COMMENT THE COST OF CONTROLLING CO2 EMISSIONS

W. David Montgomery
Vice-President
Charles River Associates Inc.
Washington

Global climate change is a matter of serious debate throughout the world.

There are numerous scenarios developed about its potential impact. They range from benign to apparently catastrophic. Unfortunately, available evidence gives little basis for choosing among them.

While scientists expand their understanding of global climate and its possible future changes, policy makers need to consider the economic implication of rapid, large reductions in carbon dioxide emissions.

CO2, which comes from burning oil, gas, and coal and from deforestation, has been targeted as the most significant "greenhouse gas" involved in climate change. Its reduction is therefore the main focus of most proposals to curb the "greenhouse effect." The benefits of reducing CO2 emissions, however, remain uncertain.

NO CLEAR EVIDENCE

There is no clear evidence of the consequences of climate change. A century may elapse before significant changes appear, and their impact on the U.S. economy may be very small. Indeed, a study by the National Academy of Sciences found that in none of its scenarios would climate change cause any measurable economic harm to industrialized countries. We need to consider the economic effects of government mandated reductions in CO2 emissions against this backdrop.

A remarkable number of studies have examined those economic effects. The studies fall into two classes:

Economic models that predict the effect of changes in energy markets on the economy.
Technology studies that use engineering calculations to assess potential gains in energy efficiency.

Taken together, the economic models show that while the economic benefits of reducing CO2 emissions may be uncertain, the costs of stabilizing or reducing those emissions are likely to be high.

Stabilizing carbon dioxide emissions at or below current levels, a frequently cited goal, could require a carbon tax of $200/ton or more.

What does this mean? It is the equivalent of taxing coal at $120/ton, oil at $26/bbl, and gas at $3.20/Mcf. That is about a five-fold increase in the price of coal and more than a doubling of the prices of oil and gas.

Those costs would cause annual losses of 1.7% of America's gross national product (GNP) in 2020 and 2.4% in 2100.

Today, 1.7% of GNP represents about $95 billion. That is a big number. By way of comparison, consider that Congress just settled on a surface transportation bill tagged at $150 billion during 6 years. The federal government will spend $25 billion/year to maintain our transportation infrastructure-one fourth of the cost of stabilizing CO2 emissions.

Furthermore, reliable estimates put the total cost of pollution control laws already on the books at a little more than 2% of GNP. Stabilizing CO2 would increase that cost by another 80%!

There are limits to our understanding of those costs.

Technology models suggest energy savings might not be costly because increased energy efficiency would save consumers money. But technology models cannot explain why consumers won't take advantage of apparently profitable opportunities to save energy.

In fact, the assumptions, methodologies, and conclusions of economic and technology models have not been reconciled. But in every case I have examined, economic models deal more convincingly with the critical questions than do technology models.

WHAT TO DO

So what do we do?

Because the costs of immediate reductions in CO2 emissions are high and their benefits are uncertain, we should allow ourselves time to commercialize safe forms of nuclear power and other nonfossil energy technologies and become more sure about costs. Those technologies eventually could curb the effect of greenhouse gases far more cheaply than is possible through immediate mandated reduction in emissions.

Finding ways to reverse deforestation, because growing trees remove carbon dioxide, could do the same.

Advice to delay action pending better information is always viewed with suspicion. But a wise person does not immediately replace a car engine when a suspicious noise begins. Opening the hood, investigating the problem, and getting some repair estimates is a normal reaction.

Whether we begin to reduce carbon emissions now or 10-20 years from now makes little difference to the ultimate potential for climate change. The difference can easily be made up in the future through more ambitious efforts based on new technologies.

And because it is reasonable to assume better technology will significantly lower the cost of reducing CO2 emissions, rapid action now to reduce emissions could be sheer waste.

Further climatological research should clarify the real extent to which the planet's climate is in jeopardy. Most significantly, such research may even show that massive CO2 reductions are not required.