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Post-2015 Consensus: Climate Change Perspective, Fischer

Summary

While concurring with some of the broad conclusions of the challenge paper, there is no scientific consensus that a limit of 450 ppm of CO2 does not pass a cost-benefit test; in fact, broad political consensus implies that limiting temperature rise to 2°C is cost effective. Neither are annual emissions caps inherently costly, depending on the policy measures used to achieve them. Overall, bringing fossil fuel prices more in line with their social costs necessarily produces greater benefits, which suggests that negotiating higher and converging carbon prices may hold more promise than trying to agree quantity targets.

Any policy portfolio that focuses primarily on R&D and/or renewable energy deployment is inherently more costly than one that incorporates a fundamental role for carbon pricing, which encourages the use of all abatement options. To avoid costly delay in taking action on mitigation while waiting for international agreement on emissions targets, we should immediately work toward aligning the prices of emitting energy sources with their social costs—removing fossil fuel subsidies, using market-based mechanisms to regulate conventional air pollutants, and pricing carbon.

Galiana cites a few studies which find that even less ambitious stabilization targets than 2° are unlikely to be cost-effective in a conventional analysis. However, models are limited in their ability to estimate the full range of potential costs and do not necessarily take account of possible catastrophic damage caused by uncertain events. Neither can modelling address the ethical and distributional effects of climate change. Environmental justice argues for an even lower target, for example to protect vulnerable small island states. In contrast to the challenge paper, the IEA emphasizes the feasibility of meeting climate goals cost-effectively with existing technologies.

Bringing down the cost of low-carbon technologies—or even finding breakthrough technologies—has many advantages, particularly in a world reluctant to take costly measures to reduce emissions. If low-carbon energy sources can become cost-competitive on their own, they will naturally displace fossil-based sources. This is particularly relevant for developing countries, which could then decarbonize without sacrificing growth.

However, a target of 0.5% of GDP spent on low-carbon technology R&D is highly ambitious, if not unrealistic, considering that OECD countries spend on average just 0.04% of GDP on all energy-related R&D. Relying too heavily on innovation as a mitigation policy also creates two main problems. The first is delay, which will raise overall costs substantially. The second is the lack of incentive for other abatement options, which may be ignored. On the other hand, developing backstop technologies – particularly for carbon capture and storage – would be very useful, but they would not be deployed without carbon pricing or regulation.

Overall, it is difficult to avoid making emissions pricing a central piece of mitigation policy, since carbon pricing encourages all options. The first step would be to remove all fossil fuel subsidies, followed by aligning fossil fuel prices at least with the cost burdens they impose locally. The final step would be to add a price for carbon, either through a carbon tax or emissions trading mechanisms. Given that the national benefits of a green tax shift can be more transparent than those of an emissions target, finding agreement on prices may well be more feasible than an agreement on quantities.

Finally, for me, the challenge paper’s presentation of cost-benefit ratios is at best uninformative and at worst misleading.  Broad political consensus has already been reached for limiting global temperature rise to 2.0°C. The much bigger question is how to get there. . Economists have demonstrated time and again that the single most cost-effective policy for reducing emissions is to price them.