Market Forces

What a small country’s successes and mistakes can teach us about emission pricing

I’m from Aotearoa, New Zealand, and I really love its land and people, but I am fully aware that from a global perspective it appears pretty insignificant – that’s actually one of its charms.  But being small doesn’t mean you can’t make big contributions including toward stabilizing the climate. This recently published article highlights some lessons New Zealand’s experience with emissions trading can offer other Emissions Trading System (ETS) designers at a time when effective climate action is ever more urgent.

Talking intensively to ETS practitioners and experts around the globe about their diverse choices and the reasons why they made them has made me acutely aware of the need to tailor every ETS to local conditions.  In a complex, heterogeneous world facing an existential crisis, diversity in climate policy design makes us stronger and frankly, improves the odds that the young people we love will live in a world where they can thrive.

New Zealand created the second national emissions trading system in 2008, and the system established a number of firsts, some of which have been repeated widely, like output-based allocation of allowances to combat leakage risk.  Others offer cautionary tales, like linking a small country’s emissions trading market to a large emissions trading market over which you have little control.

Simplicity helps make an ETS more manageable and effective

New Zealand’s small scale makes simplicity a key virtue. Our regulators are well educated, but there just aren’t many of them.  This simplicity would also be a strength in a country with capability constraints, or where corruption is a problem and simplicity naturally increases transparency and reduces opportunities for manipulation.

Regulating fossil-fuel production and imports (that inevitably lead to predictable amounts of emissions – in the absence of effective carbon capture and storage) at the first point of commercialization, another first, made monitoring simple and, in the New Zealand context, minimized the number of regulated agents needed to cover almost 100% coverage of energy-related emissions including all domestic transport.

An ETS needs to match a country’s profile and culture

New Zealand’s small scale and our unusual emissions profile (around half our emissions are biological emissions from agriculture – cow burps and other unmentionables – and lots of land ripe for reforestation) led New Zealand to aim for an ‘all sources – all sectors’ coverage of emission pricing – and this worked well for our politics.  In New Zealand ‘fairness’ is a critical cultural valueNew Zealand’s ETS covers energy, transportation and industrial process emissions but also deforestation, reforestation, and fugitive emissions from fossil fuel production and landfill waste management.  We are still working out how to cover those challenging cows in a way that allows rural communities to thrive – with the current intention being to regulate with emission pricing at the farm level starting in 2025.

The cultural value of fairness also led to a strong linkage between the motivations for free allocation and th methods chosen.  Sectors and companies (sometimes pretty much the same thing in NZ) who lobbied for free allocation had to make a logical case that was publicly scrutinized. Lump-sum allocations were given as compensation to those who were losing the value of stranded assets – e.g. owners of pre-1990 forests, including Māori Iwi (tribes) who lost some of the value of forests they had recently received in Treaty settlements when deforestation began to attract carbon liabilities.  Output-based allocation is still provided for industrial activities that are emissions intensive and trade exposed and therefore face a risk of leakage of these economic activities to other countries where climate policy is weaker.  By effectively subsidizing the activities that might move, output-based allocation reduces that risk.

Political instability can negatively impact markets

Not all experiences have been positive however.  As the report highlights, New Zealand’s ETS has suffered from a lack of policy stability and hence lack of emission price stability.  This was partly because our emissions price was largely determined by international markets (from 2008 to mid-2015, New Zealand companies could buy and surrender unlimited amounts of international Kyoto units such as those from the Clean Development Mechanism and Joint Implementation).  New Zealand’s emission prices bobbed like a cork on the international market. Another critical flaw: not embedding our ETS firmly in a long-term vision for low-emissions transformation and within a wider non-political institutional framework that gives predictability of purpose in the inevitable ETS evolutionary process.

The ability to guide, enable and incentivize dynamic efficiency (e.g. efficient low-emissions investment) has always been a key argument for emissions pricing, but, as a profession we economists have paid too little attention to the political and cultural stability that is critical to enable this. Policy makers need to regularly adapt and update policies. That process of policy evolution can help guide us efficiently through a low-emissions transformation, or, in the face of powerful vested interests and strong temptations to globally free-ride, it can open up repeated opportunities to undermine ambition.

