''Measuring the Costs of Climate Change Policies''

Studies of the costs of climate change policies have utilized a variety of measures or metrics for summarizing costs. The leading economic models have utilized GNP, GDP, the ''area under a marginal cost curve,'' the discounted present value of consumption, and a welfare measure taken directly from the utility function of the model's representative agent (the ''Equivalent Variation''). Even when calculated using a single model, these metrics do not necessarily give similar magnitudes of costs or even rank policies consistently. This paper discusses in non-technical terms the economic concepts lying behind each concept, the theoretical basis for expecting each measure to provide a consistent ranking of policies, and the reasons why different measures provide different rankings. It identifies a method of calculating the ''Equivalent Variation'' as theoretically superior to the other cost metrics in ranking policies. When regulators put forward new economic or regulatory policies, there is a need to compare the costs and benefits of these new policies to existing policies and other alternatives to determine which policy is most cost-effective. For command and control policies, it is quite difficult to compute costs, but for more market-based policies, economists have had a great deal of success employing general equilibrium models to assess a policy's costs. Not all cost measures, however, arrive at the same ranking. Furthermore, cost measures can produce contradictory results for a specific policy. These problems make it difficult for a policy-maker to determine the best policy. For a cost measures to be of value, one would like to be confident of two things. First one wants to be sure whether the policy is a winner or loser. Second, one wants to be confident that a measure produces the correct policy ranking. That is, one wants to have confidence in a policy measure's ability to correctly rank policies from most beneficial to most harmful. This paper analyzes empirically these two properties of different costs measures as they pertain to assessing the costs of the carbon abatement policies, especially the Kyoto Protocol, under alternative assumptions about implementation.