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4 Policy Framework The previous chapter clearly points out gaps in our knowledge and un- derstanding of key physical phenomena in greenhouse warming. Neverthe- less, current scientific knowledge seems to indicate that unconstrained re- leases of greenhouse gases from fossil fuel combustion and other sources would ultimately cause climate change. There are no specific conclusions, however, about the regional and local effects associated with increased at- mospheric concentrations of greenhouse gases. Nor is there much indica- tion about how rapidly the effects might emerge. Our knowledge about other topics central to the analysis of the green- house warming problem is at least as insecure. The number of analyses of the overall impact on the economy of this country of greenhouse warming is even smaller than the number of GCM runs simulating an equivalent dou- bling of CO2. Economic experts differ in their assumptions about future population and economic growth, technological change, and a host of other factors. Because the economic models must project trends far into the future, their results are likely to remain controversial. How then, in the midst of this uncertainty, can we begin to evaluate policy options? Several concepts that can help us in that task are presented in the next two sections. COMPARING MITIGATION AND ADAPTATION Many different policies could be adopted in response to the prospect of greenhouse warming. In order to evaluate these policy options, it is useful to categorize them into three types: 27
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28 POLICY IMPLICATIONS OF GREENHOUSE WARMING 1. Options that eliminate or reduce greenhouse gas emissions. 2. Options that"offset" emissions by removing greenhouse gases from the atmosphere, by blocking incident solar radiation, or by altering the reflection or absorption properties of the earth's surface. 3. Options that help human and ecologic systems adjust or adapt to new climatic conditions and events. In this report the first and second types of interventions are referred to as "mitigation" since they can take effect prior to the onset of climate change and slow its pace. Mitigation options are discussed in more detail in Chap- ter 6. The third type of intervention is referred to as "adaptation" since its effects come into play primarily after climate has changed. A fuller discus- sion of adaptation appears in Chapter 5. In comparing mitigation and adaptation, one consideration is whether a given action will, in addition to providing adaptation or mitigation benefits, also improve economic efficiency. Even progressive societies find much of their economic activity falling short of demonstrated "best practice." New, more efficient practices are being developed continually, but it takes time for them to diffuse throughout the economy. There are many obstacles to more rapid diffusion of better practice, including lack of information, insufficient supply of components or products, political interests, inappropriate incentives, and simple human inertia. In general, however, every society has many opportunities to improve its overall situation by reducing the gap between .. current practice and best practice. Many of the actions taken to deal with potential greenhouse warming could also improve economic well-being be- cause they are more efficient than prevailing practice. These options should be distinguished from another class of actions: so-called "free-standing" actions, which satisfy other social or environmental objectives (and may or may not contribute to economic efficiency as such). Figure 4.1 compares hypothetical mitigation and adaptation actions in response to potential greenhouse warming. If climate change occurs, and no mitigation or adaptation actions are undertaken, a substantial reduction in real income is likely over time. Initially, mitigation is likely to reduce real income more than either doing nothing or taking adaptation measures as climatic changes emerge. Ultimately, however, mitigation actions could result in higher real income than waiting and taking adaptation measures. In this scenario, investing in mitigation reduces consumption now. but oro ~ ~. 1_ _ 17_ ~_ 1 , . . -----I ~ ~~~ r~~ auras an In one future. ~xpena~ures on megaton options should thus be seen as investments in the future. Many combinations of mitigation and adaptation actions are possible. Choosing the best mix of mitigation and adaptation strategies depends in part on the discount rate applied to the investment. The higher the discount rate, the greater the case for postponement of costly actions. Use of discount rates is one way of assigning values to future outcomes.
