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Appendix B
Thinking about Time in the Context of Global Climate Change
The costs, effectiveness, and benefits of policy instruments to
mitigate global climate change are influenced by the time at which
actions are taken and at which the greenhouse gas emissions and
sequestrations occur. Three dimensions are involved. The first is
the straightforward matter of the timing of costs and resultant
benefits with regard to the discounted present value of resources
expended and benefits received. The second is the relative value
decision-makers place on different beneficial effects of
mitigation; goals are multidimensional, and each aspect may be met
to a different degree depending on the timing of changes in
greenhouse flows. The cost-benefit ratio of instruments therefore
depends on the mix of goals sought. The third dimension is
associated with the complex relationship between flows of emissions
and sequestrations, and the resultant augmentation of the stock of
greenhouse gases in the atmospheric system, inherently a
time-dependent phenomenon. Each of these dimensions affects the
relative attractiveness of classes of policy instruments and
therefore must be taken into account in the design of an optimum
system of interventions. It is not a simple matter of minimizing
the dollars spent per ton reduced.
Timing of Costs and Effects
(Benefits)
The issue of timing of costs and effects is straightforward. The
absolute level of the discount rate to be used is a matter of great
complexity and no little controversy. However, as long as it is not
zero, the earlier that benefits can be received and the longer that
costs can be delayed, the better—all other things held equal.
The premise behind this conclusion is that resources are fungible
and have alternative uses—in satisfying consumption needs and
augmenting future production through investment. What makes
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this a matter of special concern here is that the value placed
on the specific mitigation effects of instruments depends crucially
on the mix of goals sought.
Goals of Mitigation of Global Climate
Change
The mitigation of global climate change is not a one-dimensional
phenomenon such that all possible benefits of policy actions are
achieved simultaneously. This complicates the ranking of
instruments on a cost per ton basis. To take different components
into account in making rankings, it is first necessary to decompose
the bundle of potential desired goals and then to determine how
each possible policy instrument furthers or hinders the
satisfaction of each. Furthermore, before the instruments can be
put on a common basis it is also necessary to form some judgments
about the terms of the acceptable trade-offs among mitigation
goals. A similar process is required to compare the cost incurred
in pursuing the use of a mitigation instrument with the cost of
adaptation or of meeting non-climate-change goals such as faster
economic growth or increased consumption.
Three component subgoals of global climate change mitigation can
be posited. The first is to reduce the rate of change in the stock
of greenhouse gases, on the twin premises that the speed of global
climate change is sensitive to relatively small changes in the
stock and that damage wrought is an increasing function of the rate
of change. This goal would stress the avoidance of sudden increases
in the flow of greenhouse gases, for example, even at the cost of
giving up some reductions in the long-term level of the stock.
The second subgoal is to reduce the total amount of global
climate change experienced between now and some future time, with
the endpoint defined either arbitrarily or as the point where the
global climate system is again in equilibrium. The presumption here
is that the damage to be mitigated arises from the integral of
global climate change over each year between now and the endpoint
selected. This might be loosely termed the ''total damage borne"
measure, and a proxy for its mitigation is the sum by years of the
augmentation of the stock of greenhouse gases avoided.
The third subgoal is to reduce the ultimate level of global
climate change at the chosen endpoint. Pursuit of this goal
presumes that the time path of global climate change is of little
consequence as long as the policy instruments result in an
acceptably low level of ultimate change. As a proxy for this goal,
the target is the ultimate level of the stock of greenhouse gases.
Total benefits of mitigation would presumably be maximized by some
optimal combination in achieving all three of these subgoals.
Figure B.1 illustrates these concepts in a schematic way. It
shows the stock of greenhouse gases that is taken as a proxy for
global climate change.
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FIGURE B.1 Base case.
Line 2 at the top, business as usual (BAU), illustrates the
system without policy intervention. The slope of this line (for
simplicity shown as linear with time) is a proxy for the speed of
global climate change. Line 1 illustrates stabilization of
greenhouse gas stocks at the present level. The difference between
lines 1 and 2 shows the greenhouse gas stock proxy for the
cumulative exposure to global climate change due to future
anthropogenic augmentation of greenhouse gases. The vertical
difference between the
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BAU line and line 1 represents a proxy for the level of global
climate change introduced to the system at any point in time due to
future anthropogenic activity.
