Costs Come First in a Reset Climate Agenda

This study was originally published by the Federation of American Scientists (FAS).
Read the comprehensive study here.

Key Takeaways

• The costs of climate policy influence whether reforms benefit society, as well as their likelihood of passage and durability. Four ways to categorize climate policy costs are: negative-cost policies (pro-growth policies with climate co-benefits); low-cost policies (costs below domestic climate benefits); medium-cost policies (costs below global climate benefits); and high-cost policies (costs above global climate benefits). Cross-partisan alignment is most evident among pro-abundance progressives and pro-market conservatives.
• Negative- and low-cost policies align with domestic self-interest and comprise a growing share of the abatement curve. For example, market liberalization in permitting, siting, electricity regulation, and certain transportation applications lower energy costs and have profound emissions benefits. A prominent low-cost policy is emissions transparency. Negative- and low-cost policies hold the most potential for durable reforms and are often technocratic in nature.
• Chronic underconsideration of costs has induced an overselection of high-cost policies and underpursuit of low- and negative-cost policies. Legislative policies, such as subsidies and fuel mandates or bans, often receive no ex ante cost-benefit analysis before adoption. Interventions receiving cost-benefit analysis, especially regulation, tend to underestimate costs.
• Innovation policy – namely public support for research, development, and early-stage deployment – can align with domestic self-interest and address legitimate market deficiencies. By contrast, industrial policy for mature technology carries high costs, often erodes social welfare, and is not politically durable. Notably, public support for mature technologies in the Inflation Reduction Act was not durable, but support remained for nascent industry.
• We recommend that a reset climate agenda focus on abatement results over symbolic outcomes, prioritize state capacity for technocratic institutions, and emphasize cost considerations in policy formulation and maintenance. Negative cost policies warrant prioritization, with an emphasis on mobilizing beneficiaries like consumer, non-incumbent supplier, and taxpayer groups to overcome the lobbying clout of entrenched interests. Robust benefit-cost analysis should precede any cost-additive policies and be periodically reconducted to guide adjustments.
  

Introduction

Public policy involves tradeoffs. The primary tradeoff for climate change mitigation is economic cost. Secondary tradeoffs include commercial freedom, consumer choice, and the quality or reliability of goods and services. Political movements seeking to address a collective action problem, such as climate change, are prone to overlook the consequences of tradeoffs on other parties, like consumers and taxpayers. This paper posits that the cost tradeoffs of climate change mitigation have been underappreciated in the formation of public policy. This has resulted in an overselection of high cost policies that are not politically durable and may erode social welfare. It also results in overlooking low or negative-cost policies that are durable and hold deep abatement potential. These policies can have broad political appeal because they align with the self-interest of the United States, however they typically require dispersed beneficiaries to overcome the concentrated lobby of entrenched interests.

A core, normative objective of public policy is to improve social welfare, which “encourages broadminded attentiveness to all positive and negative effects of policy choices”. Environmental economics determines the welfare effects of climate change mitigation policy by the net of its abatement benefits less the costs. The conventional technique to determine abatement benefits is the social cost of carbon (SCC). The barometer for whether climate policy benefits society is to determine whether abatement benefits exceed costs. Accounting for full social welfare effects requires consideration of co-benefits as well, granted these tend to be conventional air emissions with existing mitigation mechanisms covered under the Clean Air Act. Nevertheless, accounting for costs is essential to ensure climate policy benefits society.

Abatement costs also have a discernable bearing on the likelihood and durability of policy reforms. Climate policies exhibit patterns of passage, mid-course adjustments, and political resilience across election cycles based on the constituency support levels linked to benefit-allocation and cost imposition. This paper develops four policy classifications as a function of their abatement benefit-cost profile, and uses this framework to examine the political economy, abatement effectiveness, and economic performance of select past and potential policy instruments.