Frank Ackerman, Climate Economist
First in a series of posts on climate policy.
The damages expected from climate change seem to get worse with each new study. Reports from the IPCC and the U.S. Global Change Research Project, and a multi-author review article in Science, all published in late 2018, are among the recent bearers of bad news. Even more continues to arrive in a swarm of research articles, too numerous to list here. And most of these reports are talking about not-so-long-term damages. Dramatic climate disruption and massive economic losses are coming in just a few decades, not centuries, if we continue along our present path of inaction. It’s almost enough to make you support an emergency program to reduce emissions and switch to a path of rapid decarbonization.
But wait: isn’t there something about economics we need to figure out first? Would drastic emission reductions pass a cost-benefit test? How do we know that we wouldn’t be spending too much on climate policy?
In fact, a crash program to decarbonize the economy is obviously the right answer. There are just a few things you need to know about the economics of climate policy, in order to confirm that Adam Smith and his intellectual heirs have not overturned common sense on this issue. Three key points are worth remembering.
Worst-case risks matter more than likely outcomes
For uncertain, extreme risks, policy should be based on the credible worst-case outcome, not the expected or most likely value. This is the way people think about insurance against disasters. The odds that your house won’t burn down next year are better than 99 percent – but you probably have fire insurance anyway. Likewise, young parents have more than a 99 percent chance of surviving the coming year, but often buy life insurance to protect their children.
Real uncertainty, of course, has nothing to do with the fake uncertainty of climate denial. In insurance terms, real uncertainty consists of not knowing when a house fire might occur; fake uncertainty is the (obviously wrong) claim that houses never catch fire. See my Worst-Case Economics for more detailed exploration of worst cases and (real) uncertainty, in both climate and finance.
For climate risks, worst cases are much too dreadful to ignore. What we know is that climate change could be very bad for us; but no one knows exactly how bad it will be or exactly when it will arrive. How likely are we to reach tipping points into an irreversibly worse climate, and when will these tipping points occur? As the careful qualifications in the IPCC and other reports remind us, climate change could be very bad, surprisingly soon, but almost no one is willing to put a precise number or date on the expected losses.
One group does rush in where scientists fear to tread, guessing about the precise magnitude and timing of future climate damages: economists engaged in cost-benefit analysis (CBA). Rarely used before the 1990s, CBA has become the default, “common-sense” approach to policy evaluation, particularly in environmental policy. In CBA-world you begin by measuring and monetizing the benefits, and the costs, of a policy – and then “buy” the policy if, and only if, the monetary value of the benefits exceeds the costs.
There are numerous problems with CBA, such as the need to (literally) make up monetary prices for priceless values of human life, health and the natural environment. In practice, CBA often trivializes the value of life and nature. Climate policy raises yet another problem: CBA requires a single number, such as a most likely outcome, best guess, or weighted average, for every element of costs (e.g. future costs of clean energy) and benefits (e.g. monetary value of future damages avoided by clean energy expenditures). There is no simple way to incorporate a wide range of uncertainty about such values into CBA. The second post in this series will look more deeply at economists’ misplaced precision about climate damages.
Costs of emission reduction are dropping fast
The insurance analogy is suggestive, but not a perfect fit for climate policy. There is no intergalactic insurance agency that can offer us a loaner planet to use while ours is towed back to the shop for repairs. Instead, we will have to “self-insure” against climate risks – the equivalent of spending money on fireproofing your house rather than relying on an insurance policy.
Climate self-insurance consists largely of reducing carbon emissions, in order to reduce future losses.[1] The one piece of unalloyed good news in climate policy today is the plummeting cost of clean energy. In the windiest and sunniest parts of the world (and the United States), new wind and solar power installations now produce electricity at costs equal to or lower than from fossil fuel-burning plants.
A 2017 report from the International Renewable Energy Agency (IRENA) projects that this will soon be true worldwide: global average renewable energy costs will be within the range of fossil fuel-fired costs by 2020, with on-shore wind and solar photovoltaic panels at the low end of the range. Despite low costs for clean energy, many utilities will still propose to build fossil fuel plants, reflecting the inertia of traditional energy planning and the once-prudent wisdom of the cheap-fuel, pre-climate change era.