New Zealand is now engaged in the next step of its ETS evolution, learning from others and through critical reflection on our own positive and negative experiences, but continuing to innovate and tailor ETS solutions to our own unusual circumstances. The direct impact on global emissions will be small whatever New Zealand does with its ETS, but the lessons and the example that even small yet significant  countries can act and find new solutions, will hopefully help and inspire others.

Kia kaha Aotearoa

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How renewables, natural gas and flat demand led to a drop in CO2 emissions from the US power sector

New state-by-state research shows significant reductions across the country from 2005-2015

 Decarbonizing the power sector in the United States will be critical to achieving the goal of a 100% clean economy by 2050 – especially since reaching “net-zero” greenhouse gas emissions across the economy means that other energy-using sectors such as buildings and transport will increasingly need to be electrified, switching away from direct fossil fuel use and relying on low-carbon electricity instead. Demand for electricity is therefore very likely to grow in the future – which makes it critical that its CO2 emissions sharply decrease through the accelerated deployment of low carbon technologies, such as wind and solar power, in the decades ahead.

US power sector CO2 emissions, 1990-2015

For now, US power sector CO2 emissions appear to have turned a corner. While CO2 emissions from the U.S. power sector increased between 1990 and 2005, they peaked shortly thereafter, and then decreased to the point that by 2015, they had fallen by 20% (or 480 million metric tonnes CO2) compared to 2005.

In recently published research, my co-authors and I wanted to understand the drivers behind the drastic fall in the country’s—and individual states’–power sector CO2 emissions, and in particular the role that low carbon technologies such as wind and solar power have already played in reducing US power sector CO2 emissions. Our analysis, published in Environmental Research Letters  used an approach called index decomposition analysis and found that natural gas substituting for coal and petroleum coupled with large increases in renewable energy generation—primarily wind—were responsible for 60% and 30%, respectively, of the decline in CO2 emissions from the US power sector between 2005 and 2015.

Renewable growth in red states

Most of the emissions reductions driven by renewable energy growth came from Texas and states in the Midwest — Iowa, Kansas, Illinois and Oklahoma. While many of these states are not necessarily known for supporting aggressive climate policies, the combination of federal tax credits, state energy policies, decreasing costs of renewables and windy conditions appears to have provided powerful support for renewable energy deployment.

Texas, in particular, is an interesting case. In 2005, it was the leading emitter of U.S. power sector CO2 emissions across the country. But by 2015, its gross reductions from wind energy totaled 27 million metric tons, or more than 5% of the total net US reduction in power sector CO2 emissions since 2005 (i.e., a sixth of the total US reduction attributed to renewables). The state achieved its final renewable portfolio standard (RPS) target in 2008—seven years ahead of its 2015 goal. In addition to reduced costs of turbine technologies, federal tax credits and positive wind conditions also likely played a role in wind’s growth.

Wind generation in Texas, Iowa, Kansas, Illinois and Oklahoma together contributed half of the renewables-related emission reductions (70Mt or 3%-points out of the 20% reduction in US power sector CO2 emissions since 2005).

Over the same period, many states that had relied heavily on coal like Pennsylvania, Georgia, Alabama and Florida, reduced emissions by substituting natural gas for coal in electricity generation. While that prompted a decline in CO2 emissions, it’s important to note that while natural gas emits less CO2 emissions than coal and petroleum when producing electricity it is still a source of CO2 emissions and can only take us so far in decarbonizing the power sector. In addition, methane leakage across the supply chain remains a significant issue–and is not accounted for in this analysis, meaning the overall net greenhouse gas benefit from this natural gas expansion was–potentially significantly—lower.

Need for new policy

While there are positive signs in the power sector—the cost of renewables continues to decline and a growing number of states are taking crucial action to cut CO2 emissions, these trends as well as the specific factors identified in this analysis cannot be relied upon to achieve the deep emissions reductions needed in the decades ahead.

U.S. power sector CO2 emissions are projected to remain relatively flat over the next decade and rise slowly after that, absent new policies. This is particularly significant given that, much of the decarbonization of other sectors such as buildings and transportation will need to rely heavily on electrification.

Ultimately, new policy interventions are necessary, including strong limits on climate pollution – not only in the power sector, but across the entire economy to drive reductions at the pace and scale needed for the US to be 100% clean no later than 2050.

