including advanced notice of regulatory requirements, can help decision-makers to make an
efficient transition to changing circumstances. Product labeling and “seals of approval” are
additional informational tools used privately and by governments to facilitate efficient markets.
Accurate information about risks can allow investors to make appropriate decisions.53 Some
private initiatives, such as the Ceres Investor Network on Climate Risks,54 seek and disseminate
information, including through corporate shareholder resolutions, about investment risks and
opportunities associated with climate change.
Additionally, technical assistance programs—like several existing federal voluntary programs,
such as the Climate Leaders or Energy Star programs55—can help consumers and businesses to
make economical choices. Technical assistance programs may provide, for example, calculation
tools, training, and access to information. Programs may work with equipment suppliers to
commercialize products that are more efficient or emit fewer GHGs, as has occurred with, for
example, Energy Star home electronics initiatives, or the Mobile Air Conditioning Climate
Protection Partnership. Most experts agree that such programs work best when targeted to address
specific decision-makers or imperfections in the market, and that the GHG reductions they could
yield by themselves are limited. Some programs, however, may result in private savings that far
exceed their federal budgetary costs (which are broadly spread across taxpayers). On the other
hand, the governmental expenditures per unit of emissions reduction achieved may be much
higher than regulatory programs, where more costs are borne by emissions sources.
Perceived investment risks can sometimes make consumers and investors reticent to make
changes or invest in new technologies. Risk-sharing policy tools can include loan guarantees,
insurance, or tax incentives. Public information and education campaigns are additional tools that
can support a policy’s acceptability and effectiveness.
Tools to Stimulate Technological Change
Achieving deep GHG emission reductions from projected levels would require extraordinary
changes in how energy is used and supplied over time. Moreover, the cost to reduce GHG
emissions would depend critically on development and deployment of improved technologies.
Multiple studies conclude that “markets are unlikely to provide proper incentives for the
development of clean technologies, absent public policy.”56 Public policies clearly have led to
major technological advances in other fields (e.g., developing nuclear energy, putting humans on
the moon, developing advanced weapons). Still, the quantitative link between policy tools and
resulting technological advance is unpredictable.
53
Konar, Shameek, and Mark A. Cohen. “Information As Regulation: The Effect of Community Right to Know Laws
on Toxic Emissions.” Journal of Environmental Economics and Management 32, no. 1 (January 1997): 109-124.
54
http://www.ceres.org/investor-network.
55
A number of federal voluntary programs help businesses, other institutions and consumer to identify how they
contribute to GHG emissions and to identify and carry out changes that can lead to GHG reductions and frequently
save money. For more information, see http://www.energystar.gov/.
56
A review of research is provided in Popp, David, Richard G. Newell, and Adam B. Jaffe. “Energy, the Environment,
and Technological Change.” National Bureau of Economic Research Working Paper Series No. 14832 (April 2009).
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Often, policies to stimulate technological change are described as “demand-pull,” or “supplypush.” A third type of policy aims to improve market function, to lubricate the interface between
buyers and suppliers. Specific measures in these three categories are described below.
Demand-Pull: Policy tools can act on the demand for new technologies. Some types of policy
tools act primarily to stimulate demand for new technologies:
•
“Technology-forcing” regulations57 have effectively stimulated demand for better
(and more cost-effective) technologies in the past. “Technology-forcing policies
respond to the reality that the world is not static and that policy itself can create
and shape the options society faces in meeting its needs.”58 Many economists
prefer price incentives to stimulate technological change, because they
decentralize decision-making to consumers and suppliers, and are arguably more
cost-effective. On the other hand, price incentives may not succeed in inducing
transformative or radical change from existing technologies because of the lack
of certainty regarding prices over the long period required for developing and
commercializing new technologies. At least one study found that, in some
circumstances, technology mandates may be more effective than direct financial
incentives.59
•
Renewable or clean energy quotas have been enacted in many states, requiring
electricity producers to generate a specified share of power with defined
renewable energy or other (i.e., nuclear, hydroelectric) technologies. These kinds
of quotas create demand for designated classes of technologies that may not
otherwise be commercially preferred by investors (e.g., because of perceived
risks or extra costs). The Clean Energy Standard (CES) is an example of demandside, technology-forcing incentive. This option has been proposed by the Obama
Administration,60 as well as by Senators Jeff Bingaman and Lisa Murkowski.61 A
CES has been enacted in Indiana.62
•
Tax incentives and consumer rebates can reduce the price to purchasers of certain
technologies. The Energy Policy Act of 2005 (P.L. 109-58), for example,
extended numerous tax credits to individuals and businesses to make investments
in energy efficiency or renewable energy generation that meet certain criteria, in
order to accelerate technology deployment.
57
“Where a regulator mandates a standard that cannot be met with existing technology,” according to Gerard, David,
and Lester Lave. “Experiments in Technology Forcing: Comparing the Regulatory Processes of US Automobile Safety
and Emissions Regulations.” International Journal of Technology, Policy and Management 7 (2007): 1-14.
