Market Forces

Barriers to tapping the potential of carbon markets for agriculture

By / Bio / Published: January 21, 2021

An EDF analysis of carbon credits for rice growers shows great climate and cost-savings potential, but is that enough for farmers to participate?

In 2015, rice became the first crop for which agricultural carbon credits were valid for compliance in the California cap-and-trade system. Unfortunately, as of September 2020, no compliance credits have been generated. A newly released report by EDF explores the reasons why.

In the U.S., agricultural greenhouse gas emissions comprise approximately 10% of the economy-wide total emissions. The share of emissions from agriculture is larger for non-CO2 GHGs, making up approximately 78% of the U.S. total for nitrous oxide and 38% for methane.

Policymakers are eager to find mitigation opportunities in the agriculture sector, best evidenced by the bipartisan Growing Climate Solutions Act, which seeks to enable voluntary credit markets for producers to mitigate climate change.

As both policymakers and producers eye the potential of the agriculture sector to grow climate solutions, it’s worth taking a closer look at both the opportunities and the challenges that must first be addressed to tap this potential.

A case study of carbon credits for rice

EDF’s work on agricultural carbon credits began in earnest in 2007 after receiving the first of several U.S. Department of Agriculture grants to investigate how to bring agricultural emissions reduction credits to market. The objective was to design crediting systems that achieve the dual benefits of reducing GHG emissions while also providing meaningful revenue opportunities to landowners.

An EDF discussion paper summarizes some of the underlying analytics of these efforts for a series of crops and geographies. One specific example from the paper — rice in California — highlights both the carbon- and cost-saving opportunities associated with conservation practices like bailing and drainage, and the challenges associated with agricultural credits as a viable abatement measure.

The opportunity: Lowering costs and emissions

Rice is a GHG-intensive crop. It emits twice the amount of emissions per calorie as wheat, three times that of maize, and accounts for 5-20% of global methane emissions. EDF’s research focused on the nation’s two most intensive rice production regions — California’s Sacramento Valley and Mid-Southern U.S. These regions produce 26% and 72% of the domestic rice supply, respectively.

Our analysis began by using a biogeochemical model, DeNitrification-DeComposition (DNDC), to assess the abatement potential for current (baseline) practices and other lower-GHG alternatives in the California rice region. This led our scientists to discover a fairly large overall mitigation potential of more than 0.6 MMt-CO2e-100/year, or approximately 15%, of overall California rice emissions.

We then developed estimates of abatement costs by practice through cost budgets and consultation with agronomists. Combining this with the GHG modeling yielded the following marginal abatement cost curves (one for each practice).

Marginal Abatement Cost Curves for Rice Practices in California. Abbreviations: N (number of fields); WF (winter flooding of rice paddies); NWF (no winter flooding). WF/NWF practices follow a 60/40% distribution, historically, and play a role in determining the scale of achievable reductions.

These graphs illustrate that for all but one practice there are negative abatement costs with averages ranging from -$29.45/acre to -$0.45/acre, suggesting potential savings for farmers from implementing practice changes. For yields, the DNDC model projected that yields would remain relatively unchanged, aside from dry seeding, for which growers would experience an average 4.5% decrease.

These findings show great promise in terms of GHG abatement potential and cost savings for producers with minimal yield impacts (dry seeding aside). So, why aren’t growers already pursuing these practices? What barriers are getting in the way?

Three key barriers to entry

Our analysis identified a few potential barriers for farmers to generate carbon credits.

  1. Weak price signals

Understanding why growers are passing up potential cost savings from practices that reduce GHG emissions requires a closer look at farm economics. Adam Jaffe offers a useful typology for the various barriers to adoption, some of which I have identified below.

Putting the practice costs and yield impacts together, we can imagine a scenario where we have a carbon market in place and a carbon price of $10/ton (the California spot price at the time this work was carried out). In this instance, we’d find that with an average 0.7 ton/acre reduction, most rice growers would be looking at potential revenue from the market of approximately 0.5% of their overall crop sales revenue (typically $1,500/acre), or 2.6% of their net profit (approximately $250/acre), not including further potential gains from the negative abatement costs of certain practices and locations.

