Economic Policy Archives - Page 20 of 39 - An Economic View of the Environment

What to Expect at COP-25 in Madrid

The “Rulebook” for the Paris Agreement puts flesh on the bones of the skeletal 13-page Agreement, and was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially provides for international carbon markets and other forms of cross-border cooperation. Watch for key developments in Madrid!

Key Challenge for Long-Term Success of Paris Agreement

There are two necessary conditions for ultimate success of the Paris Agreement. First, adequate scope of participation. This has been achieved, with meaningful participation from countries representing some 98% of global emissions – or some 85% if the U.S. withdraws in November, 2020 (compared with the 14% of global emissions from countries committed to emissions reductions under the current, second commitment period of the Kyoto Protocol). The other necessary condition is adequate ambition of the individual national contributions. This is where the greatest challenges lie.

The very element of the Paris Agreement that has fostered such broad scope of participation – namely, that the individual national “pledges” (Nationally Determined Contributions or NDCs) are anchored in national circumstances and domestic political realities – implies that individual contributions may not be sufficient, due to the global commons nature of the climate change problem, and the attendant free-rider issues.

So, are there ways to enable and facilitate increased ambition over time? Linkage of regional, national, and sub-national policies can be part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems. Linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies will be highly heterogeneous. More about this below.

Merits and Concerns regarding Linkage

Linkage facilitates significant compliance cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions. According to one recent study, costs could – in theory – be reduced to 25% of what they otherwise would be! Also, linkage means improved functioning of markets by reducing market power and price volatility, and there are political benefits to linking parties as a sign of momentum when political jurisdictions band together. Another advantage is administrative economies of scale. Finally and very importantly, linkage allows for the UNFCCC’s key equity principle of “common but differentiated responsibilities and respective capabilities” (CBDR) to be achieved without sacrificing cost-effectiveness.

There are also some legitimate concerns about policy linkage. First, there are distributional impacts, both in the form of redistribution within jurisdictions, and redistribution across jurisdictions. Such impacts are politically problematic. There is also the automatic propagation of some design elements, in particular, the cost-containment elements of banking and price collars which propagate from one linked system to another. For that matter, weak design in one jurisdiction affects prices and quality in all linked jurisdictions. And price shocks can propagate through linked jurisdictions. Finally, there is decreased autonomy, as rules are set jointly by all linked parties.

Linkage and the Paris Agreement

There are three distinct but closely related levels of relevant policy action. First, national (or regional) governments can establish emission-reduction policies, including carbon taxes, cap-and-trade systems, and performance standards. Second, these jurisdictions can link their policy instruments through mutual recognition of permits, allowances, or credits via bilateral agreements. This allows trade of these units across international borders, which facilitates lower-cost achievement of the aggregate target. But such transfers of emission reduction responsibilities and actions need to be correctly counted toward compliance with respective NDCs under the Paris Agreement. This is where Article 6 comes in!

In particular, Article 6.2 provides for Internationally Transferred Mitigation Outcomes (ITMOs) and Corresponding Adjustments, which together can function as the international accounting mechanism to correctly reflect a multiplicity of international private-sector exchanges (under various international linkages).

In other words, I view ITMOs as units of accounting for Corresponding Adjustments, not as a medium of exchange for government-government purchase and sale. Otherwise, Article 6.2 would become equivalent to the Kyoto Protocol’s Article 17 (international emissions trading), and will fail as that did, because governments are not cost-minimizing agents, and lack requisite information even if they were (Hahn & Stavins, “What Has the Kyoto Protocol Wrought? The Real Architecture of International Tradeable Permit Markets,” 1999).

Is Heterogeneity a Challenge for Linkage?

