Energy Economics Archives - An Economic View of the Environment

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.

A Key Issue for the Upcoming Climate Conference in Santiago

In December of this year, delegates to the 25^th Conference of the Parties (COP-25) of the United Nations Framework Convention on Climate Change (UNFCCC) will assemble in Santiago, Chile, for two weeks of negotiations. The location for the Conference was changed to Santiago when the Chilean government graciously stepped in as host after the Brazilian government reneged – two months after winning the bid and one month after the election of President Jair Bolsonaro – on its previous commitment to host COP-25.

The previous year, COP-24 took place in Katowice, Poland. As I’ve previously written at this blog (”Climate Negotiations in Poland Advanced Implementation of the Paris Agreement”, December 20, 2018), the delegates at that Conference reached consensus on a 156-page “Rulebook” that filled in important details for 28 of the 29 articles of the skeletal Paris Agreement. Consensus was not reached on one very important part of the Agreement, Article 6, the home for international cooperation that can bring down costs, and thereby facilitate greater ambition.

This presents a major challenge for the delegates to this year’s COP as they seek to complete the Rulebook with details for Article 6; in particular, how to facilitate a robust system of international cooperation (that allows for international carbon markets) while avoiding the possibility of double counting of emissions reductions, that is, counting the same emission reduction more than once when assessing progress towards the achievement of climate mitigation targets.

This is the topic of an article that appeared very recently in Science, “Double Counting and the Paris Agreement Rulebook,” which I had the pleasure of co-authoring with an international set of colleagues – Lambert Schneider, Maosheng Duan, Kelley Kizzier, Derik Broekhoff, Frank Jotzo, Harald Winkler, Michael Lazarus, Andrew Howard, and Christina Hood. In this blog essay, I provide a brief summary, which I hope will entice readers to check out the full version in Science (Volume 366, Issue 6462, pp. 180-183, October 11, 2019).

The Context

It is important to distinguish among three distinct yet closely related levels of actions in regard to international cooperation under Article 6 of the Paris Agreement:

First, national or regional jurisdictions can establish domestic policies, such as emissions trading systems, carbon taxes, or performance standards, for the purpose of achieving the targets specified in their respective Nationally Determined Contributions (NDCs) under the Agreement.

Second, jurisdictions can link their respective domestic policy instruments, as, for example, California and Quebec have done, allowing allowances to be traded across international borders. Such linkage was the subject of a previous article in 2018 in Science I co-authored with Michael Mehling and Gilbert Metcalf (a more complete version of that work appeared in the periodical, Environmental Law, earlier this year).

Third, and the focus of the new Science article and this blog essay, Article 6.2 provides a potential home for accounting mechanisms (“Internationally Transferable Mitigation Outcomes” or ITMOs, and “Corresponding Adjustments”) that can properly take account of such international transfers when demonstrating achievement of national targets under the Paris Agreement.

The Risk of Double Counting

If two different jurisdictions, such as two countries with their own NDCs, were both to take credit for the same emission reductions, there would be double counting under the Paris Agreement, which would be a significant threat to the integrity of the Agreement and any carbon markets employed in its implementation. Given that half of the Parties of the Paris Agreement have indicated their intention to participate in carbon markets, avoiding (that is, reducing the risk of) such double accounting is critical for the credibility of the Paris regime. A robust system to account for international transfers of emission reductions is necessary.

As my co-authors and I explain in the Science article, Article 6.2 of the Agreement provides the needed accounting framework through provision for “corresponding adjustments,” which can function as a form of double-entry bookkeeping. But despite the fact that the Paris Agreement is explicit that double counting should be avoided, some Parties to the Agreement disagree about how it should be avoided, and indeed, about what constitutes double counting. In addition, there is some controversy related to how much international oversight is needed to ensure robust accounting

The Path Ahead

Success at COP-25 in Santiago is critical. In our Science article, my co-authors and I propose several principles to guide the negotiations. I will mention just two of these in this brief essay.

First, a single set of common international accounting rules should apply under the Paris Agreement, irrespective of what type of carbon market mechanism is used to generate emission reductions.

Second, effective accounting will be greatly facilitated by all countries adopting targets (NDCs) that are economy-wide, cover all GHGs, apply to common multi-year time periods, and are expressed as GHG emissions. The Paris Agreement expressly foresees that countries will move toward such economy-wide targets over time.

If international cooperation is to combat climate change cost-effectively, the Paris Agreement needs to employ rules for international carbon markets that ensure environmental integrity and avoid double counting. Otherwise, carbon markets may sadly undermine the Paris climate agreement.