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Climate Change Risks and Policies: An Overview
Michael A. Toman

Toman’s paper proposes six steps to follow when making decisions about climate policy. Toman’s first step is to think comprehensively about the risks. In my opinion, it is better to stay on the safe side of risk assessment, because it is better to be prepared for something that may never happen than to have to face it without preparation. There is obviously a lot of uncertainty about the extent and magnitude of future climate change effects and climate change may not cost as much as we might think due to technological advances which makes it difficult to put a numerical value on the costs associated with the risks. In addition to being unable to estimate the potential costs in a risk assessment of climate change, it is challenging to estimate the cost of changing systems since future costs and benefits will be different than they are today. I assume that would probably save money in the long run by being prepared for the worst rather than trying to adapt in the moment. Ideally, we would invest not in adapting to a changing climate, but in preventing climate change in the first place. The problem is since it is a global issue it requires global participation. It is no countries’ personal self-interest to bear the weight of the costs associated with implementing new climate policy, and as a result, unless there is some sort of agreement we will do nothing.
Although his paper does not go into detail about the economic models these steps are based on, they can be inferred from his argument and are important for understanding the reasons and significance for each step of thinking about climate change risks and their application in international policy and action. As we discussed in class, a Cost Benefit Analysis is very useful for establishing the cost of something and seeing how it fluctuates with different policies. With this model, what we are really measuring and trying to maximize is GDP, which is impacted greatly by the state of the environment and human health. If we do nothing, the cost is actually higher than implementing new policies because the cost will be the outcome of future climate change and the risk it poses to the environment and human health. Public health directly affects productivity, which in turn impacts GDP. However, we need to think beyond GDP, because indirect use values often do not get factored in. A perfect example is the Production Possibilities Frontier we discussed in class comparing output of Timber versus Hiking. As climate change provides and external force pushing the graph inwards, the level of timber output will remain the same since it provides direct economical value, while the decrease in Hiking value or opportunities will not be considered since it is harder to measure. We need to consider the Total Economic Value, since most effects will be non-market effects.
Toman says that we must think about the climate change problem and possible solutions in a global context. He acknowledges some of the disagreements that may arise between developing and developed countries, but he fails to give any commentary on possible solutions to these disagreements between developing and developed nations. What is a way to reconcile these two types of nations? Who is right and who is wrong? Which argument is stronger: that developed nations need to do more since they are responsible for past pollutions, or that developing nations need to do more since they will be adding the greatest number of pollutants as they continue to develop? What makes sense to me is for developed nations to help implement new technologies and policies in developing countries’ infrastructure.

- Travis, Smith, Flores, Retzloff

Will Fulwider

Comments on Michael Toman's Climate Change Risks and Policies:
An Overview

Toman's piece maintains a macro-level view of how human society, invariably through the policy changes, should address the issue of a changing climate. He submits a six step framework of thinking comprehensively about risks, thinking long term, addressing adaptation, thinking internationally, keeping distributional issues in mind, and estimating control costs comprehensively and realistically. While including some seemingly obvious steps this comprehensive analysis affords policy makers a criterion through which holistic policies can address the multifarious nature of climate change. Of particular note is the scope through which action on climate change is executed. Effects of climate change will be felt by U.S. on a local level, rising sea level, increased hurricane frequency, etc., but curbing the disastrous effects of climate change requires international and national cooperation.

Toman does not explicitly state the models he used in establishing and running this framework, however in class we addressed multiple models that Toman undoubtedly used. His initial step, thinking comprehensively about risk, focuses on those things that would be affected by climate change and details agriculture, wetlands, and human health, among others. In order to think comprehensively about risks, we must think about both market and non-market goods/resources, therefore using marginal abatement costs would help to ascertain the costs of cutting emissions. The marginal damages function is useful in calculating the possible costs inflicted upon these systems by climatic change. Using non-market valuation techniques would help address issues dealing with natural resources like the wetlands Toman mentions, or as we mentioned in class, deforestation. Using a production possibilities frontier, Toman could determine that climate change would push in the PPF of timber vs. hiking in a forest and if forest management was want to sustain the same levels of timber extraction as before climate change, hiking possibilities would be significantly reduced. Another option that could easily quantify the risk associated with decreased hiking due to climate change driven deforestation would be to utilize a travel cost analysis to see how much people had paid to travel further for forested land because of decreased hiking opportunities.

The above is an example of how many different models that we have used in class are inferred through Toman's work, and he likely uses most of the models for each section of his framework. For example, thinking long term would also look into abatement cost curves as time would push in the marginal abatement cost curve, thereby decreasing emissions without changing the price of the tax. Addressing adaptation would delve into how new technologies would possibly reduce abatement costs, lower the cost of marginal damages, or even expand the PPF.

Schrag and Toman concur on the need for a flexible timescale for reducing emissions. The problems associated with GGH are not as detrimental with regards to rate, but rather cumulative. This notion along with the need for economic incentives to reduce emissions I think to be two of the most important policy takeaways from the paper. Rather than enacting command and control policies, policy makers need to take in mind the adage that firms respond to incentives and incentivize reducing emissions, either through a tax, permits, or subsidies. While he notes this importance he does not delve into too much detail about introducing these policies and wrapping them up within flexible timescales; the inherent fault of such macro investigations. I would ask Toman timescales he proposes for introducing tax policies like we discussed in class, and how to weigh the importance of curtailing emissions, keeping in mind the residence time of CO2, with creating realistic outcomes.

