Episode 5 of Paul G. Allen and Morgan Spurlock’s We The Economy explores the hidden value of natural capital:
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.
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.
Put Republican Hank Paulson, Independent Mike Bloomberg, and Democrat Tom Steyer together, and out comes one of the more unusual – and unusually impactful – climate reports.
Tri-partisan coalition tackles climate change
The report is significant, first, because we have a tri-partisan group spanning George W. Bush’s treasury secretary Paulson, former mayor of New York Bloomberg, and environmentalist investor Steyer – all joining forces to get a message through.
That list of names alone should make one sit up and listen.
Last time a similar coalition came together was in the dog days of 2009, when Senators Lindsay Graham, Joe Lieberman, and John Kerry were drafting the to-date last viable (and ultimately unsuccessful) Senate climate bill.
Global warming is hitting home
Next, Risky Business is important because it shows how climate change is hitting home. No real surprise there for anyone paying attention to globally rising temperatures, but the full report goes into much more granular details than most, focusing on impacts at county, state and regional levels.
Risky Business employs the latest econometric techniques to come up with numbers that should surprise even the most hardened climate hawks and wake up those still untouched by reality. Crop yield losses, for example, could go as high as 50 to 70 percent (!) in some Midwestern and Southern states, absent agricultural adaptation.
The report is also replete with references to heat strokes, sky-rocketing electricity demand for air conditioning, and major losses from damages to properties up and down our ever-receding coast lines.
Not precisely uplifting material, yet this report does a better job than most in laying it all out.
Financial markets can teach us a climate lesson
Finally, and perhaps most significantly, Risky Business gets the framing exactly right: Climate change is replete with deep-seated risks and uncertainties.
In spite of all that we know about the science, there’s lots more that we don’t. And none of that means that climate change isn’t bad. As the report makes clear, what we don’t know could potentially be much worse.
Climate change, in the end, is all about risk management.
Few are better equipped to face up to that reality than the trio spearheading the effort; Paulson, Bloomberg and Steyer have made their careers (and fortunes) in the financial sector. In fact, as United States Treasury secretary between 2006 and 2009, Paulson was perhaps closest of anyone to the latest, global example of what happens when risks get ignored.
We cannot – must not – ignore risk when it comes to something as global as global warming. After all, for climate, much like for financial markets, it’s not over ‘til the fat tail zings.
This open letter, co-authored by Gernot Wagner and first published on EDF Voices, was written in response to a New York Times article citing Dr. Roger Bezdek’s report on “The Social Costs of Carbon? No, The Social Benefits of Carbon.”
Dear Dr. Bezdek,
After seeing so many peer-reviewed studies documenting the costs of carbon pollution, it’s refreshing to encounter some out-of-the-box thinking to the contrary. You had us with your assertion that: “Even the most conservative estimates peg the social benefit of carbon-based fuels as 50 times greater than its supposed social cost.” We almost quit our jobs and joined the coal lobby. Who wouldn’t want to work so selflessly for the greater good?
Then we looked at the rest of your report. Your central argument seems to be: Cheap fuels emit carbon; cheap fuels are good; so, by the transitive property of Huh?!, carbon is good. Pithy arguments are fine, but circular ones aren’t.
First off, cheap fuels are good. Or more precisely, cheap and efficient energy services are good. (Energy efficiency, of course, is good, too. Inefficiency clearly isn’t.) Cheap energy services have done wonders for the United States and the world, and they are still doing so. No one here is anti-energy; we are against ruining our planet while we are at it.
The high cost of cheap energy
Yes, the sadly still dominant fuels—by far not all—emit carbon pollution. Coal emits the most. Which is why the cost to society is so staggering. Forget carbon for a moment. Mercury poisoning from U.S. power plants alone causes everything from heart attacks to asthma to inhibiting cognitive development in children. The latter alone is responsible forestimated costs of $1.3 billion per year by knocking off IQ points in kids. All told, coal costs America $330 to 500 billion per year.
Put differently, every ton of coal—like every barrel of oil—causes more in external damagesthan it adds value to GDP. The costs faced by those deciding how much fossil fuel to burn are much lower than the costs faced by society.
None of that means we shouldn’t burn any coal or oil. It simply means those who profit from producing these fuels shouldn’t get a free ride on the taxpayer. Conservative estimates indicate that carbon pollution costs society about $40 per ton. And yes, that’s a cost.
Socializing the costs is not an option
As someone with a Ph.D. in economics, Dr. Bezdek, you surely understand the difference between private benefits and social costs. No one would be burning any coal if there weren’t benefits to doing so. However, the “social benefits” you ascribe to coal are anything but; in reality they are private, in the best sense of the word.
If you are the one burning coal, you benefit. If you are the one using electricity produced by burning coal, you benefit, too. To be clear, these are benefits. No one disputes that. It’s how markets work.
But markets also fail in a very important way. The bystanders who are breathing the polluted air are paying dearly. The costs, if you will, are socialized. Society—all of us—pays for them. That includes those who seemingly benefit from burning coal in the first place.
Your claim that what you call “social benefits” of coal dwarf the costs is wrong in theory and practice. In theory, because they are private benefits. As a matter of practice because these (private) benefits are very much included in the calculations that give us the social costs of coal. What you call out as the social benefits of coal use are already captured by these calculations. They are part of economic output.
Our indicators for GDP do a pretty good job capturing all these private benefits of economic activity. Where they fail is with the social costs. Hence the need to calculate the social cost of carbon pollution in the first place.
So far so bad. Then there’s this:
Plants need carbon dioxide to grow, just not too much of it
In your report, you also discuss what you call the benefits of increases in agricultural yields from the well-known carbon dioxide fertilization effect. It may surprise you to hear that the models used to calculate the cost of carbon include that effect. It turns out, they, too, in part base it on outdated science that ought to be updated.
But their science still isn’t as old as yours. For some reason, you only chose to include papers on the fertilization effect published between 1902 and 1997 (save one that is tangentially related).
For an updated perspective, try one of the most comprehensive economic analysis to date, pointing to large aggregate losses. Or try this Science article, casting serious doubt on any claims that carbon dioxide fertilization could offset the impacts on agricultural yields from climate change.
Farmers and ranchers already have a lot to endure from the effects of climate change. There’s no need to make it worse with false, outdated promises.
Coal lobby speaks, industry no longer listens
It’s for all these reasons that, to borrow the apt title to the otherwise excellent New York Times story that ran your quote: “Industry Awakens to Threat of Climate Change”. And it’s precisely why the U.S. government calculates the social cost of carbon pollution. Yes, sadly, it’s a cost, not a benefit.
To our readers: Want to get involved? The White House has issued a formal call for public comments on the way the cost of carbon figure is calculated, open throughFebruary 26. You can help by reminding our leaders in Washington that we need strong, science-based climate policies.
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.
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.