Global CO2 Reductions: Domestic and International ConsequencesApril 1995
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by Dr. Alan S. Manne, Professor Emeritus of Operations Research at Stanford University
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This Special Report, prepared in advance of the first Conference
of The Parties, which meets March 28-April 7, 1995 in Berlin, assesses the
likely costs associated with taking drastic action to reduce carbon dioxide
(CO2) emissions. This
issue arose as countries attempted to implement the Framework Convention
on Climate Change, which 160 nations signed in Rio de Janeiro, Brazil in
June 1992. In his paper, Professor Manne concludes that "an aggressive
CO2 abatement policy is unwarranted for the near term."
Such action, Manne points out, could result in annual losses equal to 1.0
to 2.5 percent of U.S. Gross Domestic Product (GDP) and hinder OECD (Organization
for Economic Cooperation and Development) countries' competitiveness in
such basic industries as chemicals, steel, aluminum, petroleum refining,
and mining. Professor Manne does not discount the possibility of global
warming, but he notes that CO2
buildup is not likely to cause a near-term rise in global temperatures.
The most prudent course of action for the next several decades, he argues,
is a " hedging strategy" that delays taking strong measures to
reduce CO2 emissions
until more is known about specific risks to the environment. "Even
after 2020," he says, "there would still be enough time to adapt
the global economy to a sharp decline in carbon emissions if we learn that
such action is warranted."
|Figure 1||Annual U.S. GDP Losses Due to Carbon Limit|
In percentage terms, the costs to the United States of CO2 abatement appear modest. Recall, however, that the GDP is an astronomical number. With the possible exception of health care, almost any program looks small in relation to the GDP. The United States today is spending about 2 percent of its GDP on all forms of environmental protection: air, water, and solid waste disposal. Until a consensus is reached on both the benefits and the costs of CO2 abatement, it is difficult to argue the need for drastic immediate measures to achieve global emissions stabilization. A slower and more deliberate approach might make better sense.
Abatement Costs: Loss of OECD's Trade Competitiveness
From a political perspective, the impact of CO2 reduction on individual industries is perhaps even more significant than the impact on the economy as a whole. This would be particularly troublesome in the case of a unilateral agreement. As a first step toward a global agreement, it is often suggested that the OECD countries (the United States, Canada, Japan, Australia, New Zealand, and Western Europe) take the lead, and that we adopt unilateral measures to reduce carbon emissions.
In any sector where energy inputs are significant (say, 5 to 20 percent of production costs), a unilateral agreement to limit carbon emissions would have serious impacts on our international competitiveness. These sectors include basic industries such as steel, aluminum, copper, petroleum refining, and petrochemicals production. Furthermore, coal is the most carbon-intensive of our fossil fuels, and this could virtually wipe out any prospects for coal exports from the United States.
Moreover, CO2 reduction could lead to major changes in the location of energy-intensive manufacturing industries. Strains would be placed upon trade pacts such as the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA). Domestic producers would call for protection and subsidies. A high value would be placed on Washington area ("Inside-the-Beltway") specialists with expertise in estimating the direct and indirect carbon content of internationally traded goods.
Despite the apparent enthusiasm of the European Community for CO2 abatement, these industries have been remarkably successful in lobbying for exemptions from the Community's proposed carbon taxes. In the absence of such exemptions, the OECD's energy-intensive manufacturing industries would tend to move offshore to nonparticipants such as China, India, and Brazil. The resulting increase of carbon emissions in those nations would partially offset the reductions undertaken unilaterally by the OECD countries.
Costs and Benefits of Global Abatement
Global warming poses a potential threat to all nations, not just to the United States. Our descendants will be affected not only by the United States' actions, but by those of other major carbon emitters. The impact of five different policies for controlling CO2 emissions is shown in Figure 2. These strategies are based on a five-region description of the world: the USA, other OECD nations, the former USSR, China, and all other nations combined.