Bayan Misaghi

Toman’s Climate Change Risks and Policies: An Overview
Bayan Misaghi, Kingsley Mooney, Matt Ziemer, Mary Benjamin

Though “Climate Change Risks and Policies: An Overview” had its most recent revision over a decade ago, the framework for thinking about possible solutions to controlling greenhouse gases are more relevant than ever. Toman starts his paper outlining the treaties and disagreements of the 1990s, pointing out that documents like Article 2 of the United Nations Framework Convention on Climate Change were written ambiguously, leaving terms like “dangerous” up for interpretation. Furthermore, Articles 3 and 4 give potential solutions such as mitigating climate change through financial support and low-emission technologies, but again they failed to include targets for greenhouse gas reduction in developing countries and focus solely on Annex I countries. Granted, this is hardly surprising since nations are prone to naturally resisting change, but it is concerning considering the large and rapidly growing population of India and some nations in Africa, and the rise from poverty of hundreds of millions of individuals in China.

The paper goes on to present a six-step decision framework about how the United States and the world can implement effective policies to reduce carbon emissions. They are: Think comprehensively about risks; Think long term; Address adaptation; Think internationally; Keep distributional issues in mind; Estimate control costs comprehensively and realistically. These six policies were not formally modeled by Toman, but one can think about what types of analysis would be required to develop and forecast effective policies. Toman warns us though that there is no silver bullet; in fact, even with the right policies, the climate will probably still get worse, though at a much slower rate.

Because the atmosphere is a public good, the problem is truly international: both the developed and developing world need to develop policies that would reduce global emissions. This clearly leads to the problem of cooperation: with the proper enforcement of international treaties, there is incentive for countries to cheat resulting in a Nash equilibrium where nations continue to pollute at an unsustainable rate. Toman uses the “think internationally” point to address this. Because energy use is strongly coupled with economic growth, we can see why both developing and developed countries might be incentivized to only agree to protocols that are within an easy reach for them. We can use game theory to model this and then use cost-benefit analysis to estimate the severity of the repercussions a country would need to pay in the case they were caught cheating in order to develop an effective policy.

Thinking comprehensively about risks initially requires a cost-benefit analysis in terms of marginal abatement costs and marginal damage functions. At least nominally, we must first consider the market associated with preserving some part of the environment—this is essentially the monetary opportunity cost of the present value of the environmental good. Unfortunately, this is a lot more difficult to calculate with air quality and climate than it would be for a more excludable good like a forest. However, more studies by meteorologists, geologists, climatologists, public health experts, etc. can provide for us the probabilities of certain events occurring and confidence intervals on the number of lives negatively effected from a public health standpoint. For example, Jacobson et al. (2005) provides us the number of dollars saved per gallon if US automobiles were to switch from using petroleum with an average emission rate to Hybrid, Natural gas, Wind, or Coal energy sources. These estimates take into account the decreases in public health costs from people dying or becoming ill, which is an economic benefit to switching. On the other hand, the Jacobson et al. (2005) ignores costs such as the costs to implement these technologies, change infrastructure, etc. Of course, these costs would need to be considered before enforcing a policy that would require all vehicles to switch to an alternative energy source. Another example of a risk associated with climate change would be increased probabilities of natural disaster; therefore, the expected value of the increase in damages these disasters would cause must also be calculated. In a business as usual scenario, we could model these risks as aggregate supply shifting inwards and driving the price level up.

The aforementioned only takes into account market-related risks. We must also consider non-market valuation through techniques like contingent valuation, willingness to travel, etc. Certainly with the change in climate utility of nature enthusiasts will decrease, but so will that of the average person. We can see the effects of this in Beijing, for example. The vast amount of air pollution due to coal combustion has resulted in dangerous particulate matter, sulfate, and nitrogen compounds in the air. Though there have been an increase in occurrence of lung cancer (whose cost can more-or-less be calculated using market-related techniques), there is also a decrease in utility for the aggregate population since people may have more trouble breathing, may be spending less time outside than they otherwise would, etc.

Walking through the “Think long-term” point Toman brings up, we can potentially model benefits associated with increased investment in environmental protection. In the case of public health, an increase in the air quality may result in greater productivity for a given population and capital stock. This could be modeled as a rotation upward of the production function. Thus, aggregate supply would shift outwards as people are more productive. In a business as usual context, productivity would decrease and aggregate supply would shift left driving the price level up. Again, we must be sure to consider nonmarket related goods as well. If we ignore the negative externalities of climate change and air pollution it is possible that in only a market-sense there would be little or no change, while those that enjoy the goods in a non-market sense would have vast decreases in utility. In the case of air in a business as usual scenario, individuals and firms may continue to use the public good as a receptacle for gaseous waste, but relatively non-market uses of air like hand-gliding or even breathing might suffer tremendously. This would be represented as a shift/rotation inwards of the production possibilities frontier, while keeping the same level of pollution and dramatically decreasing the level of nonmarket uses. In this nonmarket case, consumer surplus of breathing, hand-gliding, etc. decreases. We can also model how harsh enough repercussions might incentivize firms to innovate. Given that the aggregate supply of conventional sources of energy that are high in carbon emissions has shifted left (in the case of a strict environmental policy), we could model the response of firms in terms of their own research and development. Firms would have greater incentive to invest in alternate energy technologies, increasing the productivity function of these technologies. This would cause a shift of the aggregate supply for these alternate energy sources to the right, thus, decreasing the price of these sources and leading to their greater consumption.

This blog attempted to address some of the ways we could formally model Toman’s points. The modeling discussed is by no means comprehensive, but may be a starting point for someone attempting to breakdown such a complicated issue.

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