(And, at the risk of sounding “too clever by half,” surely we also agree that a “negative carbon tax” would increase emissions, not decrease emissions, as suggested by negative marginal abatement costs.). As I said in my article, if firms are irrational enough to forgo profitable abatement activities, then “we cannot rely on them to find innovative way to reduce emissions under a cap-and-trade system.” I don’t think firms are, by and large, acting irrationally, so I do think market-based regulations will work to lower cost. Ted Gayer offers a response to critics of his recent op-ed about the peculiar policy implications of "negative cost" greenhouse gas reductions. It is estimated that the rise in temperature would reduce global output by 2 to 3 percent. Incremental Cost Not all emissions of greenhouse gases are equally expensive to reduce. social cost of carbon to be approximately $46 in 2017 dollars for a ton of emissions. Ezra Klein helpfully provides the McKinsey figure, so readers can judge for themselves whether a marginal cost curve that crosses the x-axis looks peculiar. They are substantially lower cost than prescriptive command-and-control regulations because they give firms (and consumers) flexibility in how to achieve reductions. The report is not a cost-benefit analysis, so it needs to be evaluated in the broader context of all the costs and benefits of reducing greenhouse gas emissions. The accumulation of greenhouse gases in the atmosphere—particularly carbon dioxide (CO2), which is released when fossil fuels (such as coal, oil, and natural gas) are burned and as a result of deforestation—contributes to climate change, which imposes costs on countries around the globe, including the United States. In criticizing me, Avent wrote: “You’d think we’d have learned by now to approach market results with at least some caution. My article pointed out the peculiar finding in a report by McKinsey & Company that purports to show “negative costs” for many greenhouse gas abatement activities. Opt for reusable and used goods rather than new and disposable products. As our nation adapts to meet economic and infrastructure demands, it is critical to understand the potential impacts on air pollution, greenhouse gases (GHGs), and the people living, working, and recreating near ports. Five key groups of abatement measures costing 40 euros a ton or less are relevant to the power sector: reducing demand, carbon capture and storage, renewables, nuclear power, and improving the greenhouse gas efficiency of fossil fuel plants. h޼V]o�6�O�c�1?$��^>��f�)�0��qTׅ#��5~��EQ�"#�ZȲD��=���+)�q��0\�X��̹NR���ָJn23d�e�f�ɸLswc�4��X.�u��\�9�Un���q�J�W:1���$C��fn���K�a����Y�e< The Industry Commission Inquiry Report, Costs and Benefits of Reducing Greenhouse Gas Emissions, was signed on 15 November 1991 and released in two volumes. These studies assume that firms will respond rationally to a change in prices. But I don’t think citing the housing bubble is strong evidence that firms are forgoing profitable energy-saving projects. In fact, the median cost of conserved carbon is negative— -$110 per tonne for existing buildings and -$25/tonne for new construction—as compared with market prices for carbon trading and offsets in the +$10 to +$30/tonne range. On September 30, 2020, Colorado released a public comment draft of its Greenhouse Gas Pollution Reduction Roadmap which details early action steps the state can take toward meeting the near-term goals of reducing greenhouse gas (GHG) pollution 26% by 2025 and 50% by 2030 from 2005 levels. The Cost of Reducing Greenhouse Gas Emissions Ken Gillingham, Yale University Jim Stock, Harvard Economics Dept. Abstract: This paper reviews the cost of various interventions that reduce greenhouse gas emissions. There are a number of academic studies on the optimal carbon tax (none of which, to my knowledge, assume negative marginal abatement costs). Offsets are measured in tonnes of carbon dioxide-equivalent (CO 2 e). But I think it’s fair to say that there’s a lot of evidence for cheap conservation, at least in the early stages.”, Brookings Papers on Economic Activity: Fall 2019, Equitable Land Use for Asian Infrastructure. I am not arguing that there is “no point in having” a cap-and-trade program. The shipping sector will need to reduce its greenhouse gas emissions significantly over the coming decades in order to align them with the Paris Climate goals. Previously, Maryland had enacted the Greenhouse Gas Reduction Act of 2009, setting reduction targets of 25% below 2006 levels by 2020 and establishing a long-term goal of reducing statewide emissions by up to 90% below 2006 levels by 2050. Short-term costs of technologies. If Avent is right that firms are behaving irrationally, then we have bigger problems on our hands with respect to the policy response. I fear that this point was misunderstood by Avent (perhaps because I stated it, as Avent suggests, in a manner that was “too clever by half”). What will it cost to bring down the sector’s emissions? February 25, 2019. At the same time, CO2 emissions would be reduced by 80% over today’s natural gas power plants, and the cost of generating a kilowatt-hour of electricity would be 7.8 cents in 2027 (in today’s dollars), just 1.2 cents more than today’s average cost. 5) Reduce household waste. One tonne of carbon offset represents the reduction of one tonne of carbon dioxide or its equivalent in other greenhouse gases. 