Market Forces

How Climate Economics supports the Paris agreement temperature targets

New research building on Nobel Prize winner Nordhaus’ past contributions shows reaching UN climate targets is a good investment for the planet

Two years ago William Nordhaus was awarded the Nobel Prize in Economic Sciences for his pioneering work on “integrated assessment modeling” (IAM) and his Dynamic Integrated model of Climate and the Economy (DICE)—a framework designed to analyze the interplay between the economy and climate change, and used to assess economically optimal CO2 emission pathways and the social cost of carbon (SCC). Now a new paper published in Nature Climate Change demonstrates that a 1.5 to 2 degree target in line with the UN Paris agreement is economically optimal when the DICE model is updated to reflect newer research and latest expert assessment.

As I described in a blog about Nordhaus’ Nobel Prize two years ago, there were several ways new research could strengthen the results from Nordhaus’ DICE model and other IAMs. In this new paper, Martin C. Hänsel and co-authors (including Daniel Johansson, Christian Azar and EDF Senior Contributing Economist Thomas Sterner) made a number of such modifications to the baseline assumptions to update the results coming out of Nordhaus’ DICE model.

Two of their key updates relates to the economic assumptions/inputs to the model:

  • Updating the damage function (the assumed relationship between climatic changes and economic damages) to reflect a recent meta-analysis of climate damage estimates; and
  • Updating how equity between present and future generations is taken into account in DICE by revising the parameters determining the social discount rate. The choice of discount rate has a large impact on the results coming out of IAMs, since it determines the weight given to the climate damages affecting future generations.  This has spurred a long-standing debateespecially since the value of at least one of the parameters typically discussed is based on value judgments. Hänsel et al therefore chose to update the values of the parameters determining the social discount rate according to a recent survey of expert opinions.

The authors also made a number of additional updates to reflect new research in climate science and thereby improve the assumptions determining the relationship between greenhouse gas (GHG) emissions and temperature change (which include assumptions with respect to the global carbon cycle and the energy balance model translating radiative forcing to temperature impacts).

The authors also considered the impact of:

  • NETs (negative emissions technologies) such as afforestation, Biomass Energy with Carbon Capture and Storage (BECCS), and direct air capture. By providing the additional option of negative emissions after 2050, NETs further reduce the optimal equilibrium temperature, but also leads to a lower SCC in 2020 since the availability of NETs makes it optimal to postpone some emission reductions. However, it’s important to note that the potential magnitude of NETs available and on what timeline is debated and, for some strategies, still to be demonstrated.
  • Emission pathways with higher abatement of non-CO2 GHG emissions (which are not determined inside the DICE model) and make even lower equilibrium temperatures attainable. This illustrates the value of also addressing short term climate forcers such as methane emissions.

Both these latter updates contribute to a reduction in the economically optimal equilibrium temperature in DICE (i.e., the long run global average temperature which would provide the theoretically optimal balance between the social cost of climate damages and the costs of emission reductions).

The combined results of all these updates – reflecting recent findings in the climate economics and climate science literature – to the baseline assumptions in DICE are:

  • The SCC in 2020 is twice as high with all the other updates but with Nordhaus’ baseline assumptions for the social discount rate left unchanged. This is well in line with the strong consensus that SCCs at the levels produced with the baseline assumptions in DICE ($39 per tonne) significantly underestimate the true social costs of carbon dioxide emissions.
  • Optimal climate policy according to this updated DICE model keeps equilibrium temperature below 2 °C in 2100 in three quarters of all model runs.

Despite these key updates to the DICE framework, there are still—as the authors also point out—additional enhancements that can be made to improve this type of climate economic analysis, which weighs the costs and benefits of climate action. Such enhancements include consideration of risk and uncertainty and the representation of so-called “tipping points” as well as taking into account that the value of environmental assets relative to other goods and services may increase as they suffer a larger share of the costly damages from climate change.

Overall, these new findings show that the temperature targets in the Paris agreement (where countries committed to limiting the global temperature rise to well below 2 °C and to actively pursue a 1.5 °C target) are also supported by climate economic analysis and that reaching the UN climate targets is a good investment for the planet.