Super-low costs for renewables, which would have seemed like fantasies 10 years ago, are now driving the economics and the feasibility of plans for decarbonization. Many progressive Democrats have endorsed a “green new deal”, calling for elimination of fossil fuels, massive investment in energy efficiency and clean energy, and fairness in the distribution of jobs and opportunities.
Robert Pollin, an economist who has studied green new deal options, estimates that annual investment of about 1.5 percent of GDP would be needed. That’s about $300 billion a year for the United States, and four times as much, $1.2 trillion a year, for the world economy. Those numbers may sound large, but so are the fossil fuel subsidies and investments that the green new deal would eliminate.
In a 2015 study, my colleagues and I calculated that 80 percent of U.S. greenhouse gas emissions could be eliminated by 2050, with no net increase in energy or transportation costs. Since that time, renewables have only gotten cheaper. (Our result does not necessarily contradict Pollin’s estimate, since the last 20 percent of emissions will be the hardest and most expensive to eliminate.)
These projections of future costs are inevitably uncertain, because the future has not happened yet. The risks, however, do not appear dangerous or burdensome. So far, the surprises on the cost side have been unexpectedly rapid decreases in renewable energy prices. These are not the risks that require rethinking our approach to climate policy.
Costs of not reducing emissions may be disastrously large
The disastrous worst-case risks are all on the benefits, or avoided climate damages, side of the ledger. The scientific uncertainties about climate change concern the timing and extent of damages. Therefore, the urgency of avoiding these damages, or conversely the cost of not avoiding them, is intrinsically uncertain, and could be disastrously large.
It has become common, among economists, to estimate the “social cost of carbon” (SCC), defined as the monetary value of the present and future climate damages per ton of carbon dioxide or equivalent. This is where the pick-a-number imperative of cost-benefit analysis introduces the greatest distortion: huge uncertainties in damages should naturally translate into huge uncertainties in the SCC, not a single point estimate.
[1] Adaptation, or expenditure to reduce vulnerability to climate damages, is also important but may not be effective beyond the early stages of warming. And some adaptation costs are required to cope with warming that can no longer be avoided – that is, they have become sunk costs, not present or future policy choices
Second in a series of posts on climate policy.
According to scientists, climate damages are deeply uncertain, but could be ominously large (see the previous post). Alternatively, according to the best-known economic calculation, lifetime damages caused by emissions in 2020 will be worth $51 per metric ton of carbon dioxide, in 2018 prices.
These two views can’t both be right. This post explains where the $51 estimate comes from, why it’s not reliable, and the meaning for climate policy of the deep uncertainty about the value of damages.
A tale of three models
The “social cost of carbon” (SCC) is the value of present and future climate damages caused by a ton of carbon dioxide emissions. The Obama administration assembled an Interagency Working Group to estimate the SCC. In its final (August 2016) revision of the numbers, the most widely used variant of the SCC was $42 per metric ton of carbon dioxide emitted in 2020, expressed in 2007 dollars – equivalent to $51 in 2018 dollars. Numbers like this were used in Obama-era cost-benefit analyses of new regulations, placing a dollar value on the reduction in carbon emissions from, say, vehicle fuel efficiency standards.
To create these numbers, the Working Group averaged the results from three well-known models. These do not provide more detailed or in-depth analysis than other models. On the contrary, two of them stand out for being simpler and easier to use than other models. They are, however, the most frequently cited models in climate economics. They are famous for being famous, the Kardashians of climate models.
DICE, developed by William Nordhaus at Yale University, offers a skeletal simplicity: it represents the dynamics of the world economy, the climate, and the interactions between the two with only 19 equations. This (plus Nordhaus’ free distribution of the software) has made it by far the most widely used model, valuable for classroom teaching, for initial high-level sketches of climate impacts, and for researchers (at times including myself) who lack the funding to acquire and use more complicated models. Yet no one thinks that DICE represents the frontier of knowledge about the world economy or the environment. DICE estimates aggregate global climate damages as a quadratic function of temperature increases, rising only gradually as the world warms.
