Author Archives: Gernot Wagner

We need a climate insurance policy – now

Q&A with Karin Rives first published on EDF Voices.

Climate Shock

Before climate change gets so bad that we may be forced to “geoengineer” ourselves out of catastrophe, a new book—Climate Shock—suggests that we reframe the problem altogether.

Gernot Wagner, a lead senior economist at Environmental Defense Fund and co-author of the book, says we ought to look at climate change as a risk management problem and treat it as such. I had a chat with Gernot about the book he will release next week together with Martin L. Weitzman, a professor of economics at Harvard University.

Karin Rives: Many books have already been published on climate change. What’s new or different about Climate Shock?

Most everyone focuses on what we know about climate change. Our book is about what we don’t know.

Call it Nassim Nicholas Taleb’s “Black Swan,” or the Rumsfeldian “unknown unknowns”—a state of complete and dangerous uncertainty and unpredictability. Call it what you want, but it’s that tail that may yet wag us in the end.

What we know is bad. What we don’t know is potentially much worse. Climate, in the end, is a risk management issue. Just like homeowners take out insurance against fires and flooding, society needs insurance against climate change.

KR: So what do we know?

Last time the planet experienced as much carbon in its atmosphere as there is now, sea levels where up to 66 feet higher than they are today. Camels lived in Canada. That was more than 3 million years ago. The geological clock read “Pliocene.”

We certainly know enough to take reasoned action today. And almost everything we don’t know points in one and only one direction: that action is all the more urgent.

KR: Why do we need to read this book now?

The time to buy our insurance policy is now—while we still can. And I’m speaking both metaphorically and literally.

Insurance here, of course, is to avoid dumping carbon into the atmosphere. We pay to have our trash picked up instead of just dumping it for free onto our streets. We similarly need to pay to avoid dumping carbon into our atmosphere.

That’s not free, but it’s still relatively cheap to do—and much cheaper than experiencing the consequences of unchecked global warming.

KR: What should be my three most important takeaways from your book?

Scream, cope, and profit.

We need to get the right policies in place, and soon. That’s “scream.” Then there’s some global warming we can no longer avoid—and that we are already experiencing. Let’s prepare ourselves better for that.

“Profit” is, of course, what you would expect two economists to say, dollar signs in their eyes and all. All that starts with smart investment decisions. Green, clean, and lean isn’t just got for the planet. It’s also the right financial choice and we need to ensure that it is much more so going forward.

The main takeaway, in the end, is that this isn’t some artificial battle between capitalism and the climate. It’s not about sticking it to the man. It’s about sticking it to carbon.

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Reconsidering the Rebound Effect

By Kenneth Gillingham, David Rapson, and Gernot Wagner.

The Rebound Effect and Energy Efficiency PolicyThe rebound effect from improving energy efficiency has been widely discussed—from the pages of the New York Times and New Yorker to the halls of policy and to a voluminous academic literature. It’s been known for over a century and, on the surface, is simple to understand. Buy a more fuel-efficient car, drive more. Invent a more efficient bulb, use more light. If efficiency improves, the price of energy services will drop, inducing increased demand for those services. Consumers will respond, producers will respond, and markets will re-equilibrate. All of these responses can lead to reductions in the energy savings expected from improved energy efficiency. And so some question the overall value of energy efficiency, by arguing that it will only lead to more energy use—a case often called "backfire."

In a new RFF discussion paper, "The Rebound Effect and Energy Efficiency Policy" we review the literature on the rebound effect, classify the different types, and highlight the need for careful distinction between causal links—which are indeed worthy of the “rebound” label—and mere correlations, which are not. We find, in fact, that measures to improve efficiency, despite potential rebound effects—are likely to improve welfare, generally.

Among the key questions about the rebound effect are a) whether the net benefits of energy efficiency increases are positive (for a costless improvement, the answer is almost certainly "yes"), and b) whether the increase in demand for energy services uses so much additional energy that it leads to greater, rather than less, demand for energy itself (the answer is almost certainly "no").

