Climate Economics

A new United Nations report is the latest sign that the global-warming debate is moving beyond science to hardball economics, dividing nations and industries in a scramble over how the cleanup bill will be divided -- and how big it will be.

Amid mounting political and public pressure to curb global-warming emissions, companies and governments are reaching general consensus on what technologies need to be deployed and how much it could cost. Now a battle is heating up over the details.

The report issued Friday by the United Nations' Intergovernmental Panel on Climate Change, an international panel of scientists, says the world can meaningfully curb global-warming emissions over the next several decades without significantly crimping global economic growth. But that would require sweeping changes to the global energy system -- and the cost would hit some sectors much harder than others.

"There's not a win-win here," says Ray Kopp, a senior fellow at Resources for the Future, a Washington-based think tank studying global-warming policy. "Somebody gets hammered and somebody doesn't."

The U.N. report says reducing greenhouse-gas emissions enough to avoid the worst consequences of global warming could reduce projected global economic output in 2030 by as much as 3% below the level it would otherwise reach that year. Whether that is a significant economic drag is a matter of dispute.

Bush administration officials argue a 3% reduction in the global economy in 2030 would be too severe. It is "something that we probably want to avoid," James Connaughton, chairman of the White House Council on Environmental Quality, said Friday. He said the effects could fall unevenly across the economy, causing some factories to move abroad and particularly hurting lower-income Americans. He said the administration supports emission-reduction measures it believes can be made at lower cost.

Officials who led the U.N. report played down the cost. "It's not an order of magnitude that cripples the economy," said Bert Metz, a Dutch researcher and co-chairman of the report.

Jonathan Pershing, director of the climate and energy program at the World Resources Institute, a Washington-based environmental think tank, said the potential cost to the economy "suggests you want to be pretty careful" in designing the emission-reduction system. "But if you do this right, it's not going to break the bank."

Reducing emissions to the levels studied in the U.N. report would cost between $20 and $100 for every ton of carbon dioxide, the main global-warming gas, that is kept out of the atmosphere, the report says. That is the price companies would have to pay either to curb their own emissions enough to comply with a cap or to buy emission "credits" on a trading market that pay someone else to do the cleanup.

Prices are approaching those levels already in parts of the world where emission caps are in place. In Europe, which in 2005 imposed a carbon cap on itself, a credit allowing the bearer to emit a ton of CO2 next year is trading today at about $25.

The rise in prices envisioned in the U.N. report is broadly in line with what many are predicting by 2030. Consultant McKinsey & Co. estimated in a January study that greenhouse-gas cuts approximately as stringent as those surveyed in the U.N. study would cost as much as $40 a ton of avoided CO2.

Both the U.N. and McKinsey studies assume the world attacks global-warming emissions in the most economically efficient way. For instance, the U.N. study assumes the cuts come from across geographic regions and economic sectors, spreading the costs broadly. If that doesn't happen, the costs would rise. Currently, the world's two biggest global-warming emitters, the U.S. and China, haven't accepted emission caps.

Another question is what sectors of the economy cough up the bulk of the emission cuts. Like most studies, the U.N. report says that improving the energy efficiency of buildings and cars can produce significant emission cuts while actually saving money. That is because the extra initial investment in, say, home insulation or a more fuel-efficient auto engine can more than pay for itself in lower electricity bills or fewer trips to the gas pump.

But that assumes consumers will be willing to wait many years to recoup the extra up-front costs. In reality, many consumers don't keep their houses or cars that long. So the government also would have to dangle incentives to consumers or mandate that car makers lift mileage.

"A carbon price that gets a lot to happen in other sectors of the economy does not make much happen in transport," explains Robert Socolow, a professor at Princeton University focusing on climate change. He says a carbon cap that imposes a $30-a-ton price for CO2 emissions raises the retail price of a gallon of gasoline by about 30 cents -- not enough to prod many people to go out and buy a more-efficient car.

In Europe, the carbon cap has fallen on utilities and manufacturers, largely because targeting a relatively small number of large power plants and factories is easier than targeting millions of cars and trucks. In the U.S., many heavy-emitting companies now say they think a federal emissions cap is all but inevitable. That is why utilities are lobbying particularly hard to shape the details of any cap.

One is Duke Energy Corp., based in Charlotte, N.C. James Rogers, Duke's chief executive, said in an interview earlier this year that the company already has "made a lot of investment decisions in recognition of the fact that we're going to live in a carbon-constrained world." But he said it remains far from clear how high the cost of avoiding each ton of CO2 emissions will climb. For planning purposes, he said, over the life of potential power plants, "I've used $7.50 to $30" a ton.

# posted by Hugh Bartling @ 9:00 AM