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POLICY FRAMEWORK - - ~- TIME 29 _ No Climate Change, No Action , ~ Mitigation to Avoid Adaptation Adaptation, No Mitigation Climate Change, No Action FIGURE 4.1 Schematic comparison of mitigation and adaptation. The uppermost curve plots world economic well-being, essentially the amount of real income available for consumption, assuming that there is no climate change. The lowest curve plots world economic well-being assuming that there is climate change and no actions are taken either to prevent or to cope with those changes. Notice that the axes are not defined quantitatively. Thus the curves are only relative, and this figure cannot be used to estimate the amount of economic welfare lost by expenditures on mitigation. Similarly, it cannot be used to estimate the time at which the return from expendi- tures on mitigation would exceed the return from expenditures on adaptation. ASSIGNING VALUES TO FUTURE OUTCOMES Most people have a time preference for money. They would rather have, for example, $100 to use today than $105 a year from now. Future costs and benefits are usually transformed into their "present value" by using a discount rate, which is similar to the interest on savings. Discount rates enable current and future returns to be compared. A central, and controversial, issue is which discount rate to use in weigh- ing the relative advantages of present and future impacts and costs. There are essentially three courses of action with regard to responding to potential greenhouse warming: (1) we can invest resources now to slow greenhouse gas emissions; (2) we can invest in other projects that might yield a higher return; and (3) we can defer any kind of investment in the future in favor of current consumption. Applying a discount rate near the yield on other investments at least 10 percent per year in most countries, in real terms
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30 POLICY IMPLICATIONS OF GREENTIO USE WARMING in evaluating responses to greenhouse warming would lead to the conclusion that our investment dollars could be most efficiently used in capital projects, education, or other sectors. It suggests that we should not take costly, low- payoff actions to reduce greenhouse gas emissions. High discount rates place a low value on future outcomes. Applying a low discount rate to greenhouse investment choices say, 3 percent per year would make investing now to avoid greenhouse warming more attractive. But such a low discount rate means that other investment opportunities have been exhausted or are being ignored. It is likely that there will be more investment opportunities with returns of greater than 3 percent than there are available funds. A low discount rate on resources invested in response to potential climate change is inconsistent with a high return on capital investment. The panel makes no attempt to resolve this issue. This study uses rates of 3, 6, and 10 percent in calculations to ensure that unique circumstances that would alter assessment of the outcome are not overlooked. Because consumers sometimes act in ways that indicate an even higher discount rate in their purchases, a rate of 30 percent is also used in considering some mitigation options. For the purposes of comparing options and arriving at recommendations for action, the panel used a single real discount rate of 6 percent per year. Use of a 10 percent discount rate would decrease the present value of the low-cost options but would not change their rankings. A METHOD FOR COMPARING OPTIONS Using the concepts described above, we can compare options by care- fully enumerating the impacts of action and inaction and then trying to find a course that minimizes the net costs of the impacts of mitigation and adaptation. More specifically, the anticipated consequences of greenhouse warming (both adverse and beneficial) can be arrayed to produce a "damage function" showing the anticipated costs and benefits associated with projected climatic changes. The mitigation and adaptation options can be similarly arrayed according to what they would cost and how effective they would be. A well-designed response will involve balancing incremental impacts and costs. A sensible policy requires that the level of action chosen be "cost-effective," which means that the total cost of attaining a level of reduction of climate change should be minimized. Ideally, the evaluation would consider the full costs associated with each mitigation alternative. Called "full social cost pricing," such an analysis would allocate to each option not only the costs of its development, construction, operation, and decommissioning or disposal, but also those of environmen- tal or health problems resulting from its use. Burning coal, for example, not only emits greenhouse gases, but also contributes to a variety of health
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POLICY FRAMEWORK 31 problems (for nearby residents as well as coal miners) and to environmental problems such as acid rain. All these would be included in full social cost pricing. A different example involves increasing automobile fuel efficiency by reducing the size and weight of vehicles. Reducing vehicle size results both in reduced emissions of greenhouse gases, a benefit, and in increased likelihood of injury from collisions with larger vehicles, a cost. Ideally, all costs and benefits would be considered. In practice, such a framework can be used only in an approximate man- ner. It is impossible to determine all of the costs of all options today, much less of climatic changes that will not occur for 50 to 100 years. Many of the important concerns are difficult to measure and are not fully captured in prices or other market indicators. Nevertheless, the panel finds this conceptual framework to be a constructive way to organize the evaluation of policy options. Assessing Mitigation Options Most mitigation options considered here use currently available tech- niques and equipment that could be installed within 10 years. Actions that reduce or offset emissions of greenhouse gases or otherwise deal with greenhouse warming are evaluated in terms of annualized costs and annualized reduction of CO2 emissions. Options addressing greenhouse gases other than CO2 are translated into the equivalent CO2 emissions. Annualized costs (or emissions) are determined by estimating the total costs in constant dollars (or emissions in CO2 equivalents of that option over its lifetime. This includes the so- called "engineering" costs of construction, installation, operation, maintenance, and