On April 24, 2001 Governor Jane Swift of Massachusetts announced new restrictions on four pollutants emitted by electric generating facilities in her state. The pollutants are nitrogen oxides, sulfur dioxide, mercury, and carbon dioxide (CO2). The regulations will reduce pollutants that cause smog and acid rain by as much as 75 percent by 2008, and comprise the first domestic regulation of a greenhouse gas in the United States.
Governor Swift's announcement is noteworthy because until recently, the widely held view in legislatures nationwide (including Congress) was that carbon dioxide regulation was a "third rail" of environmental policy. Most politicians, even the most environmentally minded members, have never publicly endorsed direct regulation of carbon dioxide. In the past, the mere mention of CO2 regulations immediately conjured up the fierce debates over the Clinton administration's attempt in 1993 to curb carbon dioxide emissions by enacting a tax on each british thermal unit (Btu) of energy produced. The Vice President's initiative was soundly defeated, and the demise of that bill was read as the obituary for future attempts to regulate such a widely emitted pollutant.
But the political landscape regarding climate change has begun to shift, and Governor Swift's announcement is indication of a new outlook on climate change policy. Beginning in 1990, the nations of the world have been engaged in intense negotiations on a treaty to curb worldwide emissions of greenhouse gases. During the past decade, the parties to the negotiations have been making progress in defining elements the possible treaty, the first to curb worldwide emissions of a greenhouse gas. The most recent round of negotiations, in The Hague from November 13-28, 2000, witnessed a shift in conservative attitudes toward two obstacles to United States Senate ratification of the treaty: acceptance of the science of climate change and the viability of market-based mechanisms to reduce emissions.
It was just three years ago at the negotiations in Kyoto, Japan, that denial and vitriol were common. At those 1997 negotiations, critics denounced scientific evidence of global warming, labeling scientists as ideologues and negotiators as conspirators. Senator Chuck Hagel's (R-NE) comment on the assembled scientists and diplomats was typical: "What are they doing? Why are they here? Who are these people? I've never seen so much nonsense. I've never seen so many silly people." He later added, "We are taking national sovereignty away from every nation that signs this treaty." Senator Larry Craig (R-ID), citing a petition allegedly signed by some 15,000 scientists, said that "the vast majority" of scientists consider global warming an "exaggerated threat." The credibility of the petition was later undermined when it was discovered to contain names of pop music singers, movie stars, and nonexistent individuals.
These harsh words uttered only three years ago make the change of attitude in The Hague all the more significant. Senator Craig stunned an assembly of American environmental groups in the Hague last November when he allowed that, "the science is coalescing," showing the world to be warming at least in part due to greenhouse gas emissions. Senator Craig promised to use his chairmanship of the Republican Policy Committee to bring science and policy together on the issue of global warming.
Senator Hagel also took the floor in The Hague. He agreed with Senator Craig's evaluation of the scientific evidence for climate change. He left environmentalists momentarily speechless when he declared that the Byrd-Hagel Resolution--a Senate resolution making developing country participation in the treaty a condition of ratification--need not stand in the way of domestic action on climate change. He surprised the group again when he stated that then-presidential candidate Bush had a "huge opportunity" to take positive action on the issue.
Senator Frank Murkowski (R-AK), Chairman of the Senate Energy Committee, issued a press release at the negotiations calling for a comprehensive energy policy to address greenhouse gas emissions. He wrote, "I remain convinced that the risk of human-induced climate change is a risk we should address in a responsible manner . . . a new approach to dealing with the risk of climate change is necessary . . ." His current comprehensive energy legislation includes extensive provisions to encourage energy efficiency and reduce carbon dioxide emissions.
