Carbon Pricing in the Real World

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hello and welcome everybody i'm excited for  today's event on carbon pricing in the real world   i'm jesse jenkins at the andlinger center  for energy and the environment at princeton   university and with the department of  mechanical and aerospace engineering   and on behalf of princeton's andlinger center  and our partners for this event at the niskanen   center and our co-sponsors of the environmental  defense fund and the center for policy research   in energy and environment at princeton  school of public and international affairs   thanks everyone for attending i wanted to give  a bit of an introduction to this event before   handing things over to our panelists  and moderators we've got a great uh   hour and a half or so in store for you today and  i was motivated um to put together this event by   the publication of danny cullenward and david  victor's recent book making climate policy work   which landed on my doorstep around the winter  break and which offers a cogent and constructive   critique of how carbon pricing policies work in  practice across the world carbon pricing could   be the most powerful tool in our climate policy  arsenal by putting a price on carbon pollution   that's equal to the societal damages caused by an  additional ton of climate warming carbon dioxide   policymakers can provide incentives that reach all  corners of our economy and incentivize decisions   by businesses and consumers to consider the  economic costs of climate change in all of   their decision making by internalizing  the cost of carbon emissions in this way   and by which can be implemented either through  a carbon tax or through emissions cap and permit   trading programs is widely regarded as the least  expensive and most market-friendly way to drive   down greenhouse gas emissions and confront the  threat posed by climate change there's only one   catch governments around the world consistently  fall short in their efforts to price carbon   danny and david's new book offers a look across  the world's experiences with carbon pricing   and provides a useful diagnosis of the real world  challenges that carbon pricing faces in practice   and i think a constructive set of recommendations  for how we can do better going forward so i'm   excited to welcome our first panel which will  include uh danny and david um and then we're gonna   have some further discussion later on by suzi kerr  chief economist at the environmental defense fund   and joe majkut of the niskanen center uh who are  going to offer a more proactive or positive spin   um on in their experiences working through policy  making channels to try to implement carbon pricing   so to briefly introduce our first panel danny  cullenward is an energy economist and lawyer   working on the design and implementation of  scientific scientifically grounded climate policy   he's the policy director at carbon plan a  lecturer at stanford law school and a member   of california's independent emissions market  advisory committee where he's had a front row   seat to the implementation and administration of  california's greenhouse gas cap and trade program   he holds a jd and phd in environment  and resources from stanford university   david victor is a professor of industrial  organization and innovation at the school of   global policy and strategy at the university  of california san diego where he also holds   numerous courtesy appointments reflective  of his work at the intersection of energy   climate change politics and policy his research  focuses on regulated industries and how regulation   affects the operation of major energy markets and  their impact on climate change he's the author of   several books on international climate policy  and politics each of which is required reading   in my view and he's a fellow alumni of mit  where he earned a phd in political science   i'm going to hand things over for the rest of  this event tomorrow a gust moderator today robert   keohane an emeritus professor of international  affairs at princeton university he's the author   of after hegemony cooperation and discord in the  world political economy among many other important   works in the fields of international relations  and international politics professor keohane is   a member of the american academy of arts and  sciences the american philosophical society   and the national academy of sciences as well as  a corresponding member of the british academy   i'm going to hand things over to bob now to to  moderate our first event our first portion of   the panel and just want to note that uh we are  going to be taking questions from each of you   via the q a portion of the uh uh of the zoom uh  features here i'll be monitoring those and passing   things along to uh our discussions uh and with  that i'll hand things over to uh professor keohane oh thank you jesse it's a  great pleasure to be here uh   david is an old friend and i know danny  as well as well as well as suzi so it's a   it it's a good event because we are not debating  whether climate change is real and we're not   debating whether to do something about it we're  having a more serious debate on what to do about   it and how large a role congress prizes should  play or should play uh the national academies   of sciences uh issued a recent report in february  which i recommend to all of you which is kind of   ambivalent about current prices so it sets the  stage for this debate they say yes there should   be a carbon price of forty dollars a ton but  they don't put emphasis on it and and the chair   of that panel stephen pacala in introducing  it indicated that all of the recommendations   he thought could be fulfilled without a carbon  price so that it's it's carbon price but it's not   essential to so they're kind of on the fence about  this which indicates that this is a topic which   uh is a live topic that divides people who are  otherwise on the same side of most issues who   are serious policy analysts studying climate  change uh in a uh in a uh sustained way so   we'll start with david victor and and danny hello  and dave is going to speak first and then danny   excellent well thank you very much bob and jesse  and princeton and all of your affiliates for the   invitation it's really terrific to be with you  here today and i think the introductions that both   of you made really set up the question in front of  us which is um it's easy as a political scientist   to be to explain pessimism around climate change  and the lack of action but the reality right now   is there's a lot happening and more could be  happening uh a lot of technological progress   and so the question right now for for us  analysts is which policy instruments really   move the needle it's been a huge the literature  for the most part has been around what things cost   what is technological feasibility all important  questions but ultimately serious climate policy   requires putting together and holding together a  political coalition and that's what this book is   about it's about the politics of instrument choice  of policy instrument choice we're very focused   on uh throughout the book on market instruments  of two flavors cap and trade systems so quantity   measures uh carbon taxes uh price price measures  uh because the empirical experience is mostly   around uh around cap and trade the core of the  book is a lot about that but we're also going   to have some observations about carbon taxes and  also frankly how to make cap and trade systems a   little more tax-like because the politics of  that are are easier what's new in this study   is uh is a a theory of politics and  attention to uh to political behavior   