Learning from Thirty Years of Experience with Cap-and-Trade Systems

“Those who do not remember the past are condemned to repeat it.”

The implication of this famous line (often misquoted as “those who do not learn history are doomed to repeat it”) from philosopher George Santayana’s 1905 book, The Life of Reason, Volume I – Reason in Common Sense, is that we are wise to learn from our mistakes.  This is undoubtedly true, as is the parallel recommendation that we are wise to learn from our successes.


China is expected to launch later this year the world’s largest (CO2) emissions trading system; the European Union is in the process of extending and strengthening its CO2 cap-and-trade system; California has just extended and strengthened its CO2 cap-and-trade system; and earlier this week, nine New England and Middle Atlantic U.S. states announced their plan to extend and strengthen the Regional Greenhouse Gas Initiative.  With such developments in place and on the horizon, this is an important time to think carefully and critically about the history of cap-and-trade, and identify lessons that can be learned from three decades of prior experiences – both successes and failures.

That is precisely what Richard Schmalensee (Howard W. Johnson Professor of Economics and Management, Emeritus, at the Massachusetts Institute of Technology, and Dean Emeritus of the MIT Sloan School of Management) and I sought to do in an article which recently appeared in the Review of Environmental Economics and Policy (REEP) (“Lessons Learned from Three Decades of Experience with Cap and Trade,” Review of Environmental Economics and Policy, volume 11, issue 1, Winter 2017, pp. 59-79).  I encourage you to read the full article, which – in keeping with the style of the Review of Environmental Economics and Policy – is brief and broadly accessible.

In the hope that you may be stimulated to read the full article, in today’s blog essay I draw on the article to provide the historical context of our analysis, and to review some of our conclusions (for the actual analysis of individual cap-and-trade systems, and the justifications for our conclusions, you will need to see the article).

The Historical Context

Thirty years ago, many environmental advocates argued that government allocation of rights to emit pollution legitimized environmental degradation, while others questioned the feasibility of such an approach.  At the time, virtually all pollution regulations took a command-and-control approach, specifying the type of pollution-control equipment to be used or setting uniform limits on emission levels or rates.

Today, it is widely recognized – at least among students of economics – that because emission reduction costs can vary greatly, the aggregate abatement costs under command-and-control approaches can be much higher than under market-based approaches, which establish a price on emissions – either directly through taxes or indirectly through a market for tradable emissions rights established under a cap-and-trade policy.  Because market-based approaches tend to equate marginal abatement costs rather than emissions levels or rates across sources, they can achieve aggregate pollution-control targets at minimum cost.

In the REEP article, Dick Schmalensee and I examined the design and performance of seven of the most prominent emissions trading systems that have been implemented over the past 30 years in order to identify key lessons for future applications.  We focused on systems that have been important environmentally and/or economically, and whose performance has been well documented.  We excluded emission-reduction-credit (offset) systems, which offer credits for emissions reductions from some counterfactual baseline, because while emissions can generally be measured directly, emissions reductions are unobservable and often ill-defined.

The seven emissions trading systems we examined were:

  • the U.S. Environmental Protection Agency’s (EPA’s) phasedown of leaded gasoline in the 1980s;
  • the U.S. sulfur dioxide (SO2) allowance trading program under the Clean Air Act Amendments of 1990;
  • the Regional Clean Air Incentives Market (RECLAIM) in southern California;
  • the trading of nitrogen oxides (NOX) in the eastern United States;
  • the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States;
  • California’s cap-and-trade system under Assembly Bill 32; and
  • the European Union (EU) Emissions Trading System (ETS).

All of these programs except the first are textbook cap-and-trade systems.

In the article, we reviewed the design, performance, and lessons learned from each of the seven systems (and briefly discussed several other cap-and-trade systems).  In this blog essay, however, I turn immediately to our summary of key lessons.

Lessons from Thirty Years of Experience

Overall, we found that cap-and-trade systems, if well designed and appropriately implemented, can achieve their core objective of meeting targeted emissions reductions cost-effectively.  This is not something that was taken for granted in the past, and is still not accepted in some quarters.  That said, the devil is in the details, and design as well as the economic environment in which systems are implemented are very important.  Moreover, as with any policy instrument, there is no guarantee of success.  Based on the numerous specific lessons we identified in our analysis, several design and implementation features of cap-and-trade programs appear critical to their performance.

Key Features for System Design and Implementation

First, it is important not to require prior approval of trades.  In contrast to early U.S. experience with emissions offset systems, transactions costs can be low enough to permit considerable efficiency-enhancing trade if prior approval of trades is not required.

Second, it is clear from both theory and experience that a robust market requires a cap that is significantly below BAU emissions.

Third, to avoid unnecessary price volatility, it is important for final rules (including those for allowance allocation) to be established and accurate data supplied well before commencement of a system’s first compliance period.

Fourth, high levels of compliance in a downstream system can be achieved by ensuring there is accurate emissions monitoring combined with significant penalties for non-compliance.

Fifth, provisions for allowance banking have proven to very important for achieving maximum gains from trade, and the absence of banking provisions can lead to price spikes and collapses.

