Market Forces

As climate week gets underway, policymakers should prioritize ways to reduce emissions from one of the biggest contributors to greenhouse gases: the transportation sector. A diverse group of stakeholders recently came together to discuss opportunities to do just that.

Transportation accounts for nearly one third of all greenhouse gas emissions in the U.S. and a substantial share of local pollution in urban areas. Not only do these emissions greatly contribute to climate change, they can cause significant health concerns, from respiratory and cardiovascular illnesses, to premature mortality. Furthermore, communities of color and low-income communities have suffered much more from the health and well-being impacts of transportation-related air pollution than non-disadvantaged communities. Thus, it is both a social and environmental imperative to clean our transportation system.

However, cleaning our transportation system is not a trivial task—the effects of pollution vary widely in space and across different communities; the impacts of pollution are felt locally, regionally and globally; and multiple challenges across many different sectors of our economy to achieving this goal still exist. We will need a coordinated, multi-sector approach, with major investments and targeted policies.

To discuss these solutions and explore opportunities, Resources for the Future, Environmental Defense Fund, and Duke University’s Nicholas Institute hosted a two-day virtual workshop in July 2020. We invited individuals from all over the country, and from different sectors, including local governments, non-governmental organizations, stakeholder and community groups, industry, and academics, in an effort to increase communication across sectors, explore diverse policy solutions, and hear from different points of view.

Though we heard diverse approaches and assumptions from the different speakers and participants, we all agreed on the following: Cleaning our transportation system is a necessary and urgent action, and we can leverage this transformation to achieve even more improvements in social outcomes, above and beyond those caused by the transportation sector.

Panel I: Effectiveness and Behavioral Responses to Carbon Pricing and Vehicle Regulations under Existing Policies  

The first panel of the day discussed the effectiveness of carbon pricing and vehicle regulations on cleaning the transportation system, given existing policies and the nature of our “business as usual” future.

One of the main takeaways: though carbon and gasoline taxes can and have had an impact on reducing gasoline consumption, these taxes won’t be enough to achieve the major structural changes needed for the sector.

Other policies, such as vehicle efficiency standards and scrappage programs (like cash-for-clunkers), can help ensure older vehicles are replaced with better, more efficient (or even electric) alternatives, and can also work in conjunction with gasoline and carbon taxes to help achieve a cleaner transportation system. However, these programs may cause some unintended consequences if not pursued cautiously or developed jointly with policies that increase access to alternative modes of transportation.

Panel II: Distributional Effects of Transportation Policy

The workshop’s second panel focused on how to structure transportation policies to reduce the inequalities that transport-related pollution creates among different communities. The speakers highlighted the many different types of inequalities created by unjust and problematic housing and transportation policies, magnified by disadvantaged communities’ greater exposure to pollution, and how the transformation of the system can be leveraged to improve these distributional outcomes.

To be able to achieve these improvements, several steps must be taken, including:

• Use data and modeling to identify disadvantaged communities most affected by transportation pollution;
• Actively engage with community and environmental justice groups from the beginning when setting policy in order to identify their most pressing issues and concerns and ensure they have a seat at the table;
• Conduct research to identify the most beneficial policies and actions for these communities and address their concerns;
• Work to avoid unintended consequences of transportation policy that may harm disadvantaged communities in our quest to green the transportation system.

Panel III: Investments on Carbon Revenue: Efficacy and Impacts Across Groups

Our third panel explored the many avenues for investments of revenue raised from policies such as a carbon tax. There exist almost infinite options for investments- in both the private and public sectors, to individuals or corporations, for education and behavior modification, to infrastructure and technology, and so much more. Identifying the investment that provides the largest bang for buck is a challenge worth pursuing in order to maximize the benefits of our clean transportation transformation.

One of the difficulties is understanding the distributional impacts of investments. It is important to identify who will benefit the most from these investments, and whether there are important spillovers such as job creation. When the benefits of an investment are diffuse or long term, this can create a political challenge in its implementation. Furthermore, understanding the policy context around the investment is key: non-transportation-related policies such as zoning or housing regulations can affect the benefits of any investment in this space. For example, changing zoning rules could improve access to alternative modes of transportation, making investments in electric vehicle charging stations and public transit more effective at shifting driving away from private, fossil-fueled vehicles.

Panel IV: Changing the Rules: State and Local Policies and Potential Interactions with Carbon Pricing

The final panel of the day discussed how non-carbon pricing policies at the state and local level may interact with existing carbon policies, such as the Regional Greenhouse Gas Initiative (RGGI, a regional cap and trade program covering GHG emissions from 10 states in the northeast). Though cap and trade or carbon pricing sends a price signal to reduce carbon emissions, it alone may not be enough to achieve the large transformation required.