It is obvious on inspection that changes in the path of the
stock through the use of policy instruments can have different
effects on satisfying each of the three subgoals posited. For
example, a policy that resulted in severe depression of the line
through much of this time, followed by a rapid increase up to and
beyond the BAU level, would reduce the total exposure to climate
change, but at the cost of rapid change later and of a higher
end-point value. In contrast, a rapid short-term increase of
greenhouse gas stocks, in exchange for earlier stabilization and a
lower endpoint, would subject the system both to the damage of
rapid increase in the short run and to greater cumulative global
climate change borne. The point is clear: Realization of components
of the bundle of desired mitigation effects may not be achieved
simultaneously by policy instruments. Trade-offs among them may be
necessary. It follows that three requirements must be met before
optimizing policy choices among instruments can be made. First, it
is necessary to determine the damage functions associated with the
three separate aspects of global climate change—speed, total
quantity experienced, and ultimate level. Second, it is necessary
to associate these with changes in the stock of greenhouse gases.
Third, it is necessary to determine how candidate policy
instruments affect the stock and how much they cost. As complex as
they are important, these matters are likely to be beyond careful
estimation for some time. This does not mean, however, that they
are subjects that can rightfully be ignored by policymakers
choosing among instruments. On a gross and intuitive level, the
trade-offs involved among these goals can be incorporated usefully
into decisions about the degree to which different classes of
instruments should be pursued.
The Flow-Stock Relationship
Greenhouse gases are emitted through both natural and
anthropogenic processes and are subsequently sequestered or serve
to augment the existing stock in the atmosphere. Sequestration
occurs both in unmanaged sinks such as the oceans and in sinks
subject to human influence such as forests. Greenhouse gases are
also transformed and lose their greenhouse property over time.
(This attenuation, which differs in rate among greenhouse gases, is
ignored here because it does not affect the essence of this
analysis.) The stock is many multiples of the flow and,
consequently, exhibits substantial inertia. Further, the portion of
the flow that is subject to human management is a fraction of the
flow through the system, adding to the inertia of the stock to
flows notionally within human control. There are also numerous lags
and feedbacks in the system that affect the flow-stock
relationship
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(but these are ignored here as well). Also relevant is the
hypothesis that past increases in greenhouse gases have yet to be
fully reflected in observed global climate change. This suggests
that stabilization of the stock of greenhouse gases would still
leave additional global climate change in the system; a reduction
of the stock would be required to stabilize the climate itself.
Highly simplified, the basic relationships are illustrated in
Figures B.1a and B.1b, which describe stocks and flows,
respectively. The vertical scales differ enormously between the two
diagrams; in each, the scale is broken to exaggerate the changes
relative to the base. Line 2 in Figure B.1b describes the BAU trend
of flows of greenhouse gases net of BAU sequestration. It is
associated with the BAU trend of greenhouse gas stocks previously
described in Figure B.1a. Line 1 of Figure B.1b shows net flows
kept constant at current rates, just as line 1 of Figure B.1a shows
constant stocks at the current level. The BAU lines of Figure B.1
are used in subsequent diagrams as the base case to which the
effects of classes of instruments are compared. Actual future
trends, in reality, will probably be nonlinear (i.e., curve) with
respect to time, but the trend line is shown here as linear to
illustrate the principles involved in characterizing different
policy instruments.
Characterization of Classes of Policy
Instruments
The conclusion that follows from the above discussion is that
the time dimension is a useful addition to the evaluation criteria
used to choose among policy instruments. Their relative
attractiveness depends on more than their resource costs and the
number of tons removed:
• It depends on when the costs are incurred (the later, the
better) and when the benefits are felt (the sooner, the
better).
• It depends on the effect of the instrument on the speed
with which the climate change occurs (the slower, the better).