Unfortunately, in context of the overarching farm economics, this makes for a weak incentive.

If we now imagine a new scenario with a carbon price closer to today’s social cost of carbon ($42/ton), we find that the potential revenue from participating in the market rises closer to 2% of crop sales revenue and 11% of net profit. At this price, the incentive appears to be substantially more robust, which tells us that, from a social standpoint and with a strong price signal, the market could be viable. But as it currently stands, conditions are falling short of this potential.

  1. Large transaction costs

Another critical consideration for engaging in any market is transaction costs — for GHG markets in particular, monitoring, reporting and verification (MRV) costs.

Our analysis found transaction costs to be significant on a per-grower basis at approximately $14/acre for an average 1,000-acre California farm. At a market price of $10/ton, transaction costs are double the average expected return from carbon markets of $7/acre, providing a steep disincentive. Even with credits priced at the higher social cost of carbon ($42/ton), transaction costs would still equal nearly 50% of potential revenue, essentially cutting their expected financial gains in half.

Further economic modeling showed the importance of allowing a way to aggregate projects for MRV transations due to the very large third-party fees incurred to verify reductions. However, even if growers use aggregation as a means to cost-share, it will be critical to find ways to use technologies like remote sensing and automated data generation and analysis to streamline this process, realize savings and still guarantee accurate verification.

  1. Changing behavior is an obstacle in itself

Finally, behavioral factors represent a hurdle that cannot be ignored — the hidden additional cost of switching practices. This cost is difficult to quantify precisely, but we know from experience that behavior is hard to shift and farming practice changes typically require planning and close coordination with a number of consultants and business partners.

Understanding this, we performed a survey for corn and almond growers, asking how much participants in a carbon market would need to be paid to reduce fertilizer applications, and thereby decrease nitrous oxide emissions. To isolate the behavioral barriers, we designed the survey to encourage the farmers to assume no additional costs, risks or yield impacts.

Their responses ranged from $18-40/acre, when a representative farmer might only receive $7/acre in returns with a $10/t carbon price. This gap in the valuation likely represents factors such as personal or cultural values and aversion to risk and uncertainty that may be very difficult to overcome using market incentives alone[1].

Managing risk and risk perceptions is a challenge that must be addressed to see widespread uptake of mitigation practices.

Where do we go from here?

The agricultural sector has the potential to play a key role in contributing to national climate goals.

Crediting systems are just one tool to support this, but more research and pilot programs are needed to help overcome the barriers to entry, increase confidence in high-quality and cost-effective credits, and also evaluate and correct for potential inequities and injustices.

EDF is launching a new phase of research dedicated to this work, in addition to developing complementary finance and policy tools that correct for existing disincentives and inequities to create a more just and resilient food system.

With the right combination of tools in the toolbox, we can unleash the power of carbon markets to boost long-term resilience on the farm and beyond.

 

[1] It is important to note that all of the numbers depicted above represent averages, and there are certainly cases for which incentives are large at the individual level, and some growers may have zero or even negative switching costs, so many farmers have ripe potential for carbon market participation.

 

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What a small country’s successes and mistakes can teach us about emission pricing

By / Published: January 21, 2020

I’m from Aotearoa, New Zealand, and I really love its land and people, but I am fully aware that from a global perspective it appears pretty insignificant – that’s actually one of its charms.  But being small doesn’t mean you can’t make big contributions including toward stabilizing the climate. This recently published article highlights some lessons New Zealand’s experience with emissions trading can offer other Emissions Trading System (ETS) designers at a time when effective climate action is ever more urgent.

Talking intensively to ETS practitioners and experts around the globe about their diverse choices and the reasons why they made them has made me acutely aware of the need to tailor every ETS to local conditions.  In a complex, heterogeneous world facing an existential crisis, diversity in climate policy design makes us stronger and frankly, improves the odds that the young people we love will live in a world where they can thrive.

New Zealand created the second national emissions trading system in 2008, and the system established a number of firsts, some of which have been repeated widely, like output-based allocation of allowances to combat leakage risk.  Others offer cautionary tales, like linking a small country’s emissions trading market to a large emissions trading market over which you have little control.

