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Obama Shifts Approach to Costs of Climate Change

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The strongest argument for a major U.S. government response to climate change is the obvious argument: climate change.

Green jobs have long had a whiff of exaggeration to them. The alternative-energy sector may ultimately employ millions of people. But raising the cost of the energy that households and businesses use every day -- a necessary effect of helping the climate -- is not exactly a recipe for an economic boom.

The stronger argument for a major government response to climate change is the more obvious argument: climate change. The continental United States endured its hottest year on record in 2012, and the planet's 13 hottest years have all occurred since 1998. Major storms and wildfires are increasing in many regions. The air in much of China resembles soup. The seas are rising faster than forecast only a few years ago, and the costs of extreme weather are rising, too.

In Washington, the economic case for responding to climate change has made little progress, and President Barack Obama has subtly shifted his approach, talking less about green jobs and more about extreme weather.

As he prepares to deliver the first State of the Union address of his second term, on Tuesday night, he and his advisers face some big decisions on climate policy. One is how to make the biggest dent in carbon emissions through executive-branch actions, given the long odds of Congress's passing any substantial bill. Another is to rethink the economics of climate policy now that the early burst of green-job enthusiasm has waned.

Alternative energy may not be a solution to the United States' economic problems. But neither is it guaranteed to make those problems much worse, despite the continuing claims of opponents. Mr. Obama has a range of options with the potential for different economic consequences. Some may indeed do harm, but others could have economic benefits that equal their costs, particularly in a world in which temperatures, storms and uncertainty keep rising.

The most intriguing choice facing Mr. Obama is whether to resuscitate a version of the centerpiece of the Democrats' failed 2009 climate push: a cap-and-trade program. He has little chance of creating such an economywide program, because Republicans and some coal-state Democrats oppose it. But he may be able to create a scaled-down version specifically for power plants -- no small thing, given that power plants produce about one-third of the country's carbon emissions.

To economists, the best climate policies are those that allow market incentives to work, and the most damaging tend to be those heavy on mandates. "Telling companies they have to install this or that equipment is the more expensive way to proceed," said Michael Greenstone, an economics professor at the Massachusetts Institute of Technology and a former Obama administration adviser. "Instead of a one-size-fits-all solution, you should allow companies to find the least-cost solution."

Mandating that every power plant use turbines with a minimum efficiency, for instance, is likely to impose large costs on some. Perhaps the plants are designed in a way that makes it easier -- and cheaper -- for them to use their old turbines and reduce emissions another way. A turbine mandate could force them to raise prices for consumers more than necessary to achieve the same climate benefit.

A cap-and-trade system requires companies to buy permits for their emissions and allows the companies to decide how best to meet their targets. A company that finds inexpensive ways to reduce emissions can sell its unused permits to companies that would have had to spend large sums to reduce emissions, lowering prices for everyone.

In previous decades, the United States reduced acid rainfall and the levels of lead in gasoline through similar approaches, at lower costs than predicted.

White House officials have already signaled that Mr. Obama is likely to use a 2007 Supreme Court decision -- which gave the Environmental Protection Agency the authority to regulate greenhouse gases -- to regulate existing power plants. In his first term, the E.P.A. relied on that decision to negotiate a steep increase in fuel- economy standards with automakers and to overhaul standards for newly constructed power plants. The rules for new power plants would effectively halt the construction of new coal plants.

Those rules relied mostly on mandates, like requiring automakers to have a certain average fuel efficiency across their entire fleet. And mandates can indeed reduce carbon emissions. In Mr. Obama's second term, aides say the president may also mandate that home appliances and office buildings produce fewer emissions.

But even largely successful mandates often bring little-noticed costs. So environmental economists are watching to see whether Mr. Obama will also take steps to keep economic growth at the center of his climate policy, by attempting to regulate existing power plants with market-friendly permits.

Such a step would most likely draw legal challenges, but so would any move by the administration to regulate power-plant emissions.

The system would not be a true cap-and-trade program, because it would lack a nationwide cap on power-plant emissions, notes Nathaniel Keohane, a vice president at the Environmental Defense Fund and a former White House economist. Still, the system would create credits that efficient plants could sell to less-efficient plants.

The program would still be vulnerable to political caricature as a "cap-and-tax" program, much as the 2009 cap-and-trade bill was. This time, though, individual Congress members would not need to vote for it. The administration could implement it, fight for it in the courts -- and hope, as in the past, that the costs end up being far lower than critics predict.

"Realistically, there is very little prospect of progress in this Congress," Mr. Keohane said. "Ultimately, we have to have a comprehensive policy," he argued, given the scale of the problem. "But we can get started in the short run."

Beyond a market-based system, financing for research is a second major way Washington can try to slow climate change without harming economic growth. The U.S. government will spend $3.8 billion this year on clean-energy research and development, according to the Brookings Institution.

It is a tiny sum relative to the $30 billion for medical research or the $15 billion for agriculture subsidies. A cross-ideological report, from the American Enterprise Institute, the Breakthrough Institute and the Brookings Institution, has recommended an additional $25 billion a year for alternative energy.

Of course, in the current fiscal and partisan environment, so much additional financing is about as likely to pass Congress as a carbon tax. The more realistic hope, scientists and economists say, is for the government to spend existing money more effectively.

The small Energy Department program Advanced Research Projects Agency-Energy, known as Arpa-e -- modeled after Darpa, the Pentagon research lab that built the Internet -- should be a model, Mr. Greenstone and others say. The program finances high-risk research when the private sector is unlikely to find it profitable, and it makes decisions based on peer review. But Arpa-e is the exception, and much government research spending has lower odds of major success.

The U.S. government could play a further role by making its own buildings and operations more energy efficient. Doing so could have a modest effect on the country's total emissions. Perhaps more important, it could bolster the nascent market for alternative energy.

The two sides in the climate debate have spent recent years offering dueling -- and dubious -- economic claims. Switching to more expensive, cleaner energy does not promise more prosperity and a healthier planet. But it also does not need to result in stagnation. A government climate response brings a mix of costs and benefits, and the specific policies that Mr. Obama and Congress pursue will help determine the balance.

In the end, the strongest economic argument for an aggressive response to climate change is not the windfall of green jobs. It is the fact that the U.S. economy will not function very well in a world full of droughts, hurricanes and heat waves.

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