and what's also new is uh is empirics it's been  enough experience now with with market-based   instruments that we can lay out some some basic  theories about how the world works politically and   then see whether the the actual experience with  uh with with market-based instruments uh survives   contact with that theory and that's what we're  gonna what we're gonna be uh dealing with today so   here's a picture of the book which is available  on amazon so we can send money to jeff bezos if   you're interested in buying the book and then i  want to just put to go go straight to the next   slide which sets up the puzzle that we're going to  carry through the presentation today what you see   on the left side is world bank data showing since  1990 the fraction of global emissions year by year   that come from jurisdictions that have carbon  market systems in one form or another and since   the middle 2000s that fraction has risen with the  uh in particular with the arrival of the european   emissions trading scheme and then systems in  california the northeastern states the so-called   reggie systems uh this year we have rolling out  and kind of haphazard ways the chinese system   so now you have this big rise in the role of uh  in the world of market-based instruments and uh uh   and and it seemed and at the same time a lot more  action on climate change so look on the surface   that that um uh that the use of market-based  instruments coincides with with policy action   what you see on the right side though are the  actual price levels um so about 85 percent of   world emissions are currently have effectively no  no price right above that you see the price levels   that are consistent with the reggie uh system  in the northeast so less than ten dollars a ton   above that you see cal price level is consistent  with what we have in california seventeen eighteen   dollars a ton you have the european uh levels  above that and you have point three percent of   global emissions have a price that's above  that's above fifty dollars uh fifty dollars   a ton so um that's a pretty big puzzle which  is we see the a huge use of uh of market-based   instruments but when you look closely at the  actual price levels it's nothing like the social   cost of carbon and frankly also it's nothing like  what societies are actually spending when you   go look at the cost of the policy measures like  renewable portfolio standards energy efficiency   measures a variety of other things that real  governments uh run by politicians that need to   to hold on to power that they've been putting into  into place and so that's the the big puzzle that   we're trying to explain uh throughout this book um  our explanation that we offer is uh is through a   lens of political behavior and it's not just kind  of politics is hard and so on but we're trying to   provide a systematic explanation for the political  behavior that we have that we observe in the book   we look at institutions institutions aggregate  interests and make decisions and the voting rules   and institutions matter and so on and then we also  look at five major interest groups or organized   potentially organized interest groups of which  three do most of the work we look at incumbent   emitting industries they're very well organized  they know who they are because they already exist   and they know what the consequences might  be of policies that change the status quo   they're typically very powerful we look at voters  which for the most part tend not to be that well   organized around climate policy especially  in opposition to climate policy except in   those in a few sectors where climate policy has  visible effects uh like in transportation fuels   where people know to the decimal point what the  cost of gasoline is and how it might change as a   result of climate and other kinds of policies we  look at political leaders who are democratically   responsive and are often playing pioneering  roles in creating markets my former governor   jerry brown for example civil society  organized civil society we look at in the book   most organized civil society think  ngos is not that heavily engaged with   carbon markets joe's organization susie's  organization are among the few exceptions   and then look at emerging low-carbon industries  which tend frankly not to be that well organized   and focused on carbon markets because if you're a  fledgling new industry you're much more interested   in direct subsidy or market support or market  access then then some abstract uh ephemeral and   distant impact of a gradually rising carbon price  into the future so what we think is that these   first three interest groups do do a huge amount of  the work and explaining what uh what happens what   we observe empirically in the real world with this  this now huge experience with using market-based   instruments to try and address the climate change  problem and over the next few minutes danny and i   are going to talk about four observations  there are many more in the book but four   observations are going to help give you a sense  of what our our core our core argument is and   the first observation is that one of the reasons  if not the central reason why prices are so low   is that um the the organized interest groups  incumbents are often opposed to policies that   alter the status quo but their power becomes  much greater uh when when that opposition is   also magnified by other interest groups such as  uh such as voters and so you see in essentially   every market we've observed in the real world you  see what we call potemkin marcus after the fabled   tsarist villages where you take the czar out to  show how beautiful the construction project has   been and so on as long as nobody looks behind the  facade it all looks like the facade is beautiful   or in our case that the market is actually doing  uh doing the work this is a shutterstock image   that dave roberts included in his volts newsletter  the three-part series about about the book for cap   and trade systems this problem is particularly uh  severe because in every market that has a cap and   trade system most of the emission reductions is  being are being implemented through regulatory   policy instruments uh direct action industrial  policy a handful of other of other things and   not the the market-based instruments think that  the cap and trade system in effect is trading   a residual you have other policies like renewable  portfolio standards that cause emission reductions   and then whatever is left over gets traded uh as  a residual so the prices that come out of the cap   and trade system don't in fact uh reflect the  real marginal the real marginal effort that is   being made by by firms there there's been a whole  series of empirical studies that have now looked   at this among other others seven bornstein's  recent piece the american economic review and a   lot of other research and we present a lot of that  a lot of that in in in the book so this is a huge   problem and one of the things we grapple with  in the book is is this does this exist because   policymakers were asleep in economics 101 when  they were learning about externalities and if they   only learned more economics or we yelled  louder as policy analysts would uh would   they do to do something differently and we think  they weren't asleep we think they were wide awake   they they they knew what they saw and from  a political point of view a lot of what we   love about markets transparency fungibility across  different sectors the ability for the market   to find out how to allocate costs and benefits  that's a horror show for politicians who want to   put together and hold together political support  for uh for a policy instrument