Yes, it can be. There are three major categories of heterogeneity that can pose challenges to effective international policy linkage under the Paris Agreement. First, there are heterogeneous policy instruments: cap-and-trade; tradable performance standards; emission reduction credits (offsets); taxes; and performance standards. Second, there are heterogeneous jurisdictions and geographic scope: regional, national, and sub-national; and status under the Paris Agreement (Party and non-Party). Third, the NDC targets themselves area highly heterogeneous: hard (mass-based) emissions caps; relative mass-based emissions caps (relative to BAU); rate-based emissions caps (per unit of economic activity or per unit of output); and non-emissions caps, such as some degree of penetration of renewable energy sources. Also, there are differences in base year, target year, sectors, GHGs, estimated global warming potential, and conditionality.

Is Linkage Among Such Heterogeneous Policies Feasible or Wise?

With Michael Mehling (MIT) and Gilbert Metcalf (Tufts University), I have carried out research on heterogeneous linkage and the Paris Agreement (“Linking Climate Policies to Advance Global Mitigation.” Science 359, 2018). Among our major findings is the following. Most features of heterogeneity do not present insurmountable obstacles to linkage, but some present real challenges, and indicate the need for specific accounting guidance to avoid double-counting. Article 6.2 provides an obvious home for this accounting guidance (Schneider, Duan, Stavins, Kizzier, Broekhoff, Jotzo, Winkler, Lazarus, Howard, and Hood. “Double counting and the Paris Agreement rulebook.” Science 366, 2019).

The Outlook for Heterogeneous Linkage under Article 6.2 of the Paris Agreement

The negotiators in Madrid have an opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2. A robust accounting framework can foster successful linkages of climate policies across jurisdictions. But if guidance extends much beyond basic accounting rules – such as implicit taxes on cooperation via what have been termed “share of proceeds” and “net global emission reduction” – then restrictive requirements will impede effective linkage, and thereby drive up compliance costs. True to the spirit of the Paris Agreement, less may be more!

So, a combination of sensible common accounting rules and absence of restrictive criteria and conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, and – most important – thereby increase the latitude of Parties to scale up the ambition of their NDCs.

Only time – and the work of the delegates in Madrid – will tell.

The Harvard Project on Climate Agreements at COP-25

Along with my Harvard colleagues, Joseph Aldy, Robert Stowe, and Jason Chapman, I will be at the Twenty-Fifth Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) in Madrid, Spain, leading our delegation from the Harvard Project on Climate Agreements (HPCA), December 8-11, 2019.

In addition to holding a series of bilateral meetings with various national delegations, I will participate in at least four events. Two of these are panel sessions organized by HPCA, while the two others are panel sessions organized by national delegations. Our team will be at COP-25 during the week of December 8-12, 2019. COP-25 attendees who wish to meet with the Harvard Project during the conference should send an email Jason Chapman, Project Manager (jason_chapman@hks.harvard.edu).

Four Events in Brief

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by Harvard Project on Climate Agreements, Enel Foundation, and Tsinghua University Global Climate Change Institute; Monday, December 9, 2019; 11:30 am – 1:00 pm; Location: Side Event Room 3

The Seventh Global Climate Change Think Tank Forum: The Latest Developments in Climate Change Economics
Robert Stavins, Presenter; Hosted by China National Center for Climate Change Strategy and International Cooperation; Tuesday, December 10, 2019; 6:00 pm – 7:30 pm; Location: China Pavilion

Realizing the Potential of Article 6 of the Paris Agreement
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by the Harvard Project on Climate Agreements; Wednesday, December 11, 2019; 12:30 pm – 2:00 pm; Location: Pavilion of the International Emissions Trading Association (IETA)

Enhancing Capacity of Developing Countries to Address Climate Change: Issues and Opportunities
Robert Stavins, Keynote Speaker; Hosted by Korea University, Green Asia, Center for Climate and Sustainable Development Law and Policy, Global Green Growth Institute, UNDP Seoul Policy Centre, UN Office for Sustainable Development; Wednesday, December 11, 2019; 3:00 pm – 4:30 pm; Location: Korea Pavilion

Two Harvard Project Events in Detail

Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience

Monday, 9 December, 2019; 11:30am – 1:00pm, Location: Side Event Room 3

Speakers will present recent research and analysis of carbon-pricing policy to reduce greenhouse-gas emissions. The panel will give some attention to experience and prospects in South America and to China’s emerging national system. A new research paper by Robert Stavins on the relative merits of cap and trade and carbon taxes will provide a basis for much of the discussion.

