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The holy grail of climate economics? A price on carbon.

(This blog post was co-authored with Dominic Watson and originally posted on EDF Voices.)

If there were a competition for the most important number in the world, the price on carbon would certainly be a strong contender.

The World Bank has been a long-time supporter of carbon pricing and its recent report, Decarbonizing Development, adds a strong voice to the chorus of climate policy experts, economists, and business leaders who champion the economic, social and environmental benefits of pricing pollution.

The report underscores the importance of getting the economics of climate change policies right so we can transition cost-effectively to a carbon-neutral economy.

Because we live in a world of ‘bottom-up’ climate policy, the authors rightfully say, this will require multi-pronged policy solutions, each tailored to a country’s particular economic and political conditions.

At the heart of this broader approach, however, lies the holy grail of climate economics: a price on carbon.

Markets bring results – fossil fuel subsidies don’t

Global temperatures must stay below the 2°C threshold for the world to avoid catastrophic climate change. This requires that net carbon emissions are reduced to zero by the middle to the end of the century.

A price on pollution has been shown time and time again to be the most cost-effective way to reduce emissions. By internalizing the cost of pollution to firms – meaning, making polluters pay for the right to emit carbon – they will have an incentive to reduce emissions and look for the cheapest emissions reduction options.

A tax on carbon, or a cap-and-trade system where permits – or allowances to emit carbon – are auctioned to firms, have the added benefit of bolstering government coffers. The additional revenue can be used to, for example, offset costs low-income households incur should power rates or costs on goods rise.

It can also be used to reduce taxes, including taxes on labor and capital that can affect social welfare and create market inefficiencies.

The World Bank reminds us that getting the price right will include removing costly subsidies on fossil fuels – now estimated at $548 billion worldwide. In addition to encouraging the overconsumption of fossil fuels, these subsidies have proven ineffective for helping the poor or for promoting competitiveness.

A mix of policies can boost clean energy

A comprehensive climate policy package should include a mix of additional policies to help address other market failures, the report notes. Policy makers can help boost innovation in clean technologies, for example, by supplementing a carbon price with temporary support for investments, targeted subsidies, performance standards and technology mandates.

Case in point: California’s AB 32 program, which guarantees emissions reductions through a market based cap-and-trade program while supplementing the cap with a range of statewide regulations.

Among other things, the legislation incentivizes utilities to invest in renewables and requires building, vehicle and appliance efficiency standards that help consumers save on their electricity bills.

Next: A global price on carbon

Some countries may choose to rely on such regulatory measures alone and opt out of market-based solutions for the time being. Such policies will certainly bring countries closer to meeting their emissions goals.

In the long-term, however, a carbon price must form the linchpin of any viable national emissions reduction plan.

And ultimately, if we’re to meet that net-zero carbon emissions goal in the most cost-effective way, all countries should face the same global carbon price.

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Big Rigs: Will the Climate Benefit from Switching Diesel Trucks to Natural Gas?

Originally posted on EDF's Energy Exchange.

16058670001_80994ae935_zThe surge in natural gas production that has reshaped the American energy landscape has many in the commercial transportation sector considering whether to start shifting their heavy-duty vehicle fleets from diesel to natural gas fuel. Many are looking to an advantage in carbon dioxide emissions to justify the higher cost and reduced fuel efficiency of a natural gas vehicle.

But in fact, a study published today in Environmental Science & Technology finds that while there are pathways for natural gas trucks to achieve climate benefits, reductions in potent heat trapping methane emissions across the natural gas value chain are necessary, along with engine efficiency improvements. If these steps are not taken, switching truck fleets from diesel to natural gas could actually increase warming for decades.

Methane, the main ingredient in natural gas, has 84 times more warming power than CO2 over a 20-year timeframe. Reducing emissions throughout the natural gas value chain is an important opportunity to reduce our overall greenhouse footprint.