and so that's why   they favor direct intervention and regulations  because you can manage the politics of that uh   much more much more easily this same challenge  exists for for carbon tax instruments one of the   good examples of that is norway which has one  of the highest tax environments in the world   and yet the most important pioneering carbon  capture and storage project that's being developed   right now in the norwegian market is a is a  project the northern lights project that could   not be justified on carbon tax grounds alone it  required direct and substantial support from the   norwegian government and the european government  so we see this pattern all around the world   this this potemkin markets uh pattern that uh  is the core explanation for why prices are low   even as governments are making significant efforts  and i want to underscore that the book that we've   written is not an anti-market book danny and  i are both trained in that in that discipline   it's a book that's trying to look at whether the  the ideas the elegant ideas of using market-based   instruments can work in the real political world  where there are organized forces that often want   to keep your policy from being being effective and  a key part of politics is managing the incidents   of the costs and benefits around groups that  otherwise could block completely block your policy   another thing we spend spent a lot of time in  the book discussing is the coverage of different   sectors and the the different interest groups  that that are relevant for uh for climate policy   are organized in different ways in different  in different sectors and so one way to think   about this is on the vertical axis is the  extent to which there's a demand for a for a   for a policy response uh the extent to which uh  actors are organized they have the capacity to   block policy where you see transportation fuels  at the absolute top we think the transportation   fuel problem is in some sense one of the hardest  because the public in much of the world is so   attentive to the cost of transportation fuels  electric power sector uh in the bottom right   is the opposite it's not that the power incumbents  in the power sector are indifferent to the cost of   policy but it's the government also has the  capacity to adjust the incidence of costs   uh on those different groups in ways that keep the  politics together and that's the horizontal axis   is think of this conceptually as  the size of the toolkit available   to policymakers to respond to politically  well-organized organized groups in the   power sector the tool gets really large direct  regulation tariffs and so on the transportation   area the toolkit is much smaller but for the  capacity to simply remove or water down the policy   and this is why uh cap and trade systems that or  tax systems that link together multiple sectors   follow the advice of good market design  often end up stuck with prices that are   extremely low because the politics of the least  ambitious sector the transportation fuel sector   end up driving the politics of the system uh the  system overall one of the ways you can test this   theory is to go out into the real world and  look at the actual incidence of carbon prices   which is what we show in the next on the next  slide uh using this using amazing data set the   jeffrey dolphin originally cambridge university  put together that looks it looks at the carbon   price sector by sector for all of the economies  that have market-based instruments in place   if the nominal carbon price or the price that's in  the law or the price that comes out of the market   were applied to all sectors then you'd be  on the 45 degree line shown in the in the   dotted uh gray lines there but instead what  you see is the economy-wide average price   is much much lower because there are sectors that  are fully exempted uh from from carbon pricing   and and uh or pricing levels are reduced precisely  because those sectors are politically very exposed   think for example the swedish steel industry  where you have the highest carbon tax in the world   across the swedish nominal carbon tax in the world  and yet the steel sector is exempted from the vast   majority of that because swedish steel could not  compete in the global market global commodity   market if it didn't have that kind of exemption  and so this is the real world of politics and   one of the ways you see this is in the is in  the actual prices that the economy experiences   as opposed to the idealized theoretical prices  which is where we tend to focus a lot of our   a lot of our research hopefully our research  until now so i want to hand it over now to   danny who's going to do a deep dive and look at  the situation in california where you can really   see this difference across different sectors  as and the data are particularly rich danny   thanks david uh and thank you to jesse and to our  discussion so joe and suzi really appreciate the   chance to be with you all so i wanted to show you  a picture that brings together a number of the   concepts david's just talked about and i think  california is probably the place where the data   are richest and allow us to speak most clearly  about these issues in a comprehensive manner   so i'm showing you a number of policy measures  that the state of california pursues on climate   policy and on the left-hand side you see our  cap and trade program which covers about three   quarters of the state's emissions it covers  all three of the sectors david just discussed   and as a result the politics are very very  difficult to move this system to a higher ambition   higher price outcome you've seen prices stuck  basically at an administratively determined price   floor for the market's entire history currently  17 18 a ton when you start to look at individual   sectors in california you see a very different  story california has a famously ambitious   renewable portfolio standard and after hawaii was  the second state to push for 100 clean electricity   uh in a major bill that followed actually a  very contentious bill to extend the cap and   trade program and help perpetuate these politics  that we've been talking about um california's   renewable portfolio standard when you measure the  cost effectiveness you measure the cost of carbon   that's being reduced we're pushing a lot harder on  that and we're on the direction of moving into a   zero zero grade implementation pathway um arguably  because you're looking at a single sector where   the politics are easier to organize the public  perception around the benefits of moving to clean   energy easier and the cost implications simpler  for policymakers to manage although by no means   a simple matter as jesse and others know  we see similar examples actually i think   maybe the most important and prominent one is in  california's low carbon fuel standard which is a   actually itself a carbon pricing program that  applies to just a single sector to transportation   fuels that are sold in the state and that program  trades at around 200 a ton these days what's so   interesting about this policy is that if you go  look around the world that a lot of the people who   are pursuing some of the most aggressive climate  mitigation strategies including direct air capture   as well as some of the efforts to develop negative  emissions or carbon capture and storage facilities   in california everybody's looking at the lcfs as  a primary means of financing these breaking edge   technologies because it delivers such a high  price signal that's so valuable it helps bring   new technologies to market almost an order of  magnitude higher costs i guess a little bit more   than you see with the overall economy wide