Simplicity helps make an ETS more manageable and effective

New Zealand’s small scale makes simplicity a key virtue. Our regulators are well educated, but there just aren’t many of them.  This simplicity would also be a strength in a country with capability constraints, or where corruption is a problem and simplicity naturally increases transparency and reduces opportunities for manipulation.

Regulating fossil-fuel production and imports (that inevitably lead to predictable amounts of emissions – in the absence of effective carbon capture and storage) at the first point of commercialization, another first, made monitoring simple and, in the New Zealand context, minimized the number of regulated agents needed to cover almost 100% coverage of energy-related emissions including all domestic transport.

An ETS needs to match a country’s profile and culture

New Zealand’s small scale and our unusual emissions profile (around half our emissions are biological emissions from agriculture – cow burps and other unmentionables – and lots of land ripe for reforestation) led New Zealand to aim for an ‘all sources – all sectors’ coverage of emission pricing – and this worked well for our politics.  In New Zealand ‘fairness’ is a critical cultural value.  New Zealand’s ETS covers energy, transportation and industrial process emissions but also deforestation, reforestation, and fugitive emissions from fossil fuel production and landfill waste management.  We are still working out how to cover those challenging cows in a way that allows rural communities to thrive – with the current intention being to regulate with emission pricing at the farm level starting in 2025.

The cultural value of fairness also led to a strong linkage between the motivations for free allocation and th methods chosen.  Sectors and companies (sometimes pretty much the same thing in NZ) who lobbied for free allocation had to make a logical case that was publicly scrutinized. Lump-sum allocations were given as compensation to those who were losing the value of stranded assets – e.g. owners of pre-1990 forests, including Māori Iwi (tribes) who lost some of the value of forests they had recently received in Treaty settlements when deforestation began to attract carbon liabilities.  Output-based allocation is still provided for industrial activities that are emissions intensive and trade exposed and therefore face a risk of leakage of these economic activities to other countries where climate policy is weaker.  By effectively subsidizing the activities that might move, output-based allocation reduces that risk.

Political instability can negatively impact markets

Not all experiences have been positive however.  As the report highlights, New Zealand’s ETS has suffered from a lack of policy stability and hence lack of emission price stability.  This was partly because our emissions price was largely determined by international markets (from 2008 to mid-2015, New Zealand companies could buy and surrender unlimited amounts of international Kyoto units such as those from the Clean Development Mechanism and Joint Implementation).  New Zealand’s emission prices bobbed like a cork on the international market. Another critical flaw: not embedding our ETS firmly in a long-term vision for low-emissions transformation and within a wider non-political institutional framework that gives predictability of purpose in the inevitable ETS evolutionary process.

The ability to guide, enable and incentivize dynamic efficiency (e.g. efficient low-emissions investment) has always been a key argument for emissions pricing, but, as a profession we economists have paid too little attention to the political and cultural stability that is critical to enable this. Policy makers need to regularly adapt and update policies. That process of policy evolution can help guide us efficiently through a low-emissions transformation, or, in the face of powerful vested interests and strong temptations to globally free-ride, it can open up repeated opportunities to undermine ambition.

New Zealand is now engaged in the next step of its ETS evolution, learning from others and through critical reflection on our own positive and negative experiences, but continuing to innovate and tailor ETS solutions to our own unusual circumstances. The direct impact on global emissions will be small whatever New Zealand does with its ETS, but the lessons and the example that even small yet significant  countries can act and find new solutions, will hopefully help and inspire others.

Kia kaha Aotearoa

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How renewables, natural gas and flat demand led to a drop in CO2 emissions from the US power sector

By / Bio / Published: August 30, 2019

New state-by-state research shows significant reductions across the country from 2005-2015

 Decarbonizing the power sector in the United States will be critical to achieving the goal of a 100% clean economy by 2050 – especially since reaching “net-zero” greenhouse gas emissions across the economy means that other energy-using sectors such as buildings and transport will increasingly need to be electrified, switching away from direct fossil fuel use and relying on low-carbon electricity instead. Demand for electricity is therefore very likely to grow in the future – which makes it critical that its CO2 emissions sharply decrease through the accelerated deployment of low carbon technologies, such as wind and solar power, in the decades ahead.