• It depends on the effect of the instrument on the total
global climate change experienced, as summed over the years from
the present to the endpoint (the smaller the total, the
better).
• It depends on the effect of the instrument on the
ultimate level of global climate change imposed on the future at
the chosen endpoint (the lower, the better).
Major classes of policy instruments are discussed below with
reference to the above time-related criteria.
Temporary Reduction in Greenhouse Gas
Flows: Class 1
One class of instruments yields a temporary reduction of
greenhouse gas flows. Different cases are illustrated in Figure
B.2. Figure B.2b shows
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FIGURE B.2 Temporary reduction in flows.
schematically the net change in the flow to the atmosphere by
time interval. The effect on the stock is shown (greatly
exaggerated for clarity) on Figure B.2a.
The prototypical example of this class would be a public
relations campaign that caused thermostat adjustments lasting 1
year (case a). The stock would be permanently reduced, but of
course not by much relative to the total. This case is functionally
the same as a conservation activity that requires annual operation
and management expenditures (case b); the action
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is simply repeated each year. (For simplicity of presentation,
case a is shown as following case b; case c follows both.) In cases
a and b the assumption is that contemporaneous economic consumption
(defined as including diminished amenities) is foregone to achieve
the reduction in greenhouse gas flows and hence stock. The costs of
reducing the flows are borne in the year the reduction takes place,
but the benefits are experienced (essentially) forever. This class
of instruments has the following characteristics:
1. Their costs are borne as the flows of greenhouse gases
are reduced.
2. Permanent reduction occurs in the stock, but not in the
flow.
3. There is a once-and-for-all decline in stocks that
slows the speed of growth of greenhouse gases during the time of
the action.
4. Timing affects the total damage borne. To the extent
that this consequence is a matter of concern, early conservation is
to be preferred.
5. Timing of action does not influence the final level of
greenhouse gas stock. It follows that to the extent that the final
level of stocks is what matters, conservation now, rather than
later, is a poorer bargain.
Case c is a variant of a temporary reduction. An example would
be investment in establishing a forest that sequesters greenhouse
gases at an increasing and then decreasing rate, with the
incremental net quantity sequestered reaching zero when the forest
is in long-term carbon sequestration equilibrium. The distinction
between this and the previous two cases rests on the timing and the
nature of the costs borne. There are investments in establishing
the forest and continuing opportunity costs in sustaining the land
in forests; the latter continue even after the forest reaches
equilibrium. Case c represents a contingent reduction in the
greenhouse gas stock—depending on a continuing resource use to
secure.
Characteristic of this subclass are the following:
1. Costs are borne prior to any benefit as the flows are
reduced and permanently thereafter to sustain the
sequestration.
2. The reduction of stock is contingent upon continued
expenditures; flow reductions are temporary.
3. The speed of growth of greenhouse gas stocks is slowed
steadily as gases are sequestered, but the possibility of later
escalation exists.
4. Same as cases a and b.
5. Same as cases a and b.
Permanent Reduction of Greenhouse Gas
Flows: Class 2
Another class of policy instrument is one in which a one-time
investment leads to a continuous reduction of flows of an equal
amount over time. An example would be a change in a long-lived
building's envelopes such that
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less energy was used each year. This class is shown in Figure
B.3, with the investment made in the present.
This class of instruments has the following characteristics:
1. Costs are borne before the flows of greenhouse gases
are affected.
2. There is a permanent reduction in flows and a
cumulative, permanent reduction in stocks.
3. There is a reduction in the speed of change in global
climate, which starts at the time of the action.
FIGURE B.3 Permanent reduction in flows.
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4. Timing of action affects the total damage borne, and
the quantity is an increasing function of how soon the instrument
is used.
5. Timing of action affects the final level of greenhouse
gas stocks. It follows that to the extent the final level of stocks
is what is of consequence, action now rather than later is the
better bargain.
Temporary Sequestration with
Subsequent Release, and Variants: Class 3
This class of policy instruments is characterized by a cycling
of greenhouse gases in and out of the atmosphere. It is one that
illustrates to a striking degree the importance of different
mitigation goals in comparing policy instruments.
