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20
A Framework for Evaluating Mitigation Options

To devise a coherent strategy for mitigation of greenhouse warming, it is necessary to have an analytical framework that compares the alternatives available. This chapter develops such a framework and discusses a number of issues that arise in the development of a plan to respond to the potential effects of greenhouse warming.

Economics and engineering are central to the comparison of alternatives. The connections between human activities and their environmental consequences are technological in character; engineering is consequently required to imagine, design, and implement alternatives. Economic concepts are central to choosing among the technically feasible alternatives. A variety of social and cultural factors are also important in the interactions of humans with their physical environment, but these are not the primary focus of this inquiry.

The chain of causation from human activities, to the release of greenhouse gases, to changes in the composition of the atmosphere, and to climate change is long, often indirect, and complex. For this reason, estimating the relationship between human activities affected by policies or shifts in markets and far-removed changes in climate is a difficult technical task. Indeed, the very human difficulty of perceiving this indirect and long-term relationship is an important component of the problem of greenhouse warming.

It is easier to see the direct costs of decreasing CO2 emissions than to estimate the benefits of doing so. There is, accordingly, an emphasis in this report on the direct costs of change rather than on the potential benefits and secondary costs of changing. Readers should bear in mind that the picture presented by the panel is skewed in this respect.

Even if the relation between human activity and climate change were



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Page 171 20 A Framework for Evaluating Mitigation Options To devise a coherent strategy for mitigation of greenhouse warming, it is necessary to have an analytical framework that compares the alternatives available. This chapter develops such a framework and discusses a number of issues that arise in the development of a plan to respond to the potential effects of greenhouse warming. Economics and engineering are central to the comparison of alternatives. The connections between human activities and their environmental consequences are technological in character; engineering is consequently required to imagine, design, and implement alternatives. Economic concepts are central to choosing among the technically feasible alternatives. A variety of social and cultural factors are also important in the interactions of humans with their physical environment, but these are not the primary focus of this inquiry. The chain of causation from human activities, to the release of greenhouse gases, to changes in the composition of the atmosphere, and to climate change is long, often indirect, and complex. For this reason, estimating the relationship between human activities affected by policies or shifts in markets and far-removed changes in climate is a difficult technical task. Indeed, the very human difficulty of perceiving this indirect and long-term relationship is an important component of the problem of greenhouse warming. It is easier to see the direct costs of decreasing CO2 emissions than to estimate the benefits of doing so. There is, accordingly, an emphasis in this report on the direct costs of change rather than on the potential benefits and secondary costs of changing. Readers should bear in mind that the picture presented by the panel is skewed in this respect. Even if the relation between human activity and climate change were

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Page 172 readily quantifiable, there would still be the matter of selecting the most effective, least costly response strategies. Here economic concepts are central. Proposed responses to greenhouse warming include ideas that would affect national economies, international trade, and the life-styles of people in both developing and industrialized societies. Moreover, selecting some of these alternatives would mean that other highly valued objectives—such as improving economic status or national security—would have to be altered. Making choices in the face of scarcity—the problem at the heart of economic science—is inescapable. Much of this chapter is devoted to explaining the difficulties of carrying out a conceptually straightforward approach. There are three critical problems: (1) markets are imperfect—that is, neither the prices observed nor the responses of markets are the simple result of demand and supply operating unimpeded; (2) uncertainties abound in the technical realm, in social responses to policy instruments, in environmental changes due to changing climate, and in markets; and (3) consideration of most alternatives requires comparing costs and benefits at different times, paid for or enjoyed by different people. Although it has been possible to assemble an overview of the options for mitigating greenhouse warming, the panel urges readers to bear in mind the formidable problems of theory and practice limiting the precision of the estimates that can be provided at this time and even the qualitative accuracy of the picture that can be presented. Background Greenhouse warming is a phenomenon of the atmosphere, taking place in a global "commons." Similar emissions of greenhouse gases have similar potential to affect global climate, regardless of their country of origin. Thus mitigation strategies must be global in scope, at least implicitly involving both developed and developing countries. Indeed, many of the lowest-cost mitigation options may be found at first in some of the poorest developing countries. For example, the efficiency of wood-burning cookstoves can potentially be raised at very low cost (Reid, 1989). Because these countries may be unwilling or unable to afford such policies, the developed countries may choose to underwirte such efforts. This targeted redistribution of economic resources could be efficient and less costly to the developed countries than mitigation strategies directed solely toward their domestic economies. Because of the limited availability of information on a global basis, however, and the scope of the panel's responsibilities, the analysis of mitigation options in the chapters that follow is devoted largely to the United States. With a few exceptions, information on mitigation costs and estimates of