US power sector CO2 emissions, 1990-2015

For now, US power sector CO2 emissions appear to have turned a corner. While CO2 emissions from the U.S. power sector increased between 1990 and 2005, they peaked shortly thereafter, and then decreased to the point that by 2015, they had fallen by 20% (or 480 million metric tonnes CO2) compared to 2005.

In recently published research, my co-authors and I wanted to understand the drivers behind the drastic fall in the country’s—and individual states’–power sector CO2 emissions, and in particular the role that low carbon technologies such as wind and solar power have already played in reducing US power sector CO2 emissions. Our analysis, published in Environmental Research Letters  used an approach called index decomposition analysis and found that natural gas substituting for coal and petroleum coupled with large increases in renewable energy generation—primarily wind—were responsible for 60% and 30%, respectively, of the decline in CO2 emissions from the US power sector between 2005 and 2015.

Renewable growth in red states

Most of the emissions reductions driven by renewable energy growth came from Texas and states in the Midwest — Iowa, Kansas, Illinois and Oklahoma. While many of these states are not necessarily known for supporting aggressive climate policies, the combination of federal tax credits, state energy policies, decreasing costs of renewables and windy conditions appears to have provided powerful support for renewable energy deployment.

Texas, in particular, is an interesting case. In 2005, it was the leading emitter of U.S. power sector CO2 emissions across the country. But by 2015, its gross reductions from wind energy totaled 27 million metric tons, or more than 5% of the total net US reduction in power sector CO2 emissions since 2005 (i.e., a sixth of the total US reduction attributed to renewables). The state achieved its final renewable portfolio standard (RPS) target in 2008—seven years ahead of its 2015 goal. In addition to reduced costs of turbine technologies, federal tax credits and positive wind conditions also likely played a role in wind’s growth.

Wind generation in Texas, Iowa, Kansas, Illinois and Oklahoma together contributed half of the renewables-related emission reductions (70Mt or 3%-points out of the 20% reduction in US power sector CO2 emissions since 2005).

Over the same period, many states that had relied heavily on coal like Pennsylvania, Georgia, Alabama and Florida, reduced emissions by substituting natural gas for coal in electricity generation. While that prompted a decline in CO2 emissions, it’s important to note that while natural gas emits less CO2 emissions than coal and petroleum when producing electricity it is still a source of CO2 emissions and can only take us so far in decarbonizing the power sector. In addition, methane leakage across the supply chain remains a significant issue–and is not accounted for in this analysis, meaning the overall net greenhouse gas benefit from this natural gas expansion was–potentially significantly—lower.

Need for new policy

While there are positive signs in the power sector—the cost of renewables continues to decline and a growing number of states are taking crucial action to cut CO2 emissions, these trends as well as the specific factors identified in this analysis cannot be relied upon to achieve the deep emissions reductions needed in the decades ahead.

U.S. power sector CO2 emissions are projected to remain relatively flat over the next decade and rise slowly after that, absent new policies. This is particularly significant given that, much of the decarbonization of other sectors such as buildings and transportation will need to rely heavily on electrification.

Ultimately, new policy interventions are necessary, including strong limits on climate pollution – not only in the power sector, but across the entire economy to drive reductions at the pace and scale needed for the US to be 100% clean no later than 2050.

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Not all fossil fuel subsidies are created equal, all are bad for the planet

By / Bio / Published: June 13, 2019

This is part two of a five-part series exploring “Policy Design for the Anthropocene,” based on a recent Nature Sustainability Perspective. The first post explored the intersection of policy and politics in the development of instruments to help humans and systems adapt to the changing planet.

A recent International Monetary Fund (IMF) working paper made headlines by revealing that the world is subsidizing fossil fuels to the tune of $5 trillion a year. Every one of these dollars is a step backward for the climate. That much is clear.

Instead of subsidizing fossil emissions, each ton of carbon dioxide (CO2) emitted should be appropriately priced. That’s also where it’s important to dig into the numbers.