PAGE, developed by Chris Hope at Cambridge University, resembles DICE in level of complexity, and has been used in many European analyses. It is the only one of the three models to include any explicit treatment of uncertain climate risks, assuming the threat of an abrupt, mid-size economic loss (beyond the “predictable” damages) that becomes both more likely and more severe as temperatures rise. Perhaps for this reason, PAGE consistently produces the highest SCC estimates among the three models.
FUND, developed by Richard Tol and David Anthoff, is more detailed than DICE or PAGE, with separate treatment of more than a dozen damage categories. Yet the development of these damages estimates has been idiosyncratic, in some cases (such as agriculture) relying on relatively optimistic research from 20 years ago rather than more troubling, recent findings on climate impacts. Even in later versions, after many small updates, FUND still estimates that many of its damage categories are too small to matter; in some FUND scenarios, the largest cost of warming is the increased expenditure on air conditioning.
Much has been written about what’s wrong with relying on these three models. The definitive critique is the National Academy of Sciences study, which reviews the shortcomings of the three models in detail and suggests ways to build a better model for estimating the SCC. (Released just days before the Trump inauguration, the study was doomed to be ignored.)
Embracing uncertainty
Expected climate damages are uncertain over a wide range, including the possibility of disastrously large impacts. The SCC is a monetary valuation of expected damages per ton of carbon dioxide. Therefore, SCC values should be uncertain over a wide range, including the possibility of disastrously high values.
Look beyond the three-model calculation, and the range of possible SCC values is extremely wide, including very high upper bounds. Many studies have adopted DICE or another model as a base, then demonstrated that minor, reasonable changes in assumptions lead to huge changes in the SCC. To cite a few examples:
- A meta-analysis of SCC values found that, in order to reflect major climate risks, the SCC needs to be at least $125.
- A study by Simon Dietz and Nicholas Stern found a range of optimal carbon prices (i.e. SCC values), depending on key climate uncertainties, ranging from $45 to $160 for emissions in 2025, and from $111 to $394 for emissions in 2055 (in 2018 dollars per ton of carbon dioxide).
- In my own research, coauthored with Liz Stanton, we found that a few major uncertainties lead to an extremely wide range of possible SCC values, from $34 to $1,079 for emissions in 2010, and from $77 to $1,875 for 2050 emissions (again converted to 2018 dollars).
- Martin Weitzman has written several articles emphasizing that the SCC depends heavily on the unknown shape of the damage function – that is, the details of the assumed relationship between rising temperatures and rising damages. His “Dismal Theorem” article argues that the marginal value of reducing emissions – the SCC – is literally infinite, since catastrophes that would cause human extinction remain too plausible to ignore (although they are not the most likely outcomes).
Whether or not the SCC is infinite, many researchers have found that it is uncertain, with the broad range of plausible values including dangerously high estimates. This is the economic reflection of scientific uncertainty about the timing and extent of climate damages.
How much can we afford?
As explained in the previous post in this series, deep uncertainty about the magnitude and timing of risks stymies the use of cost-benefit analysis for climate policy. Rather, policy should be set in an insurance-like framework, focused on credible worst-case losses rather than most likely outcomes. Given the magnitude of the global problem, this means “self-insurance” – investing in measures that make worst cases less likely.
How much does climate “self-insurance” – greenhouse gas emission reduction – cost? Several early (2008 to 2010) studies of rapid decarbonization, pushing the envelope of what was technically feasible at the time, came up with mid-century carbon prices of roughly $150 – $500 per ton of carbon dioxide abated.[1] Since then, renewable energy has experienced rapid progress and declining prices, undoubtedly lowering the carbon price on a maximum feasible reduction scenario.Even at $150 to $500 per ton, the cost of abatement was comparable to or lower than many of the worst-case estimates of the SCC, or climate damages per ton. In short, we already know that doing everything on the least-cost emission reduction path will cost less, per ton of carbon dioxide, than worst-case climate damages.