Growing Body of Research

The new study examines several different types of engine technologies, and both liquefied and compressed natural gas fuels, and concludes that a conversion from diesel could lead to greater warming over the next 50 to 90 years before providing benefits to the climate.

These results align with an earlier paper published by EDF scientists in 2012 in the Proceedings of the National Academy of Sciences (PNAS), but reach these conclusions through updated and more detailed data, as well as analysis tackling a wider scope of vehicle sizes, engine technologies, and fuel types.

Pathway to Positive Climate Benefits

By examining a range of assumptions, the new study finds there are indeed pathways for heavy duty natural gas vehicles to achieve climate benefits, provided methane emissions across the value chain are reduced both upstream and at the vehicle level.

Improvements in fuel efficiency could help ensure these vehicles are climate friendly. Today’s natural gas truck engines are typically five to fifteen percent less efficient than diesel engines. Consuming more fuel for each mile traveled reduces the relative CO2 savings. If that efficiency gap can be closed, natural gas trucks will fare that much better compared to diesel.

Upcoming Policy Opportunities

While emissions in the natural gas value chain are a serious challenge, they also represent an opportunity to achieve significant, cost-effective reductions in overall greenhouse gas emissions. Several policy mechanisms are in play that could improve the climate prospects of natural gas trucks. These include recently announced federal upstream methane regulations and upcoming federal fuel efficiency and greenhouse gas standards for heavy trucks.

More information is needed to estimate with confidence the current climate footprint of trucks, and to get a better understanding of methane loss along the natural gas value chain. Significant research is underway to update estimates of methane emissions across the U.S. natural gas system, including the ambitious scientific research effort to publish 16 field studies launched by EDF and its partners.

Advancing Understanding

The paper released today is distinct from this ongoing effort and does not use any data from those studies, but it serves complementary purposes: First, it emphasizes the importance of gathering more and better data on methane loss; second, one of its major contributions is the various “sensitivity analyses” it presents.

These ranges of potential results are designed to understand the implications of changing underlying assumptions about methane emissions and efficiency. Our new paper creates a framework to evaluate the climate impacts of a fuel switch to natural gas in the trucking sector as we gain better data on the magnitude and distribution of leakage and as both leakage and vehicle efficiency evolve due to policy changes and market dynamics.

Policymakers wishing to address climate change should use caution before promoting fuel switching to natural gas in the trucking sector until we are more certain about the magnitude of methane loss and have acted sufficiently to reduce emissions and improve natural gas engine efficiency.

For more detail on the paper released today, please see our Frequently Asked Questions.

Image Source: Flickr/TruckPR

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Stakeholders Gather to Discuss How Time-Variant Electricity Pricing Can Work in New York

Originally posted on EDF's Energy Exchange.

new-york-540807_640Last week, Environmental Defense Fund (EDF) co-hosted a successful forum on residential time-variant electricity pricing – which allows customers to pay different prices for electricity depending on when it is used – within the context of New York’s ‘Reforming the Energy Vision’ (REV) proceeding.’

Co-hosted with the New York Department of Public Service and New York University’s Institute for Policy Integrity, the full-day forum, “On the REV Agenda: The Role of Time-Variant Pricing,” brought together more than 150 regulators, utility executives, academics, and other stakeholders to explore how residential time-variant pricing works, what it can accomplish, and how best to implement it. Below is a recap of some of the high-level takeaways from the forum.

How time-variant pricing (TVP) works

One of EDF’s objectives has been to improve the efficiency of the electricity industry by pursuing a market-based approach to electricity pricing. In most well-functioning markets, the cost of making a product and its relative scarcity is reflected in the price. For example, a door is more expensive than the wood with which it is made in order to reflect the labor costs involved. Similarly, strawberries are more expensive during the winter because they are less abundant during that time. Customers understand that prices vary with production costs and over time, yet neither of these elements gets reflected in how residential customers currently pay for electricity.

Read More »

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We can get better biodiversity outcomes from environmental markets

This post was co-authored with Sara Snider and Stacy Small-Lorenz. 


