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Needed: A Parallel Approach on Climate Policy

March 17, 2005

by Richard Newell

Although the signs are vague and sketchy, there is a growing sense that a new consensus may be building on a separate strategy on technology to effectively deal with the challenge of climate change policy, both in the U.S. and around the world.

While Europe is focused on near-term Kyoto greenhouse gas emission targets and the new EU emissions-trading system to achieve them, the Bush Administration is focused on longer-term research and development of new technologies such as advanced coal combustion.

In Congress, Senators Joe Lieberman and John McCain are expected to reintroduce their legislation establishing a cap-and-trade system for greenhouse gases, while Senator Chuck Hagel is touting his competing strategy to spur technology. The shouting across the aisles and across the Atlantic is growing louder even as Prime Minister Blair has opened a dialog with President Bush on climate change issues.

Key to this trend is a desire to reconcile what is often presented as a competing "either/or" option--an "emission targets" versus "technology" strategy--to address climate change. Both economic analysis and pragmatic politics suggest that sound policy will involve both of these policy tracks.

In addition to the environmental problem of global climate change, which will not be solved by the free market in the absence of policy, there are also market problems associated with the development and adoption of new technologies. An important technology market problem occurs because the benefits of new technologies tend to be spread broadly, so it is impossible for the private sector to capture the full rewards from their investments in new technology. This presents double trouble for climate-friendly technologies, as they must surmount both of these market problems simultaneously. It is a basic principle of economics that for sound policy you need at least as many instruments as there are market problems.

Given the very long-term nature of the problem, it seems unlikely that an emissions policy alone will be adequate to drive the long-term research and investments that are needed to solve the climate problem at reasonable cost. One reason for this is the inability of current policy makers to credibly commit to a long-term emissions path.

Likewise, long-term technology R&D alone is not sufficient because it provides no direct incentives for adoption of new technologies--and because it focuses on the longer term it misses near-term opportunities for cost-effective emissions reductions.

This suggests that in addition to policies focused directly on reducing greenhouse emissions, like the EU or McCain-Lieberman cap-and-trade systems, a balanced approach to solving the climate problem will include policies supporting research, development, and diffusion of climate-friendly technologies. Not only does this make good economic sense, it also makes good political sense, both from a domestic and international point of view.

On the international climate policy front, at least two things are necessary for progress looking forward. The first is meaningful participation by the United States. The second is meaningful participation by developing countries, particularly China and India. To bring in the United States, two things are imperative: the participation of developing countries, and, at least for the foreseeable future, a focus on something other than near-term emission targets.

Given these realities, developing a strategy that could parallel Kyoto seems a timely and prudent course -- not as a substitute for policies focused on reducing greenhouse gas emissions, but rather as an important complementary strategy that has broader international appeal at this point in time. Absorption of new climate-friendly technology is a key driver of economic development, and is therefore of keen interest to developing countries.

In addition, given the close linkages of international knowledge and technology transfer with international trade and international development policy, paying more attention to the technological side of the question brings to the fore the importance of trade and development forces as fundamental drivers of global climate change. Indeed, the International Energy Agency estimated energy-sector investments over the next 30 years at about $16 trillion (yes, trillion), split roughly equal between developing and industrialized countries. Moving this money in a climate-friendly direction is a key to solving the problem.

Much work remains to be done in creating and more strongly supporting avenues for international cooperation on climate technology, but we're not starting from ground zero. The World Bank's Global Environmental Facility, the Clean Development Mechanism, and a number of multilateral technology agreements exist with this end in mind. But as yet there is a decided absence of an organizing vision and sufficient support to meet the magnitude of the challenge.

And the challenge is huge. Most everyone agrees that stabilization of greenhouse gas concentrations in the atmosphere is the ultimate goal, which will eventually require near-zero emissions of these gases. This implies that we will either cease to burn fossil fuels (currently 90 percent of world energy use) or we must somehow develop cost-effective technologies to capture and store these emissions. No one questions that this is a truly daunting task requiring widespread adoption of new technologies, most of which do not currently exist at reasonable cost.

The United Kingdom's current leadership of the G-8, interest on the part of U.S. politicians, a growing realization by Europe of the importance of the technology angle, and a growing impatience by at least some in industry with the climate policy impasse, creates an opportunity for renewed international cooperation in addressing global climate change.

Let's hope the shouting doesn't drown out reasoned discussion and cooperation, where cooperation is possible. 

***** 

Richard G. Newell is a Senior Fellow at Resources for the Future, an independent energy and environmental research organization in Washington, D.C.

RFF is home to a diverse community of scholars dedicated to improving environmental policy and natural resource management through social science research. Resources for the Future provides objective and independent analysis and encourages scholars to express their individual opinions, which may differ from those of other RFF scholars, officers, and directors.

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