Sixth, price collars are important.  A changing economy can reduce emissions below a cap, rendering it non-binding, or a growing economy can increase emissions and drive allowance prices to excessive levels.  Price collars reduce price volatility by combining an auction price floor with an allowance reserve.  The resulting hybrid systems will generally have lower costs (as more stable prices facilitate investment planning) at the expense of less certain emissions reductions.

Finally, economy-wide systems are feasible, although downstream, sectoral programs have been more commonly employed.

Political Considerations that Affect Cap-and-Trade Design

Experiences with cap-and-trade also indicate the importance of political considerations for the design of cap-and-trade programs.

First, because of the potentially large distributional impacts involved, the allocation of allowances has inevitably been a major political issue.  Free allowance allocation has proven to help build political support. Under many circumstances, the equilibrium allowance distribution, and hence the aggregate abatement costs of a cap-and-trade system, are independent of the initial allowance allocation (Montgomery 1972; Hahn and Stavins 2012).  This means that the allowance allocation decision can be used to build political support and address equity issues without concern about impacts on overall cost-effectiveness.

Of course, free allowance allocation eliminates the opportunity to cut overall social costs by auctioning allowances and using the proceeds to cut distortionary taxes.  On the other hand, experience has shown that political pressures exist to use auction revenue not to cut such taxes, but to fund new or existing environmental programs.  Indeed, cap-and-trade allowance auctions can and have generated very significant revenue for governments.

Second, the possibility of emissions leakage and adverse competitiveness impacts has been a prominent political concern in the design of cap-and-trade systems.  Virtually any meaningful environmental policy will increase production costs and thus could raise these concerns, but this issue has been more prominent in the case of cap-and-trade instruments.  In practice, leakage from cap-and-trade systems can range from non-existent to potentially quite serious.  It is most likely to be significant for programs of limited geographic scope, particularly in the power sector because of interconnected electricity markets.  Attempts to reduce leakage and competitiveness threats through free allocation of allowances do not per se address the problem, but an output-based updating allocation can do so.

Third, although carbon pricing (through cap-and-trade or taxes) may be necessary to address climate change, it is surely not sufficient.  In some cases, abatement costs can be reduced through the use of complementary policies that address other market failures, but the types of “complementary policies” that have emerged from political processes have instead addressed emissions under the cap, thereby relocating rather than reducing emissions, driving up abatement costs, and suppressing allowance prices.

Identifying New Applications

Cap-and-trade systems are now being seriously considered for a wide range of environmental problems.  Past experience can offer some guidance as to when this approach is most likely to be successful.

First, the greater the differences in the cost of abating pollution across sources, the greater the likely cost savings from a market-based system – whether cap-and-trade or tax — relative to conventional regulation (Newell and Stavins 2003).  For example, it was clear early on that SO2 abatement cost heterogeneity was great, because of differences in ages of plants and their proximity to sources of low-sulfur coal (Carlson et al. 2000).

Second, the greater the degree of mixing of pollutants in the receiving airshed (or watershed), the more attractive a market-based system, because when there is a high degree of mixing, local hot spots are not a concern, and the focus can thus be on cost-effective achievement of aggregate emissions reductions.  Most cap-and-trade systems have been based on either the reality or the assumption of uniform mixing of pollutants. However, even without uniform mixing, well-designed cap-and-trade systems can be effective, as illustrated by the two-zone trading system under RECLAIM, at the cost of greater complexity.

Third and finally, since Weitzman’s (1974) seminal analysis of the effects of cost uncertainty on the relative efficiency of price versus quantity instruments, it has been well known that in the presence of cost uncertainty, the relative efficiency of these two types of instruments depends on the pattern of costs and benefits.  Subsequent literature has identified additional relevant considerations (Stavins 1996; Newell and Pizer 2003).  Perhaps more importantly, theory (Roberts and Spence 1976) and experience have shown that there are efficiency advantages of hybrid systems that combine price and quantity instruments in the presence of uncertainty.

Implications for Climate Change Policy

Two highly relevant lessons from thirty years of experience with cap-and-trade systems stand out.  First, cap-and-trade has proven itself to be environmentally effective and economically cost-effective relative to traditional command and control approaches. Moreover, less flexible systems would not have led to the technological change that appears to have been induced by market-based instruments (Schmalensee and Stavins 2013) or the induced process innovations that have resulted (Doucet and Strauss 1994).

Second, and equally important, the performance of cap-and-trade systems depends on how well they are designed.  In particular, it is important to reduce unnecessary price volatility, and hybrid designs can offer an attractive option if some variability of emissions can be tolerated, since substantial price volatility generally raises costs.

All of this suggests that cap-and-trade merits serious consideration when regions, nations, or sub-national jurisdictions are developing policies to reduce greenhouse gas (GHG) emissions.  And, indeed, this has happened.  However, because any meaningful climate policy will have significant impacts on economic activity in many sectors and regions, proposals for such policies have often triggered significant opposition.

In the United States, the failure of cap-and-trade climate policy in the Congress in 2010 was essentially collateral damage from a much larger political war that decimated the ranks of both moderate Republicans and moderate Democrats.  Nevertheless, political support for using cap-and-trade systems to reduce GHG emissions has emerged in many other parts of the world.  In fact, in the negotiations leading up to the Paris climate conference in 2015, many parties endorsed key roles for carbon markets, and broad agreement emerged concerning the value of linking those markets (codified in Article 6 of the Paris Agreement).

