MAKING TRADE-OFFS IN THE GREENHOUSE: Relative Price Changes, Non-CO2 Greenhouse Gases and Tropical Deforestation in Climate Policy

Abstract: This thesis, consisting of five separate papers, is an inquiry into climate policy and the trade-offs that have to be made when formulating such policy. It covers three major topics: (1) the economics of choosing a climate policy target; (2) the economic merits of the Global Warming Potentials (GWPs), the metric governing the trade-off between abatement of different greenhouse gases (GHGs) in the current climate regime; and (3) the promises and challenges with including the GHG emissions from tropical deforestation in a future climate regime. In paper I we argue that future scarcities—induced by a changing composition of the economy and climate change—should lead to rising relative prices of environmental goods and services, raising the estimated damages of climate change and counteracting the effect of discounting. We show that this may have as large an effect on the efficient level of GHG abatement as adopting a low discount rate. In paper II and III we analyze the trade-off between abatement of different GHGs. In paper II we estimate the economic loss of using GWPs, as opposed to making a cost-effective trade-off between GHGs. Using a dynamic climate-economy model, MiMiC, we find this loss to be in the order of 5 percent of total net present value abatement costs if 2°C climate target is to be reached. In paper III we show that uncertainty and learning about the climate sensitivity increases the near-term cost-effective valuation of short-lived GHGs—e.g., methane (CH4)—relative to long-lived—e.g., carbon dioxide (CO2). In paper IV and V we analyze the role that reduced tropical deforestation (RED) may play in a future international climate regime. Paper IV finds that implementing a RED regime faces significant challenges, foremost when it comes to the issue of setting targets that assure that emission reductions are additional. Paper V analyzes the competition over land between forest preservation and bioenergy cultivation under stringent climate policies. We find that the net present value of forest clearing for palm oil bioenergy plantations is positive, even in the face of a price on the carbon emissions from deforestation. Climate policy, in the form of a uniform carbon price, may therefore not suffice as protection for the world’s tropical forests.