Alternative policies, such as the low carbon fuel standard, congestion pricing, or even policies outside of the transportation sector can help to bring about even greater reductions of transportation emissions, especially when combined with carbon pricing policies.

Electricity sector policies are an especially important one to get right. As our transportation system becomes less reliant on gasoline and more reliant on electricity for fueling, we need to ensure that the electric sector is clean (and carbon pricing can play an important role in achieving this outcome), while also implementing policies to reduce the costs that charging vehicles can place on the system.

A Vision for a Clean Transportation Future

This workshop made a strong case for urgent action—the emissions associated with transportation are too large and affect too many vulnerable communities to allow the status quo to continue unabated. Many different types of policies can be implemented, and even in the face of political challenges – particularly at the federal level – cities and states across the country are already taking action.

The speakers envisioned a future where transportation is clean; where all individuals across the country, regardless of where they live, have mobility access and alternatives in their modes of travel; where investments are made with an eye towards maximizing the public benefit and ensuring those most disadvantaged are uplifted; and where all communities have a voice in shaping the path of this clean transformation. This clean future exists; now it is up to us to shape policies in order to achieve it.

New research building on Nobel Prize winner Nordhaus’ past contributions shows reaching UN climate targets is a good investment for the planet

Two years ago William Nordhaus was awarded the Nobel Prize in Economic Sciences for his pioneering work on “integrated assessment modeling” (IAM) and his Dynamic Integrated model of Climate and the Economy (DICE)—a framework designed to analyze the interplay between the economy and climate change, and used to assess economically optimal CO2 emission pathways and the social cost of carbon (SCC). Now a new paper published in Nature Climate Change demonstrates that a 1.5 to 2 degree target in line with the UN Paris agreement is economically optimal when the DICE model is updated to reflect newer research and latest expert assessment.

As I described in a blog about Nordhaus’ Nobel Prize two years ago, there were several ways new research could strengthen the results from Nordhaus’ DICE model and other IAMs. In this new paper, Martin C. Hänsel and co-authors (including Daniel Johansson, Christian Azar and EDF Senior Contributing Economist Thomas Sterner) made a number of such modifications to the baseline assumptions to update the results coming out of Nordhaus’ DICE model.

Two of their key updates relates to the economic assumptions/inputs to the model:

• Updating the damage function (the assumed relationship between climatic changes and economic damages) to reflect a recent meta-analysis of climate damage estimates; and
• Updating how equity between present and future generations is taken into account in DICE by revising the parameters determining the social discount rate. The choice of discount rate has a large impact on the results coming out of IAMs, since it determines the weight given to the climate damages affecting future generations.  This has spurred a long-standing debate—especially since the value of at least one of the parameters typically discussed is based on value judgments. Hänsel et al therefore chose to update the values of the parameters determining the social discount rate according to a recent survey of expert opinions.

The authors also made a number of additional updates to reflect new research in climate science and thereby improve the assumptions determining the relationship between greenhouse gas (GHG) emissions and temperature change (which include assumptions with respect to the global carbon cycle and the energy balance model translating radiative forcing to temperature impacts).

The authors also considered the impact of:

• NETs (negative emissions technologies) such as afforestation, Biomass Energy with Carbon Capture and Storage (BECCS), and direct air capture. By providing the additional option of negative emissions after 2050, NETs further reduce the optimal equilibrium temperature, but also leads to a lower SCC in 2020 since the availability of NETs makes it optimal to postpone some emission reductions. However, it’s important to note that the potential magnitude of NETs available and on what timeline is debated and, for some strategies, still to be demonstrated.
• Emission pathways with higher abatement of non-CO2 GHG emissions (which are not determined inside the DICE model) and make even lower equilibrium temperatures attainable. This illustrates the value of also addressing short term climate forcers such as methane emissions.

Both these latter updates contribute to a reduction in the economically optimal equilibrium temperature in DICE (i.e., the long run global average temperature which would provide the theoretically optimal balance between the social cost of climate damages and the costs of emission reductions).

The combined results of all these updates – reflecting recent findings in the climate economics and climate science literature – to the baseline assumptions in DICE are:

• The SCC in 2020 is twice as high with all the other updates but with Nordhaus’ baseline assumptions for the social discount rate left unchanged. This is well in line with the strong consensus that SCCs at the levels produced with the baseline assumptions in DICE ($39 per tonne) significantly underestimate the true social costs of carbon dioxide emissions.
• Optimal climate policy according to this updated DICE model keeps equilibrium temperature below 2 °C in 2100 in three quarters of all model runs.