cap  and trade program and you see results that are   very very different because it has such an  ambitious price trajectory when you take a   step back california is about to go through a  scoping plan process to think about how it's   going to achieve its carbon neutrality goals by  mid-century and how to achieve a legally binding   2030 emissions limit the last time the state  did this it looked at a portfolio of policies   many of them significantly more expensive than  the cap and trade program in no small part because   they're also much more ambitious and a range of  costs up to 200 a ton as well there when you open   up the hood on the spending side of these programs  which is something very few people have done   particularly in the context of political thinking  around carbon pricing you see an even wider range   of outcomes now some of the spending is what i  think ungenerously you would call pork pork is   a big part of how political systems operate and  we shouldn't run away screaming from it but you   often see some of the expenditures targeting  really ambitious and beneficial activities you   also see interest groups scrambling to label their  preferred expenditures green and to sort of come   in under the line in that sort of way so you see a  wide variety of outcomes in terms of the effective   carbon pricing that's in place and this this macro  economy-wide cap and trade program sort of sits on   top of it and creates the mirage that we're using  a market-based approach when in fact we're driving   our progress with very different strategies and  techniques california is not alone in that and we   think is is typical of the politics that we talk  about in this book the reason california stuck   on low prices on cap and trade is if you want to  adjust the program to make it do a bigger share   of california's climate policy agenda you're  going to raise transportation fuel prices and   that means anytime you want to move forward with  this instrument you fight industry you fight the   oil industry you fight the major emitters like  refiners you fight all of the manufacturers you   fight the food processors you fight them all  at the same time rather than thinking about   step-by-step opportunities to regulate subsidize  do public expenditures set performance standards   you can go step by step with those alternate  approaches and that we think is a big part   of the reason you have to have such different  levels of ambition in places like california the story for the european union is somewhat  different and we wanted to call out the experience   with the eu because the eu has been a major  success story in our view and it's something we   talk a lot about in the book we also think it's  an exception and that the conditions you see in   europe are unlikely to be found in very many other  places europe very famously these days has prices   they're almost at 50 a ton these days this is a  couple of months out of date these data remarkable   high prices right now that are pushing uh europe's  electricity sector to clean up its act including   with member states that have historically favored  coal so this is a big deal in the electricity   sector and it's it's a really good outcome as far  as we're concerned but it also follows nearly a   decade of prices being stuck in extremely low gear  as europe first began importing over a billion   questionable offset credits from international  offsetting and burden-sharing agreements under   the kyoto protocol era as well as suffering the  consequences of a massive oversupply problem that   is related in part to the policies of its member  states which let california push on other measures   and the effects of the great recession from last  decade it took extraordinary efforts to improve   the capacity of european regulators to centralize  political authority and ultimately set up major   reforms that began a couple of years ago that  pulled all of this together and the europeans have   demonstrated how to do that in a very effective  way that we think other markets should copy and   consider but there are a couple of problems that  europe hasn't solved that everyone needs to be   paying attention to because for all of the success  of this case study and it is a very big success   we have a couple of major problems the first  major problem europe is living through right now   which is that this program applies to its  industrial sector and that means all of the   trade exposed industries particularly those  operating in international commodity markets   are facing major competitiveness concerns and  the standard textbook answer that uh analysts   today gives well let's just do border carbon  adjustments let's come up with trade measures that   equilibrate the price of carbon at the border  rebate the exporters charge the importers and   now we have this even playing field through this  beautifully designed concept the problem with   border carbon adjustments beyond the fact that  they're wickedly difficult to do in practice   is that the politics don't necessarily cut in  that direction it was assumed that when europe   was pushing very very hard on these measures  that it would increase the possibility of a club   of climate-oriented countries to come together to  advocate for border carbon adjustments what we're   seeing instead right now is the united states  which has talked about these kinds of issues in   the past is also signaling maybe there's cold feet  in the u.s because europe's border carbon measures   would absolutely be applied to and potentially  target u.s imports and if you think the united   states reaction to border carbon adjustments is  tense or complicated i promise you the indian   and chinese trade perspectives are even more  significant and challenging as far as border   adjustments are concerned if you can do a border  carbon adjustment you can address this problem   but the politics we think are much more complex  than many analysts oppose the second issue that is   essentially unresolved in these political systems  is the question of transportation fuel price   impacts which are the most politically salient  for the everyday voter and the standard response   to this which i think is absolutely good economic  policy uh but which we believe may be much more   politically tenuous than many people want to admit  is the use of a significant dominant possibly even   universal share of the revenues collected by these  programs going back to households in the form of   flat per capita rebates or other forms of  progressive income transfers now the fact   is when you transfer on incomes like this you end  up making the lowest income households better off   so there is a net progressive effect of a  tax on carbon or a price on carbon combined   with these rebates but it's a very difficult  political proposition i put up here two groups   the citizens climate lobby a grassroots political  organization the united states that advocates for   these policies and an industry-backed group called  the climate leadership council which does the same   the major difference between them is the third  rail we need to talk about in the united states   which is that most of the industrial proposals  those backed particularly by the oil industry   also come with significant regulatory rollbacks  and the prospect of trying to roll back   regulations that are favored by many stakeholders  at the same time you're sort of betting the farm   on border adjustments and dividends i think  that's a very unstable design even though   it's one that on paper i personally support i've  even worked on legislation to do this in the past   at both the state and the federal level people  don't like it and we need to talk about that   the last