Market Forces

Trump Moves to Cook the Books, Undercutting Common Sense Climate Protections

By Susanne Brooks / Bio / Published: March 20, 2017

This blog was co-authored with Martha Roberts

It’s reported that the Trump Administration is poised to continue its barrage of attacks on some of our most vital health and environmental protections, following last week’s assault on broadly supported fuel economy and greenhouse gas safeguards for cars and light trucks. Here’s one attack that they may try to sneak under the radar—a move that would undercut common sense climate protection all across the federal government: directing federal agencies to abandon the use of social cost of carbon estimates in their evaluation of new policy.

The social cost of carbon is a measure of the economic harm from the impacts of climate change. Specifically, it’s the dollar value of the total damages from emitting one ton of carbon dioxide into the atmosphere. Weakening or eliminating the use of the social cost of carbon would result in skewed and biased policy-making that ignores the benefits of crucial safeguards and stacks the deck against actions to protect communities from the mounting costs of climate change.

The devastating impacts of climate change on health and the environment – such as extreme weather events, the spread of disease, sea level rise, and increased food insecurity – can cost American businesses, families, governments and taxpayers hundreds of billions of dollars through rising health care costs, destruction of property, increased food prices, and more. Many of these impacts are already being felt by communities across the country, as the government’s leading scientific agencies have found.

When the federal government develops policy affecting the carbon pollution causing climate change, it is both reasonable and essential that it takes these costs into account. The social cost of carbon is a tool that allows policy-makers to do just that.

Currently, the federal government uses a social cost of carbon estimate—roughly $40 per ton of carbon pollution—that was developed through a transparent and rigorous interagency process, relied on the latest peer-reviewed science and economics available, and allowed for repeated public comment as well as input from the National Academy of Sciences.

But that may not last much longer. As we’ve seen, the Trump Administration is waging war against an array of our most crucial health and environmental protections, ignoring the urgent threat of climate change while prioritizing fossil fuel interests. President Trump’s new Administrator of the Environmental Protection Agency, Scott Pruitt, denies that carbon pollution is a primary contributor to climate change, and built his political career by suing EPA 14 times as Oklahoma Attorney General to block protections from mercury, arsenic and smog pollution, hand in hand with the worst elements of the fossil fuel industry. Meanwhile the Administration is proposing devastating cuts to the budgets for EPA and climate research, and is moving towards revoking the Clean Power Plan, America’s first-ever nationwide limits on carbon pollution from power plants.

All of this points to a clear disregard for basic science, economic principles, and our nation’s clean air laws. Eliminating or weakening the social cost of carbon is another pernicious tactic by the Administration to undermine the development of crucial climate safeguards – by erroneously making it appear as though reducing carbon pollution has little or no benefit to society and the economy. Even the current figure is very likely a conservative lower bound since it does not yet include all of the widely recognized and accepted impacts of climate change.

The details of the upcoming attack are still unclear. It’s possible that the Administration may end use of the uniform social cost of carbon estimate at the federal level—despite its rigorous basis and judicial precedent. Other indications suggest that the Administration may choose to artificially and arbitrarily discount the costs of climate change for the health and economic well-being of our kids, grandkids, and future generations—ignoring the growing consensus among economists that supports valuing these impacts more, as does a recent report from the Council of Economic Advisors. Or the Administration may decide to disregard the fact that our greenhouse gas pollution has harmful impacts outside U.S. borders that can have costly repercussions for Americans.

Throwing out the social cost of carbon may play well with President Trump’s supporters in the fossil fuel industry. But the importance and appropriateness of accounting for these costs is a matter of both economics and law. We also know that nearly two thirds of Americans are concerned about climate change. Undermining limits on pollution—protections that are rooted in rigorous scientific research, reflecting long-standing bipartisan economic principles—will ultimately harm the health and environmental safety of all Americans, including Trump’s supporters.

