Economists, including myself, have long favored carbon-pricing policies – either carbon taxes or cap-and-trade – as the best approach to reducing emissions of carbon dioxide (CO2) in large, complex economies – on the basis of: feasibility of limiting emissions from hundreds of millions of point and non-point sources; short-term cost-effectiveness in the face of highly heterogeneous abatement costs associated with highly diverse sources; and long-term effectiveness and efficiency by bringing about carbon-friendly technological change.
Although economists would therefore argue that carbon-pricing policies will be a necessary element of a truly meaningful policy portfolio, they would not claim that they will be sufficient, partly because of the presence of other market failures (such as principal-agent problems in the context of energy-efficiency technology adoption decisions in renter-occupied properties, and information spillovers leading to insufficient private investments in research and development).
But there is another reason for the insufficiency of carbon-pricing policies, and that reason is captured by a single word: politics. It has become increasingly clear that in the United States carbon-pricing policies do not have sufficient constituencies among either conservative Republicans or “progressive” liberal Democrats to become a central element of meaningful climate change policy. Hence, there is increasing recognition – even by economists – that more attention needs to be given to other, so-called “second-best” policies, which may be more costly but will also be more politically feasible.
This point is made in compelling fashion by Gilbert Metcalf, Professor of Economics at Tufts University and a long-time analyst, expert, and advocate of the use of carbon taxes, in the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” You can hear Gib’s plea for broader thinking by listening to our conversation here.
In these podcasts, I converse with leading experts from academia, government, industry, and NGOs. Gib Metcalf fits well in this group, as a long-time Professor of Economics at Tufts, a Research Associate at the National Bureau of Economic Research, a University Fellow at Resources For The Future, an Associate Scholar of the Harvard Environmental Economics Program, and a former Deputy Assistant Secretary for Environment and Energy at the U.S. Department of the Treasury (2011-2012). He has spent much of his career working on policy design and evaluation in the area of energy and climate change, both in academia and government.
Gib Metcalf’s call for pragmatism and broader thinking on climate change policy by the economics community is particularly striking (and compelling) because of his extensive analysis over more than a decade and his strong advocacy for the development of a U.S. carbon tax. This is exemplified by his excellent 2019 book, Paying for Pollution: Why a Carbon Tax is Good for America (Oxford University Press).
As a longtime proponent of a carbon tax to affix a social price on CO2 emissions, Metcalf is particularly convincing when he acknowledges in our conversation that he is now convinced that a carbon tax is not a practical option in today’s exceptionally partisan political climate.
“I am a firm believer that we should do the most efficient policies possible, and I think carbon pricing is precisely the way to do that. I prefer a carbon tax to cap-and-trade, I think for a number of reasons … but the political environment is such that, that’s just not going to happen,” he says. “And meanwhile, the concentration of greenhouse gases in the atmosphere continues to rise. So given, that I think we are obligated, those of us who care about the climate, to promote policies that will reduce emissions now, even if they’re not necessarily our most desirable policies.”
So, Metcalf argues that the Biden Administration should consider regulatory actions and executive orders in addition to statutory subsidies to give polluters incentives to seek cleaner energy alternatives. Commenting on the serious legal challenges that some regulatory initiatives are likely to face (particularly given the 6-3 conservative majority on the U.S. Supreme Court), he offers a cause for optimism:
“I see less of a problem with fuel economy standards [by] ratcheting those up. So, we can do something in transportation. I think we’ll [also] use tax credits in the electricity sector instead of regulation and perhaps we’ll do the same in buildings, but that gets to the third leg of what I would call a policy tripod in a third best world, which is R&D spending. And here, I think the R&D spending really needs to be focused on the technologies that have the greatest potential to lower the cost of clean energy.”
Gib Metcalf argues that production tax credits can be used to encourage further development of clean energy options, including wind power, but they should be designed in a way that will account for the increasingly negative impacts of carbon emissions.
