Policies to curb greenhouse gas emissions will come at a cost to energy producers, industry and consumers. Policymakers around the globe are working to determine the most effective and cost efficient way to reduce these emissions — from renewable energy subsidies and fuel efficiency standards to carbon taxes and cap-and-trade policies.
To tackle this challenge, Sergey Paltsev from MIT and Pantelis Capros from the National Technical University of Athens have come together to assess which methods and metrics are best for calculating the cost of climate policies. In their study, published this week in Climate Change Economics, they find that there is no one ideal metric for climate mitigation policies, but measuring changes in consumer welfare is one of the most appropriate techniques.
“With many of these regulations, the total costs are often less visible to consumers because the true costs are not reflected in the price of energy, but distributed to other sectors of the economy,” says Paltsev, the assistant director for economic research at the MIT Joint Program on the Science and Policy of Global Change. “The true measure of the cost of a policy is reflected in the change in consumers’ behavior, something that economists call ‘change in welfare,’ but it is hard to convey this measure to policy makers and general public.”
In the study, the researchers compare different concepts that are used to inform the public about the cost implications of climate change. They consider two major modeling types where costs are calculated, energy system models and macroeconomic models. Energy system models focus solely on the energy sector and treat the rest of the economy as a given. Macroeconomic models represent the energy system as part of the entire economy and provide more detailed information on the various sectors. Within these approaches there are a variety of metrics used to calculate the cost of a climate mitigation policy.
After studying the cost metrics associated with each modeling approach, the researchers compared the metrics used by a team of international researchers to better understand the impacts of the current EU emissions targets. They find that there are large variations in cost estimates and most metrics are not directly comparable, which makes it difficult for policymakers to interpret the results of these studies.
Paltsev says there is no ideal metric for costs, but it’s clear that some approaches are more effective than others. For example, carbon prices and marginal abatement cost curves are unable to reflect the full impact of the policy on the economy. In addition, energy system models do not always take into account the full cost of a climate policy — particularly the economic impacts of policies interacting with one another. The authors recognize that depending on the objectives, other metrics and modeling techniques may be appropriate. They conclude that measuring changes in consumer welfare or consumption is an effective approach that should be used by policymakers to evaluate climate policies.