The Senators' statements underscore a larger trend among businesses potentially affected by emissions restrictions. In anticipation of a treaty, much of corporate America is moving toward controlling greenhouse gases. Boeing, DuPont and Intel are some of the major businesses working with the Pew Center on Global Climate Change, a research group dedicated to identifying cost-effective ways to reduce greenhouse gas emissions. Multinational corporations such as Shell and BP Amoco have developed their own internal, market-based systems in preparation for eventual emissions restrictions. The Global Climate Coalition, once a reliable source of opposition from the largest US businesses, has lost all but a few of its corporate members, as companies including the Ford Motor Company, Daimler-Chrysler, Texaco, General Motors and the Southern Company have defected.
The ground on climate change is shifting. Events at The Hague demonstrated that despite differences on how the treaty will be implemented, even the treaty's critics now acknowledge that some action will be taken to address the effects of greenhouse gas emissions. It is no longer a question of if, but of how and when.
The question of "how" concerns this paper. Climate change policy, like many other environmental policies, is largely driven by the need to balance costs and benefits of regulations to mitigate environmental damages. For this reason, policymakers have often turned to economists and economic analysis for answers about economically efficient alternative climate change policies. The conclusion of this paper is that, despite the allure of economic modeling as a source of precise answers to troubling public policy questions, it provides only principles to guide policy choice, not definitive policy prescriptions. The following chapters underscore the difficulties inherent in the use of economic modeling as a tool for determining policy choice, and use the insights gained from economic modeling to outline "best practices" for climate change policy development.
After a review of the issue of climate change and the current state of climate change policy, the paper presents a case study in economic modeling using a recent government estimate of the costs and benefits of regulating greenhouse gases. The case study demonstrates the difficulties of using economic models to provide policy prescriptions, and the insights from this exercise are subsequently used to derive some principles for sound climate change policy development. The conclusions discuss policy proposals that embody these best practices and current initiatives to that stand to help, or hinder, their realization.
Chapter 2 provides background on the issue of climate change. It surveys the development of scientific research on global climate change and the current state of international policy making on greenhouse gas emissions. The chapter also provides a legislative and diplomatic history of domestic and international efforts to address a growing scientific consensus on the problems associated with global climate change.
Chapter 3 uses a case study to examine the contribution of economic theory to the field of climate change policy. In recent years, a body of literature has been created to address the challenge of choosing efficient policies when the costs and benefits of regulatory action are uncertain. This discussion is especially applicable to climate change, because estimates of costs and benefits vary widely depending upon the assumptions one uses in generating cost projections. This chapter uses one recent government study of the costs and benefits of carbon regulation to show the strengths, limitations and potential contributions of economic models in terms of guiding policy choice. The chapter concludes that although economic analysis can provide useful insights in to specific policy choices, using even a simple economic model with high quality data to represent an ideal set of policies is problematic. Policy makers may find it useful to examine closely the assumptions contained in regulatory cost models and use economic theory to draw out guiding principles for policymaking, rather than definitive policy prescriptions.
Chapter 4 builds upon the case study to draw out some "best principles" for constructing greenhouse gas regulations. It affirms the insight from Chapter 3 that the outcome of an economic model is driven by key assumptions about policy choice. Using the assumptions that determine the outcome of a model, the chapter derives policy principles that maximize economic efficiency and social welfare. It then outlines the types of policies that promote these principles. These policies will be referred to as "best practices" for climate change policy formulation. In conclusion, the chapter outlines the main obstacles to realizing best practices in the current climate change treaty, as well as some private initiatives that bode well for future action on climate change. Obstacles to efficient policy implementation in the current version of the treaty are the concepts of additionality, supplementarity, and weak compliance mechanisms, as well as prohibitions on the use of carbon dioxide "sinks" to mitigate against carbon emissions. As a counterpoint to these obstacles, substantial voluntary private actions to anticipate regulations may shape how policies are developed. Following Chapter 4 are several appendices, including a glossary of technical terms used in this document.
Climate change policy is a complex issue. It is my hope that this paper will provide a useful lens through which to evaluate competing policy proposals on climate change.