Our findings are clear: while it is possible for rebound effects to be large in some settings, there is no reliable evidence supporting rebound effects so large that improving energy efficiency leads to more energy use. Backfire is theoretically possible, but even the theoretical predictions rely on channels that are either a) second-order in magnitude (and thus unlikely to overwhelm primary effects), or b) lacking in empirical evidence of their existence and magnitude. Globally, we have little reason to worry about backfire. While there is much uncertainty about the size of the so-called "macroeconomic rebound" (how re-equilibration of markets and such hypothesized effects as induced innovation from the energy efficiency improvement may lead to a rebound), we consider a plausible upper bound of the total effect to be in the range of 60 percent (that is, 60 percent of the potential energy savings will be lost to rebound), with most studies pointing to a smaller effect.

Regardless of its size, we find that the rebound effect is very likely to be welfare-improving. In fact, in the extreme, energy efficiency improvements that come about from innovations or otherwise have no cost are unequivocally welfare-enhancing. If the improvements come with costs, such as air pollution from more driving or more expensive technology, those need to be weighed against the energy savings, emissions savings, and welfare benefits from the policy.

In short, undue emphasis on backfire is a mere distraction. Or as we put it in a recent letter to the editor of the New York Times: energy efficiency improvements such as "LEDs alone won’t solve global warming or global poverty, but they are a step in the right direction for both."

Published on Common Resources. The RFF Discussion Paper is here: "The Rebound Effect and Energy Efficiency Policy."

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Is energy efficiency a good thing even with rebound?

By Inês Azevedo, Kenneth Gillingham, David Rapson, and Gernot Wagner.

Lighting is critical to our livelihoods. Humans have used lighting technology since long before industrialization. For many centuries, this lighting was extremely inefficient, with over 95% of the energy consumed wasted as heat. Recently, the Nobel Prize in Physics was awarded to Isamu Akasaki, Hiroshi Amano and Shuji Nakamura for their remarkable contributions towards highly efficient light emitting diode (LED) technology. A day later, Michael Shellenberger and Ted Nordhaus reignited a long standing debate with an Op-Ed in The New York Times claiming that these developments are not likely to save energy and instead may backfire. (TheTimes has since corrected a crucial point of the article, and it has published three letters to the editor, including one by a subset of co-authors here.)

As evidence for these claims, Shellenberger and Nordhaus cite research that observes the vast improvements in the efficiency of lighting over the past two centuries having resulted in “more and more of the planet [being] dotted with clusters of lights.” They take this as evidence of how newer and ever more efficient lighting technologies have led to demand increases and, thus, have “led to more overall energy consumption.” Further, they refer to “recent estimates and case studies” that suggest “energy-saving technologies may backfire, meaning that increased energy consumption associated with lower energy costs because of higher efficiency may in fact result in higher energy consumption than there would have been without those technologies.”

First off, yes, it is likely that many efficiency improvements are associated with some rebound effect. It’s been with us forever, and it’s been known for over a century. More efficient lighting leads to people using more light. Key here is “leads to.” Causality matters. More on that in a minute.

For now, a quick look at the actual technology in question. It turns out the technology developments for LED lighting are, in fact, much greater than previous advances in lighting. Figure 1 [see the pdf] shows the dramatic pace of technology change in LED efficacy. The Nobel Prize was well-deserved: LEDs provide a major energy-saving innovation.

But what about the claim that this efficiency improvement will only lead to more energy use? This claim is simply not justified. Noting that lighting dots the globe at night today when it did not in the 19th century may be confounding correlation with causation. The world is also much wealthier today and the service provided by light from electricity is very different than candlelight. Perhaps earlier lighting would have dotted the globe at night in 1850 too had we been as wealthy as today and had consistent lighting. We cannot say without looking at the evidence.

The evidence we have is quite clear. Shellenberger and Nordhaus say “The I.E.A. and I.P.C.C. estimate that the rebound could be over 50 percent globally,” and they then proceed to talk about “backfire,” a rebound effect of over 100 percent. That’s quite a jump from 50 to 100. What’s missing here is that most studies, including the IEA’s and their own(!), take 60% as an upper bound. The IPCC summarizes the evidence as thus:

“A comprehensive review of 500 studies suggests that direct rebounds are likely to be over 10% and could be considerably higher (i.e., 10% less savings than the projected saving from engineering principles). Other reviews have shown larger ranges with Thomas and Azevedo (Thomas and Azevedo, 2013) suggesting between 0 and 60%. For household‐efficiency measures, the majority of studies show rebounds in developed countries in the region of 20-45% (the sum of direct and indirect rebound effects), meaning that efficiency measures achieve 65-80% of their original purposes.”