It’s tempting to go with the $5 trillion figure, as it suggests a simple remedy: remove the subsidies. At one level, that is precisely the right message. But the details matter, and they go well beyond the semantics of what it means to subsidize something.

Direct subsidies are large

The actual, direct subsidies—money flowing directly from governments to fossil fuel companies and users—are “only” around $300 billion per year. That is still a huge number, and it may well be an underestimate at that. The International Energy Agency’s World Energy Outlook 2014, which took a closer look at fossil subsidies than reports since, put the number closer to around $500 billion; a 2015 World Bank paper provided more detailed methodologies and a range of between $500 billion and $2 trillion.

What all these estimates have in common is that they stick to a tight definition of a subsidy:

Subsidy (noun, \ ˈsəb-sə-dē \)

“a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public,” per  Merriam-Webster.

These taxpayer-funded giveaways are not only not “advantageous to the public,” they also ignore the enormous now-socialized costs each ton of CO2 emitted causes over its lifetime in the atmosphere. (Each ton emitted today stays in the atmosphere for dozens to hundreds of years.)

The direct subsidies also come in various shapes and forms—from some countries keeping the cost of gasoline artificially low, to a $1 billion tax credit for “refined coal” in the United States.

Indirect subsidies are significantly larger

The vast majority of the IMF’s total $5 trillion figure is the unpriced socialized cost of each ton of CO2 emitted into the atmosphere. Each ton, the IMF estimates conservatively, causes about $40 in damages over its lifetime in today’s dollars.

Depending on one’s definition of a subsidy, this may well qualify. It’s a grant from the public to fossil fuel producers and users—something the public pays for in lives, livelihoods and other unpriced consequences of unmitigated climate change.

The remedy here is very different than removing direct government subsidies. It’s to price each ton of CO2 emitted for less to be emitted. The principle couldn’t be simpler: “When something costs more, people buy less of it,” as Bill Nye imbued memorably on John Oliver’s Last Week Tonight recently.

 

https://twitter.com/GernotWagner/status/1128444583229186048

All that goes well beyond semantics of what it means to subsidize. One policy is to remove a tax loophole or another kind of subsidy, the other is to introduce a carbon price. The politics here are very different.

Unpriced climate risks might be much larger still

The $5 trillion figure also hides something else. By using a $40-per-ton figure, the IMF focuses on a point estimate for each ton of CO2 emitted, and a conservative one at that. The number comes from an estimate produced by President Obama’s Interagency Working Group on the Social Cost of Carbon. That’s a good starting point, certainly a better one than the current Administration’s estimate.

But even the $40 figure is conservative. It captures what was quantifiable and quantified at the time. It does not account for many known yet still-to-be-quantified damages. It does not account for risks and uncertainties, the vast majority of which would push the number significantly higher still.

In short, the $5 trillion figure may well convey a false sense of certainty.

In some sense, little of that matters. The point is: there is a vast thumb on the scale pushing the world economy toward fossil fuels, the exact opposite of what should be done to ensure a stable climate.

In another very real sense, the different matters a lot: Politics may trump all else, but policy design matters, too.

By now the task is so steep that it’s simply not enough to say we need to price emissions and leave things at that. Yes, we need to price carbon, but we also need to subsidize cleaner alternatives—in the true sense of what it means to subsidize: to do so for the benefit of the public. Whether that comes under the heading of a “Green New Deal” or not, it is a much more comprehensive approach than one single policy instrument.

This is party 2 of a 5-part series exploring policy solutions outlined in broad terms in “Policy Design for the Anthropocene.” Part 3 will focus on “Coasian” rights-based instruments, taking a closer look at tools that limit overall pollution to create markets where there were none before.

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Policy Design for the Anthropocene

By / Bio / Published: May 10, 2019

There’s no denying we humans are changing the planet at an unprecedented pace. If carbon dioxide in the atmosphere is any guide, that pace is increasing at an increasing rate. For those so mathematically inclined, that’s the third derivative pointing in the wrong direction.

