Fuzzy math

How much will it really cost to address climate change?

Posted by Andrew Dessler (Guest Contributor) at 3:23 PM on 12 May 2008

Read more about: climate | greenhouse-gas emissions | climate change mitigation | economy

One of the consistent claims made by those opposed to policies to reduce greenhouse-gas emissions is that the cost will be prohibitive. I have always been somewhat suspicious of this claim, however. When I started graduate school in 1988, the Montreal Protocol had just been signed. It required industrialized countries to significantly reduce the production of chlorofluorocarbons within a decade or so (the exact schedule of production reduction depended on the particular molecule).

At the time, there were all sorts of apocalyptic claims being made about the costs and impacts of the Montreal Protocol: It will bankrupt us, it will force us to give up our refrigerators, millions of people in Africa will starve because of lack of access to refrigeration, etc.

In the end, none of this was true. The cost of compliance was so low, in fact, that I'll bet most of you didn't even realize it when our society switched over from chlorofluorocarbons to the replacement molecule, hydrochlorofluorocarbons, in the mid-'90s.

A few days ago, I came across a nice article from 2002 in The American Prospect by Eban Goodstein on this question of cost estimates:

In July, Carol Browner, chief of the Environmental Protection Agency, issued new regulations reducing permissible levels of smog and particulate (fine soot) pollution. The political battle leading up to the decision was fierce, even within the administration. One staff member on the Council of Economic Advisors maintained that the regulations would cost a whopping $60 billion -- a figure quickly seized upon by industry opposition. The EPA's own cost estimate was much more modest, between $6 billion and $8 billion. In making her case for the new regulations, however, Browner publicly disavowed even her own agency's cost estimates. She argued that industry would find a way to do it cheaper.

Whom to believe? Confronted with conflicting estimates, most lay people either throw up their hands or choose sides ideologically. But history provides a basis for evaluating these estimates. Not only do industry lobbyists wildly overestimate the costs of proposed environmental regulations. More surprisingly, academic and government economists consistently do too -- and for an equally surprising reason. When forecasting the costs of new environmental regulations, economic analysts routinely ignore a primary economic lesson: Markets cut costs through innovation. And innovation can be promoted through regulation. This history is worth bearing in mind as we approach the most important environmental controversy to date -- how to deal with the crisis of global warming.

As Goodstein shows, if history is any guide, and it usually is, the people forecasting economic doom from policies to reduce greenhouse-gas emissions are almost certainly wrong. More surprisingly, perhaps, is that those with the optimistic estimates of costs may also be overestimating the costs.

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11 Comments | Post a Comment

The reason economists overestimate

is because their models don't take technological change into consideration, believe it or not. Most economic models begin with something like the following, "Assume no technological change...". It's always been that way and probably always will, because neoclassical economics can't model technological change. Or in order to do so, they'd have to throw in some outside (exogenous) factor, that they obtained outside their theoretical universe.

by Jon Rynn at 3:41 PM on 12 May 2008

Montreal is the Wrong Model

The Montreal protocol was successful because inexpensive alternatives to ozone-depleting chemicals had already been invented when it went into effect. In fact, an earlier attempt at a global agreement failed several years earlier because the alternative chemicals were not yet available, and the cost of action was viewed by governments as too high. It was not until Dupont demonstrated that it could, at comparable cost, produce HCFCs, a chemical alternative to CFCs that did not deplete the ozone layer, that an international agreement to protect the ozone was achieved.

Advocates of cap-and-trade believe that technology innovation follows regulation, but history shows the reverse is just as often the case.

by lmeisel at 3:46 PM on 12 May 2008

Threat spurred alternatives...

Advocates of cap-and-trade believe that technology innovation follows regulation, but history shows the reverse is just as often the case.

The threat of regulation is what helped spurred Dupont to look into alternatives to begin with. As ya said, they had been tryin' to do it some years earlier, and it suddenly had Dupont runnin' scared on might happen if it did pass...and also how they might adapt and corner the market if regulations were imposed.

by Tasermons Partner at 3:50 PM on 12 May 2008

Mitigation economic analysis

I´m interested in the economic analysis of AGW mitigation, and I´ve always found suspicious those vague claims of "it´s cheaper to let happen". Lomborg does that often.

The only extensive paper on this that I found on the internet available to the public was this one by W. Nordhaus, which states
"Our estimate is that the present value of global abatement costs for the optimal policy would be around $2.2 trillion, which represents 0.11 percent of discounted world income".
http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf

Does anyone have an opinion about this paper, or maybe could recommend others so that I could get some perspective?