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Canaries in the mine of climate cooperation

Strong emissions trading system prices encourage and facilitate climate action but also reflect private sector confidence in governments’ commitments to long-term transformation.

Every evening in my Brooklyn neighborhood we come out onto our stoops with our children, dogs, bells, horns and pots (my contribution – inspired by the Colombian cacerolazos I witnessed protesting – non-violently, though I can’t say quietly – in Bogotá). We make a big noise to thank and celebrate the generosity and selflessness of the medical personnel and essential workers who are keeping life going during the crisis. Their example is an inspiration to us all and reminds us that humans are at essence a cooperative species. This same spirit of cooperation, backed up by strong social and political institutions including effective emissions trading systems, can help protect our climate in these difficult times.

Our focus now must be on flattening the curve, caring for the sick and vulnerable, and then getting back to work. But as we recover from this crisis, we need to do so in a way that helps us confront the next one: global climate change. Lawmakers in many countries are beginning to pivot from relief to recovery, focusing on the longer-term work of getting the economy back on track. We need that economy to have low greenhouse gas emissions.

No one should take false hope from the temporary decline in greenhouse gas emissions we have seen recently. In the short term, when economic activity falls, pollution falls. During the financial crisis of 2007-9 global greenhouse gas emissions did drop, slightly and briefly. The current economic crisis is deeper but will also pass and when it does, so too will the dip in climate pollution.

To make declines in emissions permanent, we need to seize this moment of fundamental change to ensure effective, efficient, resilient policies to lock in economic and behavioral shifts that do contribute to a transition to a low emission future where all people thrive.

One key element of the policy mix in an increasing number of countries and jurisdictions is an Emissions Trading System. These systems limit greenhouse gas emissions while allowing flexibility around where and when emissions occur.  They provide price signals to help guide clean investment and other climate actions. The limit, or cap, controls emissions; the marginal cost of achieving that limit, which depends on technology and other climate policies among other things, drives the ETS price.

What drives emission prices?

Those ETS price signals have been affected by COVID and its economic consequences. The climate challenge is no less urgent, but is the private sector feeling less pressure from governments to act? Are the canaries who sing in the healthy cooperation mine falling quiet?

Initially both the European Union and New Zealand ETS prices dropped dramatically, but they have since clawed back much of their initial losses. Will they recover and even move to levels consistent with modeled estimates of prices required to stabilize the global at less than two degrees above pre-industrial levels? A recent survey by IETA suggests not. It finds private sector expectations of emissions prices over the next 10 years have fallen relative to expectations a year ago by 12% (EU and the Western Climate Initiative (WCI) – California and Quebec), 27% (Regional Greenhouse Gas initiative), and 35 – 38% (New Zealand and Mexico). What does this mean?

During a recession, when capital is scarce, because ETS units are assets their price will also tend to fall in a similar way to other assets. As the financial sector recovers, asset prices should also recover. These price adjustments, like those driven by new information about mitigation technology provide useful signals. However, general economic factors and new information about the true costs of achieving our climate goals are not the only drivers of these changes in prices.

Because an emissions trading system is a market created by regulation, the price in each ETS is deeply dependent on expectations about the future stringency of that regulation. Because allowances in emissions trading systems are ‘bankable’ (they can be saved for future use by those who emit less and hence surrender fewer allowances today), as long as there is a ‘bank’ of units available their price depends on what people expect demand and supply will be in future, not just on current scarcity. That makes ETS prices a barometer of both the stringency of policy that politicians are willing to implement—and also of the private sector’s expectations about how stringent policy is likely to be over the long term.

In 2008 there was some international optimism about climate action. The Kyoto Protocol had come into force in 2005; obligations began in 2008. Climate policies were gaining traction in many countries. The EU emissions trading system started its second phase with a healthy price, and New Zealand’s ETS kicked off with similar prices. These reflected that optimism. In the US, the Regional Greenhouse Gas Initiative held its first auction in 2008, and California was moving forward after passing the ambitious Global Warming Solutions Act in 2006. But by December 2009, the price of carbon allowances in the EU emissions trading system had fallen, partly as a result of economic contraction, and more importantly things were beginning to fall apart internationally starting with an unsuccessful U.N. Climate Summit in Copenhagen. By the end of 2012 emission prices had largely collapsed (though prices in the California ETS, launched one year later, were protected by a price floor). Recession was not the only driver, and it’s always hard to disentangle various causes, but the financial crisis did not help.