Join us in Washington, DC on December 8 for a pre-ACES Conference workshop- “Getting Better Biodiversity Outcomes from Coordinated Environmental Markets.”  We welcome anyone interested in exploring the space where environmental markets, including habitat markets, interact with each other and conservation programs. Come investigate with us how biodiversity can benefit from the optimal design and coordination of markets.

Getting Better Biodiversity Outcomes from Coordinated Environmental Markets is a free pre-conference workshop for ACES Conference attendees.

Monday, December 8, 2014


Washington, DC

Register here for the ACES Conference and sign-up for this workshop!

Aligning Incentives to Maximize Environmental Benefits

Environmental markets have the potential to enhance and conserve key elements of ecosystems; however, this requires coordinated and informed decision-making. During the workshop, we will explore the evolution of habitat markets and how such markets should be designed to achieve the greatest net benefit, covering both biological and regulatory considerations of habitat market design. We will also discuss scenarios in which it could be appropriate to combine habitat markets with other markets (e.g. water and air quality) to create added-value incentives.  We will emphasize topics such as the interface of markets with federal conservation programs, the challenge of establishing baselines for landowners enrolling in habitat markets, as well as the economic and legal challenges of stacking.


Engage with Environmental Market Experts around Case Studies

Environmental markets experts will lead us through an engaging discussion of the challenges and opportunities for biodiversity markets and stacking in moderated panel and breakout discussion format. Confirmed panelists include:

  • Jessica Fox, Senior Project Manager, Electric Power Research Institute
  • Kevin Halsey, Senior Consultant, EcoMetrix Solutions Group
  • Chris Hartley, Environmental Markets Analyst, USDA Office of Environmental Markets
  • Rene Henery, California Science Director, Trout Unlimited
  • Alex Pfaff, Professor of Public Policy, Economics and Environment, Duke University
  • Morgan Robertson, Assistant Professor, University of Wisconsin
  • Jeremy Sokulsky, Chief Executive Officer, Environmental Incentives
  • David Wolfe, Director of Conservation Strategy, Environmental Defense Fund
  • Stacy Small-Lorenz, Senior Scientist, Environmental Defense Fund (Moderator)

Workshop participants will have the chance to discuss basic and complex questions around these topics by working through real-life scenarios. We will touch upon potential pitfalls, such as double-dipping, legal inconsistency, and market incompatibility, as well as the challenge of establishing baselines for landowners.  As environmental markets move forward to incentivize better biodiversity outcomes, we must be ready to collaborate and coordinate with fellow ecosystem service professionals to achieve real success.  Let’s get started at the ACES Conference!

Enter the Conversation

EDF has a long history of creating innovative market-based solutions to our environmental challenges, including the historical trading program in the 1990s that dramatically decreased acid rain and reduced exposure to harmful pollutants. Now, we continue to develop multiple markets in order to maximize environmental benefits, such as habitat restoration and carbon sequestration. A Community on Ecosystem Services’ (ACES) Conference this December provides an in-depth forum for exploring these topics with representatives from government, academia, conservation NGO’s and the private sector.

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Gross Domestic Product: Grossly incomplete, but we can fix it

Via EDF Voices. This first appeared online in an article posted at

Gross Domestic Product (GDP) is broken. Robert F. Kennedy said as much in his first major presidential campaign speech. Simon Kuznets, the father of GDP, acknowledged its shortcomings. GDP is an imperfect indicator of human well-being at best, and outright misleading at worst.

Still, we shouldn’t scrap GDP and start over.

Up to a point, GDP does tell us important facts about people’s lives, livelihoods and aspirations. Living on a dollar a day is miserable no matter how you look at it.

Choking on economic growth, of course, is equally bad. There are a few simple, well-established steps we ought to take to bring GDP closer to where we should be. That, by the way, isn’t “Green GDP” or “green accounting.” It’s honest accounting.