It is certainly possible that three decades of high receptivity to cap-and-trade in the United States, Europe, and other parts of the world will turn out to have been only a relatively brief departure from a long-term trend of reliance on command and control environmental regulation.  However, in light of the generally positive experience with cap-and-trade, there is reason for optimism that the tarnishing of cap-and-trade in US political debates will itself turn out to be a temporary departure from a long-term trend of increasing reliance on market-based environmental policy instruments.  Only time will tell.


Environmental Economics – A Personal Perspective

Today, I wish to take a brief hiatus from reflecting on the current status of climate change policy, whether in the often traumatic context of policy pronouncements – or rather, Twitter messages – from U.S. President Trump and his administration, or in the broader, longer-term context of global actions.  Rather, I want to seize on this mid-summer opportunity to think about the past rather than the present.  In particular, I would like to reflect on the four decades in which I have been engaged in the world of environmental policy, most recently – for the past 30 years – as a scholar, from my professorial perch at Harvard.

This reflection is facilitated by the fact that two years ago, I was asked by the editor of the Singapore Economic Review, Professor Euston Quah, to write about the evolution of the field of environmental economics.  I was pleased to do so, and I decided to take a quite personal approach to summarizing what otherwise would have required a rather Herculean effort.  The result was published earlier this year:  “The Evolution of Environmental Economics:  A View from the Inside,” Singapore Economic Review, volume 62, number 2, 2017, pages 251-274.

[By coincidence, in just a few days, I am travelling to Singapore to make two presentations – on August 4th at the 2017 Singapore Economic Review Conference, and on August 6th at the 7th Congress of the East Asian Association of Environmental and Resource Economics.]

Evolution of the Field of Environmental Economics

Over the past three to four decades, environmental and resource economics has evolved from what was once a relatively obscure application of welfare economics to a prominent field of economics in its own right.  The number of articles on the natural environment appearing in mainstream economics periodicals has continued to increase, as has the number of economics journals dedicated exclusively to environmental and resource topics.  Likewise, the influence of environmental economics on public policy has increased significantly, particularly as greater use has been made of market-based instruments for environmental protection.

My article this year in the Singapore Economic Review provides one economist’s perspective on this twenty-year evolution, first by tracing it through personal reflections on the professional path that has led to my research and writing, and then by summarizing some highlights of my research.  That article was itself rendered feasible because of two previous book projects.

In 1998, my tenth year on the Harvard faculty, I was asked by the British publisher, Edward Elgar Publishing Limited, if I would be willing to assemble my selected papers for a book.  I responded with enthusiasm, and selected 23 articles from the 80 (published and unpublished) papers I had produced as of then – frequently with co-authors – from the time I received my Ph.D. in 1988 through 1999.  Making the selection was not any easy task, but it was a rewarding one.  I categorized my research into seven topic areas:  generic issues in environmental economics; benefits and costs of environmental regulation, and the potential use of efficiency and other criteria for evaluating environmental goals; normative analysis of policy instruments; positive analysis of policy instruments; environmental technology innovation and diffusion; land-use change; and global climate change policy. The resulting volume, Environmental Economics and Public Policy:  Selected Papers of Robert N. Stavins, 1988-1999, was published in 2000.

In 2011, ten years after the publication of my first set of selected papers (1988-1999), Edward Elgar Publishing Limited suggested a second volume.  I selected 26 articles from the many more (published and unpublished) papers I wrote over the decade.  The papers again fell into seven (somewhat different) categories:  generic issues in environmental economics; methods of environmental policy analysis; economic analysis of alternative environmental policy instruments; the economics of technological change; natural resource economics; domestic (national and sub-national) climate change policy; and international dimensions of climate change policy. This led to the publication in 2013 of Economics of Climate Change and Environmental Policy:  Selected Papers of Robert N. Stavins, 2000-2011.

In those two volumes and in the recent article in the Singapore Economic Review, I not only summarized highlights of my research, but I also provided a description of the professional path I have taken.  In this blog essay, I am pleased to offer an abridged version below (with the addition of some relevant hyperlinks).

A Professional Path

In retrospect, my professional path may appear somewhat direct, if not altogether linear, but it hardly seemed so as I travelled along it.  The path I describe took me back and forth across the United States and to several continents, and it took me from physics to philosophy, to agricultural extension, to international development studies, to agricultural economics, and eventually to environmental economics.  During this time, much has changed in the profession.

The early ascendency of the field of environmental economics, during the period from 1970 to 1990, was centered within departments of agricultural and resource economics, mainly at U.S. universities, and at Resources for the Future (RFF), the Washington research institution.  Within most economics departments, environmental studies remained a relatively minor area of applied welfare economics.  So, when I enrolled in the Ph.D. program in Harvard’s Department of Economics in 1983, and when I received my degree five years later, no field of study was offered in the field of environmental or resource economics.

