Weathervane: A Climate Policy Blog from Resources for the Future

Jun24

Consensus on Changing Climate, Differences in Willingness to Pay

Negotiators likely have a long way to go in finding an international approach to addressing the woes of climate change. But, at least to some extent, there appears to be a degree of consensus among the citizens they represent on the scope of the problem—though interpretations of who should pay (and how much) are varied.

An international team of researchers—including some from RFF—recently finished its multi-national survey of ordinary citizen’s opinions on climate change and willingness to pay for reducing carbon dioxide emissions. In the midst of last December’s international climate negotiations, results for surveys from the United States and Sweden were released. Information from Chinese surveys has now been compiled and is included in this report.

From the abstract:

Unique survey data from a contingent valuation study conducted in three different countries (China, Sweden, and the United States) were used to investigate the ordinary citizen’s willingness to pay (WTP) for reducing CO2 emissions. We found that a large majority of the respondents in all three countries believe that the mean global temperature has increased over the last 100 years and that humans are responsible for the increase. A smaller share of Americans, however, believes these statements, when compared to the Chinese and Swedes. A larger share of Americans is also pessimistic and believes that nothing can be done to stop climate change. We also found that Sweden has the highest WTP for reductions of CO2, while China has the lowest. Thus, even though the Swedes and Chinese are similar to each other in their attitudes toward climate change, they differ considerably in their WTP. When WTP is measured as a share of household income, the willingness to pay is the same for Americans and Chinese, while again higher for the Swedes.

The survey asked respondents how much they’d be willing to pay to avoid each of the three following climate scenarios:

The results of the study show that Swedes, Americans, and Chinese are willing to pay 1.6 percent , 1.1 percent, and 0.9 percent, respectively, of their income to prevent a warming of more than 2°F. According to the authors:

A policy interpretation is that this is an estimate of the cost burden, as a percent of gross domestic product (GDP), of climate change mitigation that each country is willing to bear. Since the American respondents are more suspicious about climate change in general and more pessimistic about possibilities to reduce CO2 emissions, changing attitudes about the legitimacy of climate change and the threats it imposes may be key to unlocking public willingness to support major expenditures for mitigation. Perhaps the biggest surprise in our study was the willingness of the Chinese people to pay for CO2 mitigation as a fraction of income that was very similar to that in the United States.

Tiffany Clements is managing editor of Weathervane

Published: Jun-24-10 | 0 Comments

Apr19

Taking the Long View on Environmental Economics

Economics

With the growing urgency for policy choices on climate change, the subdiscipline of environmental economics is increasingly important. Governments’ responses to a warming planet will be heavily influenced matters of cost. People making those decisions need to consider carefully what the economists who specialize in this field can and can’t reliably tell them.

Paul Krugman offers, in this piece from the New York Times Magazine, the most concise and beautifully precise summary of climate change economics that I’ve read. There is nothing in it with which I, a non-economist, would disagree. But there are several important points go unexplored. They are points that we as a society ought to keep in mind as we read the economists and move toward deeply important decisions.

One: Costs matter— but costs to whom? This is where considerations of justice intersect with economics. The benefits of using very large amounts of fossil fuels go to the present generation of people on this planet. The costs will fall on future generations, as Krugman observed. But similarly, the benefits go mainly to people in the developed countries or those, like China, that are most rapidly developing. The costs will fall most heavily, as usual, on the poor.

Two: The costs of reshaping economies to emit much less carbon dioxide will depend on the development of new technologies. Forecasting technological progress is exceedingly hazardous, particularly over long periods. In the debates over the costs of various climate policies, much of the analysis tries to reach out about a century. To judge the chances of accuracy, ask yourself what a well-informed analyst in the year 1910 might have considered a reasonable forecast of the world in which we are living. It is plausible to assume that the past century’s rate of advancement may well be continued in this century. But that’s hardly a guarantee.

Three: Most (although not all) forecasts and analyses assume that climate change will be gradual through the coming century, like the smooth curves on the graphs that computers produce. One implication of that comforting projection is that if we do little in this decade, we can reconsider in the next decade when there will have been only a little climate change. But for some years the geologists and paleoclimatologists have been warning us that things don’t work that way. The actual record, as they have been reading it from ice cores and sea bottoms, is full of sudden, rapid shifts. A slow change suddenly sets off a cycle of self-reinforcing reactions that, in only a few years, can change temperatures and precipitation patterns drastically. No one fully understands the processes by which these past changes have occurred.

Krugman thoughtfully weighed the basic policy choice: whether to begin slowly to move off fossil fuels and increase the effort bit by bit over the century, or to undertake a much faster —and much more expensive—start. He’s persuaded by the reality that while the chances of a true world catastrophe may not be large, neither are they zero. “And,” he concludes, “that argues for aggressive moves to curb emissions, soon.”

