Estimating the non-environmental consequences of greenhouse gas reductions is harder than you think

I. BACKGROUND: THE PROBLEM As governments, economists, and citizens struggle with the variety of difficult issues surrounding the Kyoto Protocol, the problem of estimating the non-environmental consequences(1) of meaningful greenhouse-gas (GHG) reductions remains unresolved. Leaving aside the predictably pessimistic estimates produced for political purposes on behalf of segments of the fossil fuel industry, top-down modelers have begun generating runs purporting to show what the effects of implementation of the Kyoto provisions might be (see, e.g., Energy Modeling Forum, 1998; Energy Information Administration, 1998). At the same time, new bottom-up studies have attempted to answer the same question with different methodology - examining the technologically attainable emissions reductions that appear profitable at current fuel prices or that would be profitable given small increases in such prices.(2) The gap between the two approaches has not been bridged. The top-down studies typically show multibillion dollar GDP reductions (though small in percentage terms) accompanying GHG reductions of the magnitude called for by Kyoto, while the bottom-up studies suggest that very substantial reductions in emissions approaching or even exceeding the Kyoto target could be achieved at close to zero cost (or even at a gain to the economy).(3) Each approach has well known problems. It should be noted first that the framing of climate policy largely in terms of the economic costs and benefits is somewhat an artifact of an "economism" that permeates the debate. It is certainly possible to imagine other powerful justifications for climate protection. Ethical principles might be invoked (e.g., versions of "sustainable development" requiring that future generations inherit a natural world no less environmentally benign than it is at present). Once it is recognized that risk management is at the center of the climate protection problem, even the assignment of rough monetary values (and probabilities) to the various possible outcomes is quite difficult. There is no way to recover meaningful market-based "willingness to pay" data for planetary risks that fall outside historical experience, let alone outside the narrow range of marginal changes for which current prices can be used to measure marginal utilities. Given the opportunity to make an informed choice, many (most? almost all?) people would be highly reluctant to conduct a onetime, irreversible experiment with the planet that, if the outcome is unfavorable, will have disastrous consequences for their children and grandchildren. Even granting the premise that it is the dollar costs and benefits that matter most, the gap between the results of the top-down and bottom-up methodologies is very troubling. Such intellectual gridlock can be symptomatic of some sort of extrascientific agenda, as might be the case if the modelers' differences were being driven by politics or ideology. No doubt politics and ideology do affect the climate debate, but there is another possibility. The divergence of the estimates may signal a deeper scientific problem that confounds efforts to estimate the economic effects of climate policies. A persistent set of anomalies of this type may be a signal that Kuhnian "normal science" (Kuhn, 1962) is no longer adequate to make progress. Of course, the top-down studies are known to be quite sensitive to their specifications and assumptions (Repetto and Austin, 1997). The ordinary course of research should lead to a sharpening of such estimates, because some of the variation in the models' outcomes can be traced to differences that are, ultimately, empirical. For example, a recent computable general equilibrium (CGE) model with endogenous technological progress shows that alternative combinations of a carbon tax and RD Goulder and Schneider, forthcoming). …