After the financial crisis and recession, the private sector clearly did not believe that policy makers would impose stringent caps in emissions trading systems; this kept prices low. Optimism around government-led climate action had evaporated. Emission prices, and the signals they provide to investors and companies, only really recovered after 2016 in New Zealand and 2018 in Europe. We can’t wait that long again.

How we can protect climate action from shocks like COVID

Recessions don’t have to lead us to fall even further behind in addressing climate change. The way we manage ETS can help protect the continuity of climate efforts and returns on clean investments against short-term loss of confidence in governments’ commitments to climate cooperation. Possibly the smaller shifts in expectations of prices in the EU and in California and Quebec reflect their more mature institutions and price management approaches—the Market Stability Reserve in the EU and the auction price floor in California and Quebec. Market players have more confidence that the institutions will manage short-term shocks. Critically though, they also have more confidence—though still not enough—that these jurisdictions have a sustained commitment to real long-term change.

When ETS participants believe in society’s commitment to long-term, transformational change to low emissions, ETS prices will reflect only the cost of achieving that.

Recent reductions have come at an enormous cost to human wellbeing. This is not what a transition to a low-emissions economy looks like. The good news: there is still time to stop climate change in ways that allow people and nature to prosper together, and human well-being to burgeon. But the window for such action is rapidly closing. We need a positive and attractive transformation, not economic crises that cause distress and bring only temporary reductions.

We can’t avoid the worst impacts of climate change unless we transform our energy and food systems—changing not only our production but also our culture and the stories we tell ourselves about how we can flourish in balance with our environment. This requires a shift in the fundamental assumptions of all key actors (politicians, business people, officials) and a change in institutions (public and private—e.g. banks, regulations, education, supply chains) so they support of a new set of clean investments and activities and discourage emissions-intensive activities. This won’t happen through forced change. It needs leadership and steady effort.

Once the immediate health crisis from COVID abates we don’t want policy makers (and the public) to lose sight of climate policy and action and focus only on short-term economic concerns. This is what we experienced after 2009 when unemployment levels stayed high long after the global recession passed. We need to find a way to address these critical economic needs while also moving even more aggressively towards a strong, longer-term economic future that offers high wellbeing in a stable climate.

When ETS market players believe we are really on this track, ETS prices will reflect their prediction of the costs of achieving global climate goals—not their assessment of political will.  Maybe we are closer than we think. Prices in the EU-ETS recently passed €30 for the first time since 2006 (briefly before falling a little with bad economic news) and NZ-ETS prices have reached their highest level ever around NZ$34 despite the announced closure of a major emitter. I’m optimistic. The canaries are singing again.  We need to help them to sing even louder.

 

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How we underestimate the costs of climate change, and why it matters now

This post, co-authored with Maureen Lackner, originally appeared on Voices.

Costly flooding in Houston after Hurricane Harvey

Cities, states and businesses are still feeling the shock. The coronavirus has stolen more than 138,000 lives and obliterated budgets. Had the U.S. better prepared for the fallout, some of the impacts would have been less severe.

Countries in Asia, for example, accustomed to managing fast-moving viruses after their experiences with SARS, have fared much better than the United States, which leads all countries with 3.43 million COVID-19 cases.

Costs from climate will likely have similar effects, and sooner than we think. Understanding—or better yet, predicting—what we could face in the future is crucial for making the case for policy action today, not after calamity strikes.

Calculating climate costs is daunting

To make these calculations, economists rely on Integrated Economic Assessment models to estimate future costs of climate change. These models are complex tools that link emissions projections to climate and ultimately societal impacts, measured in metrics such as the costs of poorer health outcomes, lost labor, damage to infrastructure, agricultural losses and death. Economists can then value the economic cost of a changing climate in dollar amounts.