decommissioning or disposal. The total discounted cost is divided by the number of years the option is expected to last, resulting in the annualized cost of that option. Annualized emission reductions are calculated in a similar fashion. The mitigation options in this menu are then ranked according to their cost-effectiveness. Those achieving the reduction of CO2 or CO2-equivalent emissions most cheaply are ranked highest. Finally, the overall potential of each option is estimated because there are limits on how much can be achieved with each option. For example, avoiding emissions by using hydroelectric power generation might be comparatively cheap, but there are few remaining locations in the United States where dams could be built. Its overall potential is therefore relatively small. This method has distinct advantages and disadvantages. One advantage is that it enables options with different lifetimes to be compared. The costs (and benefits) of a natural gas-fired electricity plant may accrue over 25 to 30 years, a much longer period than the periods associated with vehicle efficiency improvements, since the typical life of a car is probably not more
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32 POLICY IMPLICATIONS OF GREENHOUSE WARMING than 10 years. A disadvantage is that because implementation of the high- priority options would change the pattern of emissions over time, the cost- effectiveness of various options during the later portion of their operating life might be different. For example, programs to use electricity more efficiently appear quite cost-effective in the panel's current analysis. If such programs were aggressively implemented, the need for new electricity generating capacity over the next few decades would be reduced. Thus the cost-effectiveness of investments in power generation in, say, 2010 could be altered by electricity conservation programs today. This study makes no attempt to account for such possibilities, but they could be examined in future studies. Each time a new analysis is performed, a new series of "least cost" options will emerge. This circumstance allows policymakers to regularly adjust actions to ensure the most efficient use of resources. Assessing Adaptation Options Options intended to help people and unmanaged systems of plants and animals adapt to future climate change are more difficult to assess than mitigation programs. First, we must speculate about future climatic condi- tions. GCMs are currently unable to accurately predict local and regional events and conditions of greatest interest to policymakers. Second, we must predict how the affected systems are likely to react to the changing conditions. Sensitivity to climate change depends on many things, including physiological response to temperature or moisture stress and dependency on other components of the system. A crucial concept in the assessment is the speed at which the system adjusts. If adjustments are made more rapidly than climatic conditions change, the system should be able to adapt without government assistance, although not without cost. In the panel's analysis of adaptation options, "benchmark" costs were developed on the basis of the costs of contemporary extreme weather events or conservation and restoration programs. These estimates were used to develop a measure of the magnitude of the costs that might be associated with climate change. But the panel recognizes that many issues cannot be quantified. This is especially true for impacts, and the impacts of concern are of three fundamentally different kinds. First are the consequences, either beneficial or harmful, for things that are exchanged in markets. Agriculture, for example, will be affected by changes in precipitation patterns and dates of frost in ways that will be captured in prices and other market indicators. These are reasonably easy to quantify, and adding up the market effects gives a clear picture of the impacts.
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POLICY FRAMEWORK 33 Second are things whose values are not well captured in markets. Gene- tic resources are generally undervalued because there are few property rights in genetic resources and people therefore cannot capture the benefits of the investments they might make in preserving biodiversity. Many species are unlikely ever to have marketable attributes, and it is virtually impossible to predict which ones may ultimately have economic value. These conse- quences are not well identified in current accounting systems. Third are items that some people value for reasons that have little to do with their "usefulness" or economic worth. This "ecocentric" valuation assigns intrinsic value to the living world. Species loss, in this view, is undesirable regardless of any economic value that may derive from those species. Humanity, it is held, should not do things that alter the course of natural evolution. The panel recognizes the difficulty of measuring these noneconomic cri- teria in the quantitative method described above. Since such values are codified, to some extent, in laws (e.g., those to protect biodiversity), potential greenhouse warming responses must be consistent with protection of the noneconomic values. These may be among the most difficult values to accommodate if climates change substantially. In spite of the difficulties outlined above, the panel believes this cost-effectiveness approach is the most useful method for evaluating policies involving response to greenhouse warming. OTHER FACTORS AFFECTING POLICY CHOICES ABOUT GREENHOUSE WARMING Once policy options have been ranked, certain factors not directly related to greenhouse warming come into play in the decision-making process. One such factor concerns risk perception. People differ in their willing- ness to take risks. We can expect people to differ in their reaction to the potential and uncertain threat of greenhouse warming as well. Some people may be distressed by the possibility that cherished parts of their cultural heritage or natural landscapes might be lost. Others might be unwilling to accept some aspects of proposed adjustments perhaps abandoning their traditional homeland and moving elsewhere. In any case, people and orga- nizations will differ in their judgments about how much society should pay to reduce the chance of uncertain climate change. Another factor is the constraint of limited resources. The United States is a large, wealthy country. Many other nations are severely constrained in their ability to act because of limited financial and human resources.
Representative terms from entire chapter: