7. CONCLUSIONS AND RECOMMENDATIONS

As the Administration and Congress shape U.S. policy on climate protection in the coming months, they will face persistent pressure to postpone action. Where calls for delay are more than an attempt to simply derail climate policies, they will be motivated by the belief that delaying now and implementing policies later will lower the costs without affecting our ability to meet long-term climate objectives.

This notion, however, ignores key aspects of economic, political and climate systems:

· From an economic perspective, early action is needed to initiate appropriate changes in the capital stock and to hasten technological advances. Climate protection policies may also be consistent with certain economic benefits.

· Politically, action sooner rather than later will help to establish a credible commitment to climate protection that will be necessary to ensure domestic change. Leading by example will also create a much stronger basis for ensuring international cooperation.

· Early action seems prudent given the uncertainties regarding safe stabilization levels and the risks from faster rates of concentration build-up.

As a consequence, Congress and the Administration should consider steps that will begin immediately to influence capital investment and that will spur more rapid development of alternative energy technologies. An initial role for the Administration is to ensure that a meaningful treaty is reached in Kyoto - one that incorporates sufficiently stringent targets in the near-term to create an imperative for domestic policy implementation. Ratification by the Senate and the passing of enabling legislation should occur quickly to reaffirm commitment and to make full use of the time available. Above all, the mistake made after Rio must be avoided, where failure to implement firm policies from the outset has forced the United States to concede early on that it would fail to meet the targets.

A central plank of any emissions reduction strategy must be the use of economic incentives. Evidence since Rio has shown that small-scale voluntary programs alone are unable to fundamentally change investment and consumption patterns. Broad mandatory policies will be required to alter behavior throughout the economy. A balance needs to be struck between a policy that is sufficiently early and firm to signal commitment, yet sensitive to the slow processes of capital turnover and technological development. A carbon tax implemented soon and at a low level yet which rises gradually is one policy that meets these criteria. Though taxes remain politically unpopular, if they are levied as part of a tax shift rather than a tax increase, the overall tax burden would remain unchanged. The same incentive structure could be achieved with a tradable permit system. Ideally, this should be based on short budgetary periods, say of a year or two, so as to remove the temptation to delay action and thereby increase the risk of failure to comply.

As firms and consumers perceive policies as permanent, the changing direction of capital investment and technology should make it possible to avoid high tax levels or permit prices. Experience shows that the costs of environmental compliance have tended to fall, not rise, once actual measures have been implemented.

A market instrument should be supported by a series of other policies that will not only provide direct benefits but will help to convey commitment to climate protection. In particular, inducing appropriate technological change is key. Incentives need to be set up to encourage greater private R&D in renewable energy sources and in energy conservation. There is also a need for greater R&D on the government's behalf, particularly for invention and innovation. In addition, the existing pattern of subsidies and tax expenditures to conventional energy sectors should be reassessed and changed. Most important, short-term policies must be recognized as merely the first step of a long-term economic transition that will be necessary under any path to achieve stabilization of greenhouse gas concentrations.

The Administration and Congress must be aware of the message that inaction would send to the economy. Failure to reach or ratify a treaty would add another precedent for non-action to the failure of the Rio commitments. Industries would begin to expect the same again if they could demonstrate that the same adjustment costs are relevant. Further investment would likely be channeled into carbon-intensive capital and technological development of carbon-intensive energy systems, which would increase dependency on fossil fuels and make adjustment costs higher and even more relevant in the future.

By, in effect, delaying since 1992, we have already lost precious opportunities. Meeting any emissions target now is already more expensive than it would have been if credible market and policy signals had been put in place five years ago. Continued postponement of policy implementation only risks making future changes of direction both more abrupt and more costly.