Policy Study

Nuts and Bolts

The Implications of Choosing Greenhouse-Gas Emission Reduction Strategies

Executive Summary

Most global warming discourse has centered on debates about whether the United States should adopt a strategy to reduce greenhouse gas emissions, and, if so, by how much. Less attention has been paid to specific policy tools that would be used to implement a greenhouse-gas reduction strategy. Specifically, what would energy-conservation measures and greenhouse-gas reduction measures cost?

Shortly after taking office, President Clinton announced that his administration would pursue a global warming policy designed to reduce greenhouse-gas emissions to 1990 levels by the turn of the century. Now that his administration is crafting plans to promote widescale energy conservation, these latter issues will move to the forefront in the policy debate.

Two different kinds of policy tools currently are receiving attention from policymakers. On the one hand are pricing strategies such as air emission charges (including proposals for carbon charges). On the other hand are command-andcontrol approaches whereby legislators and regulators would require (or directly promote) use of specific energyconservation technologies and practices. Both kinds of tools, designed primarily for the purpose of reducing greenhouse-gas emissions, could involve significant economic costs. For example, a charge of $100 per ton of carbon would result in a doubling of fuel costs from 1989 prices.

Command-and-control conservation strategies, now favored by many environmentalists, could potentially be even more costly, depending on the particular policy options. In general, these conservation proposals are technologically oriented rather than focused on individual behavior patterns. This tendency probably arises from wishing to avoid the political pain of having to tell people that reducing energy use is not a “free lunch.”

While enhanced conservation investment may produce some net benefits, these gains are unlikely to be as substantial as proponents estimate. Policies requiring increased fuel efficiency standards for automobiles, increased mass transit, or mandatory use of alternative fuels will likely have limited impacts in reducing energy consumption or vehicle emissions while imposing high costs. For example, the price of oil may have to rise above $30 per barrel (40 percent over current prices) before many alternative fuels would be cost-effective.

If global climate change does not materialize, pursuing all-out reduction efforts for little or no gain could cripple the economic development of future generations. Both market-oriented and command-and-control measures based on a single-purpose strategy of reducing greenhouse-gas emissions are likely to be costly, since both types of measures would introduce significant changes in current energy-consumption patterns without any certitude that the targeted emissions are currently having any adverse impacts.

On the other hand, an energy policy based on conveying market price signals about resource use, energy consumption, and air emission impacts would promote decentralized decision-making in which individuals make their own adjustments to price information. This enables individuals and firms to find the most-efficient responses to changing cost structures.