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Nature-based solutions can help New York and New Jersey adapt to rising seas and intensifying storms

Are we prepared?

With peak hurricane season upon us and what seems like daily coverage of record storms, floods, and ice melt, climate adaptation solutions should be top of mind for individuals and governments alike. After all, recent data show billion-dollar disaster events continue to take place with increasing frequency. Here in New York, many are wondering whether we’ll be ready when the next big storm hits. An emerging consensus —even among local elected leaders —seems to be: “Nope.”

The ongoing upward trend in global GHG emissions suggests we are far from experiencing the worst impacts of a changed climate. And while swift decarbonization is a first-best solution, we also need to bolster community resilience to prepare for the climate impacts around the corner.

What to expect?

New York and New Jersey are acutely vulnerable to sea level rise and storm intensification. Roughly 400,000 New York City residents currently live in an area with a 1% annual chance of flooding. The region’s coast has a booming property market, with an estimated $101.5 billion of property value in an area with a 0.5% annual chance of flooding. Like so many coastal communities, a significant number of lives, assets, and locations of priceless social value are at stake.

An intermediate scenario from NOAA anticipates global mean sea level will rise by more than three feet by 2100. The New York City Panel on Climate Change recently introduced a new low-probability, high-impact “Antarctic Rapid Ice Melt” scenario, which considers the triggering of a critical tipping point that would result in 9.5 feet of sea level rise by 2100.

The science is clear: our coastline is going to look very different by the end of the century.

What can we do?

Superstorm Sandy was a wakeup call. It exposed myriad deficiencies with regard to disaster response, electricity systems, and post-disaster recovery. The storm incurred more than $19 billion in damages in New York City alone, and led to the deaths of 24 people from my home borough of Staten Island.

In the wake of the storm, a number of promising policy responses created momentum toward greater resilience in the region. One major effort is the Army Corps of Engineers’ “New York-New Jersey Harbors and Tributaries Study,” a comprehensive regional assessment spanning 900 miles of shoreline and 25 congressional districts  that will prompt the development of large-scale storm risk mitigation infrastructure projects across both states.

This work has massive implications. One of the alternatives includes a five-mile storm surge barrier, stretching from Breezy Point, Queens, to Sandy Hook, New Jersey. The preliminary price tag of the projects in this alternative: $118.8 billion. While this is just one of five alternatives under consideration, it is clear the Corps’ work will be expensive, transformative and serve as the backbone of the region’s storm risk mitigation infrastructure for generations.

Natural infrastructure can play a part

While the vast majority of the infrastructure solutions considered in the NYNJHATS study are grey — i.e., human-engineered structures which often include steel or concrete— nature-based solutions deserve full consideration as well, because they can be economically viable components of our adaptation strategies. For example, earlier this year the Corps released a final report for a smaller civil works project—still expected to cost more than $600 million—in the Rockaways and Jamaica Bay. EDF successfully advocated to include more than nine acres of new and restored wetlands and maritime forests, and they were ultimately included, as they were deemed the most viable and economically justified solutions in those cases.

While by no means a silver bullet, nature-based solutions are sometimes the most cost-effective flood mitigation options at our disposal. Unfortunately, current Corps guidance does not factor certain incidental benefits, including those from ecosystem services, into cost-benefit analyses. This means things like improved water quality, oxygenation, carbon sequestration, and habitat restoration are excluded from the calculation, on the grounds they are difficult to quantify. Even so, the recent release of “Engineering with Nature: An Atlas” suggests the Corps is moving in a direction that will feature natural infrastructure solutions more prominently in future coastal adaptation efforts.

In the face of historic sea level rise and flood risk, natural and nature-based solutions can play a key role to restore ecosystems and serve as additional lines of defense against flooding in New York and New Jersey. Adaptation authorities need to consider the full range of benefits natural and nature-based flood risk mitigation projects can provide, otherwise we run the risk of leaving economic value on the table. Adapting to climate change is going to be a costly endeavor- let’s not make it more expensive than it has to be.