Fortunately, Harvard permitted its graduate students to develop an optional, self-designed field as one of two fields on which they were to be examined orally before proceeding to dissertation research.  Without a resident environmental economist in the Department of Economics (Martin Weitzman had yet to move to Harvard from the Massachusetts Institute of Technology), I developed an outline and reading list of the field through correspondence with leading scholars from other institutions, most prominently Kerry Smith, then at North Carolina State University.  My proposal to prepare for and be examined in the field of environmental and resource economics (along with my other field, econometrics) was approved by the Department’s director of graduate study, Dale Jorgenson.  So began my entry into the scholarly literature of the field.

But my interest in environmental economics pre-dated by a considerable number of years my matriculation at Harvard.  Like many others before and since, I came to the field because of a personal interest in the natural environment (the origin of which I describe below).  This personal interest evolved into a professional one while I was studying for an M.S. degree in agricultural economics at Cornell University in Ithaca, New York, in the late 1970’s, where my thesis advisor and mentor was Kenneth Robinson.  I had originally gone to Cornell to study for a professional degree in international development, but found agricultural economics more appealing, largely because of the opportunity to examine social questions with quantitative methods within a disciplinary framework.

The faculty at Cornell and the care given to graduate students (including masters students like myself) were outstanding.  Kenneth Robinson, my first mentor within the economics profession, became my ongoing role model for intellectual integrity.  It was a sad day many years later, in 2010, when Professor Robinson passed away.

A course in linear algebra, brilliantly taught by S. R. Searle, inspired me to pursue quantitative methods of analysis, and I was fortunate to have the opportunity to study econometrics with Timothy Mount.  One summer I had the privilege of learning about comparative economic systems in a small workshop setting from George Staller of the Cornell Department of Economics.   Working with Bud Stanton, I had my first experience teaching at the university level, and with Olan Forker, I had my first try at serious writing.  All of this led to my research and writing of an M.S. thesis, “Forecasting the Size Distribution of Farms:  A Methodological Analysis of the Dairy Industry in New York State.”  The methodology in question was a variable Markov transition probability matrix, the cells of which were estimated econometrically in a multinomial logit framework.  Much to my surprise, this work subsequently received the Outstanding Master’s Thesis Award in the national competition of the American Agricultural Economics Association.

Armed with my M.S. degree, I moved from Ithaca to Berkeley, California, where I eventually met up with Phillip LeVeen, who had until shortly before that time been a faculty member in the Department of Agricultural and Resource Economics at the University of California, Berkeley.  Phil was another superb mentor, and from him I learned the power of using simple models — by which I mean a set of supply and demand curves hastily drawn on a piece of scrap paper — to develop insights into real-world policy problems.  He introduced me to a topic that was to occupy me for the next few years — California’s perpetual concerns with water allocation.  I remember many afternoons spent working with Phil at his dining room table on questions of water supply and demand.

This work with Phil LeVeen led to a consultancy and then a staff position with the Environmental Defense Fund (EDF), the national advocacy group consisting of lawyers, natural scientists, and — then almost unique among environmental advocacy organizations — economists. This marked the beginning of what became an ongoing professional relationship with this rather remarkable organization.  At EDF, I was able to experience for the first time the use of economic analysis in pursuit of better environmental policy.  With W. R. Zach Willey, EDF’s senior economist in California, as a role model, and Thomas Graff, EDF’s senior attorney, as my mentor, I thrived in EDF’s collegial atmosphere, while thoroughly enjoying life in Berkeley’s “gourmet ghetto,” as my neighborhood was called.  Sadly, Tom Graff — without whose passionate and wise mentorship I would not be where I am today — passed away in 2009 after a heroic battle with cancer.

Although I found the work at EDF rewarding, I worried that I would eventually be constrained — either within the organization or outside it — by my limited education.  So, like many others in similar situations, I considered a law degree as the next logical step.  In fact, I came very close to enrolling at Stanford Law School, but instead, in 1983, I accepted an offer of admission to the Department of Economics at Harvard, moved back east to Cambridge, Massachusetts, and began what has turned out to be a long-term relationship with the University.

But where did my interest in the natural environment begin?  Not at Cornell; it was present long before those days.  But it had not yet arisen when I was studying earlier at Northwestern University, from which I received a B.A. degree in philosophy, having departed from my first scholarly interest, astronomy and astrophysics.

Rather, the origins of my affinity for the natural environment and my interest in resource issues are to be found in the four years I spent in a small, remote village in Sierra Leone, West Africa, as a Peace Corps Volunteer, working in agricultural extension (in particular, paddy rice development).  It was there that I was first exposed both to the qualities of a pristine natural environment and the trade-offs associated with economic development.

So, I had begun in astrophysics, moved to philosophy (both at Northwestern), then to agricultural extension in a developing country (Sierra Leone), then to international development studies and subsequently to agricultural economics (both at Cornell), then to environmental economics and policy (EDF), and eventually to graduate study in economics at Harvard.

My dissertation research at Harvard was directed by a committee of three faculty members:  Joseph Kalt, Zvi Griliches, and Adam Jaffe.  Joseph Kalt was the first faculty member at the Department of Economics to validate my interest in environmental and resource issues, and he was unfailingly generous to me and many other graduate students in making his office (and personal computer, then a rather scarce resource) available at all hours.  Later a colleague at the Kennedy School, Joe provided examples never to be forgotten — that economics could be a meaningful and enjoyable pursuit, and that excellence in teaching was a laudable goal.