thing i want to say before we wrap up  is the problem of how most markets have responded   when they've been unable to successfully tackle  the problems i just discussed and that is a heavy   reliance on mechanisms that displace the burden  of action somewhere else so carbon offsets are the   primary mechanism by which this is done the theory  perfectly sound from a climate perspective if it's   cheaper for somebody else to cut their emissions  somewhere else or to remove carbon somewhere else   let them do that pay them for it take the credit  and impose lower costs on your domestic interests   the problem is that in every single compliance  program the demand for these offsets comes from   the incumbent industries who to be perfectly  honest don't care about the quality of the   offsets they want high volumes of low prices  because they're trying to get that that simple   compliance pathway a lot of the ngos you would  hope would be standing up to monitor quality in   these programs actually have a kind of perverse  interest to capture the revenue stream that comes   as private entities effectively buy their way out  of the compliance option and often direct the the   money and the investment to preferred outcomes  in say forest conservation very famously the   kyoto era offsets programs invested heavily  in very questionable offsets with industrial   gases and clean electricity more recently in the  united states and in the voluntary markets that   are scaling up in a world of net zero corporate  pledges you're seeing some very suspicious claims   being made on forest carbon and increasingly on  soil carbon and we have a theory that we think   explains why in compliance markets it's such a  disastrous experience you want to move away from   it as fast as possible so the last thing i want  to say here is our theory of politics we hope   allows us to explain four really important things  one why do you get low prices and these potemkin   market outcomes two why multi-sector programs  although attractive with sort of economic theory   become major political liabilities for people  who have to hold together political coalitions   third why the european example works they've  instituted major reforms they cut off their   offsets and they've driven prices up to the point  where it's making a big difference in electricity   but presenting a major challenge for industry  and fourth why offsets have become essentially   a nightmare for everybody who's used them and when  we see people emerge from potemkin market outcomes   it's usually because they cut back on offsets the  last thing i want to say before handing the mic   back to david is we also have some thoughts in  the book about how to make markets work better   the first recommendation follows from this this  concept of veto points the smaller the coverage   of the program the easier the ability to push  the political stakeholders farther you'd rather   have multiple programs we think than a single  program that tries to put all these politics in   a single game second recommendation is the more  you can make markets like taxes the easier it   is to essentially organize the politics around  the beneficiaries on the revenue side and to   make sure those who are experiencing political  pain know what the upper limit on that pain is   and the european experience and the east coast  reggie program both give really great lessons   on how to do this from a technical perspective  and we think everybody including places like   california need to think very carefully  about those kinds of approaches third thing   to say is that offsets really aren't working they  haven't worked we don't think they ever will work   you can replace them with the price controls  you want by limiting prices you can direct the   spending in the direction you want by directing  the spending through competitive public programs   and you don't have to assume perfection with  these vastly complicated programs that are almost   impossible to monitor fourth and final thing to  say we talk a bit in the book about market links   people have fetishized market links we think  market links are perfectly good when you've   figured out how to run a system the way you want  it and when you create potemkin systems and start   linking them together you put everybody into that  low gear system and make it very difficult to   reform so with that let me turn it over to david  to close it out and i'm very much looking forward   to joe and suzi's thoughts so well thank thank you  very much danny and i just want to say one thing   at the very end here which is um you can one can  make markets perform better in a way that's much   more attentive to the political economy and that's  the argument that danny just summarized that we   have a whole chapter about that in the book uh  part of that is also frankly doing a better job   with the way the money that's raised in these  markets gets spent there's a tendency to to set   that aside and really focus on the the effect of  the prices on the behavior firms but if you think   prices are going to be lower than what society  is really willing to pay then the price effect   is not unimportant but it's also what you do  with the revenues that get raised and all this   points just us in the direction of what might  be called industrial policy not there's a key   word here missing on the slide not just carbon  prices not just carb not just market instruments   but complementary approaches where frankly the  industrial policy does more of the heavy lifting   not because that's necessarily plan a if  you think about this optimally but because   it's planned feasible when you think about this  this politically we have a lot of ideas in the   book about how to make industrial policy more  effective how the government can intervene in   economies in ways that are less distortionary  uh more effective in pushing boundaries   and we may want to talk some about that today  but i think the bulk of the debate today is   about what's what's really happening with  carbon pricing and we've laid out an argument   why when you think about this politically  you should be a little more suspicious so   thank you very much and look forward  to the discussions with joe and suzi uh   thank you very much david and danny that was  a very interesting presentation and now we   have commentary and response by susie kerr and  joseph majkut so suzi kerr is the chief economist   at environmental defense fund she graduated from  harvard university in 1995 with a phd in economics   in 2018 she was president of the australasian  agricultural and resource economic society   her research work focuses on on domestic  and international climate change mitigation   policy with special emphasis on emissions pricing  and land related emissions and sequestration   uh joseph majkut is director of climate policy at  the niskanen center he is an expert on in climate   science climate policy and risk and uncertainty  he also phd from princeton university and in   atmospheric and oceanic sciences so i think suzi  is going to start and then joe is going to follow good afternoon i think you've got the  order reversed i'm going to lead off   and then uh hopefully i can get us on first  base and suzi can knock me out uh thank you   to our uh speakers i really enjoyed this book um  i uh while i play mr necessary and sufficient uh   on the internet i think that the criticisms that  you've raised and the empirical reality for how   well we've been able to institute carbon pricing  in the united states really has to be dealt with   not just in the united states excuse me around  the world um we need to confront the challenges   that we've found uh many people have found them  through decades of of hard