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The United States Could Lead the Next Tech Revolution by Investing in Clean Energy

By Jonathan Camuzeaux / Published: January 9, 2017

New Risky Business Report Finds Transitioning to a Clean Energy Economy is both Technologically and Economically Feasible

In the first Risky Business report, a bi-partisan group of experts focused on the economic impacts of climate change at the country, state and regional levels and made the case that in spite of all that we do understand about the science and dangers of climate change, the uncertainty of what we don’t know could present an even more devastating future for the planet and our economy.

The latest report from the Risky Business Project, co-chaired by Michael R. Bloomberg, Henry M. Paulson, Jr., and Thomas F. Steyer, examines how best to tackle the risks posed by climate change and transition to a clean energy economy by 2050, without relying on unprecedented spending or unimagined technology. The report focuses on one pathway that will allow us to reduce carbon emissions by 80 percent by 2050 through the following three shifts:

1. Electrify the economy, replacing the dependence on fossil fuels in the heating and cooling of buildings, vehicles and other sectors. Under the report’s scenario, this would require the share of electricity as a portion of total energy use to more than double, from 23 to 51 percent.
2. Use a mix of low- to zero-carbon fuels to generate electricity. Declining costs for renewable technologies contribute in making this both technologically and economically feasible.
3. Become more energy efficient by lowering the intensity of energy used per unit of GDP by about two thirds.

New Investments Will Yield Cost Savings

Of course, there would be costs associated with achieving the dramatic emissions reductions, but the authors argue that these costs are warranted. The report concludes that substantial upfront capital investments would be offset by lower long-term fuel spending. And even though costs would grow from $220 billion per year in 2020 to $360 billion per year in 2050, they are still likely far less than the costs of unmitigated climate change or the projected spending on fossil fuels. They’re also comparable in scale to recent investments that transformed the American economy. Take the computer and software industry, which saw investments more than double from $33 billion in 1980 to $73 billion in 1985. And those outlays continued to grow exponentially—annual investments topped $400 billion in 2015. All told, the United States has invested $6 trillion in computers and software over the last 20 years.

This shift would also likely boost manufacturing and construction in the United States, and stimulate innovation and new markets. Finally, fewer dollars would go overseas to foreign oil producers, and instead stay in the U.S. economy.

The Impact on American Jobs

The authors also foresee an impact to the U.S. job market. On the plus side, they predict as many as 800,000 new construction, operation and maintenance jobs by 2050 would be required to help retrofit homes with more efficient heating and cooling systems as well as the construction, operation and maintenance of power plants. However, job losses in the coal mining and oil and gas sectors, mainly concentrated in the Southern and Mountain states, could offset these employment gains. As we continue to grow a cleaner-energy economy, it will be essential to help workers transition from high-carbon to clean jobs and provide them with the training and education to do so.

A Call for Political and Private Sector Leadership

Such a radical shift won’t be easy, and both business and policy makers will need to lead the transition to ensure its success. First and foremost, the report asserts that the U.S. government will need to create the right incentives. This will be especially important if fossil fuel prices drop, which could result in increased consumption. Lawmakers would also need to wean industry and individuals off of subsidies that make high-carbon and high-risk activities cheap and easy while removing regulatory and financial barriers to clean-energy projects. They will also need to help those Americans negatively impacted by the transition as well as those who are most vulnerable and less resilient to physical and economic climate impacts.

Businesses also need to step up to the plate by auditing their supply chains for high-carbon activities, build internal capacity to address the impacts of climate change on their businesses and put internal prices on carbon to help reduce risks.

To be sure, this kind of transformation and innovation isn’t easy, but the United States has sparked technological revolutions before that have helped transform our economy—from automobiles to air travel to computer software, and doing so has required collaboration between industry and policymakers.

We are at a critical point in time—we can either accelerate our current path and invest in a clean energy future or succumb to rhetoric that forces us backwards. If we choose to electrify our economy, reduce our reliance on dirty fuels and become more energy efficient, we will not only be at the forefront of the next technological revolution, but we’ll also help lead the world in ensuring a better future for our planet.