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Page 173 mitigation potential are derived entirely from U.S. experience and data. Similar analyses should be effected for other countries. Indeed, the analytical framework used in this report is generally applicable to the analysis of mitigation options in a global context. The Role of Cost-Effectiveness Principal among the objectives of policymakers in designing a mitigation strategy should be to minimize the adverse effects of mitigation on the domestic or world economy. This requires designing a strategy that is "cost-effective"—one in which the incremental costs of reducing radiative forcing are minimized. Because the cost per unit of mitigation for most options is not likely to be constant over the entire range of measures, estimates of incremental cost per unit of mitigation will depend on the degree of mitigation obtained, and may rise rapidly as measures are used more intensively. In this report, all cost estimates are based on changes from current levels of emissions, although in many cases these cost estimates are for substantial increments of potential mitigation. The cost of mitigation may include a number of components, some of which are difficult to measure. First, there are direct expenditures, such as the increased cost of chemical substitutes for CFCs; these costs reduce CFC concentrations below what they would otherwise be and do so promptly. Direct expenditures can be measured readily when market transactions are available to provide data on the prices consumers pay for the benefits of these expenditures. Second, there are investments whose benefits are delayed. For example, higher energy efficiency in an industrial facility will return benefits in the form of reduced emissions of greenhouse gases and energy costs as the facility reduces its energy consumption over the life of the plant. In estimating the value of a stream of benefits and costs over time, a discount rate (interest rate) is used to compute the present value equivalent in order to compare alternative investments. Third, there are implicit costs and benefits in substitutions among final goods or services that imply different levels of greenhouse gas emission. For example, inducing urban commuters to switch from automobiles to mass transit would reduce an important source of greenhouse gas emissions. Yet experience in the United States suggests that such a switch would not occur at the energy prices observed in recent time. If changes in government policy are necessary to change behavior, however, the social cost would include the net loss in value to consumers of changes in their behavior that would not have occurred without changes in policy. That cost is difficult to measure because there is no market transaction that directly reflects such changes in value to customers. Because most of the mitigation options discussed in this report involve a

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Page 174 reduction in energy consumption, there may also be reductions in other undesirable externalities of energy production. The social and economic costs of these reductions in energy consumption may even be outweighed by their benefits. For example, the decision to limit highway speed to 55 miles per hour (mph) in the 1970s and 1980s reduced traffic fatalities considerably. In principle, these reductions in externalities should be deducted from the direct and indirect costs of mitigation. Where possible, these favorable offsetting effects are identified in the chapters that follow; however, they are not generally quantified and applied as offsets to the estimates of cost per unit of mitigation. Of course, many of the issues bear on societal and individual preferences having components that extend beyond quantifiable costs. Energy Modeling The scope of the task of cost-effective choice can be seen through a review of the work done to date by economists who have estimated the costs and, less often, the benefits of mitigating greenhouse warming. There have been relatively few attempts to estimate these costs by energy modeling. In energy modeling the energy sector of the economy is represented in terms of technological activities such as space heating or transportation services. By using a mathematical programming or other algorithm, the models then solve for the "optimal" trajectory of prices, output, fuel mix, and technologies. It can be shown that, under certain conditions, the optimal trajectory would correspond to the outcome of perfectly competitive markets. (See Appendix R for more details.) Recently, a few economists have begun to work on estimating the costs and benefits of various CO2 reduction scenarios in this way. Most of these modeling exercises are still in rather preliminary form. A major problem in measuring the costs of reducing emissions of greenhouse gases lies in establishing the baseline from which these reductions are to be measured. If the object is to measure the costs of restricting CO2 emissions by some year, such as 2030, to some percentage of current emissions, it is necessary to begin by predicting unconstrained emissions for 2030. The costs of limiting CO2 will then be dependent on the assumptions made about economic and population growth until that date; the prices of oil, natural gas, and coal; technological changes in energy-using industries; and numerous other parameters that drive emissions in the unconstrained baseline scenario. A simpler approach is to estimate the cost of reducing CO2 from current emission levels. This procedure eliminates the necessity for predicting unconstrained CO2 emissions in some future year, but it does not provide estimates of the cost of restricting future emissions to some fixed level.

