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Climate Change Policy, Risk Prioritization, and U.S. Economic Growth

A monograph published June 1997 by the ACCF Center for Policy Research.
ISBN: 1-884032-06-0

Introduction

For two decades, the ACCF Center for Policy Research has sponsored innovative studies on environmental, regulatory, and tax policies to encourage capital formation. The Center has also underwritten a series of blue-ribbon forums on the impact of environmental policy on U.S. living standards, investment, and economic growth.

This volume contains the edited papers presented at the Center's September 1996 symposium, Climate Change Policy, Risk Prioritization, and U.S. Economic Growth. The research presented at this forum analyzed how alternative policies to address climate change would impact U.S. economic growth and household living standards. A central theme at the forum was also the importance of flexibility in where and when CO2 emission reductions take place as a means of reducing the cost. In addition, a new analysis stressing the need for the use of risk prioritization as a means of enhancing both environmental quality and economic growth was released.

The climate mitigation policy research is extremely timely because under the Framework Convention on Climate Change signed in Rio de Janeiro in 1992, the United States has agreed to negotiate an international treaty on limiting future greenhouse gas emissions without, according to many experts, careful evaluation of this many-sided issue. The experts believe the agreements that the United States is poised to sign in Japan have potentially serious consequences for all Americans, and these consequences have not been fully analyzed and understood.

The importance of analyzing the economic impact of proposed climate change policies is demonstrated in the papers included in this volume, which show that stringent near-term actions to reduce U.S. emissions will reduce U.S. saving, investment, and economic growth with little or no benefit in terms of CO2 emissions or concentrations in the atmosphere.

Wesleyan University Professor Gary Yohe's research for the forum concluded that a tax of as much as $260 per ton could be needed to stabilize emissions at 1990 levels by 2010 if mandatory emission reductions begin in 1997 or 1998. Stabilizing emissions by 2010 would slow the growth of GDP about 1 percent annually, reduce income and real wages by 5 to 10 percent per year, reduce fuel oil and coal consumption by 25 to 40 percent, cut electricity consumption by 20 to 32 percent, reduce new car and truck purchases by 3 to 5 percent, and worsen the distribution of income even if the carbon tax revenues were recycled back to consumers. Such a program would cause consumers to "feel" like they were living through the oil price shocks of the 1970s and 1980s all over again.

Rather than adopting near-term emission caps or tradable permits, the industrialized countries should frame climate mitigation as a series of stages, according the analysis by to Dr. Jae Edmonds and his colleagues James Dooley and Marshall Wise of Pacific Northwest National Laboratories. Stage I (the present to about 2020) would be the period in which targets and timetables for technology development and dissemination were established; Stage II (2020 to 2050) would see the enforcement of an emissions cap; and Stage III (2050 and onward) could see the gradual phaseout of all free-venting of carbon into the atmosphere. The first phase could provide incentives for technology development and deployment, which could significantly reduce the economic cost of emissions reductions.

The development of advanced non-carbon technologies holds the promise of reducing the cost of stabilizing atmospheric concentrations of greenhouse gases. If these technologies are not brought online as assumed in the study, then the cost of stabilizing greenhouse gas concentrations will be very substantial. The key to effective development and deployment of efficient, low-emissions technologies is increased funding. Indeed, additional research and development funding is a "no-regrets" action since it would correct the underproduction of goods and services that would result if high taxes and ineffective regulation-rather than advanced technologies-are used to stabilize future greenhouse concentrations.

Returning to the broader theme of risk prioritization as a strategy for setting environmental policy goals, Rochester Institute of Technology Professor Thomas D. Hopkins presented a paper suggesting that the U.S. regulatory structure could be substantially improved if it incorporated better-balanced scrutiny. He stressed that the simple logic of benefit-cost analysis, if judiciously applied, offers potent guidance that need not be tainted by partisanship or hidden agendas. Through its use, it should be possible to identify improvements in the operation of our economy as well as gains in risk reduction that changes in our regulatory structure could yield.

Dr. Hopkins noted numerous studies which indicate that regulatory policy has slowed U.S. economic growth and that reductions in regulatory costs stemming from better prioritization have the potential to improve both GDP and living standards. He cited one study that indicates $100 billion could be saved just by deleting those regulations whose costs exceed their benefits. He concluded that regulation certainly deserves as much attention as tax and government spending on economic grounds alone.

The forum's keynote addresses were given by Congressman John D. Dingell (D-MI), ranking member of the Commerce Committee, and Senator Craig Thomas (R-WY), a leading member of the Foreign Relations Committee.

Congressman Dingell expressed his concerns with the Administration's current approach to climate change policy. The Michigan congressman stressed that there are doubts about the science of climate change. "But," he added, "leaving aside the science for a moment, if you accept the premise that global warming is a problem, there is only one way to solve it: everybody has to make a commitment." Mr. Dingell also said that it will do no good for the United States to agree to limit or reduce greenhouse gas emissions if the developing nations-especially China, Brazil, India, and Indonesia-are let off the hook. He noted, "That kind of agreement could in fact award the developing countries a tremendous competitive advantage and thus do the U.S. economy great harm."

In his remarks, Senator Thomas observed that in his view, "It is too early to enter into new agreements on climate change because we do not have good science to back up the agreements and because we do not know what impact the agreements might have." He added that it is not fair to penalize the United States relative to other countries.

The ACCF Center for Policy Research is grateful to our presenters and respondents for their contributions that made this symposium and book possible.

The Center will continue to focus its attention and resources on economic growth through sound tax and environmental policies. We look forward to sharing new information, analyses, and proposals with you, and welcome your thoughts and inquiries about this and all other ACCF Center for Policy Research programs.

Charls E. Walker
Chairman

Mark A. Bloomfield
President

Margo Thorning
Senior Vice President and Director of Research