That’s it: end of economic story about evaluating climate policy. We don’t need more exact, accurate SCC estimates; they will not be forthcoming in time to shape policy, due to the uncertainties involved. Since estimated worst-case damages are rising over time, while abatement costs (such as the costs of renewables) are falling, the balance is tipping farther and farther toward “do everything you can, now.” That was already the correct answer some years ago, and only becomes more correct over time.
That’s not the end of this series of blog posts, however. Three more are coming, addressing three policy problems that arise in climate advocacy: how to talk about methane and natural gas; taxes versus cap and trade systems; and the role of equity and economic obstacles to climate policy.
Third in a series of posts on climate policy.
Carbon dioxide (CO2) represents most, but not all, greenhouse gas emissions. In EPA’s Greenhouse Gas Inventory for 2016, CO2 represented 82 percent of gross U.S. GHG emissions, while methane represented 10 percent (measured as CO2-equivalents). The top three sources of methane are agriculture, the energy industry, and waste management.
As fascinating as some of us may find such details, the general public has a short attention span for new information about climate change. Within that constraint, what do we want to communicate? For methane, there are two choices, an introductory and an advanced message.
The introductory message emphasizes that methane, the principal component of natural gas, is an important cause of global warming under any version of the data. It is therefore crucial to reduce and eliminate all fossil fuels, gas included, as soon as possible, replacing them with efficiency, renewables and energy storage.
At a more advanced level, some new research suggests that conventional data understate methane emissions. And a different way of comparing methane to CO2 implies that methane should have a higher CO2-equivalent value, raising its relative importance in GHG accounting. Some combination of these factors might even make natural gas as bad as coal, from a global warming perspective.
The introductory message is the one that matters for public communication. It focuses discussion on the simple fact that natural gas, like other fossil fuels, has got to go: it is part of the problem, not the solution. The advanced message, in contrast, emphasizes technical controversies and interpretation of recent research. It tends to produce eyes-glazed-over responses along the lines of “I wasn’t that good at science in school.”
But if you’re reading this, you can probably follow the technical debates, at least partway down the rabbit hole. Consider three chapters of the story of methane: the time span for calculating CO2-equivalents; the issue of gas leaks; and the gas vs. coal comparison.
Thinking about tomorrow
Methane is a much more potent heat-trapping gas than CO2, but CO2 remains in the atmosphere and traps heat for much longer than methane. On balance, how much does a ton of methane emissions contribute to warming, relative to a ton of CO2?
The answer depends on the time period under consideration. Methane has an atmospheric lifetime of 12 years. CO2 is affected by several processes that operate at very different speeds: 50 percent of CO2 is removed from the atmosphere within 30 years of emission, while 20 percent persists in the atmosphere for thousands of years.
Zooming in on a timespan as short as 20 years after emissions means focusing mainly on years when methane is still present in the atmosphere, trapping a lot of heat. Over a longer interval such as 100 years after emissions, most of the years are ones when methane has faded away, while a significant fraction of the CO2 emissions remains in the atmosphere. As a result, the CO2-equivalent value of methane is 84 over a 20-year period, compared to only 28 over a 100-year period.
Early IPCC and other technical reports tended to standardize on the 100-year CO2-equivalent value, implying that methane is 28 times as bad per ton as CO2. More recent studies have often highlighted the 20-year CO2-equivalent value, making methane 84 times as bad.
Neither one or the other is the correct value. Climate change is a problem of both short-term urgency and long-term consequences, of 20-year impacts, 100-year impacts, and beyond. This produces an awkward situation for research and reporting on greenhouse gases: the “exchange rate” between the two leading gases is either 28 or 84. It is less of a problem for public policy, where either of the CO2-equivalent values for methane is enough to make the case: a low-carbon economy must eliminate methane emissions, not rely on natural gas as a bridge to anywhere we want to go.
Counting the leaks
Natural gas leaks from wells and pipelines, increasing the lifecycle methane emissions associated with gas-fired heating or electricity generation. EPA estimated that methane leaks represented 1.4 percent of gas production nationwide in 2015. But a new study based on extensive field measurement found that methane leaks were 2.3 percent of gas production that year. Other studies have reported even higher leakage rates in areas where fracking is widespread.