We have each performed our own detailed surveys of the literature (Azevedo 2014; Thomas & Azevedo, 2013Gillingham et al. 2013; Gillingham et al. 2014) and largely agree with these statements from the I.P.C.C. The bottom-line: the evidence for a “backfire” is weak. The rebound effect is clearly there, but first it’s generally relatively small—especially in developed countries. Perhaps most importantly, where it does exist—and it does—it’s good.

Energy inefficiency can’t be good. That doesn’t yet mean that efficiency alone is sufficient. Every economist worth his or her degree would conclude that we need a price on carbon or a similar instrument. Bonus fact: there’s no direct rebound effect with pricing mechanisms.

As the Nobel Committee notes in its press release: “The LED lamp holds great promise for increasing the quality of life for over 1.5 billion people around the world who lack access to electricity grids.” In short, and as two of us say in a shorter letter to the editor, LEDs alone clearly won’t solve global warming, nor will they solve global poverty. But they are a step in the right direction for both. Thank you, Isamu Akasaki, Hiroshi Amano, and Shuji Nakamura, and to the Nobel Committee for recognizing their work.

Published in full as part of a broader post on "Is There Room for Agreement on the Merits and Limits of Efficient Lighting" by Andrew Revkin on the DotEarth blog of The New York Times. For a shorter take, see our letter to the editor of The New York Times. For a longer take, see "The Rebound Effect and Energy Efficiency Policy."

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What if bees had value?

Episode 5 of Paul G. Allen and Morgan Spurlock’s We The Economy explores the hidden value of natural capital:

A Bee's Invoice from We The Economy, starring Adrian Grenier, Gernot Wagner, Jodi Beggs, and Robert F. Kennedy Jr.

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The Silver Bullet Of Climate Change Policy


By Bob Litterman and Gernot Wagner

Whenever the conversation turns to climate change, someone is sure to opine that there’s no silver bullet. The issue is simply too complex to have one solution. When you focus on all the changes that need to occur to reduce greenhouse gas emissions globally it seems like a multifaceted approach is the only way forward.

Most of the world’s vexing problems share that feature. Mideast peace, nuclear non-proliferation, Eurozone stability, and plenty of other national security problems have no single right plan of attack. Some past plans might have brought us tantalizingly close to a seeming solution, but then reality started interfering once again, reconfirming the complexity of it all.

Climate change must surely be in that category. No single country, no single technology, no single approach can seemingly solve this one for us once and for all. Picking a single technology will almost inevitably end in some form of disappointment. Bureaucrats, the saying goes, ought not to try to pick winners. Leave that to venture capitalists for whom failure is a way of life. For every Apple and Facebook, there are dozens who never make it out of the garage. And clean technology doesn’t yet even have a single Apple and Facebook as the standout approach revolutionizing the field.

It turns out, though, that how you frame the issue is crucial. If you think like an engineer there are dozens of challenges. If you think like an economist, there is one. It’s guiding the ‘invisible hand’. How can you create the appropriate incentive to decrease the pollution that’s causing climate change? For that, the government need not be in the business of picking winners at all. What it should—and can—do is identify the loser that’s been clear for decades: greenhouse gas pollution. And the solution is equally clear: create incentives to reduce emissions by pricing it. If we make this one change, most other actions that are needed will follow.

That’s what the European Union has done by capping carbon emissions from its energy sector, including large industrials, covering almost half of total carbon emissions. That’s what California is doing with over 80 percent of its total global warming emissions. It’s what China is experimenting with in seven city and regional trials, including in Beijing and Shanghai. All these systems put a price on greenhouse gas pollution.

On the other side of the ledger, there are still much larger incentives to consume fossil fuels in many other countries. The International Energy Agency estimates that global subsidies are well over $500 billion. These subsidies, which incentivize emissions, sadly dwarf the paltry incentives to reduce them. Free marketeers, small government advocates, and others who dislike distorting government subsidies should be appalled at the tax money poured into fossil fuels.

