Misleading Talk about Decoupling CO2 Emissions and Economic Growth

You can call it my pet peeve or even my obsession, but whenever I read about the claimed “decoupling” of CO2 emissions and economic growth, I get annoyed.  Webster’s Dictionary defines decoupling as “eliminating the interrelationship” between two processes.  But the interrelationship between CO2 emissions and economic growth has certainly not been eliminated.

Decoupling is the wrong word and metaphor to describe what has been happening.  When a caboose is decoupled from a train, it stops moving altogether.  A better metaphor, although less linguistically appealing, would be a “slipping clutch.”  The engine continues to transmit power, and as a result the driveshaft continues to rotate, but with less velocity than when the clutch was new.

What Has Been Happening

True enough, the carbon intensities of many economies in the world, particularly those of the industrialized nations, have – for many years – been falling, as those economies have become less energy intensive (less energy use per unit of economic activity – Gross Domestic Product or GDP), and therefore less carbon intensive.  For each dollar of economic activity, CO2 emissions are less than they used to be.  For each unit of economic growth, there is less growth in CO2 emissions than previously.

Furthermore, in some cases, as economies grow, CO2 emissions can actually fall.  First, picture an economy which is growing exclusively in its services sector.  In this case, economic growth might be accompanied by no change in CO2 emissions.  Now picture an economy which is growing in its services sector, while shrinking in its manufacturing sector (sound familiar?).  In this case, economic growth might be accompanied by reduced CO2 emissions.  Now add to this picture the presence of some public policies, such as those that cause the closure of coal-fired electric generation plants, as well as greater dispatch of electricity from natural gas-fired plants.  The result:  economic growth continues, with falling CO2 emissions.  But there has been no decoupling.

Confusion Due to Failure to Employ Appropriate Counterfactual

The problem and the confusion arises from a very common mistake in the popular press and, for that matter, in many casual conversations:  failure to use the right counterfactual for analysis.  The fact that GDP is rising while emissions are falling does not mean that GDP is not affecting emissions.  The appropriate counterfactual for comparison is how much would emissions have fallen had there been no growth in GDP.  Presumably, emissions would have fallen even more.  The excess of emissions in the factual case, compared with the counterfactual case, is the magnitude of emissions growth due to (actually, “associated with”) economic growth.  There has been no elimination of the relationship between the two, although the nature and the magnitude of that relationship has changed.

What Factors Affect CO2 Emissions?

So, why have CO2 emissions been declining in some countries?  Or, more broadly and more to the point, what factors have affected CO2 emissions?  Four stand out (although there are others).

First, energy comes at a cost in all economies, and so economic incentives exist to economize on energy use through technological change.  The energy-intensity of the U.S. economy has gradually fallen – almost monotonically – since early in the twentieth century.

Second, putting aside energy-intensity and focusing on carbon intensity, some technological change has worked against the use of carbon-intensive sources of energy.  The most dramatic example, specific to the United States, has been the combination of horizontal drilling and hydraulic fracturing (fracking), which has caused a significant increase in supply and dramatic fall in the market price of natural gas, which has thereby led to a massive shift of investment and electricity dispatch from coal to natural gas.

Third, in the richer countries of the world, including this one, the process of economic growth has led to changing sectoral composition:  heavy industry to light manufacturing to services.  The deindustrialization of California is a graphic example.  Does the fact that California’s economy has grown while emissions have fallen mean that decoupling has occurred?  Of course not.  And, in the California case, there has also been a fourth factor …

Fourth, public policies have in some jurisdictions of the world (Europe, the United States, and most of the other OECD countries) discouraged carbon intensity.  In the USA, this has happened both through climate policies and other, non-climate policies.  Some non-climate policies, such as EPA’s Mercury Rule, discourage investment, encourage retirement, and discourage dispatch of coal-fired electricity, while other non-climate policies, such as CAFE standards for motor vehicles, bring about greater fuel efficiency of the fleet of cars and trucks over time.  Climate-specific policies have also mattered, such as in California, where the Global Warming Solutions Act of 2006 (AB-32) has brought down emissions through a portfolio of policies, including an economy-wide CO2 cap-and-trade system.