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Page 175 In either case, it is necessary for energy modelers to make assumptions about the costs of certain activities at scales outside recent experience or to predict technical change over some horizon. The estimated costs of reforestation or ocean-modification options are highly speculative. So are the estimates of additional costs of technologies to replace current fossil-fuel-based electric power generation. As a result, costs are usually estimated for various scenarios of technical change. These scenarios include a range of estimates of fuel prices, growth in gross national product (GNP), and other parameters. There are four relatively recent attempts to model the prospective costs of CO2 reductions: Nordhaus (1989), Manne and Richels (1990), Jorgenson and Wilcoxen (1989), and Edmonds and Reilly (1983). These provide a perspective on the current state of the art in modeling the cost of CO2 abatement. (Another review that reaches similar conclusions in Darmstadter (1991).) The Nordhaus Study Nordhaus's work on global warming began in 1977. In recent papers, he has presented the beginnings of a major modeling effort designed to estimate the cost of controlling CO2 and other greenhouse gases, assuming efficient markets and taking into account the costs and benefits of various rates of abatement. As part of this exercise, he has attempted to synthesize the results from eight studies of CO2 abatement, which draw upon data on current practice and extrapolations into the future. A log-linear ordinary least-squares regression is fitted to these estimates and shown as a relation between CO2 reductions and a "tax rate" per ton of carbon at 1989 prices. This tax rate purports to measure the minimum cost of reduction—an estimate of the marginal cost for the whole economy of the most efficient approach to CO2 reduction. His results are shown in Figure 20.1. Nordhaus also estimates the marginal costs of achieving efficient reductions in greenhouse warming through reductions in CFCs and through reforestation. He then combines the three cost curves for CFCs, reforestation, and CO2 abatement into a single efficient marginal cost curve for greenhouse gas reductions. These results are shown in Figure 20.2 (The chart estimates, for example, that a 30 percent reduction of greenhouse gases would not be equivalent of $150/t CO2 equivalent.) Nordhaus's results on the costs of mitigation should be thought of as his estimate of "the best we can do" to reduce carbon usage at minimum cost, by using currently known technology or expert estimates of the technology that can reasonably be expected to be available. Because his model assumes the consumption of resources at current levels and constant exponential growth of the economy with this resource constraint, the resulting estimates

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Page 176 image FIGURE 20.1 The Nordhaus study of the marginal cost of CO2 reduction. The symbols refer to estimates from different models. SOURCE: Nordhaus (1990). of mitigation costs must be viewed as tentative. Nordhaus stresses that the actual costs of regulatory approaches are likely to be higher, because government-mandated reductions in emissions are likely to be less efficient than a carbon tax. Analyses like Nordhaus's, however, implicitly ignore institutional barriers that impede efficient economic adjustments to change. Such barriers exist because information is imperfectly distributed, there are regulatory restrictions on transactions, and buyers or sellers can possess monopolistic control over markets. For example, the adoption of such energy efficiency measures as the installation of better-insulated windows suffers from several impediments: homeowners are generally uninformed about many possible efficiency measures, and building codes may not permit the installation of windows that would be suitable. If existing barriers to adaptation can be lowered, both buyers and sellers can gain from the resulting transactions, which leads to estimates of negative costs for some mitigation steps. That does not mean that mitigation requires no monetary outlay: it is still

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Page 177 image FIGURE 20.2 The Nordhaus study of marginal cost of greenhouse gas reduction. SOURCE: Nordhaus (1990). generally an investment, requiring the commitment of capital. It does mean that, relative to the present situation, everyone can gain from lower barriers to adaptation. There is a strong case, prima facie, for adopting suchpolicies, although experience over the past decade suggests that resistance to doing so often exists. The Manne and Richels Study Manne and Richels have built simulation models of CO2 reductions for the United States and for the entire world. These models estimate the cost of various CO2 abatement scenarios from the present through the twenty-first century and thus include forecasts of economic growth, fuel prices, and new technology. Manne and Richels examine the economic cost of holding carbon emissions constant from 1990 to 2000 and then gradually reducing these emissions to 80 percent of 1990 levels by 2020. Using a discount rate of 5 percent, they estimate the present value of aggregate loss to U.S. economic consumption due to this constraint under a variety of scenarios concerning U.S. energy technology and policy. The most restrictive and pessimistic