The estimated costs from prominent models vary, but they all emphasize how much we currently underestimate climate damages. One recent study focuses on just a few sectors, (agriculture, crime, coastal storms, energy, human mortality and labor), and finds that damages will cost about 1.2% of gross domestic product per +1°C on average.

Even so, estimating outcomes is exceedingly challenging, and many assessments have been leaving out or significantly underestimating several of the serious consequences of climate change on lives and livelihoods.

For example, some economists argue that integrated assessment models do not capture the potential for tipping points adequately, where impacts from climate change can either accelerate abruptly, or become irreversible, leaving us in an unprecedented scenario — perhaps much like the unprecedented times we are experiencing right now. Integrated economic assessment models do their best to reproduce the world’s climate, economy and systems as they exist and function today. Even so, they are ill suited to estimate what will happen in a world where our climate system is pushed past a breaking point.

In addition, there are many intangible impacts that cannot be evaluated solely using economic costs – among them, the loss of cultural heritage, or the trauma of losing your home, getting hospitalized, or losing a loved one.

Every economic model under-values the costs of climate change

What is clear: the damage estimates from these models do not adequately value future well-being and non-monetary factors. Simply put, no matter the model, the numbers it produces are more likely than not too low.

We’ve seen this play out in other major disasters.

The California Wildfires, Hurricanes Katrina and Sandy, and even the Mississippi river flood of 1927 not only resulted in direct catastrophic economic losses to the residents of those areas, they also contributed to trauma, loss of stability and displacement from those communities. Losses that weren’t quantified in damage assessments. Even less well-known disasters resulted in monumental damages. The 2006 California heat wave, for example, cost $5.4 billion, while an outbreak of West Nile Virus in Louisiana cost an estimated $207 million.

We know that climate change is going to be expensive. And it will likely be more expensive than we are able to estimate. That knowledge should prod policymakers to take action now—before it’s too late.

Inaction brought the entire world economy to its knees in a matter of weeks during a pandemic that scientists warned us would come.

Climate change is already starting to wreak havoc on the planet. We don’t have time to wait while the federal government is stymied under the Trump administration’s inaction—and in some cases—proactive rollbacks of climate protections. Just as they have in the pandemic, state and local leaders can and should lead the way to prepare for an uncertain and costly climate future.

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How the pandemic is affecting oil markets, shale and the future of climate action

Earlier this month, EDF’s Office of Chief Economist hosted a virtual fireside chat with Jason Bordoff, Professor of Professional Practice and Founding Director of Columbia University’s Center on Global Energy Policy and Marianne Kah, an Adjunct Senior Research Scholar and Advisory Board member at the Center.

Prior to joining Columbia, Bordoff had served in the Obama Administration as the Special Assistant to the President and Senior Director for Energy and Climate Change on the Staff of the National Security Council. Kah had been the Chief Economist of ConocoPhillips for 25 years, where she developed the company’s market outlooks for oil and natural gas and led the company’s scenario planning exercises. The two discussed the impact of the coronavirus pandemic on oil markets, the outlook for shale and what the 25% decline in demand says about the challenge to move beyond fossil fuels, carbon reduction and climate action.

Maureen Lackner and Aurora Barone of EDF moderated the discussion.

Maureen: Let’s talk about the impact of COVID-19 on oil markets.

Jason: We told 4.2 Billion people around the world to stay home, and oil demand only dropped 25%. On the one hand, that was the largest drop you could possibly imagine. On the other hand we were still using 75% even though we had put half the world’s population under lockdown.  I found that a sobering reminder of how staggering a challenge it is to think about moving to a world beyond oil.

Maureen: You’ve said this idea of energy dominance or energy independence has emerged as a fallacy in the last few months. Can you explain what that means and how we should be thinking about the US role in global oil markets?

