The GAO's Panel of Economists on Climate

I just ran across a May 2008 GAO report, detailing the findings of a panel of economists convened to consider US climate policy. The panel used a modified Delphi method, which can be good or evil. The eighteen panelists are fairly neoclassical, with the exception of Richard Howarth, who speaks the language but doesn’t drink the Kool-aid.

First, it’s interesting what the panelists agree on. All of the panelists supported establishing a price on greenhouse gas emissions, and a majority were fairly certain that there would be a net benefit from doing so. A majority also favored immediate action, regardless of the participation of other countries. The favored immediate action is rather fainthearted, though. One-third favored an initial price range under $10/tonCO2, and only three favored exceeding $20/tonCO. One panelist specified a safety valve price at 55 cents. Maybe the low prices are intended to rise rapidly (or at the interest rate, per Hotelling); otherwise I have a hard time seeing why one would bother with the whole endeavor. It’s quite interesting that panelists generally accept unilateral action, which by itself wouldn’t solve the climate problem. Clearly they are counting on setting an example, with imitation bringing more emissions under control, and perhaps also on first-mover advantages in innovation.

The panel was divided on the mechanism, with an edge to cap & trade with a safety valve over a carbon tax. Four of the 11 favoring cap & trade want it before 2010. I hate to disappoint, but cap & trade is too complicated to get out of the starting gate that fast (but perhaps they just mean, ASAP). All seek economy-wide coverage, and most favor all gases, both of which are eminently sensible as they maximize the ability to make tradeoffs (and maximize liquidity if there is a market). By contrast, emerging controls in the US and EU (ETS, RGGI, WCI, and CA AB32) all have limited sectoral coverage in a cap & trade. Panelists were also divided on the point of regulation, with 8 specifying upstream, 4 downstream, and 6 a combination.

There are some interesting details in the responses to individual questions. Panelists were asked to rate various items on a 1-5 scale (with 5 most important).

  • The first question asks, “How important is it that Congress consider each action to address climate change?” The top option, participating in international agreements (rated 4.47) handily beat the next-best (R&D, rated 3.44).
  • The second question rates criteria for evaluating policies. Unsurprisingly, cost effectiveness was rated highest, at 4.72. Political feasibility placed second; I find that a bit troubling as the public ought to get straight advice on what works, and make it’s own judgments. Interestingly, the third priority is “Flexibility to allow decision makers to adapt the actions/policies based on new information.” That’s absolutely critical, as we simply don’t know everything we need to know about climate and markets. In my opinion, policy complexity is the enemy of flexibility; small is beautiful. It’s also interesting to see what lies at the bottom of the list: distribution of benefits across income groups in different generations and countries. It’s quite typical in cost-benefit analysis to assume that net benefits can be used for winners to compensate losers, without worrying about whether such compensation is actually paid, but that doesn’t make it right. Environmental effectiveness (the extent to which policy achieves the environmental target), transparency and predictability also rank high. I think transparency and predictability are key, but environmental certainty is elusive. I see little value in cap & trade’s ability to force a particular emissions path, when the path needed to stabilize climate is so uncertain.
  • Question 3 prioritizes options for revenue recycling. Here, distribution matters, as “reducing tax burden for low-income individuals” places first. Reducing taxes on capital and labor are close seconds.Q
  • Question 4 rates benefits as a rationale for addressing climate change. I find the list a bit confused; it mixes means and ends. For example, it includes, “Establishing a price signal to influence market or individual behavior” – certainly a worthy mechanism, but not an end in itself. The top-ranked items are avoided climate damages in general and reduced risk of extreme events. The lowest-ranked item (at 2.63) is “Reducing risk of international conflict over natural resources and territory.” That’s a surprise; I view such security knock-on effects as a possible major amplifier of climate effects; I would have rated that item much higher.
  • Question 5 rates assumptions that affect the estimation of benefits in integrated assessment models (IAMs). As one would expect, the discount rate tops the list (at 4.41), edging out scenario assumptions like baseline economic growth (4.06) and climate sensitivity (also 4.06). Again, the bottom of the list (ancillary public health benefits, 2.76) is as interesting as the top. Most IAMs don’t even consider health and environmental cobenefits. If a serious effort were made to address them, would their importance be that low? I doubt it, especially in places like China.
  • The last question rates uncertainties that affect the estimation of benefits in integrated assessment models (IAMs). Climate science, particularly about thresholds and abrupt changes, tops the list, followed by uncertainty about economic effects of policies, adaptation, and discounting. I find the items that weren’t on the list most striking: political stability and war, baseline economic growth, oil and other resource availability, and the future trajectory of technology. Are we really that certain that BAU is a smooth growth trajectory, with emerging options for mitigation?

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