In this new episode of our monthly podcast, Jos Delbeke recounts the evolution of carbon pricing in Europe and around the world, and comments on the current state of international climate change negotiations. You can listen to the interview here.
Recalling his early days working on climate policy in Europe, Delbeke says that “emissions trading was an alien idea at that time … As an economist, I followed very much how the United States was developing the sulfur experiment.”
Delbeke maintains that the EU-ETS has been very successful. “The latest statistics show that between 2005 when we started, and today … the emissions reduction is 29%, and that is for all the installations in Europe, all big installations, and the energy and the manufacturing industry. So, 29% down in less than 15 years, I think is quite remarkable when we compare it to emissions from transport that are roughly 20% up,” he states.
Delbeke believes that the emerging Chinese ETS could be transformative in the global effort to combat global warming. “Once the Chinese have their act together, I think that may serve as a source of inspiration for a lot of other nations,” he says.
Delbeke’s interview is the fifth episode in the Environmental Insights series. Previous episodes have featured conversations with:
The “Rulebook” for the Paris Agreement puts flesh on the bones of the skeletal 13-page Agreement, and was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially provides for international carbon markets and other forms of cross-border cooperation. Watch for key developments in Madrid!
Key Challenge for Long-Term Success of Paris Agreement
There are two necessary conditions for ultimate success of the Paris Agreement. First, adequate scope of participation. This has been achieved, with meaningful participation from countries representing some 98% of global emissions – or some 85% if the U.S. withdraws in November, 2020 (compared with the 14% of global emissions from countries committed to emissions reductions under the current, second commitment period of the Kyoto Protocol). The other necessary condition is adequate ambition of the individual national contributions. This is where the greatest challenges lie.
The very element of the Paris Agreement that has fostered such broad scope of participation – namely, that the individual national “pledges” (Nationally Determined Contributions or NDCs) are anchored in national circumstances and domestic political realities – implies that individual contributions may not be sufficient, due to the global commons nature of the climate change problem, and the attendant free-rider issues.
So, are there ways to enable and facilitate increased ambition over time? Linkage of regional, national, and sub-national policies can be part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems. Linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies will be highly heterogeneous. More about this below.
Merits and Concerns regarding Linkage
Linkage facilitates significant compliance cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions. According to one recent study, costs could – in theory – be reduced to 25% of what they otherwise would be! Also, linkage means improved functioning of markets by reducing market power and price volatility, and there are political benefits to linking parties as a sign of momentum when political jurisdictions band together. Another advantage is administrative economies of scale. Finally and very importantly, linkage allows for the UNFCCC’s key equity principle of “common but differentiated responsibilities and respective capabilities” (CBDR) to be achieved without sacrificing cost-effectiveness.
There are also some legitimate concerns about policy linkage. First, there are distributional impacts, both in the form of redistribution within jurisdictions, and redistribution across jurisdictions. Such impacts are politically problematic. There is also the automatic propagation of some design elements, in particular, the cost-containment elements of banking and price collars which propagate from one linked system to another. For that matter, weak design in one jurisdiction affects prices and quality in all linked jurisdictions. And price shocks can propagate through linked jurisdictions. Finally, there is decreased autonomy, as rules are set jointly by all linked parties.
Linkage and the Paris Agreement
There are three distinct but closely related levels of relevant policy action. First, national (or regional) governments can establish emission-reduction policies, including carbon taxes, cap-and-trade systems, and performance standards. Second, these jurisdictions can link their policy instruments through mutual recognition of permits, allowances, or credits via bilateral agreements. This allows trade of these units across international borders, which facilitates lower-cost achievement of the aggregate target. But such transfers of emission reduction responsibilities and actions need to be correctly counted toward compliance with respective NDCs under the Paris Agreement. This is where Article 6 comes in!
In particular, Article 6.2 provides for Internationally Transferred Mitigation Outcomes (ITMOs) and Corresponding Adjustments, which together can function as the international accounting mechanism to correctly reflect a multiplicity of international private-sector exchanges (under various international linkages).