work advocating for   these policies or trying to design them and think  carefully about how to make them better so i look   forward to a productive discussion i'm now going  to switch to my slides and offer a few thoughts on   uh on the book and what we might be able to learn  from it as as advocates by way of introduction the   niskanen center is a 501c3 organization located in  washington dc and we advocate for a carbon price   as the principal means of reducing greenhouse  gas emissions in the united states i think it's   important to remind ourselves of the basic case  for why a carbon price as a policy intent on   bringing us to net zero is an important one to  make work well and why i think we should favor   it as implementing one early as opposed to late  principally the case here is efficiency we need to   reduce emissions quickly and we know that that's  not necessarily going to be a cost-free process   in particular uh jesse and and his colleagues  at princeton estimate that the energy cost   increase associated above reference with a net  zero economy is one to three percent of gdp those   are very large numbers this is going to take large  investments and so the more we can do it we can   uh create policies that will be efficient that  will work well the more we're going to realize   public benefits and i think there's a real tension  between the sort of political economy arguments   that are being made um and and and hold some  water by um by by david and danny and the need for   public policy to to um achieve the best public  benefit that it can i'm particularly interested   in um the the you know the two principal things  that uh carbon pricing drives both conservation   and innovation we know that higher prices  encourage conservation and i think one of the   things that we can pin for later is a discussion  around what's their role in driving innovation   i have no fundamental opposition to industrial  policy but one of the cases for carbon pricing   is that prices are an important part of creating  economic opportunity relative prices are an   important part of creating economic opportunity  for the innovators of a low-carbon economy   i also will admit however that the industrial  policy is probably something we should think   more carefully about and it can be really  important to the politics of transition in   our work in the at the federal policy level we've  seen uh particularly republicans historically um   hesitant to embrace climate action have embraced  clean energy as it gets bigger in their states   that story is pretty straightforward to tell the  picture that we see here shows us results from   a study from columbia university and others that  was released last year that i think is helpful in   setting the tone if we want to have a net zero  economy what is the carbon price we would need   to reduce emissions to capture conservation  emissions or emissions reductions and induce   innovation for the long term this model it's  a model-based study but they find that the   prices we need are somewhere in the range of  50 to 100 dollars per ton over the next decade   and i think those are actually the prices that  we can talk about realistically not from the   past decade and a half but for the one going  forward uh the black bars here show you um the   those carbon prices that have been introduced in  congress whether we could get those bills to pass   is a question but we are talking about what  i think are net zero appropriate targets here   oh how do i move my side forward there we go um i  also think that as intentions for climate change   get more serious we will see more serious prices  as danny as danny mentions the european union   has been making reforms and changed its goals  for for emissions reductions leading up to 2030   price forecasts have gone up likewise we've  seen in canada the embrace of a fairly ambitious   increase in their carbon price  federal carbon pricing program   and that one uh revenue is primarily slated  for rebates back to the population um   and i would expect if that policy holds that  you know by the end of the decade it's just a   normal part of the canadian tax system and and  um most households are are being made whole next slide one of the keys in the book that i think we  we need to spend a little bit of time on is   thinking about carbon prices or carbon markets as  things that can work in the national interest that   this sort of top-down picture of setting global  goals and then designing marketplaces early that   can help us accomplish uh those global goals  has struggled to be realized in in real politics   and so when we're thinking about how  do we design things for the national   interest and particularly in iscan and how do  we design a carbon taxation system that can be   sold in the national interest and then export it  abroad we find that the carbon tax as has two key   elements that i think are are underdeveloped  in the discussion so far today one is that   raising a carbon tax does create opportunities to  achieve partisan priorities in the united states   the u.s spends a lot of money compared to what  it brings in in terms of revenue and that's   that is a precondition that was a condition  before we had uh coveted relief spending so and   over the next decade we expect taxes to go up both  on investment and income the way i would think   about this right now is um you know with uh with a  democratic uh senate and house and presidency that   talk about budget reconciliation in the house or  or in congress there is real political opportunity   to create carbon pricing and achieve ends  the democrats might want to seek whether   that's infrastructure spending or or other sort of  distributional programs child tax credits poverty   relief etc we also know that border adjustments  while difficult to perhaps set up and administer   would if they were done correctly create  competitive advantage for some domestic industries   in the united states u.s steel is cleaner than  our competitors this graphic here shows us   emissions intensity of european imported  steel and it was created by the boston   consultant group as they were thinking through  the business connotations the market connotations   of of the eu levying a border fee on its own  imports and you see down in the lower left   there us carbon intensity of steel is much  lower and i think more markets that uh would   be carbon aware would uh help us um would help  certain industries in the united states there's   also a disadvantage for russian oil and gas  production that we probably shouldn't leave on the   on the table and lastly uh on the regulation  bit uh moving quickly to respecting my time um   administrative procedure in the united states  is clunky and slow the book argues that we're   better now the regulations that we have now  the regulatory states we have now are better   than those of the 60s and 70s they learn they're  adaptable but that process is very very slow and   if we think about trying to achieve climate  targets over the next decade or the next two   decades i think we can look at the obama clean  power plan which was agreed to the epa agreed   to rulemaking in 2010 proposed a rule in 2014  finalized it in 2015 lost in the supreme court in   2016 changes in administrations delayed action for  another four years and if you look at a serious   alternative to a federal carbon tax something like  the clean future act which was just introduced in   the house of representatives it requires at least  22 agency rulemakings within the first two years   of enactment that are not quite as large as  something like the clean power plan but would   be onerous and and relying on a industrial policy  and regulation approach which is kind of