Zvi Griliches was not only my advisor and mentor, but my spiritual father as well.  Generations of Harvard graduate students would offer similar testimony.  My own father had died only a year before I entered Harvard, and Zvi soon filled for me many paternal needs.  It is now approaching two decades since Zvi himself passed away.  I felt as if I had lost my father a second time.

If Zvi Griliches provided caring and inspiration, Adam Jaffe provided invaluable day-to-day guidance.  It was Adam who convinced me not to go on the job market in my fourth year with what would have been a mediocre dissertation, but to put in another year and do it right.  That turned out to be some of the best professional advice I have ever received.  Our intensive faculty-student relationship from dissertation days subsequently evolved into a very productive professional (and personal) one that continues to this day.  The name of Adam Jaffe appears frequently in my curriculum vitae as a co-author; he has been and continues to be much more than that.

Although they were not members of my thesis committee, I should acknowledge two other faculty members at the Harvard Department of Economics who played important roles in my education.  I was fortunate to take two courses in economic history (a department requirement) from Jeffrey Williamson, who had recently arrived from the University of Wisconsin.  Williamson’s class sessions were as close as anything I have seen to being economic research laboratories.  In class after class, we would carefully dissect one or more articles — examining hypothesis, theoretical model, data, estimation method, results, and conclusions.  If there was any place where I actually learned how to carry out economic research, it was in those classes.

The other name that is important to highlight is that of Lawrence Goulder, then a faculty member at Harvard, and now a professor at Stanford.  I say this not simply because he was willing to be my examiner in my chosen field of environmental and resource economics, nor because he subsequently became such a close friend.  Rather, what is striking about my professional relationship with Larry is the degree to which he has been an unnamed collaborator on so many projects of mine.  Although he and I have co-authored no more than a few articles, his name probably appears more frequently than anyone else’s in the acknowledgments of papers I have written.  There is no one whose overall judgement in matters of economics I trust more, and no one who has been more helpful.

When I began graduate school at Harvard in 1983, it was my intention to return to EDF as soon as I received my degree.  But by my third year in the program, I had decided to pursue an academic career, although one that was heavily flavored with involvement in the real world of public policy.  Within the context of this professional objective, it was not a difficult decision to accept the offer I received in February, 1988, to become an Assistant Professor at the Kennedy School.  Although some of the other offers I received at that time were also very attractive, the choice for me was obvious, and I have never regretted it — not for a moment.

I remain at the Kennedy School today, where I was promoted to Associate Professor in 1992 (an untenured rank at Harvard), and to a tenured position as Professor of Public Policy in 1997.   In 1998, I accepted an appointment as the Albert Pratt Professor of Business and Government, and in 2017, I was appointed the A. J. Meyer Professor of Energy and Economic Development.

In the year 2000, I launched the Harvard Environmental Economics Program, which today brings together — from across the University — thirty-two Faculty Fellows and twenty-seven Pre-Doctoral Fellows, who are graduate students studying for the Ph.D. degree in economics, political economy and government, public policy, or health policy.  The Program, which I continue to direct, forms links among faculty and graduate students engaged in research, teaching, and outreach in environmental, natural resource, and energy economics and related public policy, by sponsoring research projects, convening workshops, and supporting graduate (and undergraduate) education.

A key reason why the Program — and its various projects, including the Harvard Project on Climate Agreements — have been so successful is the marvelous administrative leadership and staff support it enjoys.  Everyone who has been involved in virtually any way has come away impressed by our Executive Director, Robert Stowe, Program Manager, Jason Chapman, and Bryan Galcik, Communications Coordinator.

At the Kennedy School, I have had an excellent mentor, William Hogan, and a superb advisor and friend, Richard Zeckhauser.  Over the years, six successive deans have provided leadership, guidance, and support (including abundant time for my research and writing) — Graham Allison, Robert Putnam, Albert Carnesale, Joseph Nye, David Ellwood, and Douglas Elmendorf.  At Harvard more broadly, I have benefitted from regular interactions with Daniel Schrag, director of the Harvard University Center for the Environment, and Martin Weitzman of the Department of Economics.  For two decades, Marty and I have co-directed a bi-weekly Seminar in Environmental Economics and Policy, which has provided me with frequent opportunities to learn both from seminar speakers and from Marty’s questions and comments.

I will also note that Harvard President Drew Faust has provided superb leadership of Harvard’s increasing research, teaching, and outreach activity on global climate change, and has been exceptionally supportive of my work on climate change policy.  I will refrain from naming the many others at Harvard and elsewhere from whom I continue to learn — including my many co-authors — only because the list of such valued colleagues and friends is so long.  Included have been a most remarkable set of Ph.D. students, many of whom have gone on to productive — indeed illustrious — careers.

Along the way, I have had my share of administrative responsibilities at Harvard, including serving as Director of Graduate Studies for the Doctoral Program in Public Policy and the Doctoral Program in Political Economy and Government, and Co-Chair of the Harvard Business School-Harvard Kennedy School Joint Degree Programs.  Outside of Harvard, I have had the privilege of being a University Fellow of Resources for the Future, a Research Associate of the National Bureau of Economic Research, and the founding Editor of the Review of Environmental Economics and Policy, as well as a member of the Board of Directors of Resources for the Future, the Scientific Advisory Board of the Fondazione Eni Enrico Mattei, and numerous editorial boards. I must also note that I serve as an editor of the Journal of Wine Economics.  In 2009, I was elected a Fellow of the Association of Environmental and Resource Economists.