Speakers: Joseph Aldy, Harvard University; Simone Mori, Enel; Raffaele Mauro Petriccione, Director General of DG Climate Action in the European Commission; Robert Stavins, Harvard University; Zhang Xiliang, Tsinghua University; government representatives to be invited.

Realizing the Potential of Article 6

Wednesday, 11 December 2019; 12:30pm – 2:00pm; Location: Pavilion of the International Emissions Trading Association (IETA)

Panelists will discuss the potential of Article 6 to decrease mitigation costs and incentivize increased ambition. They will review the status of the negotiations on the Article 6 rulebook, including issues remaining to be resolved at that point in the COP – including potentially, ongoing discussion about double counting (environmental integrity) and the Article 6 – Article 13 interface (applications of the enhanced transparency framework to Article 6 transfers).

Panelists: Joseph Aldy, Harvard Kennedy School; Kay Harrison, Ministry of Foreign Affairs and Trade, New Zealand; Kelley Kizzier, Environmental Defense Fund; Andrei Marcu, European Roundtable on Climate and Sustainable Transition; Robert Stavins, Harvard Kennedy School

The Path Ahead

After COP-25, I will post an essay at this blog assessing the progress (or lack thereof) made in Madrid – on Article 6, as well as other elements and issues.

In the meantime, if you will be at COP-25, and would like to meet with the Harvard Project on Climate Agreements, please contact Jason Chapman (jason_chapman@hks.harvard.edu).

Interview with Nick Stern in Second Episode of “Environmental Insights”

The prominent U.K. economist Nicholas Stern, IG Patel Professor of Economics and Government and chair of the Grantham Research Institute on Climate Change and Environment at the London School of Economics, is featured in the second episode of our new podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” You can listen to the interview with Professor Stern here.

In hosting these podcast episodes, I have the pleasure of interviewing interesting and accomplished people who are working at the intersection of economics and environmental policy. Our first episode, which appeared last month, featured my interview with Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency (who is leaving Harvard to become President of the Natural Resources Defense Council).

In this second episode, Nick Stern discusses his career, British politics, and efforts to combat climate change.

It was more than a decade ago that Nick – working on behalf of British Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown – directed the landmark Stern Review on the Economics of Climate Change, published in 2006. In our interview, Nick notes that it was his appointment to that position that truly sparked his intense interest in the topic.

“I wasn’t a specialist before we began, but I went to the best scientists in the world and educated myself quickly from them. I did know something, of course, like any informed social scientist should about climate, but it hadn’t been a specialty. And once you start thinking about this, you can’t stop. And I haven’t stopped since then.”

My interview with Stern is the second episode in the Environmental Insights series, with future episodes scheduled to appear once per month. The podcast is hosted on SoundCloud, and also available on iTunes, Pocket Casts, Spotify, and Stitcher.

Fifty Years of Policy Evolution under the Clean Air Act

Fifty years ago, in 1970, the first Earth Day was celebrated, the U.S. Environmental Protection Agency (EPA) was established, and the U.S. Clean Air Act was passed. Much has transpired with air pollution policy in the United States since that time. Given the current state of Federal clean air policy in this country, it may be helpful to reflect on these fifty years of policy evolution, which is what Richard Schmalensee (of the MIT Sloan School of Management) and I do in a new article that appears in the Journal of Economic Perspectives (Volume 33, Issue 4, Fall 2019), “Policy Evolution under the Clean Air Act.” I hope this brief essay will stimulate you to download and read the full article.

Setting the Stage

In the article, Professor Schmalensee and I review and assess the evolution of air pollution control policy under the Clean Air Act with particular attention to the types of policy instruments used. After outlining key provisions of the 1970 act and its main changes over time, we trace and assess the historical evolution of the policy instruments used by EPA in its clean air regulations. This evolution was sometimes driven by the emergence of new air quality problems, sometimes by innovation and experimentation within EPA, and sometimes by changes in the Clean Air Act itself.