The Bottom Line

So, yes, the carbon intensity of many economies continues to fall – for a variety of reasons, including but by no means limited to public policies.  And, in some cases, the combination of energy price changes, technological change, changes in sectoral composition, and climate and other public policies has meant that emissions have fallen in years when economic growth has continued.  But don’t be fooled.  Economic growth does affect CO2 emissions.  There has been no decoupling; just some (desirable) slipping of the clutch.

Of course, this is not an anti-environment message.  On the contrary, a belief in decoupling per se could lead to a misguided laissez-faire attitude about the path of CO2 emissions.  Being honest and accurate about the links between (desirable) economic growth and (desirable) CO2 emissions reductions puts our focus and emphasis where it ought to be:  finding better ways to have both.

When Reasonable Policy Discussions Become Unreasonable Personal Attacks

Recently I was reminded of the controversy that erupted late in 2014 about remarks made by the distinguished health economist, Jonathan Gruber, professor at MIT for two decades. Professor Gruber, one of the country’s leading experts on health policy, had played an important role in the construction of the Obama administration’s Patient Protection and Affordable Care Act, subsequently derided by its political opponents as “Obamacare.”

A brief but intense political controversy and media feeding-frenzy erupted when videos surfaced in which Professor Gruber – largely in a series of academic seminars and conferences – explained how the Act was crafted and marketed in ways that would make it easier to develop political support. For example, he noted that insurance companies were taxed instead of patients, fundamentally the same thing economically, but vastly more palatable politically. He went on to note that this was possible because of “the lack of economic understanding of the American voter.” His key point was that the program’s “lack of transparency is a huge political advantage.” Is that a controversial or even unique observation?

A Truism of Political Economy

Any economist who has worked on the development or analysis of public policy – in areas ranging from health care policy to environmental policy to financial regulation – recognizes the truth of the key insight Gruber was communicating to his audiences. It is inevitably in the interests of the advocates of a policy to make the policy’s benefits transparent and to make its costs vague, even unobservable; just as it is in the interests of the opponents of a policy to make that policy’s benefits obscure and its costs as clear as the light of day.

The specific construction of hundreds of public policies are explained by this truism. In the United States, Corporate Average Fuel Economy Standards (or “CAFE standards”) have been a bipartisan Congressional success, despite the fact that the costs they place on the American public per unit of fuel savings are vastly greater than the costs of a commensurate increase in gasoline taxes. Likewise, when conservative opponents of CO2 cap-and-trade wanted to stop the House-passed bill in its tracks, they resorted to demonizing it as “cap-and-tax.”

So, the central lesson Professor Gruber was offering is hardly controversial, and its enunciation ought not lead to the terrible attacks that he suffered. He doesn’t need me to defend him, but he was unfairly demonized, simply because people disagreed with him politically regarding the merits of the public policy he had helped develop and support.

Unfortunately, I was reminded of this recently when I found myself subject to attempted demonization, because someone did not agree with a policy I supported. What happened to me is trivial compared with what Professor Gruber has gone through, but it prompts me to write about it today.

Can We Agree to Disagree?

I have written before at this blog about the reasons why I support my university’s decision not to divest its endowment of its fossil-fuel company holdings. I won’t repeat those arguments here, but will note that I have gone out of my way not to draw conclusions or make recommendations about what other universities or other institutions ought to do in this regard, including when I agreed to write an essay on the subject for Yale Environment 360. My analysis and conclusions were not developed in spite of my decades of research, teaching, and outreach on global climate change policy; rather, they were developed because of my years of work in this area.

There are people, some of whom I greatly respect, who have different perspectives on this issue, and have come to very different conclusions than have I. We have essentially agreed to disagree. They haven’t cast aspersions on me, nor I on them. As my writings on this topic have illustrated, there are many facets to the issue, including economics, politics, ethics, and even religion. No one has cornered the market on wisdom.