Jason: Independence is a fallacy, and this clearly revealed it. Because it’s still a global oil market. What often matters politically and from the standpoint of producers is the price you’re paying at the pump. What is different now is the macroeconomic impact of oil price shocks. This has revealed that we are still vulnerable to global oil supply shocks when oil prices go up and when they fall. There are few politicians who have been more critical of OPEC than President Trump, and the fact that he had no options available to him but to pick up phone and call Moscow and to call Riyadh and say, “Can you help us out, because the pain in the oil patch is too much to bear?” lays bare the idea that we’re not able to insulate ourselves against oil price shocks. And the best way to insulate yourself from oil price shocks is to reduce the oil intensity of your economy in the first place. Which, if at the same time that you’re calling Moscow and Riyadh, you’re rolling back fuel economy standards, doesn’t make a lot of sense to me.

Maureen: What happens to US shale in all of this?

Marianne: The outlook for shale really changed before COVID-19 and before the price collapse, and it really had to do with investors being dissatisfied with the returns that were coming from these projects, because the industry was reinvesting 130% of operating cash flow. Investors got tired of it. That reduced investment already slowed production growth. There’s also increasing concern about environmental performance of some of these operations, particularly in the Permian Basin, which is growing at such a rapid rate. There’s a lot of flaring and methane emissions, which further encouraged investors to say, “I don’t want to fund this industry.” All of that happened before COVID. COVID just exaggerated these pre-existing forces by causing a large volume of oil demand to be lost, particularly since some of it may be permanent.

Jason: In the days of prices at $40 or $50, the U.S. was growing at a million to 1.5-million barrels per day per year, which is pretty extraordinary. And we did that year after year. I think those days are gone. Shale is still a major force. Shale is still there, but I think we’re going to see it growing at a much a slower rate, and I think that’s consequential for lots of issues—the environment, the U.S. economy and geopolitics.

Maureen: It seems pretty clear that we will see a pretty big consolidation in terms of the number of players, but when might see production come back, or most of it come back?

Marianne: The industry desperately needs consolidation, because there are really too many producers that are producing small volumes in wells that aren’t that economic. You’ve seen some high-profile bankruptcies—Chesapeake and Whiting petroleum. But the question is, who is going to consolidate it now? Few companies have sufficient cash. The industry is generally in cash preservation mode. And a lot of these companies are very small companies that wouldn’t be material for the oil majors. I’m not sure that consolidation (beyond the Chevron-Noble acquisition) will generally happen now, even though it’s desperately needed.

Maureen: What does the long-term picture look like for major producers, and what does this mean for emissions and a potential energy transition?

Jason: I think for those of us who care about transitioning to a much cleaner decarbonized world, it’s not terribly encouraging. You see traffic patterns and congestion patterns in countries that have reopened like China at pretty close to pre-COVID-19 levels, in some cases even a little higher. Mass transit ridership is still down 30-50% in Chinese cities, not surprisingly, because people are worried about crowded spaces. They’re taking private vehicles more. Intercity travel is still down; diesel demand has held up. Jet fuel obviously is going to be down for a while. And maybe it’s middle to the end of next year when we get back to the level of oil demand where oil was before COVID-19. And then I think it will continue growing. I don’t think we’ve seen peak oil demand. I think aviation might look different for an extended period, given how concerned people will be about traveling coming out of this pandemic.

The kind of transformational change we need for deep decarbonization is not going to happen unless we make it happen, and that’s going to need significant policies, regulations, standards and investments. We may have a window to think about very large-scale investment in the economy, and that’s going to be a historic opportunity to use in a smart way from a climate standpoint.

Maureen: What do you think about this idea that we may be seeing peak oil happen sooner than anticipated, and how can we hold companies to account here and make sure this isn’t just some type of greenwashing, empty promise?

Marianne: There are some people who think we’ve lost two years—whenever the peak was going to be, it’s now going to be two years sooner, all the way to this transition is going to get rid of commuting and reduce travel by air. It may also geographically shrink  supply chains given concern about dependence on China and other foreign sources. There is a desire to nationalize supply chains—and not, for example, buy ventilators from China. That’s going to lower the amount of marine fuel used. One thing that I think is a sleeper is, there’s a renewed emphasis on clean air. On the other side, is the movement to personal vehicles. People are leaving mass transit and moving to personal vehicles. In a low price environment, it’s harder for electric vehicles to compete. People may decide to move out of cities, because they don’t want to be in an urban area anymore, which is going to mean more driving. There’s more deliveries, so that’s again, more driving. Single-use plastics were being banned, but now there may be a reversal of that trend, because people are worried about sanitary packaging. All of these deliveries are using plastic in their boxes. So I think the jury is still out on whether and the direction of long-term impacts on oil demand. There are a lot of moving parts, which is why it’s not obvious.