58
Leone, Robert. “Technology-Forcing Public Policies and the Automobile.” In Essays in Transportation Economics
and Policy. Edited by J. Gomez-Ibanez, W. Tye, and C. Winston. Washington, DC: Brookings Institution 1999, pp.
291-323.
59
Johnstone, Nick and Ivan Hascic, “Environmental Policy Design and the Fragmentation of Markets for Innovation”
unpublished (2008).
60
Climatewire, Evan Lehmann Of. “Obama to Focus on Clean Energy, Daring Republicans to Call It ‘Froufrou.’” The
New York Times, March 30, 2011, sec. Business Day / Energy & Environment. http://www.nytimes.com/cwire/2011/
03/30/30climatewire-obama-to-focus-on-clean-energy-daring-republ-45993.html.
61
U.S. Senate Committee on Energy and Natural Resources, http://energy.senate.gov/public/index.cfm?FuseAction=
IssueItems.View&IssueItem_ID=7b61e406-3e17-4927-b3f4-d909394d46de.
62
North American Windpower, “Mitch Daniels Signs Clean Energy Standard Bill,” http://www.nawindpower.com/
naw/e107_plugins/content/content.php?content.7849.
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Supply-Push: Other policy tools primarily act on the supply of technologies—increasing
incentives for technology suppliers to conduct research and development (R&D) and to
commercialize more advanced technologies:
•
Subsidies to research and develop new or improved technologies are a common
tool of federal policy, including current approaches to mitigating climate change.
Federal appropriations of billions of dollars have been enacted in recent years to
stimulate more efficient energy technologies; renewable, nuclear, and “clean
coal” technologies; and approaches like alternatives to gasoline or diesel fuel for
vehicles. These subsidies can take the form of tax credits for R&D, cost-sharing
grants or contracts, direct investments, loan guarantees, and others.
•
Technology awards or prizes are sometimes offered to innovators that develop
advanced technologies that meet specified criteria.
•
Government procurement policies can drive technological development forward,
by setting challenging standards for performance and guaranteeing purchase of
that technology at a particular (attractive) price, or by purchasing a less-emitting
technology even if it is not the lowest cost alternative. Both types of procurement
policies have been used by the federal government to advance technologies that
emit fewer GHGs than more conventional technologies.
•
“Manhattan Project”-like federal research has been proposed by some experts,
who argue that a focused cadre of researchers, with sufficient resources and
allowed to pursue high-risk, high-payoff projects could facilitate technological
“breakthroughs” that could facilitate radical change in energy systems.
Some policy tools that may affect the advance of technologies could be indirect. For example,
incentives to ensure a sufficient supply from universities of well-trained scientists and engineers
in GHG mitigation-related fields could be a component of promoting technological advance.
Supply-Demand Interface: Some policy instruments focus on lubricating the connections
between suppliers and users of technologies;63 sometimes these are called market facilitation.
They may reduce the “transaction costs” of deploying new technologies in commercial markets.
Programs to improve the interface between suppliers and users (e.g., the “Energy Star” programs
of the Environmental Protection Agency and the Department of Energy) became a new emphasis
since the late 1980s and early 1990s. The Energy Star website claims savings in the utility bills of
consumers assisted by the program of nearly $18 billion in 2010.64
Such programs may improve the information available on technologies and markets, make it
more accessible, give it independent “third party” evaluations, improving technical capacity to
choose and install technologies, and many others. More specific examples include trade
conferences and missions, internet-based technology databases, publication of research including
reviews of applications, “stamps of approval,” etc. Most of these measures are employed already
in private markets (i.e., marketing by suppliers), especially by larger firms. However, there are
niches in markets where government-supported actions may improve the supply-demand interface
in markets and speed deployment of new technologies as well as make technology developers
63
For example, see Taylor, Margaret R. “Beyond Technology-Push and Demand-Pull: Lessons from California’s Solar
Policy.” SSRN eLibrary (July 31, 2008).
64
Energy Star, http://www.energystar.gov/index.cfm?c=about.ab_index.
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better aware of potential users needs and interests. Experts have noted the ability of supplydemand interface measures to improve market efficiency, as well as their limits in reducing
emissions in lieu of stronger incentives.
Options to Ease the Economic Transition
The U.S. economy currently depends primarily on fossil fuels, especially for electricity
generation and transportation. Without factoring in the environmental, energy security, and other
“external” costs, the United States has optimized its infrastructure to use the relatively
inexpensive fossil fuels. A transition to alternatives or to low-emission technologies, if faster than
the natural rate of capital turnover, could incur costs. Several policy mechanisms can help to ease
the transition of the current economy to one optimized around low-GHG emissions:
•
timing the total required GHG reductions to coincide with normal retirements of
equipment and infrastructure and when new investments may be made;65
•
trading, banking, and borrowing of allowances allow sources to manage the
timing of their reductions at least cost;
•
market facilitation tools, described above, can help sources and consumers make
optimal decisions, including information campaigns that help sources anticipate
the regulatory regime;
•
investment in appropriate infrastructure (important also for state, local, and
private entities) that enables deployment of emerging technologies; and
•
regulatory and permitting regimes that are adequately prepared for new
technologies in new locations (e.g., in permitting carbon capture and storage
technologies, or resolving “solar rights” issues).