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Page 178 scenario—one that assumes no autonomous improvements in energy efficiency, no development of low-cost nuclear power, and no cost-effective means of removing CO2 from utility waste gases—predicts very small reductions in U.S. consumption until 2010, but sharply rising losses thereafter. The discounted present value of U.S. consumption losses through 2100 is $3.6 trillion under this scenario, or about 1 year's current consumption (i.e., less than 1 percent of total consumption during the century). Using the most optimistic combination of assumptions, Manne and Richels estimate that the present value of the cost of the carbon emission reduction through 2100 would fall to $0.8 trillion. In that case, technical progress in and wider use of nuclear power, improved CO2 removal technology, and overall energy efficiency in the economy could reduce the cost of mitigation by 78 percent in their model. It should be stressed that Manne and Richels's results depend heavily on their assumptions concerning U.S. economic growth, world fuel prices, and the prospects for technical progress in the energy sector. They assume a substantial slowing of U.S. economic growth from 3 percent annually in the period from 1990 to 2000 to only 1 percent annually in the last half of the twenty-first century, in the absence of a carbon constraint. A higher rate of economic growth would increase the estimated costs of a carbon constraint substantially, but probably not proportionately with future GNP. Manne and Richels's estimate of the carbon tax required to produce a 20 percent reduction in carbon (C) emissions, compared to 1990 rates, is shown in Figure 20.3. It shows the carbon tax rising from nearly zero in 2000 to nearly $400/t C in 2010 and peaking at about $600/t C in 2020.1 The tax falls thereafter, presumably due to a slowing of economic growth and the expansion of more efficient (lower emissions) energy supply technology. The Jorgenson and Wilcoxen Study Jorgenson and Wilcoxen have built a long-term simulation model of the U.S. economy to measure the effects of energy and environmental policies on U.S. economic growth. Although this model was not constructed with the goal of estimating the effects of CO2 reductions, it can be used for this purpose. Jorgenson and Wilcoxen's model is by far the most disaggregated and complete model discussed here. It also has the most sophisticated treatment of capital formation, an important determinant of long-term economic growth. Carbon dioxide emissions from fossil fuel consumption plus cement manufacture were virtually the same in 1972 and 1987, according to Jorgenson and Wilcoxen, in large part because of a doubling of the relative price of oil between these two years. This observation can be used to simulate the cost of a freeze on CO2 emissions, given the central role of energy prices in the

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Page 179 image FIGURE 20.3 Manne and Richels's analysis of a carbon tax. SOURCE: Manne and Richels (1990). Jorgenson-Wilcoxen growth model. An analysis prepared by the authors concludes that long-term growth of the gross domestic product in the United States was reduced by about 1.3 percent per year by the 1972–1987 doubling of oil prices (Jorgenson and Wilcoxen, 1989). None of the three energy models described above is likely to provide precise estimates of the effects of a reduction in CO2 emissions in the next 30 years or beyond. Nevertheless, they are quite helpful in judging the first approximations of those effects. Of the models described, Nordhaus's is the best for projecting the immediate costs of reducing CO2 emission from any given current level. Manne-Richels and Jorgenson-Wilcoxen provide longer-term simulation models of the effect of energy-environment policies, including the limitation of CO2 emissions. The Edmonds and Reilly Study The Edmonds and Reilly (1983) model analyzes long-term, global emissions of CO2 by adopting a simplified picture of an economy that generates CO2 from fossil fuel burning. Because it was developed early in the current cycle of attention to greenhouse warming, the model has been widely used (e.g., Lashof and Tirpak, 1991).