Enter The Sixth Extinction, The Uninhabitable Earth, Falter, or simply the “Anthropocene”—us humans altering the planet to the point where the changes are visible in the geological record, ringing in a new epoch.

A team led by Earth systems scientists Johan Rockström and Will Steffen developed the concept of “planetary boundaries” in 2009. They identified nine major systems where humans are altering fundamental Earth systems—from climate change to land-system change to stratospheric ozone, and gave us now infamous spider graphs summarizing the all-too dire warnings (Figure 1).

Planetary boundaries, tipping points, and policies (Figure 1 from “Policy design for the Anthropocene”)

It is all the more significant, that both Rockström, now director of the famed Potsdam Institute for Climate Impact Research (PIK), and Steffen joined another large, multidisciplinary team ten years later to focus on “Policy design for the Anthropocene.” This team, led by EDF senior contributing economist Thomas Sterner, focused on the solutions.

The good news: there are many.

Table 2 summarizes the crowded field of approaches at the disposal of policymakers. It also shows the decisions to be made when deciding among them.

Policy instruments (based on Table 2 from “Policy design for the Anthropocene”)

How to choose?

Choosing among the many options available quickly moves from policy design to politics.

Take climate change as an all-too prominent example. For one, the obvious first step is to agree that there is a problem in the first place. Denying the problem is not going to get us anywhere near a constructive debate about policy solutions.

One big political decision then is to identify who benefits from acting—or conversely, who pays the costs. If the rights go to the polluter, it’s the victims who pay—all of us, in the case of climate change. If the rights go to society, it’s broadly speaking the polluters who pay. The difference is as stark as between permits on the one hand, and outright bans on the other.

Price or rights-based policies?

Often the decision how to act is among two broad buckets of policies: price or rights-based. The two are broadly speaking two sides of the same coin. Rights generate prices, and prices imply rights.

The difference plays out between carbon pricing and tradable permits. One fixes the price level, the other the amount of emissions. Cue endless academic debates about which instrument is better under which circumstances. Details, of course, do matter.

And this also brings us immediately back to politics. A big difference between price and rights-based policies, is that the latter implies that the political horse-trading doesn’t affect the overall quantity of pollution, at least to a first approximation. Whether tradeable permits are auctioned off—with polluters paying the full price—or whether they are given away for free doesn’t, at first, make a difference. Overall emissions reductions stay the same. I’m saying “at first,” because, any money raised could be spent intelligently on further emissions reductions.

Environmental effectiveness, economic efficiency, political efficacy

The larger point is that (almost) everything is possible. The problems might be dauntingly large. The solution space is similarly large. It’s also clear that no single decision criterion is enough.

Environmental effectiveness is key. Economic efficiency is similarly important.

Achieving the environmental goal is like building a train to the right station. That’s clearly the most important step. Economic efficiency is akin to building the fasted possible train. Just being fast doesn’t help, if the journey goes in the wrong direction. But efficiency implies that one can achieve the same goal at lower cost, or more at the same cost.

But smart policy design, of course, is not enough. It takes political will to get there. Designing policies that pass political muster is clearly one criterion, especially in a polarized environment.

Getting the policy minutiae right is important, but it’s also clear, of course, that politics trumps all. Policies don’t inspire action. Visions of a better future, and a just transition do.

This is party 1 of a 5-part series exploring these policy solutions outlined in broad terms in “Policy Design for the Anthropocene” in more detail. Part 2 will focus on “Pigouvian” price instruments, taking a closer look at fossil fuel subsidies and carbon pricing.

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How smart congestion pricing will benefit New Yorkers

By / Bio / Published: April 9, 2019

This post was co-authored with Maureen Lackner

Last week, New York became the first American city to adopt congestion pricing—a move that should benefit both the city’s crumbling transit system and the environment.