 

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Getting 100% Clear on 100% Clean

This post, authored by Steve Capanna, Director, U.S. Climate Policy & Analysis, originally appeared on EDF’s Climate-411 blog

Scientists agree that to maximize our chances of averting the worst impacts of climate change, we must stop adding climate pollution to the atmosphere by soon after mid-century. As one of the world’s most advanced economies, the U.S. must reach that goal no later than 2050 – which means transitioning to a 100% clean economy. If this sounds like an ambitious goal, that’s because it is. But it is also what’s needed to protect our economy, our health and our kids’ future.

Why a 100% Clean Economy?

For decades, scientists have warned that catastrophic climate change will result from continued unchecked greenhouse gas emissions. And for decades, our emissions have continued to grow.

Last fall, a Special Report from the Intergovernmental Panel on Climate Change (IPCC), the United Nations body made up of leading scientists from around the world and responsible for assessing the science related to climate change, found that to meet the goals of the Paris Agreement, it will be necessary for the world to achieve net-zero carbon dioxide emissions (adding no more pollution to the atmosphere than we can remove) by soon after midcentury. We also need to achieve deep reductions in other greenhouse gas pollutants like methane. Continued delay will only deepen the challenge, and require us to reduce our emissions even more rapidly.

We’re already seeing the impacts of climate change in communities across the country from record flooding, devastating wildfires, scorching heat waves, and bigger and more damaging storms. Although the impacts are local, climate change is a global problem – which is why the IPCC outlined a global goal. But there are several reasons why the U.S. should strive for achieving a 100% clean economy as soon as possible.

First, the U.S. is the second largest emitter in the world, behind only China. Reaching net-zero emissions globally will only be possible with U.S. leadership. Second, over our history, the U.S. is responsible for by far the most emissions of any other country, more than 85% above China, the second biggest emitter. (Check out this Carbon Brief animation to see the relative emissions contributions of top emitting countries since 1750.) The U.S. has played a major role in creating this problem – we must also play a major role in the solution.

Furthermore, tackling the climate challenge is also just good business. By transitioning as rapidly as we can to 100% clean energy across our economy – including the power sector as well as transportation and industry – we will unleash the power of American innovation to develop cheaper, more efficient clean energy technologies. As global momentum on climate action continues to build, clean energy manufacturing will be an increasingly important industry. Innovative solutions developed by American entrepreneurs can be deployed around the world, helping lower the costs of global emissions reductions while strengthening American industries.

What Exactly Does 100% Clean Mean?

As we substitute zero carbon energy sources like wind and solar for fossil fuels like coal and natural gas, we reduce emissions. We’ve made a lot of progress on this front: according to the National Renewable Energy Laboratory, from 2007-2017, renewable electricity generation more than doubled, and wind and solar generation went from less than 1% of our electricity mix to more than 8%. But we can – and must – do a lot more.

Other sectors of the economy, however, such as air travel, or steel, cement and chemicals manufacturing, are very likely to be difficult and expensive to decarbonize with the technologies we have available or are developing today.

That’s where carbon dioxide removal technologies (CDRs) can play an important role. In comparison to technologies like solar or wind, which generate carbon-free energy, CDRs actually remove carbon dioxide from the atmosphere. As long as we remove as much carbon from the atmosphere as we put into it, we’ll have achieved net-zero emissions – or a 100% clean energy economy.

There are many different types of CDRs, from natural approaches like increasing the amount of forest land and adopting sustainable farming practices, to technologies like direct air capture (DAC) that can suck pollution directly out of the air and store it underground or reuse it in products like fuel, fertilizer, or concrete.

How Do We Do It?

That’s a good question. We know that we are going to need to rapidly shift to cleaner sources of generation in the electricity sector, expand the use of clean electricity in sectors across the economy, advance energy efficiency – and also remove carbon from the atmosphere. The strategies we’ll need to pursue will vary by sector, and given the rapid pace of technology development over the last several years, it’s hard to know which zero-carbon technologies will end up being the most cost-competitive and easy to scale by 2050.

That’s why it’s important that the 100% clean economy goal is focused squarely on environmental results – cutting the pollution that causes climate change without specifying specific technology solutions. This allows for maximum opportunities to deploy a portfolio of technologies and approaches while providing incentives to innovators to find new effective and efficient low-, no-, and negative-emission technologies.