There’s one simple principle that’s been around in economics for so long that no economist worth his or her degree would question the conclusion: increase the price, watch the quantity demanded go down. It’s such a universal truism that economists call it the “Law of Demand.” Generations of graduate students have estimated the effects of price on demand for anything from the generic widget to demand for car miles driven. People may be irrational at times, but one thing that we know for sure is that they respond to incentives.

Everything we know from decades of the study of human behavior would lead us to believe that carbon pollution will go down as the price on emissions increases. The only interesting question is by how much.

The prescription then for anyone seriously concerned about climate change is simple: price carbon to the point where its now unpriced damages are incorporated into the price, and get out of the way. It’s simple. It works. It’s conservative to the core.

It’s also a silver bullet solution if there ever was one.

Bob Litterman is a Partner at Kepos Capital, LP. Gernot Wagner is a senior economist at the Environmental Defense Fund.

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Why the cost of carbon pollution is both too high and too low

From EDF Voices:

Tell someone you are a “climate economist,” and the first thing you hear after the slightly puzzled looks subside is, “How much?” Show me the money: “How much is climate change really costing us?”

Here it is: at least $40.

That, of course, isn’t the total cost, which is in the trillions of dollars. $40 is the cost per ton of carbon dioxide pollution emitted today, and represents the financial impacts of everything climate change wreaks: higher medical bills, lost productivity at work, rising seas, and more. Every American, all 300 million of us, emit around twenty of these $40-tons per year.

The number comes from none other than the U.S. government in an effort to uncover the true cost of carbon pollution. This exercise was first conducted in 2010. It involved a dozen government agencies and departments, several dozen experts, and a fifty-page, densely crafted “technical support document,” replete with some seventy, peer-reviewed references and an even more technical appendix.

Cass Sunstein, the Harvard legal scholar of Nudge fame, who was co-leading the process for the White House at the time, recently declared himself positively surprised how the usual interest-group politics were all-but absent from the discussions throughout that process. This is how science should be done to help guide public policy.

The cost of carbon pollution is too low

The number originally reached in 2010 wasn’t $40. It was a bit more than half as much. What happened? In short, the scientific understanding of the impacts of rising seas had advanced by so much, and the peer-reviewed, economic models had finally caught up to the scientific understanding circa 2007, that a routine update of the cost of carbon number resulted in the rather dramatic increase to near $40 per ton. (There are twenty pages of additional scientific prose, if you want to know the details.)

In other words, we had been seriously underestimating the cost of climate change all along. That’s the exact opposite of what you hear from those who want to ignore the problem, and the $40 itself is still woefully conservative. Some large companies, including the likes of Exxon, are voluntarily using a higher price internally for their capital investment decisions.

And everything we know about the science points to the fact that the $40 figure has nowhere to go but up. The more we know, the higher the costs. And even what we don’t knowpushes the costs higher still.

Howard Shelanski, Sunstein’s successor as the administrator of the Office of Information and Regulatory Affairs (OIRA, pronounced “oh-eye-ruh”), has since presided over a further update of the official number. In fact, this one didn’t incorporate any of the latest science. It was simply a minor technical correction of the prior update, resulting in a $1 revision downward. (The precise number is now $37, though I still say $40 at cocktail parties, to avoid a false sense of precision. Yes, that’s what a climate economist talks about at cocktail parties.)

And once again, it all demonstrated just how science ought to be done: Sometimes it advances because newer and better, peer-reviewed publications become available. Sometimes it advances because someone discovers and fixes a small mathematical error.

Your input is needed

While announcing the correction, Shelanski added another layer of transparency and an opportunity for further refinements of the numbers: a formal call for public comments on the way the cost of carbon figure is calculated, open through January 27 February 26.

We are taking this opportunity seriously. EDF, together with our partners at the Natural Resource Defense Council, New York University School of Law’s Institute for Policy Integrity, and the Union of Concerned Scientists, is submitting formal, technical comments in support of the administration’s use of the cost of carbon pollution number as well as recommending further revisions to reflect the latest science.

The bottom line, as economists like to put it, is that carbon pollution costs society a lot of money. So as the technical experts trade scientific papers, you can help by reminding our leaders in Washington that we need strong, science-based climate policies.

Update (on January 24): The official comment period just was extended for another month, through February 26. More time to show your support.

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