In highly dense areas such as lower Manhattan – where valuable road space is quite limited by its urban geography — congestion pricing allows for a better management for improving vehicle traffic flow. Since the 1950s, economists and transportation engineers have advocated for this market-based measure, which encourages drivers to consider the social cost of each trip by imposing an entrance fee to certain parts of cities—in this case, Manhattan below 60th street. These fees should both discourage driving, thus reducing traffic, while—in New York’s case—raising needed funds for the subway and city buses. These pricing plans have been successful in reducing congestion in places like Singapore and parts of Europe. They have provided additional social benefits, like reducing asthma attacks in children in Stockholm by almost half and cutting traffic accidents in London by 40 percent.

New York will formally introduce this policy instrument in 2021. And while many of the pricing decisions have been deferred, 80 percent of the revenue collected will go to the subway and bus network; 10 percent will go to New York’s commuter rail systems that serve the city. Those setting rates can look to existing pricing models and research to price for success.

Cristobal Ruiz-Tagle, an EDF High Meadows Fellow, spoke with Juan Pablo Montero – a leading environmental economist, fellow Chilean and member of our Economics Advisory Council – about his research on congestion pricing, and what New Yorkers can and should expect.

CRT: What’s the best case scenario of New Yorkers with this pricing plan?

JPM: The latest report from INRIX ranked New York as the fourth most congested city in the United States. New Yorkers lose an average of 133 hours per year in congestion—just sitting in a car and not moving, or moving very slowly. The cost of congestion per year in New York is $9.5 billion—the largest cost in the country. So that’s the starting point.

 To solve the problem, you need to set the congestion fee sufficiently high. In Santiago, we ran a study and found it should be around $14 per day. In New York as far as I understand, they’re proposing for passenger vehicles of around $12. It’s a little lower than what we see in London (£ 11.50), but I expect New Yorkers are still going to get most of the benefit from less congestion.

 The most important element of the plan is what you do with the resources collected. The proposal here is to improve public transportation. We did a study on this in Santiago and showed that if you don’t put the money back into the transportation system, the poor will be much worse off. We’re proposing something similar in Santiago–that you use the funds to both improve infrastructure and lower fares. That’s the only way to do it without turning it into a regressive policy.

CRT: Are there other benefits to these plans besides reducing traffic and improving public transportation?

 JPM: Maybe people will starting using bike lanes more frequently—or people are willing to walk more because their public transportation is better. There could be more outdoor activities. Those additional benefits are important, but they’re hard to quantify. 

 CRT: In addition to a congestion pricing plan, London also has a pollution fee, which started on April 8th. Do you think these kinds of fees will further reduce emissions and improve health? Or is there something else that should be considered?

JPM: They should, but it’s important to understand the local vehicle fleet—especially how old it is. The cars that contribute the most to local air pollution are very old cars. In terms of global pollutants—namely CO2—they’re roughly the same. Local pollutants—nitrogen oxides, fine particulate matter, etc., are much worse in older fleets. So if the fleet is new—younger than 10 years—you may not see as much as a reduction as if the fleet is very old or if you have ban on diesel pollution. People with lower incomes are more likely to leave their cars at home when charged for driving or with a congestion fee—and they tend to use older vehicles that emit more pollution.

 CRT: The age of local fleets has been important in other parts of the world, right? Especially when cities tried non-market-based measures like vehicle restrictions.

 JPM: Yes, Mexico City placed a uniform restriction on vehicles in 1989 without making any distinction between newer, cleaner cars and older, dirtier ones. You could only drive your car into the city for a limited number of days per week, so people went out and bought second cars that they could then use on the off days. And the cars they bought were older, which were dirtier. So in that way, the plan backfired.

CRT: It sounds like there are many ways to structure these congestion pricing plans:

JPM: Yes. There are ways to introduce dynamic pricing. You don’t want to keep these prices fixed forever in case the policy response wasn’t as expected. Ideally, you want to change prices based on location and time of day. This may eventually happen, but I don’t think it’s prudent to push for that today. Don’t let the perfect be the enemy of the good.

We are finally seeing this policy instrument taken seriously—and it will be very interesting to see which city is next. LA? Seattle? Washington, DC?

Congestion pricing should provide New Yorkers with a number of benefits, including cleaner air, better public health and a modernized public transit system, all while reducing that maddening gridlock in downtown Manhattan. EDF is part of a coalition of groups supporting New York’s congestion pricing plan.

 

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