what we   have today leaves there are huge opportunities  for state industry and administrative delays   with that i close i thank our authors and i look  forward to suzi's comments i will run your slides thank you so danny david thank you jesse bob and  others for inviting me to participate today um   i also read the book again um and i ferociously  agree with much of the material in the book the   need for long-term vision about where we're going  for experimentation and for strategic leadership   that inspires and supports the followers shift  changing climate change is like shifting a   complex dynamic system into a new equilibrium  that's a really daunting task and it's not   something we're going to achieve simply  with linear thinking we need to plan   and the net zero america work is a nice example  of that we need to motivate people we need to   reassure people about the changes and we need  to build trust that we can work together on this   um i worry about some of the messages that could  be taken out of the book particularly about carbon   pricing and the way carbon pricing can play a role  within the effort we've seen a lot of simplistic   stories over the years about which policy  instrument is best and those simplistic stories   uh particularly when applied in a generic way can  be very dangerous we've seen the tax versus ets   debate which has not been a useful one for  moving policy forward we need a portfolio   of policies and actions and we should be  arguing yes and lots of good policies there   will be some overlap there will be some mistakes  but but we need to be given the urgency of the   problem we need to be dealing with a wide range of  possibilities and every country is different every   country is different in the sort of policies they  will need because their economies are different   their capability is different and their politics  is different so things that won't work politically   in the united states may work very well in some  other countries it's very easy to criticize and   economists are particularly good at this we  have endless papers that show how particular   regulatory interventions are ineffective they  need to rebound they're not having the effects   that are anticipated it's really hard to create  effective policy so we do have uh some evidence   some significant evidence that prices can be  effective and by effective i don't mean they   solve the whole problem but that they do help  and they make change in the right directions we   probably have less evidence of that on industrial  policy and by that i don't mean that we shouldn't   do industrial policy work hard on it but we  shouldn't rely on it industrial policies are also   enormously subject to political pressures that can  make them less effective and in many countries the   administrative capability to implement those will  also be terrifically challenging next slide please so um cap and trade can play a really critical  role and there are two particular ways that   i think are important here one is that  there are no other policies in our toolbox   that can apply an enforceable  limit across a wide set of sources   and the new zealand case shows  that that can be up to nearly 100   of emissions in a country so why does it matter  that we are able to put on our enforceable limit   the first one is that it allows us to create a  backstop for other policies and this is the way i   think it has been used in california it makes sure  that the package as a whole actually does add up   to the goals if the emotions trading system cap is  set in a way that is consistent with those goals   and it addresses problems like rebound or over  optimism about the likely effects of policies and   policy interactions it also is really valuable in  facilitating credible international developments   if you have a solid well-designed emissions  trading system that covers a large part of   your economy and then you make a targe a  commitment in a united nations agreement   then as long as you translate that through to your  emissions trading system your cap and trade by an   adjustment of the of the caps over time people  can see that you actually have the ability to   to comply with that and that you've made a  visible legal commitment to do so it's also   potentially a very valuable tool for facilitating  international transfers that have high integrity i   agree with david and danny that offsets have real  problems they have right from the very beginning   and i've never been a fan but we do need  situations we do need the ability to reward   some activities that are not easily included in  regulation or in in standard pricing systems and   most importantly we do need the ability to  transfer resources and help and investment   to developing countries who are just not going to  go fast enough even if they take on 2050 or 2016   net zero commitments we need them to be able to  move faster and if they have credible enforceable   limits on their emissions that can be the basis  for high integrity transfers also we know that   price signals really matter  that and they matter partly well   very heavily as investment signals the most  important thing out of an emotions trading   system is not the effect on current behavior  but the effect on investment there are signal   one among many signals to investors of how serious  society actually is about addressing this problem   so that's that's a useful role to have and in in  reverse the price and emissions trading system   tells us what investors think about the likely  future intensive that regulation because it's   telling how much they're willing to invest in  buying allowances and banking them for the future   also we've tended to present emotions pricing as  though it's providing an incentive for people to   do something they didn't want to do but i think  that it's really shifted a lot in the last five   or ten years there's a lot of companies now who  are showing that they are willing to act but the   prices in the economic environment can fight  against them because it puts acting and incurring   costs puts them at a competitive disadvantage  so including carbon pricing will enable   those companies to do the mitigation that they  are willing to do without loss of profit it also   critically supports mitigation by all actors  and we tend to focus on some of the largest   actors in the economy that makes a lot of  sense in many ways but there's a large number   of actors that are small but cumulatively add  up cumulatively add up to really a large group   so next slide please the emissions trading system  that i've been most involved with is is the new   zealand emotions trading system and because new  zealand is so small the only real impact that our   policies have on global climate change is through  exactly the sort of experimentation and enabling   and inspiring that dave and danny call inspiring  followership so new zealand is a country also   where complex policy is difficult to implement  it's not that we're not capable but there are   very few of us so our experimentation has largely  focused on emissions trading which is actually a   relatively simple policy to implement relative  to industrial policy which we did actually try   previously our experience in new zealand really  reinforces message that good policy takes time   it's not something that you can create and then  evaluate a few years later and say whether it's   working or not it is going to evolve you're  going to have to iterate and approve it over time   when we don't have time that's hard to accept but  we are doing better at managing these systems over   time we've learned a lot so we're creating stable  institutions new zealand has a climate commission   the eu has much better