Despite these key updates to the DICE framework, there are still—as the authors also point out—additional enhancements that can be made to improve this type of climate economic analysis, which weighs the costs and benefits of climate action. Such enhancements include consideration of risk and uncertainty and the representation of so-called “tipping points” as well as taking into account that the value of environmental assets relative to other goods and services may increase as they suffer a larger share of the costly damages from climate change.

Overall, these new findings show that the temperature targets in the Paris agreement (where countries committed to limiting the global temperature rise to well below 2 °C and to actively pursue a 1.5 °C target) are also supported by climate economic analysis and that reaching the UN climate targets is a good investment for the planet.

How newer research is building off Nordhaus’ past contributions

Äntligen! (Swedish—my native tongue—for “Finally!”) Last week, the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economic Sciences to William Nordhaus for his pioneering work on “integrated assessment modeling” (IAM) – a framework which has made it possible to analyze the interplay between the economy and climate change, and the consequences of climate policies. And while the recognition of Nordhaus’ achievements is an encouraging sign that mainstream economics is starting to recognize the important contributions of environmental economics to the field, it’s critical that economists continue to build on and strengthen the research Nordhaus initiated.

Nordhaus started his research – in what was to become the now very active and expanding field of climate economics – already in the 1970s. His fundamental contribution came in the early 1990s when he introduced his Dynamic Integrated model of Climate and the Economy (DICE), which became the foundational framework for the IAMs used today by the Intergovernmental Panel on Climate Change (IPCC) as well as by an Interagency Working Group to develop estimates of the Social Cost of Greenhouse Gas Emissions during the Obama Administration.

The novelty of DICE was the integration of findings across disparate disciplines including physics, chemistry, and economics to model the link between economic activity and carbon emissions, leading to higher atmospheric carbon concentration and related higher global average temperatures. Furthermore, his model linked this increase in average temperature to economic damages. This integrated framework laid out the principles for estimating the damaging impacts of greenhouse gas emissions (GHGs) on human welfare, and could therefore be used to calculate the social cost of greenhouse gas emissions and to study the consequences of climate policy interventions such as carbon pricing.

In awarding him the Nobel Prize, The Royal Swedish Academy of Sciences recognized Nordhaus’ research as a methodological breakthrough and critical step forward – but one which does “not provide final answers.” While DICE, an acronym which nods to the perilous game we’re playing with the planet, laid the groundwork for the development of robust estimates of the social cost of GHGs by the Interagency Working Group (which experts agree reflect a lower bound), his research has also served to highlight how newer and ongoing research can further strengthen these estimates.

Such enhancements which further strengthen integrated assessment modeling include:

• Incorporating more of the many non-market health and environmental impacts which are still omitted in IAMs by constructing more detailed damage functions (the assumed relationship between climatic changes and economic damages) founded in empirical studies of climate impacts using real-world data and taking into account that the value of environmental assets relative to other goods and services may increase as they suffer a larger share of the damages from climate change.
• Strengthening how inter- and intra-generational equity is taken into account.
  • The highly influential Stern Review commissioned by the UK government in 2005 argued persuasively that Nordhaus put too little weight (through his choice of parameter values related to the discount rate) on the welfare of future generations which resulted in lower estimates of economic damages, and spurred an academic debate leading to recommendations that governments instead use declining discount rates when evaluating public projects and policies with long term impacts.
  • Climate change will impact different regions of the world very differently, with poorer regions generally hit worse than richer parts of the world. How well economists represent the spatial distribution of damages across regions of the world and the functional form and parameter values they choose for weighting differences in such damages significantly impact estimates of the social cost of greenhouse gas emissions.
• Strengthening the way IAMs deal with risk and uncertainty – an inherently crucial element in any analyses of climate change – and the representation of so-called “tipping points” beyond which damages accelerate or become irreversible. This more recent research shows that such model enhancements also significantly increase estimates of the social cost of greenhouse gases, and underscore the vital importance of drastically reducing GHG emissions to insure against high‐temperature catastrophic climate risks.

Nordhaus shares the Nobel Prize with Paul Romer, who is separately awarded for integrating technological innovations into long-run macroeconomic analysis and his analyses of how markets develop new technologies. This is a very appropriate choice considering the importance of technological change for addressing climate change and gives this year’s prize the common theme of how to achieve both sustained and sustainable economic growth.

It is extremely timely that the Nobel Prize in Economics to Nordhaus’ work highlighting the critical role of carbon pricing and Romer’s work on the importance of technological innovation for long-run welfare was announced on the same day as the IPCC released its special report on the impacts of global warming of 1.5 °C showing the urgency of addressing climate change, and how both carbon pricing as well as technological innovation and diffusion have important roles to play.