J. W. Anderson is Resources for the Future’s journalist in residence.

Published: Apr-19-10 | 0 Comments

Jan20

An Economist's Climate Quiz

Economics

In “The Challenges of Climate for Energy Markets” RFF Senior Fellow Timothy J. Brennan examines the economics underpinning climate policy design and their impact on the electricity sector. With a background in the economics of industrial organization, Brennan says he “can take advantage of outsider status to challenge some of the often-implicit presumptions in the climate and energy efficiency policy conversation.” The following quiz is taken from “The Challenges of Climate for Energy Markets” and was published in the January 1, 2010 issue of Managing Power Magazine:

Aspects of how climate and conservation issues are presented that seem completely natural to the environmental and energy policy community can look peculiar from the perspective of an economist who studies markets and market failure more generally. I can illustrate this with a four-question quiz.

A Quiz

Question 1: A common saying among energy conservation advocates is, “The cheapest power plant is the one you don’t build.” Would you similarly infer that …

a) The cheapest school is the one you don’t build?
b) The cheapest vaccine is the one you don’t administer?
c) The cheapest regulatory conference is the one you don’t hold?

Answer: No, I trust. Any reasonable assessment of a school, vaccine, conference, or power plant would factor in the benefits as well as the costs. To infer policy merit from this sort of claim requires an assumption that the benefits of the electricity generated by the power plant are nonexistent.

Many in the energy policy community who are not economists appear to believe that power plants have only costs rather than benefits as well. The reasons seem to be that consumers’ preferences for electricity use or against conservation technologies lack standing, or that they would use less electricity if only they had the information and wisdom of the experts.
Economic tests, such as cost-benefit analyses, that base policy on revealed consumer preferences, typically reject both of these reasons.

Question 2: Suppose someone goes to see An Inconvenient Truth, the movie that former U.S. presidential candidate and vice president Al Gore made to increase public awareness of the potential harm from climate change. After seeing the movie, out of concern that she does her part to save the planet, she goes out and changes all the light bulbs and appliances in her house to devices that use less electricity and reduce her carbon footprint. In energy policy circles, what do we call this selfless, concerned individual?

Answer: A “free rider”! Yes, someone willing to make sacrifices to reduce her carbon footprint—or, for that matter, someone who makes the effort to calculate that she’d be better off financially in the long run by using compact fluorescent lighting or installing a high-efficiency air conditioner—is lumped together with those who take advantage of others by refusing to chip in to supply a public good.

The reason is that these actions are assessed purely on the basis of the effects of utility companies’ energy efficiency subsidy programs. If someone, such as the person in the question, had switched technologies absent the subsidy program, she would get the benefit of reduced prices even without a utility energy efficiency subsidy. Thus, in industry parlance, she is a “free rider” on the subsidy. If you don’t want to be thought a free rider by utilities, be either selfish or lazy.

Question 3: Suppose we have policies directed toward the goal of reducing greenhouse gas emissions. Two examples discussed in the U.S. and Australia are marketable emissions permits and (usually tradable) requirements that a statutorily designated percentage of energy be generated by renewable fuels such as wind, biomass, passive solar, or sometimes water. What would you call these policies?

Answer: “Complementary”—or at least you would call them that if you were part of the U.S. climate discussion. But when two activities generate the same outcome, the more one has of the first, the less one needs of the second. In economics, these are substitutes. Were the more accurate term employed, it would illuminate the idea that legislating is to choose among alternatives.

Leaving political realities aside, the economic choice is simple—figure out how to get prices to incorporate the external harms of climate change, and let producers and consumers adapt by choosing the technological and conservation options that best meet their needs, taking the cost of climate effects into account. Legislators, though, gain not by making choices but by maximizing the spread of benefits, which the misleading designation “complementary” facilitates. Employing multiple options ensures that the widest possible array of potential political backers will benefit from legislation, likely at the expense of consumers and the economy at large.

Question 4: While we’re on the subject of political support, what does one call structuring climate change legislation to provide benefits to industries on the basis of claims that they would be harmed if they had to pay, directly or indirectly, to pollute?

Answer: “Competitiveness.” The (likely) possibility that one or more countries fail to adopt climate policies, and thus can export products at prices below the true marginal cost of production, may warrant adaptive pricing or trade policies in countries that undertake significant climate policies. These trade policies are justified only to reduce distortions, not to keep firms whole. Paul Krugman said in 1993, “If we can teach undergrads to wince when they hear someone talk about ‘competitiveness,’ we will have done our nation a great service.” That lesson continues to be true.

Published: Jan-20-10 | 2 Comments