Yes, it can be. There are three major categories of heterogeneity that can pose challenges to effective international policy linkage under the Paris Agreement. First, there are heterogeneous policy instruments: cap-and-trade; tradable performance standards; emission reduction credits (offsets); taxes; and performance standards. Second, there are heterogeneous jurisdictions and geographic scope: regional, national, and sub-national; and status under the Paris Agreement (Party and non-Party). Third, the NDC targets themselves area highly heterogeneous: hard (mass-based) emissions caps; relative mass-based emissions caps (relative to BAU); rate-based emissions caps (per unit of economic activity or per unit of output); and non-emissions caps, such as some degree of penetration of renewable energy sources. Also, there are differences in base year, target year, sectors, GHGs, estimated global warming potential, and conditionality.
Is Linkage Among Such Heterogeneous Policies Feasible or Wise?
The Outlook for Heterogeneous Linkage under Article 6.2 of the Paris Agreement
The negotiators in Madrid have an opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2. A robust accounting framework can foster successful linkages of climate policies across jurisdictions. But if guidance extends much beyond basic accounting rules – such as implicit taxes on cooperation via what have been termed “share of proceeds” and “net global emission reduction” – then restrictive requirements will impede effective linkage, and thereby drive up compliance costs. True to the spirit of the Paris Agreement, less may be more!
So, a combination of sensible common accounting rules and absence of restrictive criteria and conditions can accelerate linkage, allow for broader and deeper climate policy cooperation, and – most important – thereby increase the latitude of Parties to scale up the ambition of their NDCs.
Only time – and the work of the delegates in Madrid – will tell.
The Harvard Project on Climate Agreements at COP-25
In addition to holding a series of bilateral meetings with various national delegations, I will participate in at least four events. Two of these are panel sessions organized by HPCA, while the two others are panel sessions organized by national delegations. Our team will be at COP-25 during the week of December 8-12, 2019. COP-25 attendees who wish to meet with the Harvard Project during the conference should send an email Jason Chapman, Project Manager (email@example.com).
Four Events in Brief
Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by Harvard Project on Climate Agreements, Enel Foundation, and Tsinghua University Global Climate Change Institute; Monday, December 9, 2019; 11:30 am – 1:00 pm; Location: Side Event Room 3
The Seventh Global Climate Change Think Tank Forum: The Latest Developments in Climate Change Economics
Robert Stavins, Presenter; Hosted by China National Center for Climate Change Strategy and International Cooperation; Tuesday, December 10, 2019; 6:00 pm – 7:30 pm; Location: China Pavilion
Realizing the Potential of Article 6 of the Paris Agreement
Robert Stavins, Moderator and Panelist; Joseph Aldy, Panelist; Hosted by the Harvard Project on Climate Agreements; Wednesday, December 11, 2019; 12:30 pm – 2:00 pm; Location: Pavilion of the International Emissions Trading Association (IETA)
Enhancing Capacity of Developing Countries to Address Climate Change: Issues and Opportunities
Robert Stavins, Keynote Speaker; Hosted by Korea University, Green Asia, Center for Climate and Sustainable Development Law and Policy, Global Green Growth Institute, UNDP Seoul Policy Centre, UN Office for Sustainable Development; Wednesday, December 11, 2019; 3:00 pm – 4:30 pm; Location: Korea Pavilion
Two Harvard Project Events in Detail
Reducing Greenhouse Gas Emissions through Carbon Pricing: Recent Research, Analysis, and Experience
Speakers will present recent research and analysis of carbon-pricing policy to reduce greenhouse-gas emissions. The panel will give some attention to experience and prospects in South America and to China’s emerging national system. A new research paper by Robert Stavins on the relative merits of cap and trade and carbon taxes will provide a basis for much of the discussion.
Speakers: Joseph Aldy, Harvard University; Simone Mori, Enel; Raffaele Mauro Petriccione, Director General of DG Climate Action in the European Commission; Robert Stavins, Harvard University; Zhang Xiliang, Tsinghua University; government representatives to be invited.
