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What's the price of environmental policies?

Joint Program report examines discrepancies in climate-change cost estimates

A recent report from MIT researchers aims to identify why proposals for climate-change legislation often have varying and wildly different cost estimates.

The report, released in October 2010 by the MIT Joint Program on the Science and Policy of Global Change, focuses on two causes for cost-analysis discrepancies: the use of different cost measures; and different assumptions used to determine the amount of emissions reductions required to meet a policy target.

An example of recent discrepancies can be seen in the nine independent cost estimates for the 2009 Waxman-Markey Bill, which would reduce emissions in the U.S. primarily through a cap-and-trade system. In those models, the cost of enacting the policy ranged from $69 to $808 per household in 2020 — a staggering 12-fold difference.

"Divergent estimates of the cost of climate policy can cause confusion among policy makers and the public, but this important study is the first to show how much of the difference is due to researchers asking different questions or measuring different concepts, and how much is due to different assumptions about economic growth, technical change, behavioral responses, and how the model treats each of the many features of climate policy," said Don Fullerton, a professor at the University of Illinois and managing editor of the BE Journal of Economic Analysis & Policy who was not involved in the research.

The report notes that some of the differences in cost estimates can be attributed to modelers using different measures to quantify costs; right now, there is no consistent or conventional way to measure the costs of climate policies. Also, when projecting the costs of legislation, assumptions have to be made on how much emissions will need to be reduced in the future to reach a policy target.

Because policies that address climate change are usually long-term endeavors, small assumptions made from the beginning of legislative implementation can be magnified over the time span of the cost-estimate study. This means that small differences in assumptions can result in large differences in the end.

The broad range of cost estimates of climate legislation in the U.S. can contribute to confusion in policy discussions. Even if the disparities that arise from using different cost measures were eliminated, much of this range in cost estimates would still exist. Some uncertainties may be reduced, for example by defining policy implementation details. But others, like projecting economic activity or the availability of alternative technologies over the long-term, are irreducible. Regardless, the report notes that greater care and transparency is needed when comparing cost-estimate results.

Read more about the report's findings

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