Policy Study

Climate Change Policy Options and Impacts

Executive Summary

In November 1998, President Clinton signed the Kyoto Protocol, moving the United States one step closer to implementing a sweeping set of new measures to combat what is posited by some to be the looming environmental threat of our time: manmade climate change. While debate ranges over the impacts that the Kyoto Protocol on Climate Change might have, the sheer magnitude of potential implementation impacts, both intended and unintended, suggests that careful scrutiny should precede actions to reduce the risk of climate change. In signing the Kyoto Protocol, the President did more than signal a concern over manmade climate change: he put the United States on a course toward a specific set of strategies and tactics that proponents claim will head the risk of climate change off at the pass.

But there are many reasons to question the wisdom of the Kyoto Protocol’s approach to climate change policy, including questions about the scientific grounding of the protocol; questions about the feasibility of the proposed implementation mechanisms; questions about the efficacy of those measures; questions about the adverse consequences of diverting resources to address highly uncertain risks using tools with uncertain impacts; and questions about the impacts of proposed climate interventions on people’s standard of living and freedom of choice. This study examines these questions in three chapters.

In the face of claims that the Kyoto Protocol will make present and future generations safer and provide a healthier environment, Chapter 1 explores what should be the bottom-line question: Is the Kyoto Protocol likely to provide a real, net improvement in the environmental safety of present or future generations? Chapter 1 examines the scientific uncertainties in our understanding of climate change. These uncertainties also limit the effectiveness of measures aimed at forestalling such change. After reviewing the meager promise of the Kyoto Protocol to reduce greenhouse gas concentrations, stacking it up alongside the protocol’s impacts upon people’s health as it is tied to the economy, and examining the opportunity costs of premature or inappropriate resource allocation, Chapter 1 builds a balanced risk ledger which demonstrates that the near-term benefits of the Kyoto Protocol are scant while the long-term benefits are highly uncertain. Such benefits pale when compared to high near-term negative impacts and opportunity costs. At the bottom line, this risk ledger includes both pros and cons of protocol implementation, suggesting the protocol is likely to do far more harm than good.

Chapter 2 explores the most commonly discussed mechanism for implementing the Kyoto Protocol, namely emissions trading. The administration, and numerous proponents of the Kyoto Protocol’s approach to climate change policy, portray emission trading as a no-pain implementation mechanism that will let us have our cake and eat it too. But other analysts, notably those most experienced with the development and evaluation of emission-trading programs, point out that emission trading is not the panacea it is made out to be. Chapter 2 explores the factors which make emission trading less likely to work for greenhouse gases than for traditional air and water pollution problems. These factors include: 1) confusion over the “stock” and “flow” effects of air pollutants; 2) uncertainties about the influence of individual greenhouse gases; 3) uncertainty about forecasts; 4) uncertainty about outcomes; 5) problems with establishing and enforcing property rights; 6) and problems of high transaction costs. Emission trading, as an approach to climate change, is plagued with difficulties that cast serious doubt on its reputation as a no-pain approach to climate change.

Chapter 3 explores the ramifications of imposing carbon taxes, the most likely alternative to emission trading, an alternative looking more and more likely as developing countries stymie attempts to even study implementation of emission-trading regimes. The main claim of those promoting carbon taxes as an approach to forestalling climate change is that the known adverse economic impacts of a present-day tax will be offset by far-future benefits. But such claims do not stand up to scrutiny, and Chapter 3 demonstrates that uncertainties about the impacts of climate change; uncertainties about future climate benefits; uncertainties about a more economically fragile society to deal with other pressing risks; and the risks of allowing for a return to centrally planned energy policy all undermine the claims that carbon taxes are either an equitable, effective, or efficient way to forestall the risks of climate change.