Realizing the Potential of Article 6
Wednesday, 11 December 2019; 12:30pm – 2:00pm; Location: Pavilion of the International Emissions Trading Association (IETA)
Panelists will discuss the potential of Article 6 to decrease mitigation costs and incentivize increased ambition. They will review the status of the negotiations on the Article 6 rulebook, including issues remaining to be resolved at that point in the COP – including potentially, ongoing discussion about double counting (environmental integrity) and the Article 6 – Article 13 interface (applications of the enhanced transparency framework to Article 6 transfers).
Panelists: Joseph Aldy, Harvard Kennedy School; Kay Harrison, Ministry of Foreign Affairs and Trade, New Zealand; Kelley Kizzier, Environmental Defense Fund; Andrei Marcu, European Roundtable on Climate and Sustainable Transition; Robert Stavins, Harvard Kennedy School
The Path Ahead
After COP-25, I will post an essay at this blog assessing the progress (or lack thereof) made in Madrid – on Article 6, as well as other elements and issues.
In the meantime, if you will be at COP-25, and would like to meet with the Harvard Project on Climate Agreements, please contact Jason Chapman (firstname.lastname@example.org).
The world lost a remarkable scholar, a great economist, and a gentle soul on August 27th, when Martin Weitzman sadly passed away.
A week later, I was asked by the editors of the VOX CEPR Policy Portal (of the Centre for Economic Policy Research) – “research-based policy analysis and commentary from leading economists” – to write a brief intellectual biography and personal remembrance of Marty Weitzman, my colleague, friend, and long-time co-host of the Harvard Seminar on Environmental Economics and Policy. In the essay I wrote, I sought to describe how Marty’s contributions have advanced the thinking of environmental and other economists, as well as the thoughts and actions of policymakers on many fundamental issues, including policy instrument choice, discounting, species diversity, and environmental catastrophes. Today, I’m offering readers of this blog a slightly edited version of my Vox essay.
Martin Weitzman was a treasure – a gift that kept on giving to the research and policy worlds – for Harvard, for economists around the world, and for the global intellectual community. His work as an economic theorist who addressed a broad set of problems, and as an environmental economist who during the past decade focused on climate change, was unparalleled, and formed the basis for theoretical and empirical work carried out by legions of economists and other scholars around the world. His contributions to environmental economics in particular were unprecedented, and helped to shape the field for nearly five decades.
If economic theory is about stripping a problem down to its absolute essentials, and deriving meaningful insights from those essentials, then Weitzman was a master. Over and over again, Marty Weitzman demonstrated how careful and rigorous analysis of artfully constructed theoretical models can provide valuable and often surprising insights into difficult economic problems with real implications for the design of public policies.
Marty’s contributions have advanced the thinking of environmental economists and policymakers on policy instrument choice, discounting, species diversity, environmental catastrophes, and other fundamental issues. Across the board, the example of his rigorous and often ingenious work set high standards for theorizing in environmental economics and thereby served to elevate the entire field.
At the start of his research career, Weitzman studied centrally planned economies in a field that has all but disappeared from academic economics – comparative economic systems. It was during this early period of his career that Marty’s papers with titles such as ‘Soviet Postwar Economic Growth and Capital Labor Substitution’ (1970b) and ‘Iterative Multi-Level Planning with Production Targets’ (1970a) appeared.
A remarkable product of his interest in how to manage a centrally planned economy efficiently was Marty’s classic paper on ‘Prices vs. Quantities’ (1974). He began this work to address the question of whether prices or production quotas would lead to more efficient outcomes in a centrally planned economy (under conditions of uncertainty), but the paper and the subsequent literature evolved to address the question of whether a price instrument or a quantity instrument will be more efficient for environmental regulation.
Although Marty began his first forays into research and writing on environmental and natural resource problems in the 1970s (some of it developing Marxian views of common property problems), it was not until the 1990s that he turned with such passion and energy to this realm, and produced one important work after another that virtually span the field. That outpouring coincided with the beginning of my collaboration with Marty, co-hosting the Harvard Seminar on Environmental Economics and Policy (more on this below).
The share economy
Along the way, Weitzman carried out important research in macroeconomics and unemployment theory. One product of this – along with dozens of journal articles (inevitably in the top periodicals) – was his best-selling 1984 book, The Share Economy – which was eventually translated into seven languages. In this brief (167-page) book, Marty laid out his proposal for how the US economy could be protected from the dual threats of unemployment and inflation with a remarkably simple idea (a hallmark of many of his contributions) – namely that instead of companies paying workers in manufacturing a fixed wage, they be paid through something akin to profit sharing, in particular by paying workers a significant share of company revenue.