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America needs critical energy data in a “post-fact” world: 2 quick examples

By Jeremy Proville / Bio / Published: December 28, 2016

This post originally appeared on EDF’s Voices blog.

We learned earlier this month that scientists are rushing to save critical climate data on government websites before the Trump administration takes over in January. They fear that such data may be deleted and forever lost, and it’s not hard to see why.

The incoming administration has announced plans to roll back existing climate change initiatives and there have been proposals to cut research programs that support a broad range of scientific expertise, such as weather prediction critical to farmers and to states vulnerable to major disasters.

In addition to science-based climate data, however, there is concern that other critical information and analyses under the purview of agencies such as the U.S. Department of Energy may be imperiled early next year. Unbeknownst to many – including, perhaps, to the president-elect and his circle of insiders – all these datasets benefit a broad range of sectors that rely on solid economic forecasting.

Here are just two datasets that are absolutely central to the work economists and analysts do to help industry and other decision-makers interpret energy opportunities and challenges in a rapidly changing world.

1. Energy forecasts: companies depend on them

The Annual Energy Outlook reports produced by the Energy Information Administration – a 30-year-old, independent office within the Energy Department – offers economic and energy forecasts with data invaluable to the transportation and manufacturing sectors, among others. Researchers, regulators and policymakers use them, too.

It includes data on economy-wide energy consumption and electricity prices all the way down to minute information such as carbon emissions from residential clothing dryers. Companies use the report to inform energy cost projections as they strategize and forecast business operations.

This way, an aluminum smelting company that uses a very energy-intensive process, for example, can anticipate changes in energy prices and make decisions accordingly.

We already heard about a proposal to cut NASA’s climate research funding, so it’s no mystery we also worry about how a report such as the Annual Energy Outlook could be affected by a wider crackdown on scientific and economic research and data generation.

Notably, EIA was part of a controversial questionnaire the Trump administration recently sent the Energy Department.

2. Cost comparisons: help investors be smart

The cost of renewable energy is a constant source of debate and has a direct impact on innovation and investment. A utility that needs to add generation, for example, must remain informed about how the operational costs of wind turbines compare with those of a natural gas-fired power plant.

The Energy Department’s prestigious National Renewable Energy Laboratory provides a terrific amount of research on the costs of this and other sources of renewable energy, feeding them into tools such as the Transparent Cost Database.

These estimates help investors as well as consumers evaluate the cost of renewable energy sources in direct comparison to fossil fuels in an unbiased way. The outcome is smarter and more informed decisions.

Our national labs would be overseen by Texas Gov. Rick Perry if he’s confirmed as the Trump administration’s secretary of energy. The governor, who lacks the science credentials of past energy secretaries, once said he would eliminate the agency altogether.

So why the panic over data?

We know that many of the people picked for the Trump cabinet so far openly question climate science, or science in general, and that several of the nominees who will oversee agencies producing such data have a history of putting the interest of the fossil fuel industry ahead of progress on clean energy.

Beyond that, potential budget cuts are looming. Government agency heads opposed to climate action or investments in renewable energy could easily starve the programs that maintain, update and share data with the public if such information no longer fits the administration’s agenda.

Scientists are thus taking steps to download data in preparation for the day when access may be interrupted.

But a country needs hard facts and sound evidence to make smart decisions about its energy and economic future. So we need to continue to lean heavily on the apolitical data that hardworking researchers in government produce for our industry, farmers, entrepreneurs, local and state policymakers, and world-renowned researchers.

Perhaps more than ever before, we must protect and defend this vital information.

