Abstract: In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics: the use of the Ramsey formula as an organizing principle for determining discount rates over long horizons, whether the discount rate should decline over time, and how intra- and intergenerational discounting practices can be made compatible.The panel members agree that the Ramsey formula provides a useful framework for thinking about intergenerational discounting. We also agree that theory provides compelling arguments for a declining certainty-equivalent discount rate. In the Ramsey formula, uncertainty about the future rate of growth in per capita consumption can lead to a declining consumption rate of discount, assuming that shocks to consumption are positively correlated. This uncertainty in future consumption growth rates may be estimated econometrically based on historic observations, or it can be derived from subjective uncertainty about the mean rate of growth in mean consumption or its volatility. Determining the remaining parameters of the Ramsey formula is, however, challenging.

Abstract: Carbon markets are substantial and they are expanding. There are many lessons from experiences over the past eight years: fewer free allowances, better management of market-sensitive information, and a recognition that trading systems require adjustments that have consequences for market participants and market confidence. Moreover, the emerging international architecture features separate emissions trading systems serving distinct jurisdictions. These programs are complemented by a variety of other types of policies alongside the carbon markets. This sits in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol and raises a suite of new questions. In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets and relative to a variety of other policy approaches.

Abstract: Because conventional command-and-control environmental regulation often performs poorly in developing countries, policymakers are increasingly experimenting with alternatives, including state-sponsored voluntary regulatory programs that provide incentives, but not mandates, for pollution control. Although the literature on this trend is quite thin, research in industrialized countries suggests that voluntary programs are sometimes ineffective because they mainly attract relatively clean participants seeking to free-ride on unrelated pollution control investments. We use plant-level data on more than 60,000 facilities to identify the drivers of participation in the Clean Industry Program, Mexico’s flagship voluntary regulatory initiative. Our results suggest that the threat of regulatory sanctions drives participation in the program. Therefore, the program does appear to attract relatively dirty firms. We also find that plants that sold their goods in overseas markets and to government suppliers, used imported inputs, were relatively large, and were in certain sectors and states were more likely to participate in the program, all other things equal.

Abstract: This paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs, damage valuation, policy instrument choice, technological innovation, and international climate policy. We begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be, both under cost-effective stabilization of global climate and under net benefit maximization or Pigouvian emissions pricing. The remainder of the paper focuses on the appropriate scope of regulation, issues in policy instrument choice, complementary technology policy, and international policy architectures.

Abstract: Cost containment has emerged as a major point of contention in the current congressional debate about designing a cap-and-trade program to limit future U.S. greenhouse gas (GHG) emissions. This paper reviews basic concepts and policy options for cost management, drawing on a March 2008 workshop sponsored by Resources for the Future (RFF), the National Commission on Energy Policy, and Duke University’s Nicholas Institute for Environmental Policy Solutions. The different sources and temporal dimensions of cost uncertainty are explored, along with possible mechanisms for addressing short- and long-term cost concerns, including banking and borrowing, emissions offsets, a price cap (or safety valve), quantity-limited allowance reserve, and the concept of an oversight entity for GHG allowance markets modeled on the Federal Reserve. Recognizing that the inherent trade-off between environmental certainty and cost certainty has no perfect solution, the paper nonetheless concludes that numerous options exist for striking a reasonable and politically viable balance between these two objectives. In the effort to forge consensus around a particular set of options, it will be important for policymakers to strive to fit the remedy to the problem they are trying to solve and to preserve the underlying integrity of the overall program in terms of its long-term ability to sustain meaningful market incentives for low-carbon technologies.