In addition, the private sector is concerned about the possible international competitiveness and
trade impacts of GHG reductions in the United States. Some policy tools that could be applied,
although some could encounter potential challenges under the World Trade Organization (WTO)
rules,66 include
•
border tax adjustments that would raise the prices of imports from countries
without GHG controls comparable to those of the United States;
•
“international reserve” allowances that importers of certain goods must purchase
(raising the cost of imports) if the country of origin does not apply GHG controls
comparable to those of the United States;
•
giving, over some period, allowances or revenues from sales of allowances to
affected industries in order to facilitate adjustment;
65
However, some experts suggest that much capital can be maintained to last for decades longer than its nominal
“lifetime” and that the benefits of timing regulations to coincide with capital turnover may frequently be over-stated.
See, for example, Lempert, Robert J., Stephen W. Popper, Susan A. Resetar, and Stuart L. Hart. Capital Cycles and the
Timing of Climate Change. Arlington, VA: Prepared for the Pew Center on Global Climate Change, October 2002.
66
The WTO discusses the relationship between the multilateral trading system and climate change at
http://www.wto.org/english/tratop_e/envir_e/climate_intro_e.htm.
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•
in the process of crafting domestic policies, negotiating with potentially affected
WTO Members to seek ways to avoid imposing restrictive import measures;
•
working within the WTO to change or clarify rules to permit the imposition of
import restrictions by countries adopting trade-vulnerable GHG control
requirements; and
•
working multilaterally to have GHG emission controls applied equitably to
sources internationally (see discussion below) and to avoid WTO challenges.
The design of competitiveness-oriented policy tools would require caution to avoid challenge
under WTO as unfair trade practices.
International Policy Tools
Because GHG emissions from virtually all countries add to global atmospheric concentrations,
the effectiveness of policies to address climate change will depend on the collaboration of all
major countries, especially the largest emitters. Some of the large emitters, such as the nations of
the European Union, already have committed to reducing their GHG emissions below year 1990
levels and have proposed further reductions beyond the Kyoto Protocol’s current commitment
period that ends in 2012. The United States, China and other large developing country emitters
have offered GHG targets, but are not obligated to reduce their GHG, and the position of Russia
beyond 2012 remains a question. A country, if it wished to promote global GHG emission
reductions, could exercise a number of relevant policy tools, unilaterally or in cooperation
(including legal treaties) with other nations:
•
leadership and relationship-building;
•
strategic policy leverage (including quid pro quo);
•
capacity building and other technical assistance;
•
financial assistance;
•
agreement on standards for international investment; and
•
contributions of research and technological developments.
There are additional options, and a multitude of variants in designing each of these policy tools.
Tools to Stimulate Adaptation to Climate Change
Computer modeling suggests that, even if GHG emissions were stopped today, historical
emissions would lead to another 1oC (1.8oF) of warming by 2050.67 Interest has grown in recent
years in improving understanding of the potential impacts of climate variability and change, and
in stimulating effective adaptation to minimize future losses and take advantage of opportunities.
Policy tools to promote efficient adaptation could include, among other options:
67
This is roughly the same amount of global average warming that has occurred over the past century.
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•
research to improve characterization of future climate change,68 natural
variability, and the potential implications for different sectors and ecosystems;
•
public information, both broad and targeted to specific populations, including
access to robust characterization of future climate conditions and associated
risks;69
•
programs to develop practical tools to assist decision-makers to understand the
implications of climate change for their areas of operation (e.g., water
management, infrastructure engineering, disease vector prediction, etc.);
•
financial or regulatory incentives to reduce risks (e.g., to discourage construction
in vulnerable flood plains; to encourage insurers to include climate change risks
in their premium schedules; etc.);
•
improved emergency planning to reduce risks and respond to extreme weather
events (e.g., droughts, tornadoes, etc.); and
•
acquisition of key assets, such as easements in coastal zones or lands along
wildlife migratory routes, that may be valuable for long-term adaptation.
Policy tools to encourage private and public sector adaptations, like the research to support them,
are relatively undeveloped compared to work on GHG mitigation.
Author Contact Information
(name redacted)
Specialist in Energy and Environmental Policy
[redacted]@crs.loc.gov, 7-....
68
Current scientific uncertainty is very wide not just on human-induced climate change, but also on underlying natural
variability. What humans and ecosystems will experience, and may need to adapt to, will be the combination of both
influences on climate.
69
The Obama Administration has moved to establish a Climate Service within the National Oceanic and Atmospheric
Administration (NOAA), comparable to the National Weather Service but providing access to climate information on
longer time horizons—seasonally, inter-annually, or over years to decades. A variety of proposals in the 111th Congress
would have established a National Climate Service, with varying authorities, within NOAA or across agencies but none
were passed. In the President’s budget proposal for FY2012, NOAA has proposed a budget-neutral reorganization to
consolidate operations in a Climate Service. At least one appropriations proposal would prohibit any funds for
implementation of Climate Services, and other Members have expressed skepticism of the proposal.
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