October 6, 1997

Cost Uncertainties Delaying Action on Global Warming Policy

By WILLIAM K. STEVENS

ith President Clinton having accepted the dominant view among scientists that global warming is a serious matter, the increasingly urgent debate over what to do about it has largely shifted to the question of how restricting emissions of heat-trapping greenhouse gases like carbon dioxide may affect the nation's economy.

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And there, perplexity reigns.

The future severity of climate change is uncertain enough, and its future physical impact on particular countries and regions is more so. The uncertainty multiplies yet again when people try to calculate the costs and benefits of taking action to reduce greenhouse emissions.

"There's a lot more uncertainty about the economics than about the climate," said Dale Jorgenson, an economist at Harvard University who specializes in environmental questions.

Carbon dioxide is produced by the burning of fossil fuels like coal, oil and natural gas, which are the energy foundation of the modern economy. Some players in the debate, notably industries that produce fossil fuels or use lots of them, argue that serious economic damage would result if use of the fuels were significantly cut back.

Others, including environmentalists and advocates of alternatives to fossil-fuel energy, say the economy as a whole would gain because it would use energy more efficiently.

In between is a range of estimates, typically based on uncertain assumptions about how various aspects of the economy would respond to cuts in the use of fossil fuel and how strategies for cutting emissions would actually work.

All of this will be under the spotlight in Washington on Monday at a daylong conference on climate change sponsored by the White House. Clinton, who plans to take part in the meeting, supports legally binding international action to cut emissions, but not at the price of harming the U.S. economy.

The president is under intensifying pressure to come up with a specific proposal for reducing emissions. The U.S. proposal is generally seen as critical to efforts by the nations of the world to negotiate cuts at a meeting in Kyoto, Japan, in December. It is widely expected that Clinton's proposal will be announced later this month, either just before or at a pre-Kyoto negotiating session that begins Oct. 20 in Bonn, Germany.

But as the moment of truth approaches, even some leading members of the Clinton administration have all but thrown up their hands over the difficulty of obtaining clear answers to some crucial economic questions.

Janet Yellen, the chairwoman of the president's Council of Economic Advisers, told Congress in July that it was futile to try to develop a set of economic models that can "give us a definitive answer as to the economic impacts of a given climate change policy." Computerized models are the main analytical tool employed by economists.

"If anybody tells you that he or she has the definitive answer as to the costs and benefits of particular climate-change policies," Yellen added, "I would suggest that you raise your collective eyebrows."

Can anything useful be said, then, that might aid the search for a solution creating the least economic strain?

There is general agreement that reductions of emissions would come at some cost to the economy and that the size of the cost depends largely on the size of the cuts and how rapidly they are carried out.

Energy costs would very likely rise, at least for a time, and some industry sectors, it is generally agreed, could be hit hard if they were not able to adapt quickly enough. Chief among these is perhaps the coal industry; coal burning emits the most carbon dioxide per unit of energy, and the nation's utilities depend heavily on it.

But many economists also say there are a number of ways to cut the costs substantially, through policy measures. One is by imposing a tax on fuels in proportion to their carbon content. The revenues from the tax would be used to reduce other federal taxes, thus pumping money back into the economy.

Many economists see a carbon tax as the most economically efficient way to reduce emissions. But any sort of energy tax is likely to face deadly opposition in the Republican Congress.

So attention is focusing on another possible cost-reducing mechanism: emissions trading. In this arrangement, the government sets an overall cap on emissions and issues permits to companies to emit carbon dioxide within that limit. Companies that find it more difficult and expensive to limit emissions could buy permits from those that find it easier and cheaper. The price of the permits is set in an open market.

Proponents of this plan, already in use for industrial sulfur dioxide emissions, say it cuts overall costs significantly. But many economists argue that unless the permits are initially auctioned by the government and the proceeds used to reduce other taxes, much of the cost-cutting benefit to the economy would be lost.