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Page 180 The model divides the global economy into nine regions, each of which is assumed to be a single market for energy. Six primary energy categories, three of which emit CO2 in varying amounts per unit of energy consumed, are analyzed. Demand for energy is driven by a simple model of population, regional economic activity (GNPs), energy productivity (a measure of the pace of technological change), and taxes. Supply of energy is governed by regional resource availability and economic descriptions of ''backstop" technologies available within each region. (A backstop technology provides the price at which unlimited quantities of energy are assumed to be available from an inexhaustible resource; in general, the backstop technology is more expensive than other resources currently available from domestic production or international trade.) Edmonds et al. (1986) discuss the behavior of this model when a significant subset of those assumptions is systematically varied. Projected CO2 emissions range from 5 to 20 Gt C/yr in the 400 scenarios examined. (These values cover the span between the twenty-fifth and seventy-fifth percentiles of the 400 scenarios.) Thus, by employing assumptions that are not inconsistent with current estimates, this widely used model projects a sizable uncertainty in CO2 emissions 60 years in the future, ranging from values close to those emitted today to values 4 or more times larger. Problems in Comparing Options The energy models described above yield results that appear to be strikingly different from those presented in subsequent chapters. For example, Figure 20.4 shows a curve for energy efficiency (discussed in Chapter 21) that indicates that significant amounts of carbon mitigation are available at negative net costs ("net savings") to society. (Net costs in Figure 20.4 are described in two ways: dollars per ton of CO2 saved; and costs per kilowatt-hour of electricity needed to achieve those savings.) As shown on the right-hand vertical scale, energy efficiency in the buildings sector saves money because, although energy-efficient appliances cost more than those currently in use, the additional cost (at a 6 percent real rate of interest) is less than the cost of the energy saved. Compare Figure 20.2, which estimates the carbon tax required to induce carbon emission reductions; that such a tax must be imposed to reduce emissions of greenhouse gases means that there is a positive net cost to society. Which perspective, if either, is correct? The answer lies in understanding the inherent limitations of each approach with respect to the task of evaluating specific mitigation options. Energy modeling, in its current state of development, is limited in its ability to evaluate the direct reduction or offset of greenhouse gas emissions achievable by different options. The approach used in this study, which the panel

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Page 181 image FIGURE 20.4 Technological costing analysis of energy efficiency in the buildings sector. calls "technological costing," is better suited to this task but limited in its ability to assess overall consequences for the economy. Several related problems are discussed below: (1) deviations of real markets from the idealized bargaining assumed in economic theory, (2) uncertainty, and (3) comparisons of current costs with future benefits. These problems lead to the conclusion that there is no single formula or method for choosing the best alternatives, although comparisons among alternatives are necessary to make informed and prudent decisions.

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Page 190 on this and other key assumptions, it is possible to develop a cost-effective portfolio of investments in mitigation (for a similar application, see Northwest Power Planning Council, 1986). Finding the least-cost mix of responses to greenhouse warming entails comparing all the different mitigation responses. Figure 20.5 illustrates that the least-cost plan will probably involve a mix of responses. For simplicity, only two hypothetical options are plotted. They are shown as curves giving the cost for achieving various reductions in greenhouse gas emissions (or the equivalent: removal of greenhouse gases from the atmosphere, blocking of incident radiation, or changing of the earth's reflectivity). For comparability, all responses are translated into CO2-equivalent emissions. Both options exhibit increasing cost for increasing reductions in emission (the curves gradually bend upward). If the only alternative were to achieve the desired level of reduction by choosing one option, the clear preference would be the hypothetical option B. Option B produces each level of reduction at lower cost than option A. image FIGURE 20.5 A comparison of hypothetical mitigation options. Curves show the costs of various levels of reduction  in CO2-equivalent emissions. Total costs for the period of analysis are divided by the number of years, and all comparisons over time are assumed to be on the same basis. Both the cost and potential emission reduction are converted to CO2 equivalents to allow comparison across different mitigation options.