And What About the Keystone XL Pipeline?

Likewise, on a quite different topic, on January 8, 2015, Coral Davenport wrote a story in the New York Times about the political debates in Washington regarding the proposed Keystone XL pipeline, and stated that “… most energy and policy experts say the battle over Keystone overshadows the importance of the project as an environmental threat or an engine of the economy. The pipeline will have little effect, they say, on climate change, production of the Canadian oil sands, gasoline prices and the overall job market in the United States.” She went on to quote me (accurately) as having said, “The political fight about Keystone is vastly greater than the economic, environmental or energy impact of the pipeline itself. It doesn’t make a big difference in energy prices, employment or climate change either way.” What I said was consistent with the evidence at the time (note, however, that as oil prices fall, the possibility increases that the Canadian oil sands would be uneconomic to develop without the pipeline). Once again, the analysis is not one-dimensional, and reasonable people can respectfully disagree.

When Policy Debates Become Personal Attacks

But these two topics – the Keystone XL pipeline and fossil-fuel divestment – have increasingly become engulfed in highly-charged campaigns and exceptionally heated political debates. As part of this, my integrity was recently attacked, because of my views.  A young and – I’m sure – well-intentioned climate activist and journalist, writing in the Huffington Post, implied that my assessment in the New York Times of the Washington political debates regarding Keystone XL and my support for Harvard’s divestment policy, are because “Stavins has done consulting work for Chevron, Exelon, Duke Energy and the Western States Petroleum Association.”

The author of the Huffington Post piece selected those three companies and one trade association from a list of 92 “Outside Activities” that I voluntarily provide as a means of public disclosure. The author chose not to note that the vast majority of my outside engagements are with universities, think tanks, environmental advocacy NGOs, foundations, the U.S. Environmental Protection Agency, other federal agencies and departments, international organizations, and environment ministries around the world (not to mention a set of Major League Baseball teams, but that’s another story altogether).

But what about the four he did choose to highlight? First, I am very proud of my work supported by Chevron and the closely-related Western States Petroleum Association, in which I have carried out a series of analyses studying how to strengthen and improve California’s climate policy under AB-32. That’s right – developing and assessing ways to make the AB-32 cap-and-trade system and the related suite of “complementary policies” more environmentally effective, more cost-effective, and more equitable (I’ve written about this work several times at this blog).

Likewise, my work supported by Duke Energy began a decade ago when I helped the former CEO bring home to his senior management the importance of climate change and the importance of well-designed public policies (in particular, carbon cap-and-trade) to address it. All of my subsequent work supported by Duke Energy likewise has focused on the design of better market-based instruments – cap-and-trade – to reduce CO2 emissions.

And, finally, what about Exelon? This was interesting and important work I carried out with my friend and colleague, MIT Professor Richard Schmalensee, Dean Emeritus of the Sloan School of Management (I wrote about this work at this blog and at the Huffington Post). In 2011, with support from Exelon, Professor Schmalensee and I analyzed EPA’s proposals for new rules to regulate the interstate transport of sulfur dioxide and nitrogen oxides emitted from electric power generation facilities. You can read in detail about our multi-faceted assessment, but the bottom-line is that we provided strong support for a stringent rule. Our brief summary at the University of Pennsylvania’s RegBlog concludes: “In sum, while imposing incremental costs to achieve reductions in SO2 and NOX emissions, the Transport Rule would produce significant benefits in terms of improved health outcomes, and better environmental amenities and services, which studies estimate significantly outweigh the costs.”

Sadness and Empathy

It is nothing less than absurd – and, frankly, quite sad – that someone would suggest that my views on divestment and my New York Times quote on the politics of Keystone XL were somehow due to my having received previous support for analytical work for an oil company, a trade association, and two electric utilities. This was an unfortunate move to question my credibility and damage my reputation in a misguided attempt to demonize me, rather than engage in reasonable discussion and debate. Unfortunately, most of those who have read the activist/journalist’s original commentary and have possibly repeated his claims to others will not see the essay you have just read.