The United States also favors extending the cap-and-permit idea to the international arena. Richer countries, which emit lots of carbon and would find cuts relatively expensive, could pay poorer ones, partly in technological assistance, to reduce some of theirs.

Proponents of this idea say that since it would be cheaper to make cuts in developing countries, the cost both to the United States and the global economy would be lower.

A third way to reduce costs, some economists say, is to allow some flexibility in the timing of reductions. They argue, for instance, that forcing industries to replace their physical plants with more energy-efficient ones before their natural economic life is over would be very expensive.

A fourth cost-cutting idea, often cited by environmentalists and advocates of alternative energy sources like solar and wind energy, is for government to aggressively promote the adoption of more fuel-efficient technologies.

These are myriad, and range from small things like devices making it unnecessary for television sets to use power when they are off, to large things like automobiles that deliver 60 or 70 miles per gallon, to ways of burning coal more efficiently.

A recent study by five of the government's national laboratories concluded that vigorous promotion of such technologies could reduce carbon emissions to 1990 levels by the year 2010 while saving enough energy to at least offset the cost of putting the technologies in place.

It was the latest in a long line of studies that have come to similar conclusions; some have found, in fact, that the energy savings from new technologies would increase gross domestic product, which is the total of all goods and services produced, by 1 percent or 2 percent a year over the long run.

Other economists, principally those who model the economy's overall operations, dispute this optimistic assessment, while acknowledging that some gains are possible through new technology.

"Virtually all analysts believe that there's some low-hanging fruit out there," said Richard Richels, an economist at the Electric Power Research Institute, a research organization in Palo Alto, Calif., that is supported by the power industry. The disagreement, Richels said, is over how much technological fruit can be easily picked.

A recent study by Robert Repetto and Duncan Austin of the World Resources Institute, an independent research group in Washington, concluded that such "bottom up" assessments as the five-laboratory study, which try to add up the expected impact on the economy from a wealth of new technologies, probably overstate the potential energy savings.

But the World Resources Institute also found that some conventional "top down" models, which analyze the economy's overall performance, tend to overstate the costs. Typically, the top-down models say reducing emissions to 1990 levels by 2010 would trim gross domestic product by 1 percent or 2 percent, with some predicting much greater losses.

Repetto and Austin examined 162 estimates from 16 models and found that 80 percent of their differences could be explained by what they assumed about economic uncertainties.

For example, the prediction turns out more optimistically if one assumes that the economy responds relatively easily to changes in policy, that noncarbon fuels are readily available and easily adopted and that damages from air pollution and climate change are averted as a result. Opposite assumptions produce more pessimism.

Predictions that a carbon tax or a cap-and-trade policy would seriously harm the economy are unrealistic, the two researchers wrote, because "they stem from worst-case modeling assumptions."

Assessing the damages of climate change, and therefore the benefits of averting it, is perhaps the chanciest task of all, and relatively few economists have tried it.

One who has, William Nordhaus of Yale University, says his best guess is that benefits to the overall market economy of the United States may just about balance costs over the next century. But that guess, Nordhaus said, comes "with big uncertainties."

The most important uncertainties, said Jorgenson of Harvard, have to do with how much economic growth will take place in future decades even in the absence of any climate problem.

Unlike some industry leaders, who argue that the uncertainties warrant doing nothing about emissions, Jorgenson says they are an argument for taking preventive action in the interest of future generations. But he also says he believes that the cost of reducing emissions to 1990 levels by 2010 are too high and advocates a more modest policy.

But if the policy is too modest, say many involved in the pre-Kyoto international talks, it risks losing credibility with developing countries, which have refused to undertake binding reductions until the richer nations show that they are serious.

What's more, the administration and the Senate, whose ratification would be required on any Kyoto agreement, have refused any deal that does not in some way include the poorer countries. Then there are the Europeans, who have proposed cutting emissions 15 percent below 1990 levels and are increasingly at odds with the United States over the issue.

However things turn out, flesh-and-blood political realities are likely to overshadow uncertain science and economics in the diplomatic endgame at Kyoto.