The prototypical example of this class is the creation of a
forest based on a temporary excess supply of land for agriculture,
with that forest subsequently reclaimed to grow food. This example
is shown in Figure B.4. The forest is shown as being established in
the present. It sequesters greenhouse gases through time, as shown
in case a. If the wood were then simply burned, the stock of
greenhouse gases at the endpoint would not be affected; the timing
of the flow alone is changed, as shown in case b. More to the
point, though, the outcome is likely to be that some of the
greenhouse gas will remain sequestered in lumber and some of the
biomass will be burned to replace fossil fuels, which means that
all of the greenhouse gases will not be returned to the atmosphere.
This is shown as an alternative case c.
Variants of this cycling process abound. For example, many
energy conservation efforts require initial energy-using
investments that increase greenhouse gas flows in the short run.
Creation of forests from scrubland initially releases greenhouse
gases; it may be a substantial time before the initial augmented
flow is neutralized.
Timing of flows and of changes in stocks is particularly
important in evaluating this class of instruments. An instrument
whose costs yielded climate change benefits only with a lag would
have a further hurdle to pass if it led to an initial augmentation
of greenhouse gas flows. This would be especially true if lessening
the total damage borne were an element in the desired outcome.
Furthermore, the endpoint against which the final level of stock is
judged is crucial. If it occurred as sequestration ended, but
before releases occurred, it would give a misleadingly favorable
judgment of the instrument; the obverse is also true.
Characteristics of this class of instruments include the
following:
1. The timing of costs with respect to effects on stocks
is varied; for the forest example, there are up-front investment
and continuing maintenance costs, with the latter ending only when
the forest is reconverted to its original state.
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FIGURE B.4 Temporary sequestration and
release.
2. Net flows are both positive and negative, depending on
the point in the cycle. There may be no effect on the endpoint
level of the stock.
3. The effect on the rate of change in greenhouse gas
stocks is erratic; because sequestration is typically gradual and
release rapid, spurts of increase are possible.
4. Timing of action does not affect the total damage borne
over the cycle of sequestration and release.
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5. Timing of action does not affect the endpoint level of
the stock except insofar as it occurs in a particular part of a
sequestration-release cycle.
6. To the extent that the endpoint level is a matter of
concern, instruments of this sort are ineffective in principle.
7. The relative standing of instruments of this class is
peculiarly dependent on the endpoint chose. For example, for the
forest conversion case, an endpoint sooner than the time of
reconversion will give a false signal of excessive effectiveness on
all grounds—speed of change, total damage borne, and maximum
climate change incurred.
Lagged, Uncertain Reductions in
Greenhouse Gas Flows: Class 4
Some policy instruments have effects on greenhouse gas flows
substantially in the future, and those effects may be uncertain. An
example would be increased research and development directed toward
energy-saving technologies and practices in developing countries.
These expenditures would precede (perhaps by decades) reductions in
flows, but (by assumption) the reductions would then be permanent
with the usual effect on stock. The research and development may,
of course, be fruitless, because the technology does not work, is
superseded by something better, or is not adopted for other
reasons. If it were used, however, it would affect all three of the
possible policy endpoints by slowing the speed of change, reducing
total damage borne, and lowering the final level of global climate
change.
A plausible assumption is that neither the cost of the research
and development nor the gestation period before flows are reduced
is affected by when it is initiated. However, the earlier the
research and development is done, the greater is the burden of the
costs (measured as discounted present value) and also the time
period over which the reductions in greenhouse gas flows are
accumulated. Greater accumulation time reduces both total damage
borne and the final level of global climate change. It follows that
in evaluating the wisdom of undertaking such research and
development, both types of benefits should be used and that they
are additive. They should, however, be calculated in expected value
terms by taking into account the uncertainty of their actually
coming to pass. It also follows that any research and development
that might be justified in the future is an even better bargain in
the present. As noted, this is because the mitigation effect is an
increasing function of the time between the introduction of the new
technology and the endpoint of the analysis.