Also posted in Climate science / 1 Response

How Companies Set Internal Prices on Carbon

By Jonathan Camuzeaux / Published: December 8, 2016

This post was co-authored with Elizabeth Medford

Despite the uncertainty created by the recent election, companies around the globe are demonstrating a commitment to keeping climate change in check. More than 300 American companies signed an open letter to President-elect Trump urging him not to abandon the Paris agreement. Others are acting on their own to reduce emissions in their daily operations, by setting an internal price on carbon.

The number of companies incorporating an internal carbon price into their business and investment decisions has reached new heights, a recent CDP report shows, with an increase of 23 percent over last year. The more than 1,200 companies that are currently using an internal carbon price (or are planning to within two years) are using them to determine which investments will be profitable and which will involve significant risk in the future, as carbon pricing programs are implemented around the world. Sometimes, they also use them to reach emissions reduction goals.

Not all carbon prices are created equal, and companies differ in how they set their specific price. Here’s a look at some of these methods:

Incorporating Carbon Prices from Existing Policies

Some companies set their carbon price based on policies in the countries where they operate. For example, companies with operations in the European Union might decide to use a carbon price equal to that of the European Union Emissions Trading System (EU ETS) allowances, and those operating in the Northeastern United States might adopt the carbon price that results from the Regional Greenhouse Gas Initiative market.

ConocoPhillips, for example, focuses its internal carbon pricing practices on operations in countries with existing or imminent greenhouse gas (GHG) regulation. As a result, its carbon price ranges from $6-38 per metric ton depending on the country. For operations in countries without existing or imminent GHG regulation, projects costing $150 million or greater, or that results in 25,000 or more metric tons of carbon dioxide equivalent, must undergo a sensitivity analysis that includes carbon costs.

Using Self-Imposed Carbon Fees

Others take a more aggressive approach by setting a self-imposed carbon fee on energy use. This involves setting a fee on either units of carbon dioxide generated or a proxy measurement like energy use. These programs also often include a plan for using the fees such as investment in clean energy or energy efficiency measures. This can be an effective method for incentivizing more efficient operations.

Microsoft, for example, designed its own system to account for the price of its carbon emissions. The company pledged to make its operations carbon neutral in 2012 and does so through a “carbon fee,” which is calculated based on the costs of offsetting the company’s emissions through clean energy and efficiency initiatives. Each business group within Microsoft is responsible for paying the fee depending on how much energy it uses. Microsoft collects the fees in a “central carbon fee fund” used to subsidize investments in energy efficiency, green power, and carbon offsets projects. Still, by limiting carbon fees to operational activities, Microsoft has yet to address a large chunk of their emissions.

Setting Internal Carbon Prices to Reach Emissions Reduction Targets

Other companies set an internal carbon price based on their self-adopted GHG emissions targets. This involves determining an emissions reduction goal and then back-calculating a carbon price that will ensure the company achieves its goal by the target date. This method is a broader approach focused more on significantly reducing emissions while also mitigating the potential future risk of carbon pricing policies.

Novartis, a Swiss-based global healthcare company, uses a carbon price of $100/tCO2 and cites potential climate change impacts as a motivator. The company has its own greenhouse gas emissions target, which it is using to cut emissions to half of its 2010 levels by 2030. These internal policies mean that Novartis, which is included in the European Union’s Emissions Trading Scheme (EU ETS), has been able to sell surplus allowances and thus far avoid an increase in operating costs.

Where we go from here

While these internal carbon pricing activities are welcome – and we hope they continue – they are not sufficient to reduce greenhouse gases to the degree our nation or world requires. Like these forward thinking companies, nations around the world, including the United States, need to consider the costs of inaction, including the climate-related costs, to avoid short-sighted investments. Ultimately, we will need public policies that put a limit and a price on carbon throughout the economy.

The spread of internal carbon pricing could signal greater support for carbon pricing by governments. But companies can do more: the ultimate test of a company’s convictions and commitment to carbon pricing might be their willingness to advocate for well-designed, ambitious policies that achieve the reductions we need.