In short, this would provide incentives for companies to continue adding workers as long as, through their work, they added to company revenues. This ‘novel, seemingly workable plan for equipping the economy to resist the instabilities’ that had plagued it for more than a decade (Passell 1984), was labelled in the headline of a lead New York Times 1985 editorial, ‘the best idea since Keynes’.
Policy instrument choice: prices versus quantities
For environmental economists, Marty’s most prominent contribution is probably his classic 1974 article, ‘Prices vs. Quantities’, which developed the simultaneously simple and powerful insight that – under conditions of uncertainty – the expected relative efficiency of policy instruments based on prices (such as a pollution tax) versus those based on quantities (such as a cap-and-trade system) depends on the relative slopes of the expected marginal benefit and marginal cost functions.
That work remains one of the most frequently cited articles in all of environmental economics. It stimulated a massive literature, a fact that prompted Richard Newell (Resources for the Future) to characterize the work as a ‘gift that keeps on giving’ at a symposium we held at Harvard in October 2018 to mark Marty’s retirement and celebrate his contributions, ‘Frontiers in Environmental Economics and Policy: A Symposium in Honor of Martin L Weitzman’. Even now, Marty’s 1974 paper is at the core of analysis of carbon taxes versus carbon cap-and-trade systems to address climate change (Karp and Traeger 2018; Mideksa and Weitzman 2019; Stavins 2019).
In the early 1990s, Weitzman responded to what he sensed might be the unwillingness – or the inability – of ecologists to rank ecologies in terms of their relative biodiversity, by producing a series of brilliant treatments of how these comparisons can be made quantitatively and rigorously: ‘On Diversity’ (1992); ‘What to Preserve: An Application of Diversity Theory to Crane Conservation’ (1993); ‘Patterns of Behavior in Biodiversity Preservation’ (Metrick and Weitzman 1996); and ‘The Noah’s Ark Problem’ (1998a). At the Harvard symposium, Charlie Kolstad (Stanford University) cited this body of work for its ‘significance and importance’.
It was also in the 1990s that Marty became interested in a central issue of the economic analysis of climate change policies, namely long-term discounting. Given the long time horizons of the climate change problem, analysis of the expected net present value of alternative policies can be dominated by the choice of discount rate, which – with conventional exponential discounting – will greatly diminish the relative quantitative importance of phenomena that are decades or longer in the future.
Through careful theoretical analysis, Marty concluded that rather than a constant discount rate being employed, a rate that itself is diminishing over time is appropriate, so that benefits and costs in the near future would be subject to a typical rate, while benefits and costs further in the future would be subject to a much lower rate.
A topic that has pervaded decades of analysis and commentary in the environmental sphere is the reality that conventional measures of economic growth, such as gross domestic product, are not measures of welfare, since they do not account for externalities (among other non-market economic phenomena). In 1999, the National Research Council published Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment, produced by a committee chaired by Bill Nordhaus and including Marty Weitzman (Nordhaus and Kokkelenberg 1999). That was linked with several contributions that Weitzman subsequently made to the scholarly literature, including: ‘Does NNP Growth Indicate Welfare Improvement’ (Asheim and Weitzman 2001); and ‘A Contribution to the Theory of Welfare Accounting’ (2001b).
At the Harvard symposium, Bill Nordhaus emphasized Marty’s contributions in this realm, and launched his keynote presentation, ‘The Intellectual Footprint of Martin Weitzman in Environmental Economics’, by stating that Marty ‘has changed the way we think about economics and the environment.’ He concluded that ‘those who claim that environmental regulations hurt growth are completely wrong, because they are using the wrong yardstick. Pollution should be in our measures of national output, but with a negative sign, and if we use green national output as our standard, then environmental and safety regulations have increased true economic growth substantially in recent years… For this important insight we applaud Martin Weitzman, a radically innovative spirit in economics.’