It is striking that until about 2000, EPA made increasing use of market-based instruments, enabled by major amendments to the Act in 1977 and 1990, which passed with overwhelming bipartisan support. In recent years, however, environmental policy has become a partisan battleground in the United States, and until now, it has not been possible to provide an effective response to climate change or to address other new and evolving air quality problems.

Policy Instruments Used under the Clean Air Act

Three major types of policy instruments have been employed under the authority of the Clean Air Act: technology standards, which specify the equipment or process to be used for compliance; performance standards, which specify the maximum quantity of emissions or maximum atmospheric concentrations that are allowed; and emissions trading systems, either in the form of emissions-reduction credit (offset) systems or cap-and-trade. In addition, taxes have sometimes been employed, although their use under the Clean Air Act has been peripheral.

The Evolution of Air Quality Policy Instruments

Under the 1970 Clean Air Act, all federal air pollution regulation involved either technology standards or performance standards. At that time, some environmental advocates argued that facilitating greater flexibility through tradable emission rights would inappropriately legitimize environmental degradation, while others questioned the very feasibility of such an approach. But over time, as the Clean Air Act was amended and as its interpretation by EPA evolved, air pollution regulation evolved from sole reliance on conventional, command-and-control regulations to greater use of emissions trading.

In the article, we examine EPA’s early experiments with emissions trading in the 1970s, and then turn to the leaded gasoline phasedown in the 1980s, implemented via a tradable performance standard by the Reagan administration. We also take a look at the U.S. approach to complying with the Montreal Protocol for stratospheric ozone protection, which involved both an excise tax and a trading system.

Next up in our review and assessment is the path-breaking sulfur dioxide allowance trading program, under the Clean Air Act amendments of 1990. We also examine several regional programs that were executed under the authority of the Clean Air Act, including the Regional Clean Air Incentives Market (RECLAIM) in southern California, NO_x trading in the eastern United States, and the NO_x budget trading program.

To bring this up to date, Dick Schmalensee and I also examine climate change policies, including those of the Obama administration, as well as those of the current, Trump administration.

Conclusions

We conclude that the supporters of the 1970 Clean Air Act, who no doubt hoped that it would produce major environmental benefits, would be pleased that despite the fact that real U.S. GDP more than tripled between 1970 and 2017, aggregate emissions of the six criteria pollutants declined by 73 percent.

On the other hand, the original supporters of the 1970 Clean Air Act might be quite surprised by some aspects of the evolution of clean air regulation under the Act. For example, it is difficult to imagine that any of the supporters of the 24-page 1970 Act would have predicted how complex air pollution regulation would become over the subsequent half century. And we suspect that the evolution toward more intensive use of market-based environmental policy would also have been a surprise to those involved in passage of the 1970 Clean Air Act.

However, those involved in the bipartisan passage of the 1970 Clean Air Act would likely be disappointed that environmental policy has become a partisan battleground. It has become impossible to amend the Clean Air Act or to pass other legislation to address climate change in a serious and economically sensible manner.

The Path Ahead

In the final part of the article, we note that an implication of these five decades of experience may be that policies to address climate change and other new environmental problems should be designed in ways that make them more acceptable in the real world of politics. This could mean, for example, giving greater attention to suboptimal, second-best designs of carbon-pricing regimes, such as by earmarking revenues from taxes or allowance auctions to finance additional climate mitigation, rather than optimizing the system via cuts in distortionary taxes, or using such revenues for fairness purposes, such as with lump-sum rebates or rebates targeted to low income and other particularly burdened constituencies.

Economists might also be more effective by sometimes working to catch up with the political world by examining better design of second-best non-pricing climate policy instruments, such as clean energy standards, subsidies for green technologies, and other approaches. At some point the politics may change, of course, which is why ongoing economic research on climate policy instruments of all kinds is important.