This is surely nothing compared with what Professor Gruber has gone through, but it has certainly increased my empathy for him, as well as my admiration.

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Personal Attacks: An Even Sadder Epilogue

It’s nearly two months since I wrote the essay above, but a series of recent events prompts me to add this sad epilogue.  My family and I have recently been subject to cyber-bullying, harassment, and threats, because of my public stance in support of Harvard’s decision not to divest from its endowment portfolio its holdings of fossil-fuel company stocks.

In particular, the most recent message sent to me said in part: “You may be assured that I will have a lot to say about your vocal public support of Harvard’s fossil fuel investments, … and that I have a particular interest in making sure that [your] financial connections to the fossil fuel industry are made fully public …” This threat to tarnish my reputation by publicizing a supposed conflict of interest is striking for a number of reasons:

  • In several essays at this blog and elsewhere, I have carefully explained my reasons for supporting Harvard’s decision not to divest;
  • In several essays at this blog and elsewhere, I have been completely up front about receiving support for (publically available) analytical work I’ve carried out for private-sector companies (and have long provided a list of all outside engagements at my website);
  • In the essay above, I documented the fundamentally pro-environment, policy-analytic work I had done for the specific companies mentioned; and
  • The claim that my position regarding Harvard divestment has somehow been influenced by my work with an oil company and an industry trade association defies logic.

The last item on this list – the fundamental illogic of such a claim – merits explanation. People on all sides of the divestment issue (including leaders of the student movement, and including the person who wrote the threat I quoted above) acknowledge that divestment will have no direct financial impacts on the respective companies. Rather, the merit of divestment that is most frequently cited by supporters is its symbolic value. Because divestment has no financial impacts on the fossil-fuel companies, those companies don’t care much about it. They would not care one way or the other what I might have to say on the topic. Hence, even if I did want to curry favor with those companies, that would not lead me (or anyone else) to take a particular position on the divestment issue.

The more important question to ask is whether my research, teaching, and outreach initiatives on climate change economics and policy have been biased by my having carried out consulting assignments for an oil company and trade association (two of a hundred outside engagements over the past several years)? That is, if there really was a conflict of interest, then in an effort to make those companies happy, I would presumably pull my punches regarding recommendations of what does matter to those companies – public policies that will reduce their profits by increasing their costs of doing business and/or by reducing demand for their products. But nothing could be further from the truth!

For a decade or more, my research, teaching, and outreach have focused on more enlightened, stronger, and better climate change policies. I have been outspoken in regard to the pressing need for well-designed carbon-price instruments at the national and sub-national levels, and for the need for better, more effective international climate policies, both under the United Nations Framework Convention on Climate Change and through other venues. This is reflected in my published research, my teaching, and my outreach efforts, including through this blog.

It is ironic, offensive, and sad that anyone would suggest that my support of Harvard’s divestment position is somehow tied to my outside engagements. That suggestion – and the recent threats I have received – defies logic and is contradicted by the record.

Can There Be a Positive Prognosis for Climate Negotiations?

I’m writing this brief essay on board my flight to the USA from Europe (where I participated in a workshop at the Center for European Economic Research (ZEW) in Mannheim, Germany).  It was an interesting event, the substance of which (the “energy-efficiency paradox”) I will write about in the future, but today’s post is stimulated by a news article I read on board my flight, titled, “U.S. and China May Find Agreements Outside Stymied Climate Talks.”

Bad News from Bonn

In Bonn this past week, international negotiations continued under the United Nations Framework Convention on Climate Change (UNFCCC).  The two most important countries in terms of greenhouse gas (GHG) emissions – China and the United States – apparently engaged in a war of words on the fundamental question of who should do what.  In particular, these two giants – and their respective allies in the developed and developing worlds – bickered over their very different interpretations of the Durban Platform for Enhanced Action’s call for an agreement to be reached in Paris in 2015 that is “applicable to all Parties” (countries).