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Page 191 Several analysts (Edmonds and Reilly, 1986; Nordhaus, 1990) have pointed out the technical complications of making sensible comparisons among different greenhouse gases. The cost of reductions has been plotted along the vertical axis in terms of a ''levelized" cost (i.e., total cost over the period of analysis, divided by the number of years). Responses to greenhouse warming should be evaluated as investments, because the benefit that is sought will generally take a long time to appear. Consequently, it is important to compare costs over time, rather than simply in the particular years in which expenditures are made. Discounting the costs and benefits allows such a comparison. As discussed above, the choice of discount rate influences the comparisons made. Figure 20.6 extends the comparison to additional options with different characteristics. Option C shows the "negative cost" or net positive benefits, associated with achieving the initial reductions in CO2 emissions. An example is energy efficiency, such as variable speed motors or compact fluorescent lighting. The cost of these measures would be less than the cost image FIGURE 20.6 A comparison of multiple mitigation options. Curves show the costs of various levels of reduction in CO2-equivalent emissions for four hypothetical mitigation options. Total costs for the period of analysis are divided by the number of years, and all comparisons over time are assumed to be on the same basis. Both the cost and the potential emission reduction are converted to CO2 equivalents to allow comparison across different mitigation options.

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Page 192 of adding electricity generating capacity if the conservation measures were not implemented. Option D illustrates a "backstop technology." A backstop technology provides an unlimited amount of reduction at a fixed cost. An example would be an abundant energy source that provides electricity with no CO2 emissions at all. Where a backstop technology exists, its cost sets a ceiling on the investment in reducing emissions. Only options costing less than D should be considered, no matter how much emission reduction is desired. The heavy line labeled S in Figure 20.6 shows the cost-effective combination of options. Option C is selected up to the point at which option B becomes more cost-effective. Option A is added when it becomes cost-effective. S becomes horizontal when the cost reaches that of the backstop technology. As the comparison of curves A and B indicates, the cost-effective portfolio contains a mix of alternatives. The level of expenditures is established by governments, who are guided by estimates of the benefits to be derived from mitigation, as well as budgetary considerations, international commitments, and other factors. The level of expenditure translates into a number of tons of greenhouse gas reductions; the objective is to get the largest reduction for that expenditure. This is shown by curve S in Figure 20.6, which outlines the mix of investments that produces any specified reduction at the least cost. At the point labeled b, for instance, all of the pairings from options B and C below the dashed line have been obtained, and acquisition of the alternatives at the bottom of curve A is beginning to be added. Additional savings from options B and C would also be pursued as the level of spending moves upward. (This discussion assumes that curves A through D describe independent activities, so as to avoid double-counting of savings. See Chapter 29 for an additional discussion of the problem involved in double-counting.) Curves A through C all reflect a conventional assumption: that the cost of obtaining reductions in greenhouse gas generally increases as the size of the reduction is increased. Note, however, that curve C begins below zero. As discussed in Chapters 21, 22, and 23, there may be options available that are of net benefit to society even without accounting for the benefits of reduced greenhouse warming. These include some energy efficiency measures, such as variable speed motors or compact fluorescent lighting. As mentioned above, these actions may be worth more to electric utilities than the costs of producing and installing them because the improved efficiency allows the electric utility to defer expensive additions to generating capacity. In principle, they can therefore be provided at no cost to the homeowner because they reduce the total cost of serving that customer, provided the utility can reap a reward on its investment in energy efficiency. A substantial portion of the energy savings would reduce emissions of CO2 while

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Page 193 simultaneously producing economic benefits. There may be other options available whose costs are lower than the cost of the energy saved, even without placing a value on the reductions in greenhouse gas emissions. What prevents these measures from being taken now are lack of information, inadequate economic incentives for utilities, high discount rates for personal consumption, and resistance to changing established methods. However, even technically feasible measures that benefit the national economy as a whole may not benefit every individual. Research and development should both lower and flatten the supply curves in Figure 20.6, reducing the cost of alternatives and raising the scale at which they can be economically introduced. Research and development here includes social experimentation in areas such as mass transit, marketing of energy efficiency, and planting of trees on residential property, where consumer behavior has a substantial effect on the reductions achieved. More generally, research affects uncertainty. Although the supply curves in Figure 20.6 are drawn as lines, there is actually considerable uncertainty about how much reduction is available and at what price. The lines should be bands. The distinction between two technologies may not be as clear in practice as shown for curves A and B in Figure 20.6. Timing of Mitigation Policy and Transient Effects As further described in Appendix B, another important consideration in designing a mitigation policy is the timing and targeting of mitigation activities so that they have the desired impact on greenhouse warming. Therefore an important distinction to make is that human activities affect both the stocks and the flows of greenhouse gas emissions. Greenhouse gas emissions occur in one time period, with some portion of the emissions sequestered immediately by the natural system (e.g., oceans) but with the remainder augmenting the much larger stock in the atmosphere that has developed over geological time due to the natural occurrence and long lifetime of many of these gases. The response of climate may depend in complicated ways on both stock (atmospheric concentrations) and flow (emissions and absorptions into oceans, plants, and other reservoirs). Changing both—as is done in most mitigation approaches—may therefore produce nonlinear effects. Lowering emissions by 10 Mt/yr for 10 years may not have the same effect on greenhouse warming as lowering the stock of greenhouse gases by 100 Mt in a single year. This implies that different CO2 reduction patterns will have different effects on greenhouse warming with time and thus different benefits. Therefore, in evaluating a prospective mitigation measure, one must examine the relationship between both the timing and duration of its reduction in greenhouse gases and the policy outcome desired.