A further reason for early rather than later research and
development is that it moves forward in time the knowledge about
what reductions are possible. This information could increase the
time available to plan for needed adaptation and would indicate
earlier which additional, more expensive, measures might be
necessary and which could be avoided.
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This class of instruments has effects on flows and stocks
similar to those in Figure B.3 with the reductions displaced into
the future (refer to that diagram). The characteristics of such
instruments are the following:
1. Costs are borne substantially before any reductions
occur, and implementation has further costs. The discount rate used
in the decision process has a marked effect on evaluating the
instrument.
2. Once reductions begin, there is a permanent effect on
flows and a cumulative, permanent reduction in stocks.
3. There is a reduction in the rate of change in global
climate, beginning when flows decline.
4. Timing of action affects the total damage borne; the
quantity avoided is an increasing function of how soon the
instrument is used.
5. Timing of action affects the final level of greenhouse
gas stocks. Again, the sooner action is initiated, the better the
bargain.
6. The uncertainty of outcomes must be factored into the
decision by evaluating the mitigation effects on an expected value
basis.
7. Knowledge gained about the prospects for mitigation is
a component of the benefits; again, the sooner it is acquired, the
greater is its value.
Accelerating Reductions in Greenhouse
Gas Flows: Class 5
A class of policy instruments may induce an escalating reduction
in greenhouse gas flows. Such instruments have little early
consequence but exponentially increasing effects over time. A good
example of this class of instrument would be one that reduced
population, as described further below. Another example would be
investment in infrastructure for research and development on energy
conservation. Still another would be expenditures that would lead
to a permanent shift in attitudes toward energy-conserving social
choices, such as the use of mass transit.
Population reduction is accomplished through reduction in the
fertility rate. (Delaying births would only have a once-and-for-all
effect.) The immediate result in countries at or near the margin of
subsistence is to increase the survival rate of those children
born; so in estimating the effects, it is necessary to consider the
net change in increased life expectancy. A subsequent effect is to
increase per capita income. That effect is strongest in the period
immediately after the decline in birthrate because during this
period the ratio of employed to nonemployed persons
increases—partly because women are freed from child-rearing
duties and partly because there are fewer persons (children) not in
work force. Another factor is that child-rearing investment and
expenditures (schools, medical attention, and so on) are released
to other occupations. The issue is to determine how these shifts
affect the net emission of greenhouse gases over time.
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Conventional wisdom suggests that a declining birthrate would
have little effect on net emissions in the short run and that the
effect could even be to increase emissions. The latter would occur
if the investment, labor, and consumption freed by having a smaller
cohort of infants emitted more greenhouse gases than the activities
replaced. Over time, however, the expectation is that the effects
would be positive and large and would grow exponentially as cohorts
of reduced size moved through the demographic cycle. This is
because the emission of greenhouse gases is expected to be more
responsive to falling population than it is to rising per capita
income.
The conclusion that declining population leads to lowered
greenhouse gas emissions depends crucially on the amount by which
per capita incomes rise. The latter is a matter of fact and depends
on particular circumstances. In the poorest countries, for example,
declining population may free sufficient resources from basic
consumption to allow substantial increases in highly productive
investment. This investment could more than compensate for a
declining labor force, especially in the early years after the
decline in birthrate. Total output could consequently increase, not
fall, and added output-related emissions could overshadow the
decline in emissions associated with the population drop per se.
This is especially true if emissions per person rise more than
proportionately with income, which is likely to be the case in a
poor country due to shifts in the mix of consumption goods toward
those that use more energy. In the long run, after incomes rose
sufficiently, countervailing forces would likely dominate, but that
long run may be far in the future. This possibility should be taken
into account in interpreting the results of the example given
below.
The class of instruments that might lead to an accelerated
reduction in greenhouse gas flows is illustrated in Figure B.5. The
change in BAU flows from a permanent downward shift in fertility
rates is shown as positive for a period after the change occurs. It
then turns negative and builds in waves over time. The waves are
occasioned by the movement of the diminished childbearing cohort
through time. The increasing (to some limit) reduction in flows
leads to an exponential decline in greenhouse gas stocks as
compared to BAU.