“My recommendation is that we ought to tie that tax credit to the social cost of carbon. Given the official social cost of carbon numbers that the Biden Administration is using, that would be about a two and a half cents per kilowatt hour production tax credit. So, it doesn’t change the [tax] credit now, but as the social cost of carbon rises over time, then the production tax credit should rise over time.”
At the end of our conversation, I ask Gib Metcalf for his thoughts on the current, prominent youth movements pressing for more aggressive action on climate change. His response is that he was initially skeptical about their impact, thinking of them as little more than a “side show” to meaningful action through the international climate negotiations, for example. But that is no longer the case.
“I’ve actually changed my mind entirely. I’m more pessimistic [now] about where the negotiations will get us given the urgency of action. But the youth movements, Greta Thunberg and others, are really, to me, incredibly important in that they are driving public opinion and bringing media attention to the problem, in a way that I think is extremely valuable. So, I see them as just absolutely essential.”
I raise the question of whether this very prominent youth activism is an age effect (hence likely to become more moderate as young people become adults) or a cohort effect (likely to retain its strength over time). Gib responds that the young people involved in these climate movements are likely to remain engaged.
“I think the current youth movements see a very clear stake for themselves in terms of the damages that we’re seeing in the world today because of climate change. So, I think that gives them a more enduring stake that may outlast their youth.”
That’s an excellent, optimistic note on which our conversation comes to a close.
For this and much more, I hope you will listen to my complete conversation with Gib Metcalf, the 30th 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:
- Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency
- Nick Stern of the London School of Economics discussing his career, British politics, and efforts to combat climate change
- Andrei Marcu, founder and executive director of the European Roundtable on Climate Change and Sustainable Transition
- Paul Watkinson, Chair of the Subsidiary Body for Scientific and Technological Advice (SBSTA) within the United Nations Framework Convention on Climate Change
- Jos Delbeke, professor at the European University Institute in Florence and at the KU Leuven in Belgium, and formerly Director-General of the European Commission’s DG Climate Action
- David Keith, professor at Harvard and a leading authority on geoengineering
- Joe Aldy, professor of the practice of public policy at Harvard Kennedy School, with considerable experience working on climate change policy issues in the U.S. government
- Scott Barrett, professor of natural resource economics at Columbia University, and an authority on infectious disease policy
- Rebecca Henderson, John and Natty McArthur University Professor at Harvard University, and founding co-director of the Business and Environment Initiative at Harvard Business School.
- Sue Biniaz, who was the lead climate lawyer and a lead climate negotiator for the United States from 1989 until early 2017.
- Richard Schmalensee, the Howard W. Johnson Professor of Management, and Professor of Economics Emeritus at the Massachusetts Institute of Technology.
- Kelley Kizier, Associate Vice President for International Climate at the Environmental Defense Fund.
- David Hone, Chief Climate Change Adviser, Shell International.
- Vicky Bailey, 30 years of experience in corporate and government positions in the energy sector.
- David Victor, professor of international relations at the University of California, San Diego.
- Lisa Friedman, reporter on the climate desk at the The New York Times.
- Coral Davenport, who covers energy and environmental policy for The New York Times from Washington.
- Spencer Dale, BP Group Chief Economist.
- Richard Revesz, professor at the NYU School of Law.
- Daniel Esty, Hillhouse Professor of Environment and Law at Yale University.
- William Hogan, Raymond Plank Research Professor of Global Energy Policy at Harvard.
- Jody Freeman, Archibald Cox Professor of Law at Harvard Law School.
- John Graham, Dean Emeritus, Paul O’Neill School of Public and Environmental Affairs, Indiana University.
- Gernot Wagner, Clinical Associate Professor at New York University.
- John Holdren, Research Professor, Harvard Kennedy School.
- Larry Goulder, Shuzo Nishihara Professor of Environmental and Resource Economics, Stanford University.
- Suzi Kerr, Chief Economist, Environmental Defense Fund.
- Sheila Olmstead, Professor of Public Affairs, LBJ School of Public Affairs, University of Texas, Austin.
- Robert Pindyck, Bank of Tokyo-Mitsubishi Professor of Economics and Finance, MIT Sloan School of Management.
“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.