As Congress and the Administration once again consider policies to reduce emissions of the greenhouse gasesGreenhouse Gases
Greenhouse gases contribute to global warming by absorbing solar radiation. The main ones are carbon dioxide, methane, nitrous oxide and water vapor. Some industrial chemicals, such as CFCs (chlorofluorocarbons) and HCFCs (hydrofluorocarbons) are also greenhouse gases. Humans increase atmospheric carbon dioxide mainly by burning carbon fuels. responsible for global warmingGlobal Warming
The average surface temperature of the world rose by about 1 degree Fahrenheit during the last century. The latest report of the Intergovernmental Panel on Climate Change predicts a further increase of 2 to 6 degrees in this century, even if greenhouse gas concentrations in the atmosphere are stabilized at twice the pre-industrial level. This warming would be accompanied by rising sea levels, more intense storms and droughts, heat waves, melting glaciers and other effects. , the potential cost of such policies to the American economy again becomes a critical issue. Some of those who oppose mandatory cuts in carbon dioxide emissions fear that the resulting rise in energy prices would impose serious costs on the economy, undermining prospects for growth. On the other side, many of those advocating government policies requiring emission reductions point to the availability of many opportunities to raise energy efficiencyEnergy Efficiency
Energy efficiency is the ratio between the energy input of a device, such as an automobile, and its useful output, such as mechanical energy. Improved technologies, such as hybrid engines in vehicles, combined cycle electric power plants and compact fluorescent light bulbs, have demonstrated improvements in energy efficiency. and to expand the use of renewable energyRenewable Energy
Renewable energy sources provide just over 6 percent of total energy used in the United States. The main sources are hydroelectric power, biomass burning, wind, geothermal and solar energy. Some renewable energy sources, such as wind and solar power, are increasing at more than 20 percent per year., concluding therefore that any economic impacts would be modest, at worst.
What should we believe? Since the United States has not yet initiated any national policies to reduce greenhouse gas emissions, experience provides little guidance. Predictions, both optimistic and pessimistic, are all based on simulationsSimulations
Policy simulations use economic models to predict how the economy would evolve under a set of baseline assumptions, and then predict its evolution under those assumptions plus the adoption of the policy in question, such as a tax on carbon fuels. The simulation then ascribes the difference in these two projections to the effects of the policy. performed using macro-economic modelsMacro-Economic Models
Macro-economic models describe the inter-related functioning of an entire economy, including its linkages to other economies. Many such models identify several producing sectors (e.g., industr, agriculture, energy) and consuming sectors (e.g., households, government, exports) and include equations describing their economic behavior and linkages. Some types of macro-economic models assume that economic behavior adjusts efficiently to price incentives; others assume a continuation of past trends. that attempt to show how the U.S. economy works. Any such model is just a coherent set of assumptions about the structure and functioning of the economy, based on past performance. Naturally, any model’s predictions depend entirely on the assumptions imbedded in it — how could it be otherwise?
Because the various modelsVarious Models
The 27 macro-economic models in the meta- analysis were constructed by various academic and research institutions in Europe and the United States. Descriptions of the models can be found in Robert Repetto & Duncan Austin, The Costs of Climate Protection: A Guide for the Perplexed, World Resources Institute, Washington, DC, 1997; and Terry Barker, M.S. Qureshi & J Koehler, The Costs of Greenhouse Gas Mitigation with Induced Technological Change: A Meta-Analysis of Estimates in the Literature, Tyndall Centre For Climate Change Research, Cambridge, England, July, 2006. used for the purpose differ in their assumptions, they project different economic impacts even for the same targets and timetables of emissions reductions. A “meta-analysis”Meta-Analysis
The meta-analysis was based on more than 1,400 policy simulations performed with the various models. It used statistical regression analysis to ascribe differences among models in the predicted economic cost of a given percentage reduction of greenhouse gas emissions to differences among models in specific assumptions. Though some of the models related only to the U.S. economy, others to the world economy, the meta-analysis found that both sets of models produced the same results. (Barker, page 35) This presentation refers to the U.S. economy. synthesizing all the available models reveals what the crucial assumptions are and how changing those assumptions affects the predicted economic costs of reducing greenhouse gas emissions by specific percentagesSpecific Percentages
The percentages chosen for this presentation are 20 and 40 percent below the baseline level of emissions. below the business-as-usual pathBusiness-as-usual Path
Each model projects a unique growth trajectory of emissions in the absence of any policy to reduce them. These trajectories reflect different model assumptions about rates of growth of population, technological progress, energy efficiency, and other key underlying variables. Thus, the same percentage reduction in emissions from the baseline represents different quantities in the different models. by 2030. Surprisingly, only a handful of key assumptions account for most of the differences among model predictionsDifferences Among Model Predictions
The seven assumptions described below accounted for 80 percent of the variance in the projected costs of cutting emissions by 40 percent below the baseline by 2030. of the economic costs of reducing emissions.
Those key assumptionsKey Assumptions
The seven crucial assumptions are expressed in binary (yes = 1 and no =0) form and enter the meta-analysis with coefficients that represent, across all models, the quantitative effect of that assumption on the predicted economic impact of reducing emissions. are explained here. You, as a visitor to this site, can decide for yourself what assumptions are more realistic. Then, based on this choice of preferred assumptions, you can see how reducing greenhouse gas emissions is likely to affect the economy’s gross domestic productGross Domestic Product
Gross Domestic Product is the aggregate value of all goods sold in the economy, net of raw materials, intermediate products, and components. It represents final sales to consumers and government and for exports and investment purposes. and its growth rate. Will the impacts be positive or negative? Will they be large or small? Choose your assumptions and see for yourself.
