November 27, 2005

Addressing Climate Change in America: Practical Steps For Real Policy

Climate change is real and human activity is partly to blame. That much is indisputable, but the question remains what to do about it. On one extreme you have environmentalists who call for a radical altering of the economic system to dramatically reduce carbon levels. Such a move, if done within a short time frame, would undoubtedly lead to a major world recession and diminish living standards for billions of people. On the other end of the spectrum is the belief that basically we should do nothing, as evidenced by the actions of the Bush Administration; any costs associated with addressing climate change are believed too high (for the moment at least).

Unsurprisingly, there is significant room for a middle position, which is the one I am advocating. While assessing the future costs of climate change as well as the costs of mitigating it are highly speculative and therefore imprecise, the underlying approach should still be premised on some form of cost-benefit analysis, at least to a degree. As always, arguments regarding economic efficiency (which is what CBA is) are not the end of the story; uncertainty and equity issues also come into play.

Before outlining my recommendations, it is important to note that currently the lack of political will at the federal level to treat CO2 as a pollutant (one of Bush’s broken campaign promises) has created confusion and litigation at the state level. Many state governments want to act on CO2 emissions but are limited in what they can legally do since the federal laws don’t explicitly classify CO2 as a pollutant under the Clean Air Act. California, which is the only state that has authority to enact its own more stringent air quality laws (because it passed legislation before the federal statute) is being sued by car manufacturers because it has proposed significant curbs on future CO2 emissions. At the same time, California along with seven other states and New York City have sued the nation’s top CO2 emitters in order to force them to make mandatory cuts in CO2 pollution. Only with leadership at the federal level can we get out of this mess.

Below are my recommendations for moving forward on U.S. climate change policy from the top down:

1. Set a target for modest CO2 reduction a few years in the future that will then gradually decrease to levels that scientists believe will dramatically reduce catastrophic risks by 2050 (i.e. a 30-50% reduction)

In a recent report put out by the Bush Administration regarding its “Clear Skies Initiative” it is shown that a large segment of U.S. industry could already reduce CO2 for as little as $1 a ton, which is much lower than previously believed. This should serve as the wake up call for those who have been arguing that modest reductions in CO2 will cripple the U.S. economy.

The best way to begin to substantially improve the efficiency of CO2 reduction is by creating permanent incentives to do so. Accompanying a cap in CO2 in the near future (reflecting say a 5% decrease from current levels) should be the establishment of a CO2 trading system which would immediately create an economic value for CO2 mitigation, as well as carbon sequestration. As the caps on CO2 decrease over time, this economic value would increase and create even greater incentives. American ingenuity is up to the task of mitigating CO2 but the economic incentives need to be in place to help move the process forward.

2. Work to mitigate the likely effects of climate change

Since some level of climate change is already occurring and is only likely to accelerate, policies should be aimed at helping the world adjust to these changes. This is one area where I think the environmental movement should take the lead. Here are some specifics:

2.1 The U.S. should work with other nations to expand and monitor the world’s biodiversity hotspots and other large natural corridors so that wildlife can have space to migrate as the climate shifts. Much of this work would also include reforestation of deforested areas and ecosystem restoration more generally. It will cost a good deal of money but climate change presents a unique opportunity since addressing it will also bring myriad other environmental benefits such as the preservation of habitats and species, and all the environmental services the world’s unique ecosystems provide.

2.2 As the country that is most responsible for the current loads of CO2 in the atmosphere, we should establish an international relief fund for climate-related disaster relief and mitigation. Many island nations are going to face enormous costs as the sea levels rise and the industrial countries have a moral responsibility to help them cope. In addition, if it is demonstrated that increased hurricanes and floods are due to the impacts of climate change then we also should increase our aid for this reason as well. Some of this money should be directed to the development of technologies that can help people adapt to rising sea levels, such as the new floating architecture being developed in Holland.

3. Probably most controversial (but necessary) is a significant increase in the CAFÉ standards for car fleets

Critics of such a move claim that higher fuel efficiency means smaller cars means more dead soccer moms. Despite evidence that large SUVs are actually less safe than sedans and compacts (because they roll over more frequently and kill more people they hit), the belief that somehow car manufacturers are incapable of maintaining safety while improving fuel efficiency defies reason. The basic structure of the automobile has remained essentially the same for almost a century; close to 100% of the energy consumed by cars is used to propel the automobile, not the passengers. During the 1990s, with U.S. gas prices at the lowest levels in the world, hovering around the $.50 a gallon (in 2005 dollars) car manufacturers played to consumers’ desire for big cars by simply adding tons of steel. There was no economic incentive for manufacturers to take fuel economy into account.

In some sense this represents a tremendous market failure because not only is the burning of gasoline linked to climate change, but also to air pollution and our dependence on rogue regimes in the Middle East. The government has two options to correct this failure: either dramatically raise gas prices through taxes or mandate that car manufacturers start developing more fuel-efficient cars. Since even an increase of a few miles per gallon on the average American fleet would save billons of gallons of gas the latter option is more sensible. It too can be accomplished through a market trading system: manufacturers who want to continue to specialize in gas-guzzlers could pay more innovative companies to absorb their fuel efficiency requirements. Once again, such a move would immediately create a greater economic value for fuel efficiency and we can rest assured that firms would take advantage of it.

In summary, while everyone may disagree on the extent to which we should be addressing climate change we should be doing something, which we are currently not. I have not tried to justify my proposals with any detailed cost-benefit analysis nor assigned specific dollar amounts because those should be left to the many scientists and economists who are much more versed in the specifics than I. What I have proposed, however, are the outlines of a more comprehensive climate change policy. My guess is that the immediate positive externalities (cleaner air, increased wildlife, greater R&D, new hi-tech jobs, increased international goodwill) of addressing the future costs of climate change would be significant and would be well worth the investment.

Jason Scorse