It also criticizes cap-and-trade as more corruptible (why?), and favors an internalization tax (or at least a hybrid solution).

by Alexandre at 4:08 PM on 12 May 2008

cause and effect?

lmeisel-

I think you've got your cause-and-effect wrong here. DuPont created the substitute because they were convinced that regulation was on the way. The chief scientist for DuPont, Mac McFarlane totally accepted the scientific evidence and convinced the higher ups at DuPont that regulations were on the way. Without impending regulation, there would have no substitutes.

In addition, it's widely believed the Montreal Protocol would have occurred with or without the existence of substitutes.

For a dense but complete history of the issue, see, e.g., this book.

by Andrew Dessler at 7:13 PM on 12 May 2008

A visual

This chart tracking patents on sulfur dioxide-control technologies for electric power plants is instructive:

sulfur dioxide regulation

From here.

grist.org

by David Roberts at 9:25 PM on 12 May 2008

the need for massive RD&D

Andrew-

DuPont created a low-cost substitute that made it easy for governments to enact Montreal. If there had been no low-cost substitute, we can't be sure
what would have happened. Maybe governments would have acted anyway, or maybe they would have done what governments are doing today on climate, signing treaties and doing nothing of significance to reduce emissions.

Governments would like to reduce their emissions, but doing so will not be inexpensive like Montreal. Sure, efficiency and conservation pay for themselves, but there have long been non-financial obstacles to them that won't go away with a price on carbon. Wind is relatively cheap, and could get ramped up, and you might get a single Princeton stabilization wedge. But you need somewhere between 15 and 40 more wedges of that size, and getting them will cost money. This is the reason that we need a massive research,
development and deployment effort to make that effort be as inexpensive as possible so that it happens as quickly as possible while maintaining rather than slowing economic growth, which voters and governments have made perfectly clear that they aren't willing to deliberately slow down with
higher energy prices.

by lmeisel at 10:50 AM on 13 May 2008

R and D costs money...

...and msot companies won't invest money in Rand D unless they're fairly sure it'll pay off.

And one good way to make sure it'll pay off is to threaten regulations and restrictions that would make current options or technology unavailable.

by Tasermons Partner at 12:18 PM on 13 May 2008

Regulations seem to help

lmeisel-

I think we agree that technological innovation is the key to addressing AGW, and that the gov't should be spending much more than it is now on energy R&D. That said, we seem to disagree on the role of regulation in spurring R&D. I think there's abundant evidence from the ozone episode as well as many others that regulation spurs R&D --- and thus that we should be putting a price on C emitted to the atmosphere to take advantage of this innovation. I'd love to see any evidence you have that regulations DO NOT spur innovation.

Thanks!

by Andrew Dessler at 2:55 PM on 13 May 2008

Limits of Regulation

Andrew -

It's not that I don't think regulation can spur innovation, but I think the kind of innovation it can spur is quite limited, and it's much more effective at bringing nearly cost-competitive technologies - like wind - to market.

Putting a price on carbon will, by design, direct private investment towards the least expensive methods of emissions reduction - not towards more expensive, but equally important, clean energy technologies such as solar energy and carbon capture and storage. Pricing carbon dioxide at $7-12 per ton will drive investments into efficiency and conservation, and will create incentives for energy providers to build gas-fired rather than coal-fired plants. These measures could result in modest emissions reductions.

Reducing carbon emissions at the level we need to prevent catastrophic climate change would require setting a much higher price for C. For today's clean energy alternatives to become cost-competitive with coal, gas, and oil, the price of carbon dioxide would have to be set at exorbitant levels: $37-$74 per ton to make CCS economically viable, and $217 per ton for solar PV cost-competitive.

Even in Europe, with a high price for C, they're still building new coal plants. I think that politically, it's extremely difficult, if not impossible, to get a price for C high enough to spur the kind of big innovations we need, so I think direct government investment should be doing the bulk of the work.

Sounds like we agree that govt RD&D is crucual - is there a certain yearly figure you'd like to see?

Thanks!
Lindsay

by lmeisel at 3:36 PM on 13 May 2008
[ Parent ]

Regulations do encourage R&D

There even is a category of regulations called "technology forcing". Generally these regs state that an industry must reduce pollution to set levels by a set period of time. Its done to spur businesses to develop pollution control technology.

by josullivan58 at 6:13 PM on 13 May 2008

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