institutions managing  its carbon pricing and as those institutions   get stronger the prices are getting higher  we're getting better at managing prices and in   quantities within those systems and that's largely  in my mind nullifying the debate between carbon   taxes and carbon pricing and we're beginning  to seriously reassess the high levels of free   allocation i would say new zealand has very low  levels of free allocation but but most countries   do have high levels and we're refocusing on how we  can use that revenue next slide please so please   don't make acts with our future we need to invest  in a portfolio we need to be working on a wide   range of fronts a wide range of different sorts of  instruments and we do need instruments that will   keep us honest and that's where an enforceable  limit can be terrifically helpful thank you thank you very much both both sets of  panelists for a very interesting beginning to   our conversation i'm going to ask one question  and then turn the questions from the audience   and the question is this there are two points of  agreement between the two teams here you agree   that carbon prices can be good policy very  efficient and if you can get a carbon policy if if   a divinity could impose the carbon policy on us  you probably all all four agree that it should   be done um you also agree that government policies  as david and danny have shown in the last decade   have been way too low to accomplish very much uh  what i want to ask david and danny first and then   joe and suzi is what political processes can be  realistically imagined during the next decade   that could generate a sufficiently high carbon  price let us say 1500 a ton that would make it   that would make a genuine difference as the  eu has started to move toward but david do   you want to start yeah maybe i'll start there  um and i think you've summarized the areas of   agreement you know we have disagreement about how  big the portfolio is in different areas and so on   we have violent agreement about the theory of  using markets the place to look where you can   really do the most with carbon pricing is  in the sectors where you can manage the   consequential politics of that most readily  and so we see that in the power sector   um so you could you could make quite a lot of  progress uh and indeed that is the european   experience now uh make quite a lot of progress  bringing up prices in the power sector managing   through tariff control and so on the other  consequences of that it's literally literally   bolted to the ground so it's not going to be  migrating to another country to escape regulation   and not going to be competing we're not competing  with electric generators in russia and and so   that's the place that in some sense i thought that  i think that's going to be the high water mark suzi or joe   so i'll just throw in a couple of thoughts and one  is building um bipartisan institutions and i know   this is terrifically difficult in the u.s but i  think it's something that other countries have   managed to achieve and can manage to achieve  and de-politicizing that that carbon price   so that it becomes a financial issue it becomes  something that's about the treasury and not about   the ministries for environment etc i think can  be very helpful um and i think our experience has   certainly shown that um i think the other thing  is as david and danny's policies are successful in   building up new sectors or if you include sectors  that are inevitably on the winning side of prices   you're going to be building those  constituencies for high prices and   in new zealand it's been really critical that we  include forestry not as really offsets but as a   as an integral part of the emissions trading  system and foresters uh win out of the system   so they have been a critical lobby group for  getting higher prices and better price control   okay let me pick up on the bipartisan point  there are a couple of questions uh from from the   attendees which focus on uh either on on  two questions both of which have to do with   bipartisanship one is industry including big oil  firms uh has to some extent supported a carbon tax   as david or i think it was david said uh provided  that there be uh some sort of regulatory rollback   uh i want to know i think our our attendees  want to know whether this is a faint or whether   it's genuine support would they be would they  actually form a basis for a coalition with real   estate compromise or would they say oh no sorry  you didn't take you didn't roll back all those   regulations we don't like and therefore we're not  supporting it and this relates to a question by an   attendee who's anonymous asking how we'd how you'd  assess the prospect for fee and dividend programs   like the citizens climate lobby bill closely  related uh would the direct cash payments change   the politics or would that be turned turned  on its head once it was a serious proposal   so i'm trying to start with with with david or  danny again and then i'll come to joe or suzi   sure so i mean i think the question of  regulatory rollbacks is one of the toughest   and it's something i can't sit here and say with  what the american petroleum institute's actually   going to demand as part of these negotiations but  i think there's a pretty long history of there   being some questions around both the sincerity of  those efforts and the scope of what's desired as a   compromise and i'll point to you there's there's  no greater example of this than in california   where the oil industry demanded massive regulatory  rollbacks that took away the climate regulators   ability to set direct regulations on either our  refining industry or our upstream oil and gas   industry period end lost all regulatory authority  on that industry hopefully we're going to get that   back but that was a precondition of the extension  of the cap and trade program to isolate a price   that did very little to affect those sectors and  i think the national industry is probably thinking   on similar strategic terms if we got to a real  negotiation around this i think this question   of what the rollback would be has got to be front  and center in the conversation and half promises   and illusions and vague statements make me very  concerned about the direction that conversation   would head in but i can't tell you it's resolved  because nobody's saying anything concrete that   has real political muscle right now second thing i  want to say just to touch briefly on the citizens   climate lobby point the the problem that we're  trying to address is transportation fuel prices   are visible and toxic and a dividend is a solution  to that on paper i love it i think it's a great   policy i even helped write a bill in california to  do just that the problem is there isn't much of a   serious constituency for that beyond the educated  activist community and when you start to get into   real conversations around billions of dollars  lots of other hands come into that pie and start   taking away from it if you could get it i think  it could potentially help address these concerns   but we need to watch right now that conversation  unfolding in saskatchewan and alberta   and canada where the federal government  has said this is what we're going to do   and if you believe that this theory is going to  address the political problem i've identified   watch how conservative parts of canada react to  those ideas so far it's not looking particularly   good even though i will tell you as an economist  you pencil the numbers out it is absolutely a   progressive policy it's not clear to me that  that resolves the political problem that it&

2021-03-26

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