Policy Options for Addressing Climate Change

Economists (including myself) have long recommended carbon-pricing policy instruments – principally carbon taxes or carbon cap-and-trade systems – for achieving meaningful reductions of carbon dioxide (CO2) emissions in large and complex economies.  However, such economy-wide policies are not in favor in the United States within the Biden administration, despite some interest in the Congress.  Rather, a set of alternative (second-best) options – such as a Clean Electricity Standard (CES) – are receiving more attention. 

Fortunately, economists have developed models with which both economy-wide carbon-pricing systems and sectoral policies, including a CES and increased gasoline taxes, can be consistently analyzed and compared.  Stanford University Professor Lawrence Goulder has analyzed a relatively broad set of such climate policy options available to government, and he discusses his analysis and its implications in the newest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” a podcast produced by the Harvard Environmental Economics Program.  Listen to our conversation here.

In these podcasts, I converse with leading experts from academia, government, industry, and NGOs.  Larry Goulder, the Shuzo Nishihara Professor of Environmental and Resource Economics at Stanford University, is well qualified to talk about the economics of climate change policy.  Also, I’m pleased to note that he is my long-time colleague, co-author, and good friend.

Goulder, who graduated from Harvard College with an A.B. in philosophy in 1973 and from Stanford University with a Ph.D. in economics in 1982, served on the faculty of the Department of Economics at Harvard before returning to Stanford’s economics department in 1989.  Along the way, he spent a year studying music composition at Ecole Normale de Musique de Paris with the late, great Nadia Boulanger.

Larry Goulder’s research has spanned a range of energy, environmental, and other issues, including green tax reform, the design of environmental tax systems, and climate change policy.  He is co-author with Mark Hafstead of Resources for the Future of a book I highly recommend, “Confronting the Climate Challenge: US Policy Options,” published by Columbia University Press in 2018.

In this book, Goulder and Hafstead examine alternative climate change policy options available for lawmakers through the lens of a general equilibrium framework, considering both the aggregate benefits and costs of various policies as well as the distribution of policy impacts across industries, income groups, and generations.  Included in the set of policy instruments they examine are carbon taxes, CO2 cap-and-trade, a clean energy (electricity) standard, and increased gasoline taxes.

In our conversation, Goulder explains that the research shows that price-based approaches such as carbon taxes or cap-and-trade would be the most cost-effective methods to achieve desired changes, but also that a clean energy standard could have significant impacts.

“The reasons it does pretty well … have to do with interactions between this policy and preexisting taxes in the U.S. economy,” Goulder says. “I think this result is quite relevant to current policy discussions, since today there’s a lot of focus on the CES, the Clean Energy Standard, as a way of addressing climate change. And even though our results tend to favor a carbon tax, we find that the CES could do pretty well, as well.”

When I ask Larry to assess the Trump Administration’s environmental policy portfolio, he says that he can find little to be positive about, noting that the administration caused substantial damage, some of which will be long-term.

“The reversal or elimination of some of the Obama efforts was very problematic, in particular a signature effort by the Obama administration, its Clean Power Plan, which would have put limits on the emissions of CO2 per unit of electricity generated by power plants throughout the U.S. I think dismantling that is a real problem,” Goulder remarks. “I must say also just the general tenor of the Trump Administration to deny the science and to deny, in particular, the idea that there is serious human-caused climate change is very problematic to the extent that it reinforces political opposition to dealing with this immense problem.”

Some of Goulder’s recent research has examined the impacts of China’s new emissions trading system, in which trading was launched just last month (and which was discussed in some detail in a recent webinar by Valerie Karplus, and featured in my previous blog post).  I ask Larry to provide a brief assessment. 

“This is going to be the largest emissions trading system in the world; it will more than double the amount of carbon dioxide covered by emissions pricing. And it is also using an approach that has some attractions in terms of keeping costs down,” he says. “The tradable performance standard approach used in China is somewhat less cost effective than would be an equivalently scaled cap-and-trade system, but it’s a tremendous step forward that China is taking this national level effort, that it’s employing a tradable system, and that it’s intent on achieving very significant reductions.”

My complete conversation with Larry Goulder is the 26th episode in the Environmental Insights series, with future episodes scheduled to drop each month.  You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

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Global Climate Change and the Future of the Oil & Gas Industry

I recognize that some followers of this blog may consider the oil and gas industry to be the moral equivalent of the tobacco companies – out to maximize profit without considering the broader, social implications of the use of their products.  And some may paint the oil industry with a rather broad brush, maintaining that the major oil and gas multinationals do not differ in significant ways from one another.

David Hone, my guest in the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” exemplifies a somewhat different reality, which makes it particularly interesting to engage with him in a wide-ranging conversation about the past, present, and future of the oil industry at a time of increasing concern about global climate change, linked with the combustion of fossil fuels.

David has been working in the oil industry for some 40 years, where for the past 20 years, he’s been focused exclusively on addressing global climate change.  Indeed, his title at Shell International is “Chief Climate Change Adviser.”  In addition, he is a board member – and former chairman of the board –of the International Emissions Trading Association, and a member of the board of directors of C2ES – the Center for Climate and Energy Solutions.

In our conversation, Hone describes investments by oil and gas companies to diversify beyond exclusive reliance on fossil fuels.  “I think what’s apparent today is that the industry is starting a pathway of transition. That’s been building momentum over the last few years, as companies have started to look at their portfolio, think about the longer term, look at the opportunities that are out there, look at the future energy mix,” Hone states. “But I think where people perhaps have problems with all of this is that they imagine a very fast transition, and they forget about the immense scale that this industry rests on.  It’s providing not just Shell, but all these companies a hundred million barrels of oil per day into the global economy.  And that’s not just going to vanish in any short period of time.”

I ask Hone about the impacts of the COVID-19 pandemic on the oil and gas industry.  He acknowledges that the pandemic has caused some real hardships for the industry, but notes that the industry’s flexibility has allowed it to respond fairly effectively, at least over the short term.

“[The] immediate problem has been largely addressed, but there’s still a period I think ahead of weak demand, which the industry is going to have to deal with,” he states.  “And that will probably modify the rate at which the various companies, not just the companies like Shell, but the international oil companies, the rate at which they invest.  So, it will take a while for the whole system to correct to this, but it will correct.”

Shifting the discussion to international climate change policy, Hone speaks highly of the European Union Emissions Trading System (EU ETS), crediting its simple design for getting the continent closer toward net-zero emissions.

“It’s focused very much on large emitters that are quite price responsive, and it has a declining cap that will eventually go to zero. The rate at which that goes is under discussion at the moment, but nevertheless, it will go to zero. And it has consistently delivered,” he says.  “We’ve seen high prices and very low prices over the last 15 years, but it just keeps ticking on and delivering. And I think that’s cause for optimism around its future.”

All of this and more is found in the latest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” Listen to this latest discussion here.  You can find a complete transcript of our conversation at the website of the Harvard Environmental Economics Program.

My conversation with David Hone is the thirteenth episode in the Environmental Insights series.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

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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.

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