The United States and other industrialized countries have insisted that this calls for an agreement with emissions reduction pledges by all countries (in particular, by the industrialized countries plus the large emerging economies of China, India, Brazil, Korea, Mexico, and South Africa).  But China, India, and most countries in the developing world have maintained that because the Durban Platform was adopted under the auspices of the UNFCCC, it calls only for emission reduction commitments by the industrialized countries.  In previous essays at this blog, I’ve written about the potential promise that the Durban Platform can offer for a departure from the paralysis that has characterized the past 15 years under the Kyoto Protocol with its dichotomous distinction between emissions-reductions commitments for industrialized (Annex I) countries and no such commitments for other nations.  But it is difficult to claim that the rhetoric in Bonn has been encouraging in that regard.

Better News from Beijing and Washington

At the same time, U.S. government officials back in Washington were quoted in the news article I read on board my flight as saying that bilateral negotiations with China – possibly outside of the UNFCCC – are where real progress is most likely to be made.  This caught my eye, because it may be the major – and perhaps only — cause for (cautious) optimism regarding the path ahead.  I wrote about this reality shortly after the UNFCCC negotiations concluded in Warsaw, Poland, in November, 2013, and recent developments merit returning to it today.  My premise is what I perceive to be the potential emerging convergence of interests between these two most important countries in the world when it comes to climate change and international policy to address it – China and the United States.  Five factors stand out:  emissions, historical responsibility, fuel sources, policy approaches, and geopolitics.

Emissions

First, the annual carbon dioxide (CO2) and greenhouse gas (GHG) emissions of these two countries have already converged. Whereas U.S. CO2 emissions in 1990 were almost twice the level of Chinese emissions, by 2006 China had overtaken the United States.  We are the world’s two largest emitters.

Historical Responsibility

Second, cumulative emissions are particularly important, because it is the accumulated stock of GHGs in the atmosphere that cause climate change.  Any discussion of distributional equity in the climate realm therefore inevitably turns to considerations of historic responsibility.  Looking at the period 1850-2010, the United States led the pack, accounting for nearly 19% of cumulative global emissions of GHGs, with the European Union in second place with 17%, and China third, accounting for about 12% of global cumulative emissions.  But that picture is rapidly changing, because emissions are flat to declining throughout the industrialized world, but increasingly rapidly in the large emerging economies, in particular, China.  Depending upon the relative rates of economic growth of China and the United States, as well as other factors, China may top all countries in cumulative emissions within 10 to 20 years.

Fuel Sources

Third, China and the United States both have historically high reliance on coal for generating electricity.  At a time at which U.S. dependence on coal is decreasing (due to increased supplies of unconventional natural gas and hence lower gas prices ), China continues to rely on coal, but is very concerned about this, partly because of localized health impacts of particulates and other pollutants.  Importantly, both countries have very large shale gas reserves.  U.S. output (and use for electricity generation) has been increasing rapidly, bringing down CO2 emissions, whereas Chinese exploitation and output have been constrained by available infrastructure (that is, lack of pipelines, but that will change).

Policy Approaches

Fourth, in both countries, sub-national market-based climate policies – in particular, cap-and-trade systems – are moving forward.  In the case of the China, seven pilot CO2 cap-and-trade regimes at the local level are under development, while in the United States, California’s ambitious AB-32 cap-and-trade system continues to make progress, and in the northeast, the Regional Greenhouse Gas Initiative (RGGI) is witnessing higher allowance auction prices due to the more severe targets the RGGI states recently adopted.

Geopolitics

Fifth and finally, there is the reality of global geopolitics.  If the twentieth century was the American Century, then many observers, including leaders in China, anticipate (or at least hope) that the twenty-first century will be the Chinese Century.  In this regard, I’m reminded that I was quoted by David Jolly in the New York Times, as saying, “If it’s your century, you don’t obstruct, you lead.”