Maureen: Do you think that there are certain climate policies that are more palatable that we have more leverage for now? A price on carbon might actually be an attractive source of revenue under this new situation?

Marianne: Being an economist, I do favor a carbon price, because that is the most efficient way to get people to change their behavior. The devil is in the details in terms of whether it’s fair. How you get it done in the U.S. is the obvious question. And yes, the U.S. government does need the revenues given growing deficits, but if we don’t recirculate the revenues from the carbon tax into the economy, it will have a negative impact on the economy.

 Aurora: How might US E&P [Exploration & Production] financing be affected by recent events?

 Marianne: The low oil prices certainly have affected it. The current pandemic is considered a temporary situation, so there’s a belief that demand will come back to some degree and that prices will come back to $50-60, some forecasters even think $70 a barrel. In fact, we could even see a period of very high prices because there’s insufficient investment going on in the entire E&P sector now. It’s a cyclical industry. When people don’t have cash, they don’t invest.  I think the very low price we’re getting now from the coronavirus certainly hurts, but it’s really the change of perception—whether this industry is attractive to invest in, and does it have a long-term future that impacts investment. There are increasing questions from investors—how is this industry going to be impacted by carbon actions from governments? As more and more investors ask these questions, I think there’s going to be less and less investment.

 

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Firms can manage climate policy uncertainty. Here’s how.

This post was co-authored by Alexander Golub, Adjunct Professor of Environmental Science at American University.

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For companies that are large emitters of greenhouse gases, uncertainty about policies to address climate change can be a real challenge. But our new paper in the journal Energy shows how companies that invest now in a novel approach to climate mitigation could help manage their risk of future policy obligations more effectively and at a lower cost.

The challenge

In Energy, we demonstrate how policy uncertainty puts greenhouse gas emitting companies in a bind, raising risks for these companies and making it likely that carbon prices—an indicator of costs—will rise in a series of sudden bursts, rather than following a smooth transition.

Policy uncertainty discourages private investment in low-carbon technologies. However, when credible climate policy is finally in place, industry will have missed out on prudent investment opportunities and face spiking costs as they rush to catch up with tightened emissions controls requirements.

In the paper, we show that companies have a latent demand for suitable strategies that can help manage these risks.

Abatement short squeeze

When a government institutes stronger climate policy, businesses may find themselves over-weighted with carbon-intensive assets. Caught short of investments to reduce or “abate” emissions, companies will rush to rebalance their capital stock in favor of lower carbon technologies. At the same time, other businesses will also be rushing to unload high-carbon assets and adopt the lower carbon technology. This can cause carbon prices and associated costs of reducing emissions to rise dramatically.

This is similar to the case in financial markets when prices jump as investors must rush to square accounts on an investment they have bet against—going “short” rather than “long” — in anticipation of falling prices. Until now, such a “short squeeze” was a phenomenon of the stock market — product of speculations and uncalculated risk. Climate change threatens to create such a squeeze of much broader scope and economic consequences.

A down payment on abatement

Companies need access to strategies to manage the risks of future climate liabilities. In our study, we describe how companies could reduce the costs of meeting pollution targets in an uncertain policy landscape by making relatively small investments today that can preserve the flexibility to reduce emissions more dramatically in the future—essentially putting a down payment into cost-effective climate protection programs from large-scale sources. Such strategies can include investments in research and development that could pay off in the future through the availability of low-carbon technologies.

A conceptually similar way to manage exposure to future climate costs is by helping to secure and preserve low-cost “call options” on future abatement. A “call” is a type of option that gives companies the right but not the obligation to purchase an underlying product (whether it be a stock, commodity, or carbon credit) in the future at a guaranteed price. We highlight tropical forest conservation as an ideal type of program that companies can use to buy large-scale call options on abatement. A down payment on abatement on forest protection programs would yield an immediate impact on protecting climate, biodiversity, and local communities, while protecting companies’ ability to obtain further cost-effective emissions reductions in the future.