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The Atlantic’s year-end feature “Hope & Despair”

By Gernot Wagner / Bio / Published: December 29, 2015

Lucy Nicholson / Reuters / Zak Bickel / The Atlantic

Reason for despair: Climate change. It’s the perfect problem: more global, more long-term, more irreversible, and more uncertain that virtually any other public-policy problem facing us. Climate change is a lot worse than most of us realize. Almost regardless of what we do on the mitigation front, we are in for a whole lot of hurt.

On the policy front, we have now talked for more than 20 years about how we need to turn this ship around “within a decade.” Not unlike the ever-elusive fusion technology, that hasn’t happened yet. Global carbon emissions declined slightly this year—for the first time ever without a global recession—but the trends are still pointing in the wrong direction. Worse, turning around emissions is only the very first step. It’s not enough to stabilize the flow of water going into the bathtub when the goal is to prevent the tub from overflowing. We need to turn around atmospheric concentrations of greenhouse gases. That means turning off the flow of water into the tub—getting net emissions to zero and below. It doesn’t help our efforts that many people seem to confuse the two. A study involving over 200 MIT graduate students faced with this same question revealed that even they confuse emissions and concentrations—water flowing into the tub and water levels there. If MIT graduate students can’t get this one right, what hope is there for the rest of us?

Reason for hope: Climate change. Many signs point to some real momentum to finally tackle this momentous challenge.

The Paris Climate Accord builds an important foundation. It enables transparency, accountability, and markets to help solve the problem. Many governments are moving forward with pricing carbon: from California to China, from Sweden to South Africa, we see ambitious action to reign in emissions in some 50 jurisdictions. Meanwhile, lots is happening on the clean-energy front. That’s particularly true for solar photovoltaic power, which has climbed up the learning curve—and down the cost curve—faster than most would have expected only five years ago. That has also provided an important jolt for sensible climate policy. Then there’s R&D for entirely new technologies. Bill Gates leading an investment coalition with $1 billion of his own money is only one important sign of movement in that direction. The excitement for self-driving, electric vehicles is palpable up and down Silicon Valley, to name just one potentially significant example. In the end, it’s precisely this mix of Silicon Valley, Wall Street, and, of course, Washington that will lead—and, in part, is already leading—to the necessary revolution in a number of important sectors, energy and transportation chief among them.

Excerpt from The Atlantic‘s year-end feature on Hope and Despair: “Can the Planet Be Saved?“

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From climate finance to finance

By Gernot Wagner / Bio / Published: November 19, 2015

Climate finance is lots of things to lots of people. For some, it’s the $100 billion “Copenhagen commitment”. For others, it’s Citi’s latest sustainable finance pledge of $100 billion. It’s Bill Gates’s $1 billion clean energy investment. It’s public and private monies; mitigation and adaptation; loans, bonds, equity stakes, high-risk ventures, Kyoto-style allowances, offset credits, and private and public grants. It’s all of the above. When it comes to carbon markets, climate finance is often about what happens with allowance revenue. That’s important. But the primary goal is, or ought to be, appropriately pricing the climate externality.

It’s about nudging massive private investment flows from the current high-carbon, low-efficiency path toward a low-carbon, high-efficiency one. That, in turn, means focusing on the incremental dollars necessary to sway private investments. In the end, it’s all about the margin.

Righting the wrong incentives

The incentives facing many private actors today are clearly misleading. Benefits, for the most part, are fully privatised, while many costs are socialised. That goes in particular for environmental and climate costs. The ‘hidden’ costs of energy investments are large and negative. While largely invisible to those doing the polluting, these costs are all too visible to society as a whole: in form of costs to health, ecosystems, and the economy. In the United States, for example, every additional tonne of coal, every barrel of oil, causes more in external damages than it adds value to GDP. That calculation does not even consider the large carbon externality.

