The design of a climate change policy involves two major elements that can both benefit from the insights of economic analysis. First, policymakers must decide on the goal. This may take the form of a long-term policy goal, such as stabilizing the atmospheric concentration of carbon dioxide at 550 parts per million by 2100. Or it may focus on the near-term, such as reducing greenhouse gas emissions to 7 percent below 1990 levels over the 2008-2012 period. Understanding the costs and benefits of various alternatives can assist policymakers in the process of setting climate policy goals. Analysis of the costs and benefits and accounting for the uncertainty that characterizes climate change impacts, abatement opportunities, the ability to adapt to a changing climate, and the effectiveness of policy infrastructure can inform policymakers not only on the stringency of the goal, but also on the form of the goal. Should the policy aim to take the form of an emissions target, a concentration goal, a temperature increase goal, or some other alternative? Should emissions targets be specified as fixed quantities or quantities indexed to economic growth or other factors?

Costs and Benefits
A careful consideration of the costs and benefits of any policy to mitigate global climate change is necessary to determine whether the policy makes society better off in economic terms. Researchers at RFF have focused on a vast array of issues related to cost-benefit analysis, including estimating the costs of emissions abatement, calculating the benefits of mitigating climate change impacts, assessing the effect of the choice of discount rate for long-term policies, and characterizing uncertainty in such analyses.

Price vs. Quantity
To abate greenhouse gas emissions, policymakers have two cost-effective implementation tools at their disposal: they can set a maximum quantity of emissions and allow trade of emissions rights (e.g., a cap-and-trade program) or they can set a price on emissions (e.g., a carbon tax).  Uncertainty in abatement costs complicates the choice of setting a quantity or setting a price. To address this concern, RFF researchers have developed and promoted the idea of a hybrid policy that establishes a quantitative target and tradable permit program in which the permits are subject to a price ceiling, a so-called safety valve or insurance policy against unexpectedly high abatement costs.

Emissions Targets
The Kyoto Protocol established quantitative emissions targets for industrialized countries for the 2008-2012 period. In contrast, Argentina and the United States have proposed targets based on the emissions intensity of their economic output. RFF researchers have undertaken analysis on the form and stringency of emissions targets and played active roles in the policy community on the design of intensity targets.

Taxes and Subsidies
Enacting a tax on emissions creates a direct economic incentive for firms to reduce their emissions so long as abatement costs less than the tax.  The higher cost of emissions-intensive goods under a tax also stimulates the adoption of less emissions-intensive alternatives by consumers.  In a similar fashion, a subsidy for emissions-lean or emissions-free technologies – such as hybrid vehicles and wind power – drives investment away from emissions-intensive activities. RFF has analyzed the characteristics of a carbon tax as well as undertaken research on subsidies on energy-efficient and non-carbon energy technologies.

Cap and Trade
A cap-and-trade program requires setting an aggregate emissions cap, allocating emissions permits to the economy, and allowing regulated firms to buy and sell these permits. By establishing an emissions permit market, firms can respond to the market price for emissions to decide whether to abate emissions further or buy additional permits. Researchers at RFF have been leaders on the design and evaluation of tradable permit markets, including the U.S. sulfur dioxide program, the EU emissions trading program for greenhouse gases, and the Kyoto Protocol.

Command and Control
Traditional environmental policy has been implemented through mandatory technology standards or performance standards (e.g., emissions per unit output). This “one size fits all” approach to environmental policy fails to account for the heterogeneity in firms’ operations and emissions abatement opportunities, and increases the costs necessary to meet a given emissions goal.

Voluntary Programs
As an alternative to regulatory or tax approaches, government agencies operate a variety of programs that promote voluntary efforts by companies to reduce their greenhouse gas emissions. These often take the form of providing information about emissions abatement opportunities and energy efficiency improvements as well as green labeling (e.g., EnergyStar appliances).

Carbon Sinks
Trees, agricultural crops, sea kelp – indeed all photosynthetic vegetation – naturally remove carbon dioxide from the atmosphere. Policies that promote additional biological sequestration, such as incentives for reforestation and afforestation, can complement emissions abatement policies at relatively low cost. RFF scholars have estimated the cost of carbon sequestration, evaluated carbon sink policies of various countries under the Kyoto Protocol, and assessed the role of sinks in the Clean Development Mechanism.