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EMF OP 38: Costs of Reducing Global Carbon Emissions: An Overview

Projecting the costs of reducing carbon emissions is extremely important, but exceedingly difficult. Projections of the costs of programs designed to control carbon emission are important because they are an integral component of cost-benefit analyses of alternative policies of the type described by Nordhaus in the preceding paper of this symposium. Comprehensive assessments of the cots and benefits of controlling carbon emissions are an essential prerequisite for informed policy making on global climate change. Moreover, the nature of the climate change problem dictates that costs be incurred long before benefits can be realized and accurately measured. This mismatch between more certain short-run costs and less certain long-run benefits puts the political spotlight on the cost estimates whenever specific policy options contemplated. Most experts expect this situation to persist for at least the next two decades. Projecting the costs of reducing carbon emissions is difficult because many assumptions must be made about how the world will evolve over a very long period of time with and without a control program. Typically, some of these assumptions — like population growth — are outside the scope of analysis while others — like the response of energy demand to changes in the economic output or energy prices — are the result of modeling the behavior of economic actors in response to the exogenous stimuli. There are considerable uncertainties about both the exogenous factors and the best way to model the behavioral responses. The global nature of the climate change problem adds yet another complication to the cost analysis. Scientists have concluded that it is the global concentration of carbon in the atmosphere that influences climate. Moreover, since carbon in the atmosphere gets mixed more or less uniformly, emissions anywhere change concentrations everywhere, but with a long lead time. Current global carbon emissions are estimate to be only about 3% of the stock of CO2 in the atmosphere. Thus, the cost of reducing global carbon concentrations depends on the collective emissions of all the countries of the world over long periods of time. This makes an analysis of the costs of controlling emissions in any one country or region at any point in time an important, but incomplete guide to appropriate policies for that particular country. There are several key dimensions to any projection of the cost of reducing carbon emissions. These are discussed in the next section of the paper. Section III gives an overview of the long-run projections of control costs that have been publishes, while Section IV focuses on the short-to-intermediate range time horizon. Section V concludes the expositions with a summary of what we know and don't know about the costs of controlling carbon emissions and a recommended agenda for future research.