The characteristics of instruments of this class (as illustrated
in the population example) follow:
1. Expenditures occur well before greenhouse gas emission
flows decrease and continue as needed to sustain the drop in
fertility rates.
2. The initial impact may be to increase flows and stocks,
but this is temporary—though for really poor countries
successfully launched on development, it can last a long time.
3. Reductions in flows are permanent because there is a
shift downward in population, including that of childbearing age,
even if fertility reduction expenditures cease.
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FIGURE B.5 Accelerating reductions in flows.
4. Once begun, there is a cumulative, permanent reduction
in greenhouse gas stocks at an exponential rate.
5. The speed of the change in stocks is reduced (at a
growing rate) from the time that lower fertility rates result in
lower emissions. To the extent that steady movement toward
stabilization is a goal, early use of this instrument is more
desirable than later.
6. Timing of actions affects the total damage born; thus
to the extent that lessening total damage is a goal, the sooner the
instrument is used, the better.
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7. Timing of actions affects the endpoint level of
greenhouse gas stocks as an increasing function of the interval
between initiation and endpoint, making early action relatively
more valuable than later, all other things held equal.
Lessons, Implications, and Further
Work
What has come before suggests that instruments can be divided
into classes on the basis of the time at or during which they
affect greenhouse gas emissions and stock. Division of this sort is
crucial if instruments are to be reasonably compared with each
other. This is true on three counts.
First, the relative desirability of instruments depends on their
costs related to their benefits. Because the costs of greenhouse
gas emission changes may occur at different times and their
benefits extend into the future, costs and benefits of different
instruments must be put on the same scale with respect to time for
their comparison to be meaningful. This is done through the use of
a discount rate as discussed in Chapter 20.
Second, the goal of reducing global climate change has at least
three dimensions. Instruments can have different effects on the
satisfaction of each, depending on the time that effects on
greenhouse gas stocks are observed. This is tied to the third
matter: the complex relationship between flows (which instruments
affect) and stocks (which are the result of changes in flows). It
is stocks and changes in them that affect the issue of policy
interest—global climate change.
As an illustration of the interconnectedness of these matters,
if the final greenhouse gas stock is the outcome of interest,
instruments should be measured against that, and those having the
same effect on greenhouse gas flows during one period may have very
different impacts on greenhouse gas stocks at the endpoint
selected. This suggests that judgments of the relative
cost-effectiveness of different instruments can be very dependent
on the temporal endpoint chosen. A ton of flow reduced may be a bad
bargain, no matter how cheaply achieved, if it is reinserted into
the atmosphere before the endpoint of interest.
Proper treatment of time has another use as well. It can have
important consequences for determining the optimal timing and
quantity of any intervention. This is true if that decision is
based on what society gets in the form of lesser global climate
change vis-à-vis what it gives up in terms of current
satisfaction and the enhanced ability to accommodate future
adaptation. In this, fully accounting for all the positive aspects
of mitigation—reduced speed of change, reduced total exposure
to damage, and final level of global climate change—is
important. Each has separate effects on the consequences of
societal interest such as rise in sea level, agricultural
productivity,
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and changes in ecological systems. They can also differ in their
effects on the distribution of consequences over time and
geography.
The purpose of this appendix is to indicate the role of the time
dimension in formulating a global climate change mitigation
strategy. It illustrates ways in which different instruments may
lead to outcomes that diverge from those expected when only tons
reduced and costs are considered. Application of the relationships
discussed here requires an understanding of the physical
relationships among flows, stock, and global climate change that
lies beyond current knowledge. It also requires complex judgments
about the trade-offs among sometimes competing policy goals. In
illuminating what information is needed to formulate an efficient
and effective policy, it suggests potentially fruitful areas for
further research. Even before that research is done, however,
policymakers can use some of these insights to select the mix of
instruments that appears to have the greatest prospect for
improving total welfare.
Representative terms from entire chapter:
policy instruments