2; under the Obama administration, the US government estimated the. The Cost of Reducing Greenhouse Gas Emissions by Kenneth Gillingham and James H. Stock. In such an analysis, the cost of a regulation, such as the potential loss of output, is always balanced against the benefits of carbon emissions reductions. Reducing energy use is seen as a key solution to the problem of reducing greenhouse gas emissions. Not everyone has gotten the message.” My goal isn’t to point fingers, or to claim that bond prices are exhibiting a bubble. Ryan Avent states of my claim that it is peculiar to assume “negative costs”: report on “A Call to Action to Stem the Mounting Federal Debt,”, Ezra Klein helpfully provides the McKinsey figure, Paul Krugman, says: “Now, there are some questions about how to interpret the whole thing. Estimating the Benefits of Reducing Greenhouse Gas Emissions EPA and other federal agencies use estimates of the social cost of carbon (SC-CO 2) to value the climate impacts of rulemakings.The SC-CO 2 is a measure, in dollars, of the long-term damage done by a ton of carbon dioxide (CO 2) emissions in a given year. This dollar figure also represents the value of damages … report by McKinsey & Company that purports to show “negative costs” for many greenhouse gas abatement activities, Brad DeLong states: “That McKinsey and Company exists and that businesses regularly pay it money to identify $100 bills lying on their sidewalks strongly suggests that any half-competent economist should not immediately dismiss its analytical conclusions.”. How could this be achieved? Klein says I am arguing “theory” instead of “reality.“ He’s of course right to imply that profit maximization is an assumption, which is why I wrote of it as “an approximation of reality” that is “used to simplify the complex economic world in order to make manageable inferences.” But I’m really arguing for one theory (firms are better at identifying profit-making abatements) over another theory (regulators are better at identifying profit-making abatements). I appreciate the attention, welcome the criticisms, and with respect offer some responses to my critics. But I would caution against abandoning economic principles to quickly. K. M. Chaudary/AP Vehicles move through a smog that has enveloped the area of … A carbon offset is a reduction in emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. developed show estimates of the prospective annual abatement cost4 4 Economists continue to model the costs of investment to reduce global greenhouse gas emissions and the different routes these cuts could take to avoid dangerous climate change. Continuing to focus our expertise on reducing costs and improving efficiency is, we believe, the best way to reduce our impact on the environment. %PDF-1.6 %���� Cap-and-trade and carbon tax are known as “market-based regulations” because they rely on market mechanisms to reduce pollution. To calculate the short-term costs of mitigating greenhouse gas emissions, economists estimate the up-front costs and divide by the number of tons of carbon dioxide (or equivalent) emissions reduced. You can help reduce these emissions by limiting purchases of new products and reusing old ones. �+����l���*�|G���� ������LҖI"� LP�#3dC�}u�1y���{�q��9�������oAo;�^���۔�:p|� �H˒b;��N�D[�u�s��df�_���p�?��+r� �ո��bP��L���m�l����H�T� y7U=�\P�j�Q��G�{. Measuring the Costs of Reducing Greenhouse-Gas Emissions Economists characterize and measure the costs of reducing emissions in a number of related ways, each of which pro-vides a useful perspective on how a program to control emissions would affect the economy. & HKS. People especially those who can afford it can use hybrid cars. According to the International Energy Agency , improved energy efficiency in buildings , industrial processes and transportation could reduce the world's energy needs in 2050 by one third, and help control global emissions of greenhouse gases. The Hybrid technology works in such … 2. Stock, “The Cost of Reducing Greenhouse Gas Emissions,” Journal of Economic Perspectives, Fall 2018, 55-72, in Symposium on Climate Science. Sorry, your blog cannot share posts by email. There was a spirited response from the left side of the economics blogosphere to my Forbes article (see Brad DeLong, Paul Krugman, Ryan Avent, and Ezra Klein). =o�}Z_1怱{��ͺ`w�DZ�Ӓ�'Dd��� G�s���� �1z�+� Brad DeLong states: “That McKinsey and Company exists and that businesses regularly pay it money to identify $100 bills lying on their sidewalks strongly suggests that any half-competent economist should not immediately dismiss its analytical conclusions.” The fact that businesses “pay money” to acquire cost-saving information from a consultant is not evidence against the profit-maximizing assumption. The technology could reduce greenhouse gas emissions by as much as 78%. xU&�˗ӳ�����^�w��� ~5}���u�W�ܰ?��i�?�)/����W'o�P�����fn�i����^�4�1_�҅Ȩy��6��?