Start with accounting for the true value of natural assets still in the ground. We don’t “produce” coal. We extract it. And the fact that the ton of coal extracted today is no longer there for the taking tomorrow should show up in our national income accounts. A ton of West Virginian coal adds about $30 to GDP. Honest bookkeeping would decrease that amount to $15. The same holds for oil, trees, water and all the other valuable natural assets that fuel our economy but are largely treated as free in our GDP accounting.

Then quickly move on to pollution. Every ton of coal, every barrel of oil causes more in external damages than it adds value to GDP. Properly measured GDP ought to reflect that fact.

In the end, policy makers should expand their horizon and look at a dashboard of indicators to get a fuller picture of the true state of the economy, society and the planet. Yet when it comes to GDP itself, the name of the game is fixing it rather than scrapping it. We know how to do that. The U.S. Bureau of Economic Analysis is at the ready. Let’s have a go at it.

See the original post on for a perspective from Sir Partha Dasgupta, Frank Ramsey Professor Emeritus of Economics at the University of Cambridge. 

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The Nuts and Bolts of California’s First Greenhouse Gas Auction

This article was originally posted at California Dream 2.0.


Following today’s California Air Resources Board’s (CARB) board meeting, the next major milestone in California’s efforts to reduce greenhouse gas (GHG) emissions is on November 14th, when California will hold the first auction of carbon allowances for the Global Warming Solutions Act (AB 32) cap-and-trade program. EDF has closely followed the steps CARB has taken to prepare, including participating in their successful “practice auction” this past August.  In order to shed some light on the nuts and bolts of how these auctions will work and the process going forward, we’ve put together an Auction FAQ factsheet to help answer some basic questions.

Why is CARB Auctioning CO2 Allowances?

In terms of allowance distribution, the AB32 program includes a combination of free allocation and auctioned allowances.  While it is the cap that ensures that the targeted quantity of emission reductions are achieved – regardless of the choice of type of allowance distribution – there are important differences between auctioning and free allocation relating to issues such as transaction costs, market power, price certainty, and distribution of allowance value.

Perhaps most importantly, auctioning allowances creates proceeds that can be invested in a variety of ways to further the goals of AB32 – for example, financing emission reduction projects in either capped or uncapped sectors, keeping energy prices down, or preparing for the impacts of global warming.  In addition, twenty-five percent of proceeds are actually required to be used in ways that benefit disadvantaged communities.

Another advantage of auctioning CO2 allowances is that it guarantees that all regulated entities have access to allowances on an equal footing. By holding an auction, California ensures that both large and small companies have access to allowances under the same terms, thus reducing the risk that the market becomes dominated by a few big players.

How the Auction Works

The California auction will be using a single-round, sealed-bid, uniform-price format. Under this format, companies submit confidential bids for a specific amount of allowances at specific prices (also called a bid schedule). The highest bidder is allocated their requested quantity of allowances first, then the second highest bidder, etc., until there are no more allowances.  Winning bidders receive the quantity of allowances they bid for at the uniform settlement price, which is determined as the value of the lowest winning bid – or more simply, the price at which the market clears. Regardless of their original bids, all winning bidders pay the same price. This auction format creates a clear market price, which is crucial for investors.

Using Auction Revenue to Further Emissions Reductions

There are abundant opportunities to invest the auction proceeds into sectors that deliver greenhouse gas reductions in California – from clean energy to clean transportation, energy storage and clean tech finance and investment. Not only do these investments further California’s greenhouse gas reduction goals, they can also provide considerable economic benefits, as well as substantial health co-benefits, while helping set California’s path towards sustainable economic growth. To learn more about investing AB32 auction proceeds to grow California’s clean economy, read the EDF Invest to Grow report.

Auctions will play an important role in California’s cap-and-trade program; they encourage a more stable market and create proceeds that can be used to make California’s efforts to cut climate change pollution even more effective. For more details about how the auctions are designed, how the bidding process works and what to expect on November 14th, see EDF’s Auction FAQ factsheet and the California Air Resources Board’s website (here).

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