What originally attracted me to the Kennedy School was the possibility of combining an academic career with extensive involvement in the development of public policy.  I have not been disappointed.  Indeed, a theme that emerges from my professional engagements over the past twenty-five years is the interplay between scholarly economic research and implementation in real-world political contexts.  This is a two-way street.   In some cases, my policy involvement has come from expertise I developed through research, following a path well worn by academics.  But, in many other cases, my participation in policy matters has stimulated for me entirely new lines of research activity.

Finally, what I have characterized as involvement in policy matters is described at the Kennedy School as faculty outreach, recognized to be of great institutional and social value, along with the two other components of our three-legged professional stool — research and teaching.  I should note that my outreach efforts have fallen into five broad categories:  advisory work with members of Congress and the White House (for example, Project 88, a bipartisan effort co-chaired by former Senator Timothy Wirth and the late Senator John Heinz, to develop innovative approaches to environmental and resource problems); service on federal government panels (for example, my role as Chairman of the Environmental Economics Advisory Committee of the U.S. Environmental Protection Agency Science Advisory Board); on-going consulting — often on an informal basis — with environmental NGOs (most frequently, the Environmental Defense Fund) and private firms; advisory work with state governments; and professional interventions in the international sphere, such as service as a Lead Author for the Second and the Third Assessment Reports and a Coordinating Lead Author for the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, professional roles with the World Bank and other international organizations, and advisory work with foreign governments.

Reflections on Common Themes

Preparing the brief professional autobiography for the 2000 and 2013 books and for the 2017 SER article caused me to review many of the several hundred articles, book chapters, and essays I have written over the years.  This allowed me to identify some common themes that emerge from these more than two decades of research and writing.

First, there is the value — or at least, the potential value — of economic analysis of environmental policy.  The cause of virtually all environmental problems in a market economy is economic behavior (that is, imperfect markets affected by externalities), and so economics offers a powerful lens through which to view environmental problems, and therefore a potentially effective set of analytical tools for designing and evaluating environmental policies.

A second message, connected with the first, is the specific value of benefit-cost analysis for helping to promote efficient policies.  Economic efficiency ought to be one of the key criteria for evaluating proposed and existing environmental policies.  Despite its limitations, benefit-cost analysis can be useful for consistently assimilating the disparate information that is pertinent to sound decision making.  If properly done, it can be of considerable help to public officials when they seek to establish or assess environmental policies.

Third, the means governments use to achieve environmental objectives matter greatly, because different policy instruments have very different implications along a number of dimensions, including abatement costs in both the short and the long term.  Market-based instruments are particularly attractive in this regard.

Fourth, an economic perspective is also of value when reflecting on the use of natural resources, whether land, water, fisheries, or forests.  Excessive rates of depletion are frequently due to the nature of the respective property-rights regimes, in particular, common property and open-access.  Economic instruments — such as ITQ systems in the case of fisheries — can and have been employed to bring harvesting rates down to socially efficient levels.

Fifth and finally, policies for addressing global climate change — linked with emissions of carbon dioxide and other greenhouse gases — can benefit greatly from the application of economic thinking.  On the one hand, the long time-horizon of climate change, the profound uncertainty in links between emissions and actual damages, and the possibility of catastrophic climate change present significant challenges to conventional economic analysis.  But, at the same time, the ubiquity of energy generation and use in modern economies means that only market-based policies — essentially carbon pricing regimes — are feasible instruments for achieving truly meaningful emissions reductions.  Hence, despite the challenges, an economic perspective on this greatest of environmental threats is essential.

 A Personal Message

On a personal level, the professional path I have taken offers confirmation that research can influence public policy, and that involvement in public policy can stimulate new research.  The quest — both professional and personal — that took me from Evanston, Illinois, to Sierra Leone, West Africa, to Ithaca, New York, to Berkeley, California, and finally to Cambridge, Massachusetts suggests some consistency of purpose and even function.  I find myself doing similar things, but in different contexts.  It is fair to say that my professional life has taken me along a path that has brought me home.  The words of T. S. Eliot (1943) ring true:

                        We shall not cease from exploration

                        And the end of all our exploring

                        Will be to arrive where we started

                        And know the place for the first time.

Writing these essays, this year’s article, and today’s blog post have forced me to reflect on the past, and think about the future.  The twenty-two articles that comprised the first book of my selected papers and the twenty-six essays that comprised the second volume were the product of twenty-three years on the Harvard faculty (now almost 30 years).  I continue to learn about environmental economics and related public policy from colleagues, collaborators, students, friends, and inhabitants of the ”real world” of public policy – individuals from government, private industry, advocacy groups, and the press.  I hope my learning will continue.


Trump’s Paris Withdrawal: The Nail in the Coffin of U.S. Global Leadership?

