EUROPE: Group Declares Carbon Emissions Can Be Lower Without
Raising Costs
While many macro studies have concluded that reducing CO2 emissions
would "inherently lead to economic losses, " a review
of several dozen studies by an international research group led
by Florentin Krause shows industrialized countries could "achieve
major reductions in carbon emissions at zero or negative net cost
- even before considering the benefit of avoided damages from
global climate change." Krause is one of the lead authors
of the UN IPCC economic assessment of climate change mitigation
costs and is head of a private group conducting international
studies.
In a paper entitled, Energy Policy in the Greenhouse, Krause
and his co-authors assert the macro studies they reviewed make
two major flawed assumptions: 1) that current markets for energy
efficiency and other carbon-reducing energy technologies are already
operating at optimal economic efficiency, and 2) that current
patterns of taxation of capital, labor, pollution and energy are
already economically efficient. When these assumptions are replaced
by more realistic ones, and a societal view taken, predicted economic
losses turn into opportunities for economic gains, the authors
argue.
Competition between energy supplies and efficiency investments
are hampered by the failure of the market and other economic efficiency
problems. Many of these can be improved by what the authors call
market transformation policies:
-
financial incentives for manufacturers to make more energy
efficient products ("golden carrots")
-
utility payments to buyers of more energy efficient equipment
and buildings (DSM - demand side management)
-
government rebates for efficient vehicles paid for by fees
on inefficient ones (feebates)
-
stringent building, appliance and auto efficiency standards
("sticks")
Because cost/benefit tested programs using these instruments
save energy at a profit, emissions are reduced without incurring
a loss.
These gains can be augmented by tax shift policies and subsidy
reforms. Just by removing subsidies from fossil fuels, carbon
emissions would be reduced. When imposing an energy tax or a permit
auction system, gains can offset the costs to the economy from
higher energy prices, the authors noted. When compared to a policy
of doing nothing, these market transformation and tax reform policies
could yield a large potential for decreasing emissions at no cost
or even at a profit. If they were implemented in the near-to-medium
term, sizable benefits would result during the transition to a
low carbon future. The sooner the transition is begun, the greater
the benefits to the economy and the climate.
Macro modeling (top-down) studies on which most governments have
relied to date systematically fail to capture key "no regrets"
policy options. Top-down assessments model either a cap on emissions
linked to tradable emission rights, or an energy or carbon tax.
They focus on the interaction between the energy sector and the
economy at large. Calculations of the policy impact of actions
are based on past relationships between energy consumption and
economic output. Policy cost calculations are based on changes
in the GDP.
Because bottom-up assessments identify pervasive market failures
in energy and especially energy efficiency markets, they find
market transformation policies based on incentives and regulations
to be economically more efficient.
But most bottom-up studies still overestimate costs because they
do not account for policy feedbacks on fuel and technology prices,
or for secondary air pollution benefits. They assume that market
transformation policies will succeed in shifting all annual investments
in energy-consuming devices toward better efficiency, somewhat
underestimating the time needed to achieve a certain level of
emissions reductions.
The conclusion of Krause and colleagues is as follows:
-
the OECD countries could cut carbon emissions by 50 percent
without posing an economic burden, and most likely at a benefit
-
as an intermediate goal, a reduction in emissions of 20 percent
which was first recommended in the Toronto Conference in 1988
could be achieved in the next 20 years or so, again at a net
economic benefit
Policy Requirements
Policymakers can focus first on the most cost-effective "no
regrets" measures and on proven designs for regulatory and
incentive programs. If a portion of the revenues from an energy
tax is used to finance such incentive programs, energy taxes could
be kept much lower than suggested in most top-down studies while
still inducing large emission reductions.
Global Prospects
If R&D successes are transferred to developing countries
and incorporated there, emission reductions of 50 percent or more
on a global basis should be achievable without hampering the economic
goals of the developing countries and again with no net mitigation
cost or with a possible surplus.
Future Policy Research
Because most macroeconomic modeling studies fail to capture the
potential economic benefits from no-regrets emissions reduction
policies, their usefulness for guiding climate policy is questionable.
State of the art modeling approaches involve the linking of top-down
macroeconomics models with detailed bottom-up analyses of market
transformation options and energy efficiency potentials. Without
such linkage, economic modeling merely reproduces historic patterns
of investment shaped by economically inefficient, faulty market
frameworks. "Therefore, a bottom-up analysis of optimal energy
services, efficiency levels, and policies is indispensable for
a credible greenhouse policy cost assessment."