Some will be surprised to learn that a theorist such as Marty Weitzman was as immersed as he was in concerns about the real world of natural resource management and environmental protection. One example comes from his research and outreach in the realm of fisheries management. His modelling of Icelandic commercial fisheries affected thinking and discussion around the world regarding the use of taxes and quotas to regulate open-access fisheries.
As Maureen Cropper (University of Maryland) said at the Harvard symposium, ‘this is another example of the use of a simple model and treatment of uncertainty that really did start a conversation among fisheries economists’. This application of Weitzman’s previously developed theory of instrument choice was documented in his 2002 paper ‘Landing Fees vs Harvest Quotas with Uncertain Fish Stocks’.
In recent years, Marty made prominent and important contributions to thinking about long-term climate change policy with his development of a theory of how positive biophysical feedback loops could lead to uncertainty about the damages of climate change that is best characterized by a probability distribution of damages with fat tails, such as a Pareto distribution, rather than a conventional Gaussian (normal) distribution. The result is greater weight being given to catastrophic (but relatively small probability) outcomes.
Speaking at the Harvard symposium, Bob Pindyck of MIT pointed to Weitzman’s prescient 2007 paper, ‘Subjective Expectations and Asset-Return Puzzles’ as having had a profound influence on Marty’s subsequent modelling of catastrophic climate change. A small subset of the papers Marty published on this topic include: ‘On Modeling and Interpreting the Economics of Catastrophic Climate Change’ (2009); ‘Fat-Tailed Uncertainty in the Economics of Climate Change’ (2011); and ‘Fat Tails and the Social Cost of Carbon’ (2014b).
Domestic and international climate change policy
Marty Weitzman always searched for topics for his research that were not only interesting, but also relevant and important for real-world applications. His recent work exploring alternative policy instruments to address climate change and his critical examinations of the form of international climate agreements provide telling examples of this. It was in this regard that Jim Stock (Harvard University) credited Weitzman for the ‘tremendous influence’ his ideas have had on the formulation of public policy around the world.
Just a few of the many papers that could be cited in this context are: ‘Can Negotiating a Uniform Carbon Price help to Internalize the Global Warming Externality’ (2014a); ‘A Voting Architecture for the Governance of Free-Driver Externalities, with Application to Geoengineering’ (2015); and ‘On a World Climate Assembly and the Social Cost of Carbon’ (2017). Also, of course, Marty and his former student, Gernot Wagner, wrote a lucid and compelling book, Climate Shock: The Economic Consequences of a Hotter Planet (2015).
Theoretical foundations for empirical analyses
It should be emphasized that Marty Weitzman’s theoretical work was not only important for other theorists, but also for empirical economists. In many of the realms described above, his insights were fundamental as the foundation for sound empirical analysis. As Michael Greenstone (University of Chicago) noted at the Harvard symposium, Marty’s work ‘takes something you are kind of confused about, and then after you read it, you can’t understand how in the world you were confused beforehand. It just clarifies things in a way that is really beautiful.’
A remarkable scholar
Marty Weitzman was thus a real treasure – a ‘gift that kept on giving’ – for both the research and policy worlds. His work as a theorist on environment broadly and on climate change in particular was unparalleled, and formed the basis of much theoretical and empirical research carried out by others over several decades. His work – from examining price versus quantity instruments in the early 1970s through his examinations in the last few years of the implications of fat tails in the probability distribution of possible climate damages – have changed the way economists and others think about the environment and policies to protect it.
His contributions were well recognized. He was elected a Fellow of the Econometric Society in 1976; a Fellow of the American Academy of Arts and Sciences in 1986; three times won the annual award for ‘Publication of Enduring Quality’ from the Association of Environmental and Resource Economists; received the 20th Anniversary Prize from Fondazione Eni Enrico Mattei, the Leontief Prize, and the Eric Kempe Prize in 2011; and the John Kenneth Galbraith Award in 2013.
Of course, we did not always agree. I remember our spirited discussions contrasting Marty’s strong view of the superiority of carbon taxes and my view of the relative symmetry of price and quantity instruments for climate change. Also we had some long discussions about the 2015 Paris Agreement on climate change, which Marty saw (accurately) for what it lacks, and I saw for its improvements over the international policy architecture that had preceded it. We disagreed, but were never disagreeable (and I never succeeded in changing his mind!). All in all, for three decades, I consistently learned from this remarkable scholar. He truly was a gift that kept on giving.