The announcement on June 1st by U.S. President Donald Trump that he will withdraw the United States from the Paris Climate Agreement was, in my view, misguided; and the justifications Mr. Trump provided were misleading, and to some degree, untruthful.  In this essay, I seek to explain why I believe that withdrawing from the Paris Agreement will be damaging both to the United States and the world.  Sadly, Trump’s withdrawal announcement gave the impression that the President has little understanding of the nature of the Agreement, the process for withdrawal, or the implications of withdrawal for the United States, let alone for the world.  Rather, Mr. Trump appears to be channeling talking points from his chief strategist, Stephen K. Bannon, and his supporters among Alt-Right nationalists, isolationists, and anti-globalists.

Some Context

Let’s start with a few numbers. The United States accounts for about 14% of global greenhouse gas emissions, with China the largest emitter at 30%, followed by the European Union (10%) and India (7%). But climate change is a function of atmospheric concentrations, and when looking at cumulative emissions since 1850, the United States is first with 29% of the total, then the European Union (EU) with 27%, and then Russia and China with 8% each.  With Trump’s announced withdrawal, the United States will join Syria and Nicaragua as the only countries among 195 that are not Parties of the Paris Agreement.

Global Implications of U.S. Withdrawal from the Paris Agreement

With the United States out of the Paris Agreement, it loses the ability to pressure other countries, such as the large emerging economies, to do more.  Worse yet, the announced departure may encourage some countries to do less than they had planned.  In the worst possible outcome, the U.S. announcement might eventually even lead to the broad Paris coalition unraveling.  However, initial indications from the EU, China, India, and other key Parties to the Agreement is that they will maintain their targets, and some may even make them more aggressive because of President Trump’s short-sighted action.  Only time will tell.

What Does President Trump’s Announcement Actually Mean?

In several ways, the President’s announcement was both confused and confusing.  The President stated that the country “will withdraw from the Paris climate accord but begin negotiations to re-enter either the Paris accord or an entirely new transaction on terms that are fair to the United States.  We are getting out. But we will start to negotiate, and we will see if we can make a deal that’s fair. And if we can, that’s great.”

First, the notion of re-negotiating the Paris Agreement is a non-starter.  Within hours of the President’s announcement, the idea of renegotiation was rebuked by French President Emmanuel Macron, German Chancellor Angela Merkel, Italian Premier Paolo Gentiloni, British Prime Minister Theresa May, and Canadian Prime Minister Justin Trudeau, among many other world leaders.

Second, what could Mr. Trump even mean by his assertions of the deal’s “unfairness” to the United States, and what should we to make of his statement that such unfairness could be addressed through renegotiation?  According the Paris Agreement’s own provisions, there is a required three-year delay from November, 2016 (when the Agreement came into force) before any Party (country) can even begin the process of withdrawing, and then there is another year of delay before that process is completed.  So, what the President actually announced – in effect – was the U.S. government’s intention to begin the process of withdrawing some two and a half years from now, and to complete that withdrawal process in November, 2020.

Thus, the announcement was equivalent to stating that the U.S. will remain a Party to the Agreement for virtually the entire term of this administration (which it will).  The administration could – in theory – submit a revised Nationally Determined Contribution (NDC) that is consistent with what the country can accomplish in emissions reductions (possibly a 15-19% reduction by 2025 compared with 2005, according to a recent Rhodium Group analysis, instead of the Obama NDC of a 26-28% decline), consistent with the broad rollback of Obama-era climate regulations that President Trump has initiated.  The country-specific NDC is the key element that can be thought of as affecting “fairness” of the U.S. role under the Paris Agreement, because it is only through the self-determined, voluntary, country-specific NDCs that any national targets or actions are specified.

Given that the Administration had already begun the process of unraveling Obama-era climate regulations (that were to be used achieve the Obama NDC), the announced withdrawal from the Paris Agreement has no additional effects on U.S. emissions mitigation actions.  Hence, it is fundamentally dishonest to claim as a justification for the withdrawal that this will reduce costs for the U.S. and save jobs.

Beyond the national targets and actions specified by the U.S. NDC, there is one other aspect of pledged action under the Paris Agreement that could be considered to affect fairness, and that is the set of pledges of financial contributions to the Green Climate Fund, to which industrialized countries have voluntarily pledged $10 billion since 2013 to help low-income countries reduce their GHG emissions and adapt to the effects of climate change.  If the U.S. were to fulfill its original $3 billion commitment to the Fund, this would amount to $9.41 per capita, ranking 11th among country pledges, starting with Sweden’s at $59.31 per person.  However, the President had previously announced that no funds will be going to the GCF (beyond the $1 billion already delivered during the Obama administration).  That makes the per capita U.S. contribution a bit more than $3 per capita, ranking close to the bottom of the list, only above South Korea’s pledge of about $2 per capita.  So, with this financial element, as well as with regard to domestic emissions mitigation actions, withdrawal from the Paris Agreement can have no real effects on the “fairness” of the U.S. role.

The Paris Agreement Was the Answer to U.S. Prayers

The very structure of the Paris Agreement itself was and is the answer to U.S. prayers, going back to the bipartisan Byrd-Hagel Resolution of 1997, in which the U.S. Senate – in a 95-0 vote – said that it would not ratify an international climate agreement that did not include the large emerging economies (China, India, Brazil, South Africa, Mexico, and Korea).  After more than 20 years of negotiations, an important breakthrough came with the signing of the Paris Agreement, which increased the scope of participation from countries accounting for just 14% of global emissions (under the current, second commitment period of the Kyoto Protocol) to countries accounting for 97% under the Paris Agreement.