We can achieve this goal, but it will require policies that set declining limits on greenhouse gas emissions; account for the real cost of that pollution; stimulate the research, development and deployment of innovative technologies; and incentivize rapid action, especially in the sectors of the economy that look most challenging to decarbonize.

Climate change is an urgent problem that demands an urgent solution. The time is now to commit to a 100% clean economy that will be cleaner, safer, and more prosperous for all Americans.

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Not all fossil fuel subsidies are created equal, all are bad for the planet

This is part two of a five-part series exploring Policy Design for the Anthropocene,” based on a recent Nature Sustainability Perspective. The first post explored the intersection of policy and politics in the development of instruments to help humans and systems adapt to the changing planet.

A recent International Monetary Fund (IMF) working paper made headlines by revealing that the world is subsidizing fossil fuels to the tune of $5 trillion a year. Every one of these dollars is a step backward for the climate. That much is clear.

Instead of subsidizing fossil emissions, each ton of carbon dioxide (CO2) emitted should be appropriately priced. That’s also where it’s important to dig into the numbers.

It’s tempting to go with the $5 trillion figure, as it suggests a simple remedy: remove the subsidies. At one level, that is precisely the right message. But the details matter, and they go well beyond the semantics of what it means to subsidize something.

Direct subsidies are large

The actual, direct subsidies—money flowing directly from governments to fossil fuel companies and users—are “only” around $300 billion per year. That is still a huge number, and it may well be an underestimate at that. The International Energy Agency’s World Energy Outlook 2014, which took a closer look at fossil subsidies than reports since, put the number closer to around $500 billion; a 2015 World Bank paper provided more detailed methodologies and a range of between $500 billion and $2 trillion.

What all these estimates have in common is that they stick to a tight definition of a subsidy:

Subsidy (noun, \ ˈsəb-sə-dē \)

“a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public,” per  Merriam-Webster.

These taxpayer-funded giveaways are not only not “advantageous to the public,” they also ignore the enormous now-socialized costs each ton of CO2 emitted causes over its lifetime in the atmosphere. (Each ton emitted today stays in the atmosphere for dozens to hundreds of years.)

The direct subsidies also come in various shapes and forms—from some countries keeping the cost of gasoline artificially low, to a $1 billion tax credit for “refined coal” in the United States.

Indirect subsidies are significantly larger

The vast majority of the IMF’s total $5 trillion figure is the unpriced socialized cost of each ton of CO2 emitted into the atmosphere. Each ton, the IMF estimates conservatively, causes about $40 in damages over its lifetime in today’s dollars.

Depending on one’s definition of a subsidy, this may well qualify. It’s a grant from the public to fossil fuel producers and users—something the public pays for in lives, livelihoods and other unpriced consequences of unmitigated climate change.

The remedy here is very different than removing direct government subsidies. It’s to price each ton of CO2 emitted for less to be emitted. The principle couldn’t be simpler: “When something costs more, people buy less of it,” as Bill Nye imbued memorably on John Oliver’s Last Week Tonight recently.

 

All that goes well beyond semantics of what it means to subsidize. One policy is to remove a tax loophole or another kind of subsidy, the other is to introduce a carbon price. The politics here are very different.

Unpriced climate risks might be much larger still

The $5 trillion figure also hides something else. By using a $40-per-ton figure, the IMF focuses on a point estimate for each ton of CO2 emitted, and a conservative one at that. The number comes from an estimate produced by President Obama’s Interagency Working Group on the Social Cost of Carbon. That’s a good starting point, certainly a better one than the current Administration’s estimate.

But even the $40 figure is conservative. It captures what was quantifiable and quantified at the time. It does not account for many known yet still-to-be-quantified damages. It does not account for risks and uncertainties, the vast majority of which would push the number significantly higher still.

In short, the $5 trillion figure may well convey a false sense of certainty.

In some sense, little of that matters. The point is: there is a vast thumb on the scale pushing the world economy toward fossil fuels, the exact opposite of what should be done to ensure a stable climate.

In another very real sense, the different matters a lot: Politics may trump all else, but policy design matters, too.

