Climate 411

The Silver Bullet Of Climate Change Policy

By Gernot Wagner / Published: January 24, 2014

(This post originally appeared on Forbes)

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.

Source: NYU

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.

Also posted in Greenhouse Gas Emissions, Policy / Authors: / Read 1 Response

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

By Gernot Wagner / Published: January 23, 2014

(This post originally appeared on 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 26th.

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

Also posted in Greenhouse Gas Emissions, Science, Setting the Facts Straight / Read 1 Response

Correcting the maths of the “50 to 1 Project”

By Gernot Wagner / Published: October 31, 2013

A nine-minute video, released earlier this fall, argues that climate mitigation is 50 times more expensive than adaptation. The claims are based on calculations done by Christopher Monckton. We analyzed the accompanying “sources and maths” document. In short, the author shows a disconcerting lack of understanding of climate science and economics:

  1. Fundamental misunderstanding of basic climate science: Pre-industrial levels of carbon dioxide (CO2) were at around 280 parts per million (ppm).[i] One of the most commonly stated climate policy goals is to keep concentrations below 450 ppm CO2. Monckton, oddly, adds 280 and 450 to get to 730 ppm as the goal of global stabilization efforts, making all the rest of his calculations wildly inaccurate.
  2. Prematurely cutting off analysis after ten years: Monckton calculates the benefits of the carbon tax over a ten-year time horizon. That is much too short to see the full effects of global warming or of the policy itself. Elevated carbon levels persist for hundreds to thousands of years.[ii]
  3. Erroneously applying Australian “cost-effectiveness” calculation to the world: This may be the most troubling aspect from an economist’s point of view. Monckton first calculates the effect of the Australia-only tax on global temperatures, which is unsurprisingly low, as Australia accounts for only 1.2% of world emissions. Next, he calculates the tax’s resulting “cost-effectiveness” — defined as the Australian tax influencing global temperatures. No surprise once again, that influence is there, but Australia alone can’t solve global warming for the rest of us. Then, Monckton takes the Australia-only number and scales it to mitigate 1ºC globally, resulting in a purported cost of “$3.2 quadrillion,” which he claims is the overall global “mitigation cost-effectiveness.” But this number simply represents the cost of avoiding 1ºC of warming by acting in Australia alone. Monckton has re-discovered the fact that global warming is a global problem! The correct calculation for a globally applied tax would be to calculate cost-effectiveness on a global level first. If Australia’s carbon price were to be applied globally, it would cut much more pollution at a much lower cost. And that, of course, is very much the hope. Australia, California, and the European Union are called “climate leaders” for a reason. Others must follow.

What’s the real cost of cutting carbon? The U.S. government’s estimate of the cost of one ton of CO2 pollution released today is about $40.[iii] That’s also the optimal price to make sure that each of us is paying for our own climate damages. Any policy with a lower (implied) carbon price—including the Australian tax—easily passes a benefit-cost test.

With all due respect Lord Monckton, 3rd Viscount of Brenchley, your maths are way off.

[i] “Summary for Policymakers,” IPCC Fifth Assessment Report, Working Group I (2013).

[ii] Results differ across scenarios, but a rough rule of thumb suggests that approximately 70% of the ‘peak enhancement level’ over the preindustrial level of 280 ppm perseveres after 100 years of zero emissions, while approximately 40% of the ‘peak enhancement level’ over the preindustrial level of 280 ppm persevered after 1,000 years of zero emissions (Solomon, Susan, Gian-Kasper Plattner, Reto Knutti and Pierre Friedlingstein, “Irreversible climate change due to carbon dioxide emissions” Proceedings of the National Academy of Sciences 106, no. 6 (2009): 1704-1709). Note that this refers to the net increase in carbon dioxide in the atmosphere, not the exact molecule. Archer, David, Michael Eby, Victor Brovkin, Andy Ridgwell, Long Cao, Uwe Mikolajewicz, Ken Caldeira et al. “Atmospheric lifetime of fossil fuel carbon dioxide.” Annual Review of Earth and Planetary Sciences 37 (2009): 117-134 discusses these two often confused definitions for carbon’s ‘lifetime,’ and concludes that 20-40% of excess carbon levels remain hundreds to thousands of years (“2-20 centuries”) after it is emitted. Each carbon dioxide molecule has a lifetime of anywhere between 50 to 200 years, according to the U.S. Environmental Protection Agency’s “Overview of Greenhouse Gases: Carbon Dioxide Emissions.” The precise number is under considerable scientific dispute and surprisingly poorly understood. (Inman, Mason, “Carbon is forever,” Nature Reports Climate Change 20 November 2008)

[iii] The precise value presented in Table 1 of the Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 for a ton of carbon dioxide emitted in 2015, using a 3% social discount rate increased is $38. For 2020, the number is $43; for 2030, the number increases to $52. All values are in inflation-adjusted 2007 dollars. For a further exploration of this topic, see Nordhaus, William D. The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. Yale University Press (2013) as only one of the latest examples summarizing this kind of analysis. Nordhaus concludes that the optimal policy, one that maximizes net benefits to the planet, would spend about 3% of global GDP.

Many thanks to Michelle Ho for excellent research assistance.

Also posted in Basic Science of Global Warming, International / Comments are closed

The Cost to Meet Clean Air and Environmental Standards Comes Down (Again)

By Mandy Warner / Published: June 11, 2013

It is almost getting old for us to write about this … but it needs to be repeated.

As power plant pollution control projects continue, we are seeing – yet again — that the cost of meeting clean air standards, like the Mercury and Air Toxics Standards for power plants (MATS), has fallen.

Unfortunately, that hasn’t stopped some major power companies and other opponents from trying to undermine clean air and environmental standards.

However, this past quarter American Electric Power (AEP), NRG, and FirstEnergy each told their investors that their anticipated costs for meeting environmental standards dropped.

As you can see on our chart, AEP has lowered its estimated costs of following environmental standards by half, from a high of $8 billion down to $4 to $5 billion.

AEP was the top emitter of mercury, carbon dioxide, nitrogen oxide, and sulfur dioxide in 2011 among the top 100 power producers in the U.S.

And … AEP is a leader in the lawsuit to halt the Mercury and Air Toxics Standards.

As our chart also shows, FirstEnergy has lowered their cost estimate for complying with the Mercury and Air Toxics Standards by nearly 70 percent.

FirstEnergy’s estimate dropped from a high of $3 billion down to $925 million (which is $50 million lower than they estimated last quarter).

FirstEnergy was the sixth highest emitter of mercury in 2011 among the top 100 power producers, and is also challenging the Mercury and Air Toxics Standards in court.

The third company on our chart, NRG, has lowered its costs for complying with environmental standards from $730 million to $530 million, a reduction of more than 25 percent.

NRG was the fourth highest emitter of mercury in 2011 among the top 100 power producers.

These three companies are just a few of the power companies that have decreased their cost estimates for complying MATS and other environmental standards in recent years.

The tens of billions of dollars in expected health benefits from the Mercury and Air Toxics Standards has not decreased, though.

The Mercury and Air Toxics Standards will provide crucial emission reductions of toxic pollutants including mercury, acid gases, sulfur dioxide, and chromium.

It will save thousands of lives every year, prevent heart attacks and asthma attacks, and help protect the hundreds of thousands of babies born in America every year who are exposed to unsafe levels of mercury in the womb. And that is priceless.

It’s important that we keep in mind these misguided “sky is falling” claims about environmental compliance costs as EPA carries out its responsibilities under the nation’s clean air laws to address carbon pollution from power plants.

The time tested history of the Clean Air Act is quite the opposite – the sky is clearing, and at far less than the costs predicted by industry.

Also posted in Clean Air Act, Health, News, Policy / Comments are closed

New IEA Report Sets a Road Map to a Cleaner Energy Future

By Nat Keohane / Published: June 10, 2013

Today, the International Energy Agency released a special report of its World Energy Outlook, entitled Redrawing the Energy-Climate Map. The report is notable not only for its substantive conclusions – but for what it signifies.

First, the substance:

The report starts by emphasizing that energy-related CO2 emissions are a crucial driver of global warming, that they are increasing rapidly, and that as a result the world is not on target to keep concentrations of greenhouse gases below the level that would provide even a fifty-percent probability of limiting the increase in average global temperatures to two degrees – a commonly cited benchmark to prevent the worst impacts of climate change.  Standard fare, perhaps – but noteworthy nonetheless coming from the world’s leading energy authority.

A road map toward a more secure future

The key finding of the report — what makes it required reading — is the analysis of what the IEA calls its “4-for-2˚C scenario.”

The IEA identifies a package of four policies that could keep the door open to 2 degrees through 2020 – at no net economic cost to any individual region or major country, and relying only on existing, widely available technologies:

  1. Specific energy efficiency measures in transport, buildings, and industry (1.5 GT savings in 2020/49% of the total package)
  2. Limiting construction and use of the least-efficient coal-fired power plants (640 MT/21%)
  3. Minimizing methane emissions from upstream oil and gas production (550 MTCO2e/18%)
  4. Accelerating the partial phaseout of fossil fuel subsidies (360 MT/12%)

The IEA estimates that these four measures would reduce energy-related GHG emissions by 3.1 GT CO2-eq in 2020, relative to IEA’s “New Policies” reference scenario – corresponding to 80% of the reduction required to be on a 2-degree path.

Take a look at this chart, from IEA’s report, that summarizes the policies:

(Source: World Energy Outlook Special Report, 2013)

Here’s a second chart, also from IEA’s report. This one makes the key point about no net economic costs:

(Source: World Energy Outlook Special Report, 2013)

Four policies, using widely available technologies, imposing no net economic cost on any individual region or major country, that put the world in the position to make the turn to climate safety.

That’s the headline.

The cost of delay

IEA’s report also discusses the vulnerability of the energy sector to climate change, and emphasizes that delaying climate action will drive up the costs of meeting a 2 degree target later.  The report estimates that putting off action until 2020 would trim near-term investment by $1.5 trillion in the short run – but at the cost of requiring an additional $5 trillion to be spent in subsequent years.  In present-value terms, using a 5% discount rate, delay doubles the cost of action: from $1.2 trillion to $2.3 trillion.

