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close this bookEnvironment, Energy, and Economy: Strategies for Sustainability (UNU, 1997, 381 pages)
close this folderPart 3 - Energy-economy interactions in stabilizing CO2 emissions
close this folderComments on part 3
View the document1. Lawrence R. Klein
View the document2. Warwick J. McKibbin
View the document3. Kenji Yamaji

3. Kenji Yamaji

Many interesting topics are raised and discussed in part 3. Dr. Cline makes a persuasive argument for his two-phase policy approach with the first phase of CO2 stabilization through the application of "integrated" economic analysis. By "integrated" I mean that both the cost of greenhouse gas control and the damage resulting from climate change are treated.

Professor Amano is rather neutral in a sense. He surveys the macroeconomic cost evaluations of a CO2 tax and studies of its side-effects, and he also talks about his own study on the sensitivity of the optimal climate control using a version of the integrated model originally developed by Professor Nordhaus.

Mr. Ferriter is the most pragmatic and cautious of the three. He introduces an IEA study on the carbon tax with relatively high rates and regulatory approach for promoting energy efficiency improvements. He suggests that the regulatory approach would have effects equivalent to those that can be expected with a carbon tax of US$300/tC.

I would like to comment on three points related to these presentations.

The first point is the macroeconomic impact of a carbon tax. As Professor Amano points out, the macroeconomic cost varies depending on several factors, such as the time-horizons of the models and the treatment of tax revenues. He also mentions the difference in the types of model employed. I would like to emphasize here the influence of the basic structure of the models used. On the basis of actual past performances, the general equilibrium type model and a more explicit optimization model tend to produce a smaller macroeconomic cost compared with simulation models that simulate the performance of actual imperfect market functions.

My own study on carbon tax, which is included in Professor Amano's survey, is based on a simulation type model. The cost I obtained is rather high even when the tax revenue is assumed to be recycled through income tax reduction. Of course, there is also a regional difference. I think my result reflects the higher marginal cost of CO2 reduction in Japan. But the difference of model type makes a more significant impact.

My second comment concerns the policy implications of integrated economic analysis, or optimal climate control with minimum total social cost. The uncertainties involved in damage cost evaluation are huge, particularly in the case of climate change. We have too little knowledge to do a full cost-benefit analysis of climate control. In this context, sensitivity analyses, as demonstrated by Dr. Cline and Professor Amano, are very interesting and important. However, optimal control may be very close to the business-as-usual case, and very far from CO2 stabilization, which is the path many OECD countries (including Japan) are now choosing. But, as Dr. Cline says, CO2 reduction, which is a more stringent control than CO2 stabilization, could be the optimal path depending on the choice of discount rate and the time-horizon.

It is clear that more study should be done in this field. My personal feeling is that we should take action now to deal with climate change. There are two aspects that are not mentioned in the presentations: one is that there could be a catastrophic positive feedback such as triggering a burst of methane emission from tundra in Siberia, and the second is that technology development could, eventually, dramatically reduce the cost of CO2 control. These issues are not short-term ones and therefore appear not to be suitable topics of discussion here. But I believe short-term policy should also be rooted in long-term considerations.

The last point I would like to raise is the global perspective of climate control, or more specifically the issue of "carbon leakage," which Professor Amano mentions as a side-effect. I think inter-regional equity is important as well as intergenerational equity. In this sense? the developed regions should take the lead in climate control and CO2 limitation. However, unilateral efforts by developing regions are quite likely to be accompanied by leakage; i.e. CO2 reductions in a developed region may result in CO2 increases in other regions. And such leakages can be very large. On the other hand, the assertion that joint implementation between developed and developing regions can be one of the most effective and efficient schemes to reduce global CO2 emissions is mostly maintained in qualitative terms; as far as quantitative analysis is concerned, there is not enough research in this field. Through analyses addressed to these global perspectives, pessimism about carbon leakage could be turned into positive opportunities.