Abstract: Despite the growing importance of voluntary programs as tools for environmental management, they have been subject to quite limited evaluation. Program evaluation in the absence of randomized experiments is difficult because the decision to participate may not be random and, in particular, may be correlated with the outcomes. The present study is designed to overcome these problems by gauging the environmental effectiveness of two voluntary climate change programs—the U.S. Environmental Protection Agency’s Climate Wise program and the U.S. Department of Energy’s Voluntary Reporting of Greenhouse Gases Program, or 1605(b)—with particular attention to the participation decision and how various assumptions affect estimates of program outcomes. For both programs, the analysis focuses on manufacturing firms and uses confidential census data to create a comparison group and to measure outcomes (expenditures on fuel and electricity).Overall, we find that that the effects from Climate Wise and 1605(b) on fuel and electricity expenditures are no more than 10 percent and probably less than 5 percent. Virtually no evidence suggests a statistically significant effect of either Climate Wise or 1605(b) on fuel costs. Some evidence suggests that participation in Climate Wise led to a slight (3–5 percent) increase in electricity costs that vanished after two years. Stronger evidence suggests that participation in 1605(b) led to a slight (4–8 percent) decrease in electricity costs that persisted for at least three years.

Abstract: On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change—such as taxes or a “safety-valve” price ceiling for cap-and-trade— while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve: a quantitative limit that we call the allowancereserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency relative to tax or other price-based policies. The last point highlights the deficiencies in several previous studies of price and quantity controls for climate change that do not adequately capture the dynamic opportunities within a cap-and-trade system for allowance banking, borrowing, and intertemporal arbitrage in response to unfolding information.

Abstract: Welfare comparisons of regulatory instruments under uncertainty, even in dynamic analyses, have typically focused on price versus quantity controls despite the presence of banking and borrowingprovisions in existing emissions trading programs. This is true even in the presence of banking and borrowing provisions in existing emissions trading programs. Nonetheless, many have argued that suchprovisions can reduce price volatility and lower costs in the face of uncertainty, despite any theoretical or empirical evidence. This paper develops a model and solves for optimal banking and borrowing behavior with uncertain cost shocks that are serially correlated. We show that while banking does reduce price volatility and lowers costs, the degree of these reductions depends on the persistence of shocks. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities eliminate about 20 percent of the cost difference between price and nonbankable quantities.

Abstract: Over the coming decades, the cost of U.S. climate change policy likely will be comparable to the total cost of all existing environmental regulation—perhaps 1–2 percent of national income. In order to avoid higher costs, policy efforts should create incentives for firms and individuals to pursue the cheapest climate change mitigation options over time, among all sectors, across national borders, and in the face of significant uncertainty. Well-designed national greenhouse gas mitigation policies can serve as the foundation for global efforts and as an example for emerging and developing countries. We present six key policy design issues that will determine the costs, cost-effectiveness, and distributional impacts of domestic climate policy: program scope, cost containment, offsets, revenues and allowance allocation, competitiveness, and R&D policy. We synthesize the literature on these design features, review the implications for the ongoing policy debate, and identify outstanding research questions that can inform policy development.

Abstract: The approach used to model technological change in a climate policy model is a critical determinant of its results. We provide an overview of the different approaches used in the literature, with an emphasis on recent developments regarding endogenous technological change, research and development, and learning. Detailed examination sheds light on the salient features of each approach, including strengths, limitations, and policy implications. Key issues include proper accounting for the opportunity costs of climate-related knowledge generation, treatment of knowledge spillovers and appropriability, and the empirical basis for parameterizing technological relationships. No single approach appears to dominate on all these dimensions, and different approaches may be preferred depending on the purpose of the analysis, be it positive or normative.

Abstract: Technologies to reduce significantly fossil-fuel emissions currently are unavailable or only available at high cost. In light of this, the amount of research on the pace, direction, and benefits of environmentally friendly technological change has grown dramatically in recent years. This research includes empirical estimates of these effects and modeling exercises designed to simulate endogenous technological change in response to climate policy. Unfortunately, few attempts have been made to connect these two streams of research. This paper attempts to bridge that gap, reviewing both the empirical and modeling literature on technological change.Our goal is to provide an agenda for how both empirical and modeling research in these areas can move forward in a complementary fashion. In doing so, we discuss how models used for policy evaluation can better capture empirical phenomena and how empirical research can better address the needs of models used for policy evaluation.