By now the task is so steep that it’s simply not enough to say we need to price emissions and leave things at that. Yes, we need to price carbon, but we also need to subsidize cleaner alternatives—in the true sense of what it means to subsidize: to do so for the benefit of the public. Whether that comes under the heading of a “Green New Deal” or not, it is a much more comprehensive approach than one single policy instrument.

This is party 2 of a 5-part series exploring policy solutions outlined in broad terms in Policy Design for the Anthropocene.” Part 3 will focus on “Coasian” rights-based instruments, taking a closer look at tools that limit overall pollution to create markets where there were none before.

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Policy Design for the Anthropocene

There’s no denying we humans are changing the planet at an unprecedented pace. If carbon dioxide in the atmosphere is any guide, that pace is increasing at an increasing rate. For those so mathematically inclined, that’s the third derivative pointing in the wrong direction.

Enter The Sixth Extinction, The Uninhabitable Earth, Falter, or simply the “Anthropocene”—us humans altering the planet to the point where the changes are visible in the geological record, ringing in a new epoch.

A team led by Earth systems scientists Johan Rockström and Will Steffen developed the concept of “planetary boundaries” in 2009. They identified nine major systems where humans are altering fundamental Earth systems—from climate change to land-system change to stratospheric ozone, and gave us now infamous spider graphs summarizing the all-too dire warnings (Figure 1).

Planetary boundaries, tipping points, and policies (Figure 1 from “Policy design for the Anthropocene”)

It is all the more significant, that both Rockström, now director of the famed Potsdam Institute for Climate Impact Research (PIK), and Steffen joined another large, multidisciplinary team ten years later to focus on “Policy design for the Anthropocene.” This team, led by EDF senior contributing economist Thomas Sterner, focused on the solutions.

The good news: there are many.

Table 2 summarizes the crowded field of approaches at the disposal of policymakers. It also shows the decisions to be made when deciding among them.

Policy instruments (based on Table 2 from “Policy design for the Anthropocene”)

How to choose?

Choosing among the many options available quickly moves from policy design to politics.

Take climate change as an all-too prominent example. For one, the obvious first step is to agree that there is a problem in the first place. Denying the problem is not going to get us anywhere near a constructive debate about policy solutions.

One big political decision then is to identify who benefits from acting—or conversely, who pays the costs. If the rights go to the polluter, it’s the victims who pay—all of us, in the case of climate change. If the rights go to society, it’s broadly speaking the polluters who pay. The difference is as stark as between permits on the one hand, and outright bans on the other.

Price or rights-based policies?

Often the decision how to act is among two broad buckets of policies: price or rights-based. The two are broadly speaking two sides of the same coin. Rights generate prices, and prices imply rights.

The difference plays out between carbon pricing and tradable permits. One fixes the price level, the other the amount of emissions. Cue endless academic debates about which instrument is better under which circumstances. Details, of course, do matter.

And this also brings us immediately back to politics. A big difference between price and rights-based policies, is that the latter implies that the political horse-trading doesn’t affect the overall quantity of pollution, at least to a first approximation. Whether tradeable permits are auctioned off—with polluters paying the full price—or whether they are given away for free doesn’t, at first, make a difference. Overall emissions reductions stay the same. I’m saying “at first,” because, any money raised could be spent intelligently on further emissions reductions.

Environmental effectiveness, economic efficiency, political efficacy

The larger point is that (almost) everything is possible. The problems might be dauntingly large. The solution space is similarly large. It’s also clear that no single decision criterion is enough.

Environmental effectiveness is key. Economic efficiency is similarly important.

Achieving the environmental goal is like building a train to the right station. That’s clearly the most important step. Economic efficiency is akin to building the fasted possible train. Just being fast doesn’t help, if the journey goes in the wrong direction. But efficiency implies that one can achieve the same goal at lower cost, or more at the same cost.

But smart policy design, of course, is not enough. It takes political will to get there. Designing policies that pass political muster is clearly one criterion, especially in a polarized environment.

Getting the policy minutiae right is important, but it’s also clear, of course, that politics trumps all. Policies don’t inspire action. Visions of a better future, and a just transition do.

This is party 1 of a 5-part series exploring these policy solutions outlined in broad terms in Policy Design for the Anthropocene in more detail. Part 2 will focus on “Pigouvian” price instruments, taking a closer look at fossil fuel subsidies and carbon pricing.

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