Furthermore, in addition to including all countries, the Paris Agreement answered a second key U.S. demand by granting all countries the right to determine their own targets and their own paths of action (through their respective NDCs).

And the third of three U.S. wishes was also granted by the Paris Agreement by providing for transparency around how countries report their emissions and demonstrate progress toward their respective targets.

Thus, the Paris Agreement was truly the answer to bipartisan U.S. prayers going back at least twenty years, and was eminently “fair” to the United States.  What, then, can renegotiation possibly accomplish that would make this President happy?  Perhaps one option would be to rename precisely the same agreement the “Mar-a-Lago Accord” (or simply the “Trump Agreement”)!  That might change this President’s mind.

A Rebuke to Countries around the World … and to U.S. Businesses

Mr. Trump’s decision is a remarkable rebuke to countries and heads-of-state around the world, as well as corporate leaders in the United States, and some key senior officials in the Administration, including Secretary of State Rex Tillerson.  However, the announcement does attempt to fulfill the President’s campaign pledge to “cancel” the Agreement that he claimed would “destroy American jobs.”

But dropping out of Paris will have no meaningful employment impacts.  Again, Trump had already launched the process of undoing domestic climate regulations from the Obama administration.  Also, the much-talked-about coal jobs are not coming back.  The losses that have taken place over decades are due to increased productivity (technological change) in the coal sector, and more recently, market competition from low-priced natural gas for electricity generation, not environmental regulations — and certainly not CO2 regulations that had never been implemented.

Support for Trump to keep the United States in the Paris Agreement was broad-based within U.S. private industry – from electricity generators such as PG&E and National Grid, to oil companies such as Chevron, ConocoPhillips, Exxon-Mobil, BP, and Shell (the last two having large operations within the U.S.), and a very long list of manufacturers, including giant firms such as General Motors and General Electric.  Even some of the largest coal producers, such as Arch Coal, Cloud Peak Energy, and Peabody Energy, told the President about their support for the U.S. remaining in the Agreement. This broad support was due to a simple reality – leaders of successful businesses make decisions not on the basis of ideology, but based on available evidence.

Damages to U.S. International Relations

The potential damages to U.S. international relations are grave, but should we be surprised?  After all, this is the same President who withdrew from the Trans-Pacific Partnership days after inauguration, thereby handing over to China economic leadership in Asia; and the same President who just last month dismissed and diminished NATO and insulted our key European allies, thereby granting Russian President Vladimir Putin one of his greatest wishes.  Former Mexican President Vincente Fox may have summed it up best with the shocking assessment that “the United States has stopped being the leader of the free world.”

At a time when the U.S. wants and needs cooperation from a large and diverse set of countries around the world on matters of national security, trade, and a host of other issues, it is counter-productive in the extreme to willingly become an international pariah on global climate change, but that is what President Trump has accomplished.

Defining U.S. Climate Policy Geographically, Rather than by Federal Government Action

Of course, this is not the end of all climate change policy action in the United States.  Climate policies in California, Oregon, Washington, and the Northeast will remain in place, and quite possibly be strengthened. And more than half of all states have renewable energy policies; just since Election Day, the Republican governors of Illinois and Michigan have signed legislation aimed at increasing solar and wind generation. At the federal level, important tax credits for wind and solar power will likely continue to receive bipartisan support in the U.S. Congress.

But it is highly unlikely – in the absence of a significant economic recession – that those policies (plus others from cities across the country) will be sufficient to achieve the climate targets that made up the Obama administration’s anticipated contribution (NDC) under the Paris Agreement.

Trump’s Core and a Sad Bottom Line

For President Trump’s core supporters, the move was probably perceived in very positive terms.  As Cary Coglianese, a professor of law and political science at the University of Pennsylvania, has said, “For Trump supporters it looks like he’s delivering on a campaign promise — it looks like he’s standing up for Americans against the rest of the world.”  The opposition to Paris among Trump’s electoral core (and a considerable share of Congressional Republicans) seems to be linked with their admiration for his “America First” battle cry, which builds on nostalgia for an earlier (and whiter) America with its long-gone manufacturing-based economy, plus doses of xenophobia, hostility to immigration, fear of globalism, and opposition to multilateral agreements of any kind.

The President’s announcement of withdrawing from the Paris Climate Agreement will indeed appeal to his core constituency, and thereby may help galvanize his base, and that may be the central White House objective at this time when the administration is facing grave questions and challenges from Congressional hearings and Justice Department investigations. As Ban Ki-moon, former Secretary-General of the United Nations, and I wrote in April in The Boston Globe, “reducing emissions will not be cheap or easy, but the greatest obstacles are political.”

The announcement by President Trump that he will withdraw the United States from the Paris Climate Agreement was based neither on real science nor sound economics.  Rather, it was confused, misguided, and – in some ways – dishonest.  Sadly, that makes it consistent with much of this President’s behavior – in a variety of policy realms – during the campaign and since he assumed office.