There, one of the more important metrics is the so-called ‘social cost of carbon’. The US government’s central estimate is $40 per tonne of CO2 released today. The true number is likely a lot higher, especially when considering the many ‘known unknowns’ not quantified (and sometimes not quantifiable). Regardless of the precise amount, it’s the cost to society — to the economy, health, ecosystems, the whole lot — of each tonne of CO2 released today over its lifetime.

The social cost itself is inherently a marginal concept. While all of us seven billion pay a fraction of a penny of the social cost for each of the billions of tonnes emitted today, few of those doing the actual polluting pay themselves. A price on carbon, through cap and trade or a carbon tax, ensures that anyone covered by the market forces faces the right incentives. Polluters face a direct cost of pollution and, thus, are driven to pollute less. The law of demand at work.

Incentives at work

One of the guiding principles of economics is that people are motivated by incentives. That’s not too surprising. It would be surprising if people were not motivated by what is designed to motivate them. When faced with a price on carbon, emissions go down, and investments change course.

At the level of individual businesses, solid evidence points to how existing carbon prices have incentivised investment in clean technology, research and development.

In places with no external carbon price, investments can be affected by internal carbon pricing. The Carbon Disclosure Project counts over 400 companies with an internal, ‘shadow’ carbon price, either independently or in reaction to an external market price. That price, in turn, figures into day-to-day decisions from where to site a new facility to how to source energy.

In 1999, the World Bank conducted a study to determine the impact of a shadow price for carbon on the Bank’s investments. At an internal price of $40, the highest evaluated price, almost half of the analysed investments would have had a negative net present value, and, thus, would likely not have been made. For the rest, profitability would have been significantly reduced.

Individual investments, if organised at a large enough scale, make the difference. Take the Clean Development Mechanism (CDM), a market-based mechanism that channels funding to emission reduction projects in developing countries. Countries and investors can invest in CDM projects as a way of meeting domestic reduction goals, or complying with domestic carbon prices. Through the CDM, hundreds of billions of private sector dollars have gone towards funding GHG mitigation.

With a government-imposed carbon price, reflecting the true cost of carbon to society, investment portfolios would change. Drastically. We’ve seen it in practice, but the current scale is not large enough to sway the majority of investments that matter. Today, in fact, much of firms’ investments towards mitigating climate change are made voluntarily.

From Climate Finance to Finance

Climate finance often is ‘concessional’ finance. That might be outright development aid. It also includes voluntary commitments like Citi’s $100 billion. Citi, of course, is not alone. Goldman Sachs committed $40 billion in 2012, Bank of America $50 billion in 2013, all made over 10 years. Meanwhile, these three banks alone underwrite hundreds of billions of loans every year. Total global Foreign Direct Investment is in the trillions.

These massive financial flows won’t be redirected overnight. But they do follow incentives. In fact, that’s all they follow.

Enter carbon markets. They ensure that anyone covered by the market faces the right incentives. The prevailing allowance price is one good proxy of the level of ambition of any particular market. It’s also what helps nudge investments into the right direction. In econ-speak, it’s all about internalising externalities. In English, it’s about paying your fair share and no longer socialising costs.

None of that renders what’s traditionally called ‘climate finance’ unnecessary. There are still plenty of uses for additional monies. In particular, carbon markets are all about mitigation. Adaptation might dovetail nicely on some forms of mitigation, but it’s not the primary goal. That’s where foreign aid as well as government and private grants come in. If anything, those amounts need to be scaled up, too.

But the true scaling happens on the investment front. That’s no longer “climate finance.” It’s simply “finance.” Re-channelling only 0.1% of total wealth under active management globally amounts to around a $100 billion shift. Efforts, of course, must not stop there. It’s about channelling the full $100 trillion into the right direction.

Gernot Wagner is lead senior economist at the Environmental Defense Fund, and co-author, with Harvard’s Martin L. Weitzman, of Climate Shock (Princeton University Press, 2015).

This article was first published in IETA’s Greenhouse Gas Market 2015 report “Making Waves“. Download the full text in PDF form.

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