It would be a mistake, however, to pin the critique of natural gas solely to high levels of leaks. The same study that found leaks of 2.3 percent also found that “the higher estimates stem from a small number of so-called superemitters … most tied to [malfunctioning] hatches and vents in natural gas storage tanks at extraction wells.”
It is not hard to imagine the industry, under pressure from regulators, fixing the malfunctioning hatches and vents, and developing better ways to seal leaks in general. This would increase the amount of gas that could be delivered to customers, potentially increasing industry profits. The International Energy Agency, which estimates gas leaks of 1.7 percent worldwide, also finds that 40 to 50 percent of current methane emissions could be avoided at no net cost.
The key point about methane is not the current high levels of leaks. Rather, reducing methane emissions, from leaks and other sources, is one of the most cost-effective strategies for greenhouse gas mitigation.
Different shades of bad
Some environmental advocates now claim that burning gas is just as bad for the climate as burning coal. There are several strong counterarguments, which do not undermine the case against gas.
Above all, coal is an environmental disaster, causing havoc throughout its life cycle. Coal mining devastates local communities, on a level that equals or surpasses anything done by fracking. It even releases methane from coal mining, equal to 8 percent of U.S. methane emissions according to the 2016 greenhouse gas inventory. The canaries in the coal mines, back in the day, were brought in to detect carbon monoxide and methane, the deadly gases that threatened miners.
Coal combustion gives rise not only to CO2, but also to many toxic pollutants which kill people near the plants. Since coal plants are usually located in low-income and minority neighborhoods, plant siting raises issues of environmental justice. After combustion, coal ash must be disposed of, creating a whole new set of toxic risks and environmental justice concerns in the siting of these impacts. Gas does not cause local toxic emissions or leave ash behind when it burns.
Even restricting attention to greenhouse gas emissions, an extraordinary level of leakage is required to make gas as bad as coal from a 20-year perspective, let alone a 100-year perspective. The IEA has a graph displaying the relationship between leak rates, time horizon, and climate impacts from coal vs. gas.
Finally, consider the emotional meaning of the statement that gas is as bad as coal. It often seems as if activists feel the need to show that gas is as bad as it gets, in order to support opposition to gas-fired power plants. This is surely a mistake.
It is not necessary to make something the worst ever, in order to establish that it is bad. George W. Bush was a bad president, for the environment and so much else; now it turns out that he was not the worst possible president. There is no reason to claim that Bush was as bad as Trump – or that a return to Bush-era policies would be a bridge to the future. It’s just a different shade of bad.
A gas-fired electric grid is different from a coal-fired one. But from a climate perspective, they are different shades of bad: both involve carbon emissions far above a sustainable, climate-friendly level. The need for a carbon-free alternative is the conclusion that matters, independent of the latest research details on methane.
Fourth in a series on climate policy.
We need a price on carbon emissions. This opinion, virtually unanimous among economists, is also shared by a growing number of advocates and policymakers. But unanimity disappears in the debate over how to price carbon: there is continuing controversy about the merits of taxes vs. cap-and-trade systems for pricing emissions, and about the role for complementary, non-price policies.
At the risk of spoiling the suspense, this blog post reaches two main conclusions: First, under either a carbon tax or a cap-and-trade system, the price level matters more than the mechanism used to reach that price. Second, under either approach, a reasonably high price is necessary but not sufficient for climate policy; other measures are needed to complement price incentives.
Why taxes and cap-and-trade systems are similar
A carbon tax raises the cost of fossil fuels directly, by taxing their carbon emissions from combustion. This is most easily done upstream, i.e. taxing the oil or gas well, coal mine, or fuel importer, who presumably passes the tax on to end users. There are only hundreds of upstream fuel producers and importers to keep track of, compared to millions of end users.