The top line of Figure 2 shows how emissions might evolve under a business as usual (BAU) scenario. Conventional oil and gas become exhausted sometime during the twenty-first century, but they are replaced by coal and shale-based synthetic fuels. Sometime later, the world could also run out of coal, and this is why the BAU emissions path eventually trends downward. The second and third lines show what might happen if we were to introduce modest emission taxes (U.S. $5 per ton of carbon) during the next few decades, but have them rise at a sufficiently rapid rate to encourage price-induced conservation and to discourage any shift toward carbon-based synthetic fuels. In place of synthetic fuels, we would eventually turn to high-cost renewables and to unconventional energy carriers such as hydrogen.
|Figure 2||Global Carbon Dioxide Emissions|
The two lowest emission scenarios describe much more aggressive policies designed to limit climate change. One is a proposal for stabilizing global emission flows at their 1990 levels, the second is still more ambitious: it represents a proposal for stabilizing the stocks of CO2. Concentrations are to be limited to 415 parts per million by volume (ppmv), just a bit higher than the current level of 350 ppmv.
The carbon taxes implied by each of the five alternative policies toward reducing CO2 emissions are shown in Table 1. For orientation purposes, it is worth noting that a carbon tax of U.S. $120 per ton would imply a doubling of the price of coal-or an increase of U.S. $.36 per gallon of refined petroleum products. This is the level of carbon tax required to deter synthetic fuels production in 2050.
|Table 1||Carbon Taxes Implied by Alternative Policies (1990 dollars per ton of carbon)|
|Business as usual (BAU)||0||0||0||0||0|
|Stabilize CO2 emissions||158||115||133||114||121|
|Stabilize CO2 concentrations||165||275||445||568||522|
|Figure 3||The Present Value of Global Benefits and Costs of CO2 Emission Reduction in 1990 Dollars*|
Responding to Uncertainty: A Hedging Strategy
In designing a global emission reduction strategy, it is important to realize that any of our current projections can be wrong.
There are two types of potential errors: (1) premature commitment to costly abatement strategies, and (2) belated attempts to adapt to rapid climate change. The debate is enlivened but not necessarily illuminated by rhetoric on "an irreversible ecological catastrophe" versus "the staggering costs of reducing emissions." Suppose instead we take the view of an insurance purchaser who knows that the climate experts are deadlocked on the chances of a global calamity if we follow a BAU policy. What steps would it be sensible to take today in order to reduce the risks to future generations?
We can use decision theory to select a rational course of action in the face of uncertainty. There are two ways to think about this type of decision problem. In both, there are just two possible outcomes: a favorable and an unfavorable one. One is an upside possibility, and the other is a downside risk. The "learn-then-act" (LTA) approach assumes that we have the opportunity to learn whether the state of the world is favorable or unfavorable before taking action. An alternative way of looking at things is characterized by the phrase "act-then-learn" (ATL). For illustrative purposes, it is assumed that global CO2 uncertainties are resolved sometime shortly after 2020. Prior to 2020, the energy sector's supply and conservation investment decisions must be made under uncertainty about the importance of limiting carbon emissions. Thereafter, the uncertainties are resolved.
For simplicity, suppose that there are just two long-term possibilities: In the favorable case, a global catastrophe will not occur unless the world experiences a 10°C increase from 1990 levels. In the unfavorable case, it will occur with only a 3°C increase. By a catastrophe, we mean that the world would be willing to allocate its entire GDP to avoid, say, large-scale melting of the polar ice caps.
If the 3°C scenario occurs and no corrective actions are taken, there could be a global catastrophe sometime around 2100. Most observers would assign a low probability to this high-consequence event. For illustrative purposes, suppose that this probability is 5 percent. With only two possible outcomes, this means that we would then assign a 95 percent probability to the case in which it takes a 10°C increase to lead to global catastrophe.
Figure 4 shows global carbon emissions under the two approaches: LTA (learn-then-act) versus ATL (act-then-learn). Along the dashed lines (LTA:10 and LTA:3), we make all decisions in full knowledge of whether catastrophe would occur at 10°C (topmost line) or at 3°C (bottom line). The solid forked path (ATL) shows what happens when the outcome remains unknown through 2020. This leads to a hedging strategy that lies somewhere between the two extreme cases shown along the dashed lines, probably much closer to the LTA:10 scenario.
|Figure 4||Global Carbon Emissions Under Learn-Then-Act (LTA) and Act-Then-Learn (A|
Since global temperatures are not likely to rise significantly during the next several decades, an aggressive CO2 abatement policy is unwarranted for the near term. Such policies, if implemented, could cost many hundreds of billions of dollars. Even after 2020, there would still be enough time to adapt the global economy to a sharp decline in carbon emissions if we learn that such action is warranted.