Call options on large-scale forest protection programs (REDD+)

Tropical forests contain the world’s largest reservoir of carbon within natural ecosystems that once lost cannot be recovered within the necessary time to avoid dangerous climate disruptions. Protecting these forests is thus a time-limited opportunity, but it doesn’t require expensive new technologies or infrastructure. As a result, tropical forest conservation offers one of the least cost ways to immediately reduce carbon emissions at large scales, while providing a multitude of other local and global benefits. Forests also remove carbon from the atmosphere, and as long as they remain intact they will continue to store that carbon. A relatively small investment in protecting forests now can provide urgent near-term financing for conservation while securing call options on carbon credits from ongoing future forest protection.

Tighter emissions targets could lead companies to rush to invest in renewable energy more or less simultaneously. This spike in investment may well exceed the ability of the global capital market to mobilize capital and investment resources. For example, it would be impossible to double or quadruple production of wind turbines or solar panels over a year or so. The economy may reach a physical limitation that could be hardly compensated by pumping capital.

Instead, hedging this risk by investing to secure the ability to generate credits from large-scale programs to protect tropical forests (known as REDD+ programs), companies, and the world, could “flatten the curve” on the costs of capital rebalancing to comply with climate policies. This keeps the total volume of investment below a critical level that could lead to bankruptcy or excessive macro-economic disruption (green line in figure 1).

Who benefits?

By selling REDD+ credits or call options on such credits to firms, forest nations, particularly in the tropics, can start receiving a fair price for keeping their forests protected. Such financing is important to help governments cover their costs of protecting forests and to align incentives of communities, farmers, ranchers and commodity buyers and consumers around forest protection and sustainable agriculture, rather than destructive activities like illegal logging and inefficient cattle ranching.

EDF and partners are pioneering innovative pay-for-performance mechanisms for reducing deforestation. These include the Emergent Forest Finance Accelerator, which links private sector buyers to environmentally rigorous, high-integrity carbon credits from large-scale forest protection programs.

Investments in high-quality REDD+ programs can play an important role in protecting the climate, environment and communities, while allowing companies to better prepare for the moment when society begins implementing more dramatic measures to tackle climate change. To help start the flow of credits, policymakers, companies and other stakeholders should agree on high standards for environmental quality and support the inclusion and prioritization of high-quality REDD+ programs within voluntary climate commitments as well as regulated carbon market systems.

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More confirmation that the Trump administration has been disregarding the true costs of climate pollution

This post originally appeared on Climate 411

A new report highlights the Trump administration’s dangerous efforts to obscure the real costs of climate change, while a major court decision firmly rejects the administration’s approach.

Costly flooding in Houston after Hurricane Harvey

new report from the Government Accountability Office (GAO), an independent agency tasked with providing objective nonpartisan information to policymakers, confirms what we’ve known for years: that the Trump administration has been ignoring the enormous costs of climate change. By ignoring these damages, the administration is turning its back on communities across the nation who are footing the bill for those impacts today.

In addition, a federal court recently issued a clear-cut rejection of the administration’s deceptive math on the cost of methane pollution, another greenhouse gas that is 84 times more potent than carbon dioxide over a 20 year time period. This ruling reinforces the fact that the administration has been blatantly disregarding widely accepted science and economics when it comes to the costs of climate change.

All of this comes amid a raging and widespread pandemic that underscores the absolute necessity of relying on experts and scientific data when crafting policy. With unchecked climate change fueling more devastating storms, droughts, and other public health impacts — all of which hit vulnerable communities the hardest — incorporating accurate costs of climate change in policy decision-making matters now more than ever.

Here is what this new report and court decision reveal about the administration’s backwards and harmful approach to decisions on climate change — and how experts and the courts are wholly rejecting it.