This is an argument that we at EDF — and others — have been making for some time. But it is a crucial one nonetheless – and the IEA analysis gives some added analytical weight to the argument.

Not an oil shock, but a climate shock

These findings are especially welcome coming from IEA, a world-respected authority on energy markets and policy that was founded to facilitate international coordination among oil-consuming countries.  Indeed, the messenger may be nearly as important as the message.  What launched the IEA was the 1973-4 oil crisis.  Now, nearly forty years later, the IEA report makes clear that the real energy-related threat to economic prosperity is not an oil shock, but a climate shock.

Back to the big picture

To be sure, the four policies analyzed in this report won’t fully suffice to address climate change in the long run: indeed, much more ambition will be needed.

Under the “4-for-2˚C” scenario, the IEA estimates that world energy-related emissions will peak and start to decline before 2020 – but we’ll still need concerted action on a global scale to get greenhouse gas emissions onto a steepening downward trajectory.

Take a look at one more chart from IEA’s report:

(Source: World Energy Outlook Special Report, 2013)

Acknowledging this point, IEA’s report underscores the importance of continued innovation in low-carbon technologies in transport and power generation (including carbon capture and storage), and highlights the vital importance of a long-term carbon price.

Beyond the scope of the report, there’s much to be done outside the energy sector – in particular by curbing tropical deforestation, and promoting the spread of agricultural practices that can achieve the “triple win” of greater productivity, greater resilience to climate, and lower environmental impacts (including GHG emissions).  And all of these efforts must be carried out in tandem with the overarching challenge of promoting broad-based economic prosperity around the globe, as President Jim Yong Kim of the World Bank has repeatedly emphasized.

But the bottom line is that one of the most hopeful publications on climate change you’ll read this year has come from the International Energy Agency, of all places.  Here is a road map toward a cleaner, more secure future.  Now it’s up to us to take it.

Also posted in Energy, Greenhouse Gas Emissions, News, Policy / Read 1 Response

The Boring Side of Climate is More Tangible to Most

By Keith Gaby / Published: May 8, 2013

(Originally posted yesterday on EDF Voices)

A college professor friend of mine once decided to write the least sexy book possible. Lots of academics were trying to be as edgy or trendy and, in keeping with his contrarian personality, he chose to write about insurance in American literature. Those of us working to communicate the impacts of climate change might do well to follow his example.

Environmental groups, including EDF, often focus on the drama of climate change. We do it because we’re already seeing some scary changes in the weather – from severe drought to stronger storms – and because it’s important to give the public a vivid picture of what’s happening. But there are limits to that approach. For example, people who are resistant to a message about global warming, or just not interested, will tune out such information, no matter how dramatic the presentation.

Many people don’t feel an urgency about climate change because it is such a big and remote issue. Something that is “global” necessarily feels distant. Problems that play out over decades and centuries, that involve predictions about the year 2100, are just not relevant to most people. But the truth is that climate change is starting to touch those everyday, boring things that people do care about – like insurance rates and taxes and property values.

Climate affects your 401K and other boring things

Now, boring is not generally a useful attribute in communications. But there are exceptions. You probably take a great interest in such dry and tedious matters as your 401(k) statement,  your property tax bill, or changes to the escrow on your mortgage payment. Why? Because they affect your bank account. And it may be that the best way to reach some people is to let them know that climate change, too, is doing just that.

For example, many New York area residents whose homes were severely damaged by Superstorm Sandy have already seen a 25% premium increase from the National Flood Insurance Program. The New Orleans Times-Picayune reports that thousands of residents there will face a choice of relocating or seeing increases in their insurance bill of $15,000 to $25,000.  And the business group CERES questions whether the insurance industry as a whole is prepared for the financial impacts of climate change.

This is an issue that re-insurance giant Munich Re has been studying for some time.  (If there’s something more boring than insurance, it’s re-insurance.  These are the companies that, essentially, insure the insurance companies against their risks and payouts.)  The company sees that warming oceans and higher sea levels are causing stronger storms and bigger surges of water around the globe – which, in turn, causes greater destruction of property and bigger insurance claims. So Munich Re has reasonably concluded that climate change will affect its bottom line. Which means that it will affect your bottom line, as well.

The non-environmentalist would rather save on their grocery bill than save polar bears

Of course, the effects of climate change are not limited to insurance rates. Municipal budgets have to absorb the cost of infrastructure changes, and recovery costs, associated with extreme weather.  Food prices are affected by crop losses due to record droughts.  And all of these costs get spread through the economy as the federal government pays for storm damage and recovery, and insurance and food costs are passed along to every one of us. These are issues that hit home to all those voters who don’t spend ten seconds a year thinking about the fate of polar bears.

It’s our job in the environmental community to open up a line of communication with these people.  We need to lay out the boring facts and make the boring case.  Let’s show those Americans not yet interested in climate change it is going to hit them in the wallet – whether or not they’re interested in the issue.  And by acting together, now, we can all save a lot of money…and, as a bonus, our grandchildren will get a healthier and safer world.

Also posted in Policy / Comments are closed