Asheim, Geir B, and Martin L Weitzman (2001), ‘Does NNP Growth Indicate Welfare Improvement?’ Economic Letters 73(2): 233-39.
Karp, Larry, and Christian Traeger (2018), ‘Prices versus Quantities Reassessed’, CESifo Working Paper No. 7331.
Metrick, Andrew, and Martin L Weitzman (1996), ‘Patterns of Behavior in Endangered Species Preservation’, Land Economics 72(1): 1-16.
Mideksa Torben, and Martin L Weitzman (2019), ‘Prices versus Quantities across Jurisdictions’, Journal of the Association of Environmental and Resource Economists 6(5): 883-891.
New York Times (1985), ‘Best Idea Since Keynes’, Editorial, March 28, Section A, page 30.
Nordhaus, William D, and Edward C Kokkelenberg, editors (1999), Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment, Panel on Integrated Environmental and Economic Accounting, National Academy Press.
Wagner, Gernot, and Martin L Weitzman (2015), Climate Shock: The Economic Consequences of a Hotter Planet, Princeton University Press.
Weitzman, Martin L (1970a), ‘Iterative Multi-Level Planning with Production Targets’, Econometrica 38(1): 50-65.
Weitzman, Martin L (1970b), ‘Soviet Postwar Economic Growth and Capital Labor Substitution’, American Economic Review 60 (4): 676-92.
Weitzman, Martin L (1974), ‘Prices vs. Quantities’, Review of Economic Studies 41(4): 477-91.
Weitzman, Martin L (1984), The Share Economy, Harvard University Press.
Weitzman, Martin L (1992), ‘On Diversity’, Quarterly Journal of Economics 107(2): 363-405.
Weitzman, Martin L (1993), ‘What to Preserve: An Application of Diversity Theory to Crane Conservation’, Quarterly Journal of Economics 108(1): 157-83.
Weitzman, Martin L (1994), ‘On the ‘Environmental’ Discount Rate’, Journal of Environmental Economics and Management 26: 200-9.
Weitzman, Martin L (1998a), ‘The Noah’s Ark Problem’, Econometrica 66(6): 1279-98.
Weitzman, Martin L (1998b), ‘Why the Far-Distant Future Should be Discounted at its Lowest Possible Rate’, Journal of Environmental Economics and Management 36(3): 201-8.
Weitzman, Martin L (2001a), ‘Gamma Discounting’, American Economic Review 91(1): 260-71.
Weitzman, Martin L (2001b), ‘A Contribution to the Theory of Welfare Accounting’, Scandinavian Journal of Economics 103(1): 1-23.
Weitzman, Martin L (2002), ‘Landing Fees vs Harvest Quotas with Uncertain Fish Stocks’, Journal of Environmental Economics and Management 43: 325-38.
Weitzman, Martin L (2007), ‘Subjective Expectations and Asset-Return Puzzles’, American Economic Review 97(4): 1102-30.
Weitzman, Martin L (2009), ‘On Modeling and Interpreting the Economics of Catastrophic Climate Change’, Review of Economics and Statistics 91(1): 1-19.
Weitzman, Martin L (2011), ‘Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change’, Review of Environmental Economics and Policy 5(2): 275-92.
Weitzman, Martin L (2014a), ‘Can Negotiating a Uniform Carbon Price Help to Internalize the Global Warming Externality?’, Journal of the Association of Environmental and Resource Economists 1(1/2): 29-49.
Weitzman, Martin L (2014b), ‘Fat Tails and the Social Cost of Carbon’, American Economic Review Papers and Proceedings 104(5): 544-6.
Weitzman, Martin L (2015), ‘A Voting Architecture for the Governance of Free-Driver Externalities, with Application to Geoengineering’, Scandinavian Journal of Economics 117(4): 1049-68.
Weitzman, Martin L (2017), ‘On a World Climate Assembly and the Social Cost of Carbon’, Economica 84(336): 559-86.