A cap-and-trade system accomplishes the same thing indirectly, by setting a cap on total allowable emissions, and issuing that many annual allowances. Companies that want to sell or use fossil fuels are required to hold allowances equal to their emissions. If the cap is low enough to make allowances a scarce resource, then the market will establish a price on allowances – in effect, a price on greenhouse gas emissions. Again, it is easier to apply allowance requirements, and thus induce carbon trading, at the upstream level rather than on millions of end users.
If the price of emissions is, for example, $50 per ton of carbon dioxide, then any firm that can reduce emissions for less than $50 a ton will do so – under either a tax or cap-and-trade system. Cutting emissions reduces tax payments, under a carbon tax; it reduces the need to buy allowances under a cap-and-trade system. The price, not the mechanism, is what matters for this incentive effect.
A review of the economics literature on carbon taxes vs. cap-and-trade systems found a number of other points of similarity. Either system can be configured to achieve a desired distribution of the burden on households and industries, e.g. via free allocation of some allowances, or partial exemption from taxes. Money raised from either taxes or allowance auctions could be wholly or partially refunded to households. Either approach can be manipulated to reduce effects on international competitiveness.
And problems raised with offsets – along the lines of credits given too casually for tree-planting – are not unique to cap and trade. A carbon tax could emerge from Congress riddled with obscure loopholes, which could be as damaging to the integrity of carbon pricing as any of the poorly written offset provisions of existing cap-and-trade systems. More positively speaking, either approach to carbon pricing can be carried out either with or without offsets and tax exemptions.
Why taxes and cap-and-trade systems are different
Compared to the numerous similarities between the two approaches, the list of differences is a shorter one. A carbon tax is easier and cheaper to administer. In theory, a carbon tax provides certainty about the price of emissions, while a cap-and-trade system provides certainty about the quantity of emissions (in practice, these certainties can be undone by too-frequent tinkering with tax rates or emissions caps).
Cap-and-trade systems have been more widely used in practice. The European Union’s Emissions Trading System (EU ETS) is the world’s largest carbon market. Others include the linked carbon market of California and several Canadian provinces, and the Regional Greenhouse Gas Initiative (RGGI) among states in the Northeast.
Numerous critics have pointed to potential flaws in cap-and-trade, such as overly generous, poorly monitored offsets. Many recent cap-and-trade systems, introduced in a conservative era, began with caps so high and prices so low that they have little effect (leaving them open to the criticism that the administrative costs are not justified by the skimpy results). The price must be high enough, and the cap must be low enough, to alter the behavior of major emitters.
The same applies, of course, to a carbon tax. Starting with a trivial level of carbon tax, in order to calm opponents of the measure, runs the risk of “proving” that a carbon price has no effect. The correct starting price under either system is the highest price that is politically acceptable; there is no hope of “getting the prices right” due to the uncertain and potentially disastrous scope of climate damages.
Perhaps the most salient difference between taxes and cap-and-trade is political rather than economic: in an era when people like to chant “no new taxes”, the prospects for any initiative seem worse if it involves a new tax. This could explain why there is so much more experience to date with cap-and-trade systems.
Beyond price incentives
Some carbon emitters, for instance in electricity generation, have multiple choices among alternative technologies. In such cases, price incentives alone are powerful, and producers can respond incrementally, retiring and replacing individual plants when appropriate. Other sectors face barriers that an individual firm cannot usually overcome on its own. Electric vehicles are not practical without an extensive recharging and repair infrastructure, which is just beginning to exist in a few parts of the country. In this case, no reasonable level of carbon price can, by itself, bring an adequate nationwide electric vehicle infrastructure into existence. Policies that build and promote electric vehicle infrastructure are valuable complements to a carbon price: they create a combined incentive to move away from gasoline.
Yet another reason for combining non-price climate policies with a carbon price is that purely price-based decision-making can be exhausting. People could calculate for themselves the fuel saved by buying a more fuel-efficient car and subtract that from the sticker price of the vehicle, but it is not an easy calculation. Federal and state fuel economy standards make the process simpler, by setting a floor underneath vehicle fuel efficiency.