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Page 194 Not only are there nonlinear effects due to the response of the natural environment, there also are important nonlinearities in social dynamics. An important body of knowledge has been accumulated on the reaction of various national economies to the energy price shocks of the 1970s. This analysis suggests that gradual change is likely to be significantly less costly than sudden imposition of a carbon tax or any other policy instrument designed to bring about a rapid change in CO2 emissions (Jorgenson and Wilcoxen, 1991). More generally, the transient effects of policy can be a large fraction of the total impact of attempts to mitigate greenhouse warming, particularly if the economic changes occur on a time scale of a year or shorter. Thus timing is an important policy consideration. Climate change is a slow process in comparison with the rates of price fluctuations or changes in the business cycle. To the extent that institutions permit slow phasing in of policies such as carbon taxes, gradual changes are likely to be less disruptive economically. Uncertainty and Choice of Parameters Uncertainty cannot be ignored in responding to greenhouse warming. Errors of doing too much can be as consequential as errors of doing too little; the error of trying to solve the wrong problem is as likely as the error of failing to act. Above all, errors are inevitable, whether one acts or not, but inevitable errors are also occasions to learn. Therefore policy design that incorporates these lessons of the past helps to increase the resilience of the decision-making system and to foster future learning (Holling, 1978). An initial step is to choose the range of parameters to be used in the analysis. The case of discount rate has been discussed here at some length, illustrating the social judgments at stake in making these quantitative assumptions. Note that what is needed is a range, rather than a single "best" value. If uncertainty cannot be avoided, one needs to know what would happen under different circumstances, so that serious errors can be forestalled and affordable ones identified. Therefore, as illustrated in Chapter 29, after using the best information that the Mitigation Panel had available to evaluate the cost-effectiveness and emission potential of the various mitigation options at discount rates ranging from to 3 to 30 percent, the panel used its judgment as shown in Figures 29.1 to 29.3 to provide a range of values for the cost and potential of mitigation. This process culminates in Figure 29.5, which shows two curves: one with the highest cost and lowest emission reduction, the other with the lowest cost and highest emission reduction. This technological costing curve range is compared with the range developed using energy modeling as an accuracy check.

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Page 195 It is important to note that the mitigation options evaluated are merely technical choices. It is the policy judgments that are of instrumental importance, first, because a judgment of what to study shapes the kinds of conclusions that can be reached (Selznick, 1947; Kingdon, 1984) and, second, because governments are likely to be held accountable for their actions, including actions taken in analyzing large-scale changes. Both require policy-level involvement, as well as competent technical execution. Because of this, the Mitigation Panel believes it is important to also evaluate various policy instruments that can be used in implementing the mitigation options. A list of some of the alternatives that have been proposed appears in Table 20.1. The list includes command-control instruments, economic incentives, revenue-neutral incentives, information programs, and redefinition of the mission and profits of utilities. The potential of these policy options for reducing the barriers to implementing the mitigation option is discussed in the evaluation of each option. Conclusions The charge to the Mitigation Panel was to "examine the range of policy interventions that might be employed to mitigate changes in the earth's radiation balance, assessing these options in terms of their expected impacts, costs, and, at least in qualitative terms, their relative cost-effectiveness." In this chapter, the panel has examined the two primary methods that can be used to evaluate greenhouse gas mitigation options: technological costing and energy modeling. While the energy modeling approach uses models that predict society's responses based on past societal behavior, technological costing attempts to determine the cost-effectiveness and emission reduction potential of future behavior and assumes that current public or private market imperfections can be overcome. The panel believes that the technological costing approach is better suited to evaluating the comparative advantages and disadvantages of specific mitigation options because current energy models do not have the spedicificity needed for such an analysis. For example, they look at the impact of a given carbon tax across the economy, but not the cost of specific methods for responding to that tax. However, there are reasons to be skeptical of the degree to which option-driven assessments can incorporate social responses (including market responses) to alternative courses of action. For example, although it is technically feasible at some cost to replace all coal-fired plants with nuclear power plants, social opposition to the installation of nuclear plants could prevent the option from being implemented. Yet, because energy modeling draws inferences from past behavior, the total cost of a shift to nuclear power may be overestimated, if there were to be widespread public reevaluation of the relative risks of climate change and energy technology, and if