Why undervaluing the cost of climate change is dangerous

To justify its own political agenda, the Trump administration has manipulated the calculations behind the estimated impact of emissions to allow for more climate pollution from major sources like power plants and cars. The new GAO report outlines the steps the administration has taken to drastically underestimate the “Social Cost of Carbon” — a measure of the economic harm from climate impacts that is used to inform policy and government decision-making. These impacts include extreme weather events like flooding and deadly storms, the spread of disease, and sea level rise, increased food insecurity, and more.

After a 2008 court decision requiring the federal government to account for the economic effects of climate change in regulatory benefit-cost analysis, an Interagency Working Group (IWG) comprised of experts across a dozen federal agencies began in 2009 to develop robust estimates of the social costs of carbon that could be used consistently by agencies across the government. These estimates were developed through a transparent and rigorous process based on peer-reviewed science and economics that included input from the National Academy of Sciences and the public — and were periodically updated over time to account for the latest science. More recently, the NAS conducted a thorough assessment to provide guidance on updating the social cost of carbon estimates and suggestions for continuing to build on and strengthen it.

The GAO report underscores the importance of implementing those recommendations, while pointing to the fact that the federal government has done absolutely nothing to follow through. In fact, in 2017 the Trump administration recklessly disbanded the IWG — the very federal entity that already had the mandate to take on this task.

Since then, federal agencies like the EPA have been relying on an “interim cost” to inform important regulatory decisions that is seven times lower than the IWG’s estimate — a move that dramatically underestimates the profound impacts climate change has on families, businesses, taxpayers and local governments. To make matters worse, the administration is dramatically reducing the IWG figure even though it is widely recognized to be an underestimate of the true costs. There is wide consensus that the true costs are much likely significantly higher.

The Trump administration substantially reduces estimates through two key flaws in its calculations, both of which fly in the face of established science and economic principles. First, the reduced estimates ignore that carbon emissions are a global pollutant, omitting important categories of climate change impacts on the United States. Second, they undervalue the harm to our children and future generations by significantly over-discounting future climate impacts.

By vastly undervaluing the costs of climate change — and thus, the benefits of acting on climate — the administration has been able to justify rolling back critical protections such as the landmark federal Clean Car Standards. These important rules offer critical public health benefits and fuel savings for consumers.

A court ruling refutes the administration’s deceptive math on pollution costs

In encouraging news, a recent court decision outright rejected the administration’s deceptive math on a similar metric, the ‘Social Cost of Methane,’ used to estimate the impacts of methane pollution. The Bureau of Land Management, under former Department of Interior Secretary Ryan Zinke, has been using an interim social cost of methane that is more than 25 times less than the estimate from the IWG. The U.S. District Court for the Northern District of California recently overturned the BLM’s attempt to ease protections from dangerous methane leaking, venting and discharging from oil and gas activities on public and tribal lands, where it used a distorted social cost of methane as justification. EDF joined the states of California and New Mexico and a broad coalition of health, environmental, tribal citizen and Western groups to challenge in court the rescission of these vital safeguards.

In the opinion, the judge ruled that the BLM’s decision to rely on a lower interim estimate for the social cost of methane was “arbitrary” and “capricious,” and therefore, “failed to quantify accurately the forgone methane emissions and the resulting environmental impacts.” In addition, the court underscored that “the President did not alter by fiat what constitutes the best available science” on the social cost of greenhouse gas emissions. This is a major win for not only the broad coalition involved in the case, but for the basic principle of science-based decision-making on climate change. The court’s meticulous critique of the flaws in the interim social cost of methane — and the process used to develop it — could be influential in future cases involving the social cost of greenhouse gas emissions. Such a critical ruling like this opens the possibility that the Trump administration and future administrations could be required to properly account for the costs of climate change.

The Trump administration’s unwavering, politically motivated attempts at twisting facts and discrediting experts is putting Americans’ lives, health and financial well-being at risk. Unfortunately, its effort to skew the costs of climate change is far more than a political game. It is already causing real harm to communities across the country suffering from climate impacts — and it will only add to the mounting costs our children and grandchildren will pay. That is why ongoing efforts to uncover and overturn unjust climate decisions are all the more essential.

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