When buying a major appliance, it is possible in theory to read the energy efficiency sticker on the carton, calculate your average annual use of the appliance, convert it to dollars saved per year, and see if that savings justifies purchase of a more efficient appliance. But who does all that arithmetic? Even I don’t want to do that calculation, and I have a PhD in economics and enjoy playing with numbers. My guess is that virtually no one does the calculation consistently and correctly. On the other hand, federal and state appliance efficiency standards have often set minimum levels of required efficiency, which increase over time. It’s much more fun to buy something off the shelf that meets those standards, instead of settling in for an extended data-crunching session any time you need a new fridge, air conditioner, washing machine…
In short, the carbon price is what matters, not the mechanism used to adopt that price. And whatever the price, non-price climate policies are needed as well – both to build things that no one company can do on its own, and to make energy-efficient choices accessible to all, without heroic feats of calculation.
Fifth in a series on climate policy.
Climate change is at once a common problem that threatens us all, and a source of differential harms based on location and resources. We are all on the same boat, in perilous waters – but some of us have much nicer cabins than others. What is the relationship of inequality to climate policy?
The ultimate economic obstacle to climate policy is the long life of so many investments. Housing can last for a century or more, locking residents into locations that made sense long ago. Business investments often survive for decades. These investments, in the not-so-distant past, assumed continuation of cheap oil and minimally regulated coal – thereby building in a commitment to high carbon emissions. Now, in a climate-aware world, we need to treat all fossil fuels as expensive and maintain stringent regulation of coal. And it is impossible to repurpose many past investments for the new era: they are sunk costs, valuable only in their original location or industry.
If we could wave a magic wand and have a complete do-over on urban planning, we could create a new, more comfortable and more sustainable way of life. Transit-centered housing complexes, surrounded by green spaces and by local amenities and services, could offer convenient car-free links to major employment sites. Absent a magic wand, the challenge is how to get there from here, in a short enough time frame to matter for climate policy.
Space is the final frontier in energy use. Instead of shared public spaces for all, an ever-more-unequal society allows the rich to enjoy immense private spaces, such as McMansions situated on huge exurban lots. This leads to higher heating and cooling costs for oversized housing, and to higher infrastructure costs in general: longer pipes, wires and travel distances between houses. And it locks in a commitment to low population density and long individual commutes. Outside of the biggest cities, much of the United States is too sparsely settled for mass transit.
Pushing toward clean energy
Carbon prices and other incentives are designed to push people and businesses out of the most emissions-intensive locations and activities. Along with the wealthy exurbs, cold rural states, with high heating and transportation requirements per person, will become more expensive. So, too, will investment in emissions-intensive production processes, whether in electricity generation, heavy industry, or agriculture.
The art of policymaking requires a delicate balance. Too much pressure to make fuel expensive can produce a backlash, as in the Yellow Vests protests in France, which successfully blocked an increase in the price of gasoline. Too little pressure leads to complacency, to the false belief that enough is already being done. Subsidies to support the transition may be useful but must be time-limited to avoid becoming a permanent entitlement.
The green new deal, the hopeful, if still vague, political vision that is now drawing widespread attention, calls for a transition to clean energy, investment in low-carbon infrastructure, and a focus on equality and workers’ rights. It would create substantial net benefits for the country and the economy. A more fine-grained analysis is needed, however, to identify those who might lose from the transition. Their losses will loom large in the policy debate, regardless of the benefits to the rest of society.
For example, after years of seniority-based cutbacks, many of the remaining workers in legacy energy industries (coal mines, oil wells, fossil-fueled power plants) are nearing retirement age. Pension guarantees, combined with additional funding to allow early retirement, may be more important to these workers, while new green jobs could be important to their children or to the smaller number of younger workers in at-risk jobs.
Older residents who have spent their lives and invested their savings in a rural community, or have no assets except a farm, should be welcome to remain in those communities. But the lingering mystique of an almost-vanished rural America should not lead to new initiatives to attract younger residents back to an energy-intensive, emissions-intensive lifestyle.
Responding to inequality
Energy use and carbon emissions are quite unequally distributed, within as well as between countries. In all but the poorest countries, the rich spend more on energy in absolute dollar terms, but less than others as a percentage of income. As a result, any carbon price introduced in the United States or other high-income countries will be regressive, taking a greater percentage of income from lower-income households.