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Page 196 TABLE 20.1 Potential Greenhouse Gas Mitigation Instruments I.  Command-Control Instruments   A.  Consumption   1.  Bans on certain products (aerosol hairsprays)   2.  Quantitative limitations on certain products (rationing during wartime)   3.  Mandated consumption of certain products or services (unleaded gasoline)   B.  Production   1.  Quotas on offending products (CFCs)   2.  Quotas on products using offending substances asbestos-product phaseouts)   C.  Input choices in production   1.  Mandated fuel efficiency (Corporate Average Fuel Economy standards)   2.  Durability standards (automobile bumper standards)   3.  Fuel mixture standards (gasohol?)   4.  Land reforestation requirements (strip-mining regulations)   D.  Provisions of public services   1.  Mass transit options   2.  Acquisition of public lands   E.  Standards for energy-efficient buildings   II.  Economic Incentives   A.  Taxes on inputs   1.  Carbon tax levied on fuels   2.  Specific fuel taxes (gasoline, jet fuel, etc.)   B.  Taxes on outputs   1.  Emission tax   2.  Sales tax on products (gas-guzzler tax)   C.  Financial incentives   1.  Research and development tax credit   2.  Tax credits (or deductions) for improved technologies   D.  Transferable property rights   1.  Tradeable emission reductions (offset, SO2 abatement credits, CFC permits)   2.  Reforestation credits (proposed less-developed country debt relief) III. Revenue-Neutral Incentives   A.  Gas-guzzler fee combined with gas-sipper rebate for new cars   B.  Fee rebates to create a market for low emissions of NOx, hydrocarbons, and particulates for new cars   C.  Variable hookup fees for new buildings (Table 20.1 continued on page 197)

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Page 197 (Table 20.1 continued from page 196) IV.  Information Programs   A.  Provision of basic data   B.  Provision of technological data   C.  Transmission of economic signals   D.  Technical assistance V.  Redefining the Mission and Profits of Utilities   A.  Incentives for utilities to invest in conservation and share in the avoided cost IV.  Direct Actions   A.  Direct government action (such as carrying out geoengineering options) investments in nuclear engineering were to produce technical alternatives that were widely regarded as acceptable. In conducting the analyses in subsequent chapters, the panel used the best and most reliable information available. But because more and better information is needed to determine the full social costs of mitigating greenhouse warming, the analysis presented in this report should be seen as a starting point on which future assessments can build. Despite the uncertainties described in this chapter, the components of a reasonable policy approach can be inferred from the discussion above: • Although U.S. national policy is important, it is not by itself the determining factor in global greenhouse gas emissions. • There are likely to be substantial economic impacts from controlling greenhouse gas emissions. Transient effects and transaction costs are important and potentially large, but they are highly uncertain, and methods for making usable predictions of these dynamic effects do not exist. • Mixed strategies, aimed at cost-effective reductions of greenhouse gas emissions, are likely to be the best approach to mitigation. The timing and precise design of such a mix of policies are both significant and uncertain at present. It makes sense, accordingly, to emphasize that set of policies that is cost-effective. • The ranking of options in terms of cost-effectiveness is strongly dependent on the choice of discount rate and a variety of uncertainties concerning technology, energy prices, and economic growth. • The substantial uncertainties in both science and social science make errors inevitable. It is important, accordingly, to shape policies that can be resilient and that foster learning.

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