Economics of Climate Change Policy

Rose Evaluates Economic Impact of Climate Change Policy

SPPD Research Professor Adam Rose

As the U.S. Congress considers enacting historic “cap and trade” legislation, a new book by USC School of Policy, Planning, and Development professor Adam Rose provides valuable lessons and reference points in evaluating the economic impacts of climate change policy.

The Economics of Climate Change Policy: International, National and Regional Mitigation Strategies (Edward Elgar Publishing, 2009) traces climate change polices starting with the first major proposal for a global “cap and trade” program in 1992 to more recent developments within states and regions of the United States to enact their own programs.

Rose is considered to be one of the preeminent scholars in the field, and the book represents much of his 20 years of research and involvement in policy design on the many aspects of the subject.

The breadth of coverage of topics in one volume by a single author is unprecedented. The chapters are primarily a compilation of his previously published works, which have appeared in prestigious journals such as the Journal of Environmental Economics and Management, as well as in reports by the United Nations and the U.S. Government Climate Science Program.

“The benefit of looking at climate change policy through an economic perspective is that it provides policymakers the scientific and quantitative tools to make data-based decisions that should ultimately reflect what is best for our society,” Rose said. “This kind of information is needed now more than ever as the U.S. Congress prepares to pass a major new climate policy bill that has widespread implications.”

The debate over “cap and trade” policies includes differing views over whether the government should employ market forces of supply and demand to encourage businesses to adopt climate-friendly measures or whether the government should have a more direct hand through regulation.

Rose said his research finds that “cap and trade” policies are particularly effective when they take into account flexibility and equity considerations. Equity acknowledges the realities that poorer nations, states or individuals are less well-equipped to address climate change relative to their own budget limitations and establishes a basis for assisting them. Flexibility means considering as many types of greenhouse gases, emitters and reduction strategies as possible, all of which help reduce the cost of compliance.

Among one of the first researchers to identify the central role of equity among nations and regions in addressing greenhouse gas mitigation, Rose was also among the first to quantify these equity principles so they could be incorporated into formal models that could be used to perform impact and benefit-cost analyses.

“Even though many economists believe we have no business addressing this value-laden subject, I contend that it’s useful to policymakers to know the relative cost to partners involved in reducing climate change before making any wide-scale decisions,” he said. “Across-the-board percentage cuts, or basing such decisions on rules of thumb like population numbers, are simplistic solutions that don’t take into account the magnitude of the problem and the differing perspectives of negotiating parties.”

The book provides extensive background in topics such as balancing climate policies with equity issues, exploring the regional and national economic impacts of climate change and remedial policies, and examining the design of “cap and trade” systems.

Chapters within the book’s six sections include:

  • “Greenhouse Gas Reduction Policy in the United States: Identifying Winners and Losers in an Expanded Permit Trading System.” This chapter examines how flexibility in any cap and trade system is preferable to limiting it to just the straight mitigation of carbon dioxide emissions.
  • “International Equity and Differentiation in Global Warming Policy.” This was the first paper to objectively quantify a broad set of equity principles so that they could be properly measured in formal models.
  • “Climate Change Policy Formation in Minnesota: The Case for a Regional Approach.” Rose and his co-authors estimated that Minnesota could reduce 10 percent of its emissions by 2025 at a zero or negative-cost savings by enacting policies such as green building guidelines, forestry management and increased biofuel production.

Photo by Amber Medley