To address this problem, James Boyce proposes refunding carbon revenues to households on an equal per capita basis, in a cap-and-dividend system. Boyce’s calculations show that most people could come out ahead on a cap-and-dividend plan: only the richest 20 percent of U.S. households would lose from paying a relatively high carbon price, if the revenues were refunded via equal per capita dividends.
Other authors have proposed that some of the revenues could go to basic research or to infrastructure development, accelerating the arrival of sustainable energy use. Any use of the revenues, except distribution in proportion to individual fuel use or emissions, preserves the incentive effect of a carbon price. The question of cap-and-dividend versus investment in sustainable energy is largely a debate about what will make a regressive carbon price politically acceptable.
Stranded assets
It is not only households that have invested too heavily in now-obsolete patterns of energy use. The same pattern arises in a different context, in the energy sector itself. Electric utilities have often invested in fossil-fuel-burning plants, expecting to recover their investment over 20 to 30 years of use. Now, as changing prices and priorities shut some of those plants before the end of their planned lifetimes, the unrecovered investment is a stranded asset, no longer useful for producers or customers.
The problem is further complicated by the regulatory bargains made in many states. Depending on utility regulations (which differ from state to state), a utility may have formally agreed to allow state regulators to set its rates, in exchange for an opportunity to recover its entire investment over a long period of years. What happens to that regulatory bargain when a regulated plant becomes uneconomic to operate?
Businesses whose investments have gone badly do not elicit the same degree of sympathy as individuals stuck in energy-intensive homes and careers. Indeed, Milton Friedman, the godfather of modern conservative economics, used to emphasize that private enterprise is a profit and loss system, where losses are even more important than profits in forcing companies to use their resources effectively.
Despite Friedman’s praise of losses, demanding that a utility absorb the entire loss on its stranded assets could provoke political obstacles to clean energy and climate policy. Neither zero recovery nor full recovery of a utility’s stranded assets may be appropriate in theory. Given the urgency of a rapid and complete energy transition, it may be more expedient to negotiate a settlement that allows prompt progress. Once again, it is the political art of the deal, not any fixed economic formula, that determines what should be done. Offering utilities too little provokes opposition and delay; offering them too much is unfair to everyone else and could encourage similar mistaken investments in the future.
What does global sustainability look like?
Climate change is a global problem that can only be solved by cooperation among all major countries. The challenge for American policy is not only to reduce our own emissions, but also to play a constructive role in global climate cooperation. U.S. leadership, in cooperation with China and Europe, is crucial to the global effort to control the climate. Reviving that leadership, which had barely surfaced under Obama before being abandoned by Trump, is among the most important things we can do for the world today.
In the longer run, questions of climate justice and international obligations are among the most difficult aspects of climate policy. High-income countries such as the United States and northern Europe bear substantial responsibility for the climate crisis worldwide. Among other approaches, the Greenhouse Development Rights framework combines historical responsibility for emissions and current ability to pay for mitigation, in assigning shares of the global cost of climate stabilization.
In the current political climate there is no hope of achieving complete consensus about international burden-sharing before beginning to address the climate crisis. The urgency of climate protection requires major initiatives as soon as possible, in parallel with (not waiting for the conclusion of) discussions of international equity. U.S. actions on both fronts are essential for global progress toward climate stabilization. Significant steps toward equity and burden-sharing may be required to win the support of emerging economies such as India, Indonesia and Brazil.
Finally, assuming success, what would global sustainable development look like? In view of the rapid urbanization of emerging economies, the key question is, what kind of low-carbon urban life can the world afford? The sprawling, car-intensive and carbon-intensive expanse of Los Angeles, Phoenix, or Houston seems like an amazingly expensive mistake. The compact, energy-efficient, transit-based urbanism of Tokyo or Hong Kong is at least a contender, a high-income life with much lower resource use per person.
The American example matters around the world: if our vision of the good life remains one of extravagant sprawl, others will try to imitate it. If we develop a more sustainable vision of our own future, the whole world will be watching.
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