Beyond Kyoto Addressing Cost: The Political Economy of Climate Change Prepared for the Pew Center on Global Climate Change by Joseph E. Aldy, Richard Baron and Laurence Tubiana

Cost – A Central Issue GHG mitigation affects broad range of economic activity Two broad perspectives on cost: –Efficiency – whether in the long term benefits of action exceed the costs –Cost-effectiveness – achieving maximum GHG reduction for every $ invested

Cost – A Central Issue Cost concern reflected in UNFCCC, and in Kyoto architecture and compromises –Yet primary obstacle to U.S., Australian ratification Will become only more critical as parties seek to deepen and broaden commitments Managing cost is important in its own right, but also is essential to achieving participation and compliance

Two Overarching Issues Timing Long time lags between –emissions/impacts –costs/benefits of mitigation Timing of target critical to its cost –Costs will be higher if target is too near, or too far No matter how distant the goal, near-term action is needed to promote technologies that can achieve it at lowest cost

Two Overarching Issues Uncertainty Over climate impacts/benefits of action Over costs of action –Future economic, population, emission trends –Response to mitigation measures –Rate of technology development, diffusion Models can compare costs of alternative strategies, but provide only crude estimate of long-term costs and benefits Uncertainty another reason to act now

Critical Cost Dimensions Aggregate cost Relative Cost Cost certainty

Aggregate Cost Hinges on: –Stringency of goal (magnitude and timing) –Cost-effectiveness of mitigation measures Minimized with flexibility on what, when and where of mitigation action

Relative Cost Uneven distribution of costs creates competitiveness concerns: –Among countries with targets –Between those with and without targets “Leakage” undermines effectiveness Uneven domestic costs can be obstacle to participation Politically, can be more decisive than aggregate cost

Cost Certainty Certainty promotes participation and compliance Governments secure domestic support based on expectations of cost When realized cost exceeds expected cost, risk of noncompliance rises Certainty may be more critical for marginal cost than aggregate cost

Alternative Approaches International emissions trading Quantitative target with safety valve Indexed targets Sectoral targets No-lose targets Emission taxes Technology standards

Synthesizing the Options Aggregate cost –Emissions trading most effective –Tax implementation hard to monitor –Technology standards not cost-minimizing –Sectoral target can contain cost, no-lose target can eliminate it

Synthesizing the Options Relative cost –Emissions trading can reduce differences in marginal cost –Emission taxes can also, but only if governments do not “cushion” –Technology standards likely widen cost variations across industries and countries

Synthesizing the Options Cost certainty –Depending on where price set, safety valve can provide cost “insurance” or undermine environmental objective –Indexed targets limit uncertainty over economic growth –No-lose target can eliminate downside risk of emissions commitment

Conclusions Two-way interaction between cost and participation –Suggests flexible architecture accommodating different approaches Greater cost certainty can allow a stronger environmental objective Uncertainties too great to allow reliable cost-benefit analysis -- in the end it is a political calculation

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