��k����3�e{V�����+�߲[�5+� The Regional Greenhouse Gas Initiative (RGGI) is the first mandatory market-based program in the United States to reduce greenhouse gas emissions. My theory suggests that market-based regulations are lower cost than command and control; the competing theory suggests otherwise. Every step in the life cycle of common household products, from production to disposal, adds greenhouse gases to the atmosphere. �j�n�>�~� In addition, a zip file contains the input files which were used to determine the technology cost estimates for the Notice of Proposed Rulemaking to Establish 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions Standards. But I think it’s fair to say that there’s a lot of evidence for cheap conservation, at least in the early stages.” If cheap means non-negative, then I agree! Will these costs shift maritime trade flows? Based on current scientific understanding, on the balance of probabilities, reducing global emissions will reduce the risk of dangerous climate change. Quite the opposite (although I prefer a carbon tax). Finally, Paul Krugman, says: “Now, there are some questions about how to interpret the whole thing. If firms are not rational, then we need to re-think how we compute (and design) an optimal carbon price. There are social cost estimates for other greenhouse gases. And surely we agree that the empirical – not just theoretical – literature supports the cost-saving advantage of market-based regulations. Guidance for the Brookings community and the public on our response to the coronavirus (COVID-19) », Learn more from Brookings scholars about the global response to coronavirus (COVID-19) ». As much as possible we focus on actual abatement costs (dollars per ton of carbon dioxide avoided), as measured by 50 economic studies of programs over the past … The United States could reduce GHG emissions in 2030 by 3.0 to 4.5 gigatons of CO2e using tested approaches and high-potential emerging technologies. For example, suppose a government spends $20 million to promote the development of wind farms to generate electricity, reducing carbon dioxide emissions by 1 million tons. in 2017 (IWG 2016).1Burning one gallon of petroleum gasoline produces roughly. This falls under my explanation #2 for McKinsey’s peculiar finding: i.e., “the costs of abatement are incompletely estimated.” Perhaps if McKinsey’s report included the cost of hiring consultants to gather information, their marginal abatement cost curve would not cross the x-axis, and all would be good in the state of economics. This paper offers answers to these questions and identifies areas for further Reference: Gillingham, K. and J.H. 265 0 obj <>stream By way of example, in 2019, we continued to: ... We have a corporate energy program to track greenhouse gas emissions. Ryan Avent states of my claim that it is peculiar to assume “negative costs”: “This is kind of like saying that it was foolish for people to point out that housing prices appeared to be unsustainably high back in 2005, because that would violate basic principles of economics.” I share Avent’s concern that markets can be susceptible to bubbles. This cost would run into trillions of dollars. Diesel engines are the modern-… This relates to the main point of my article, which is that assuming negative marginal cost can lead to perverse policies. North Carolina can reduce emissions cost-effectively, save ratepayers money and boost the economy. The downloadable installation file below contains the application executable file and five sample Microsoft Excel input files. Putting a cost on investing in mitigating climate change. My concern is that policymakers will abandon market-mechanisms and EPA will instead pursue greenhouse gas reductions through command-and-control regulations, using McKinsey-like “negative cost” assumptions to justify their regulations. (I do believe, as I stated in the article, that firms are not internalizing the full societal cost of their emissions.). One of the biggest factors is how long it takes to start reducing emissions. For example, subsidies to wind generation, such as the wind production tax credit in the United States, have estimated carbon abatement costs ranging from $2 to more than $260 per ton of reduced CO 2 For wind power, one reason for the large range is that there is large variation across sites in wind potential. nine kilograms of CO2, so a social cost of carbon value of $46/metric ton CO2corre-. For one, the bubble critique can be applied inconsistently. Researchers have studied the advantages of reducing greenhouse gases in croplands of a region in Spain. Many estimates suggest that the effect of climate change on the nation's economic output, and hence on federal tax revenues, will probably be small over the next 30 years and l… If one discards the profit (or utility) maximizing assumption, then market mechanisms are not cost-saving relative to command-and-control. ���T�s�O)z�ڮ�����r� ��~�H�����>�Z�V���C���Z3\l�C��-�^�x����%�8‚�/1�$�Ҥ$�%=]aUN}��~���b=��]��� �QCȎ�UlY�Qb�~?��\�W�ݸ?l��V㎷�%� �e߈d�$������'�ס�u3��ֹ�FBWթ To take just one example, just a few weeks ago, Avent responded to a report on “A Call to Action to Stem the Mounting Federal Debt,” saying “there was no good explanation for the absence of evidence that markets are worrying about American borrowing.”  No good explanation? HKS Energy Policy Seminar. PDF (180 pp, 3 MB, September 2016, EPA-420-R-16-011) Ports are a vital part of the United States economy, with seaports, Great Lakes ports, and inland river ports serving as gateways for moving freight and passengers across the country and around the world. Ironically, the McKinsey report’s cost estimate excludes the cost of acquiring information about potential energy efficiency investments. These reductions would involve pursuing a wide array of abatement options with marginal costs less than $50 per ton, with the average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency. Post was not sent - check your email addresses! Global output by 2 to 3 percent 4.5 gigatons of CO2e using tested approaches and high-potential emerging.. The cost of acquiring information about potential energy efficiency investments as 78 % empirical – not just theoretical literature! 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