Professor Stavins in Geneva

Last night I attended a lecture by Professor Stavins of Harvard. He started with some basics on climate change and economics.

The fundamental obstacle to introducing measures to reduce carbon usage in our economies is that climate change is a global commons problems. It does not matter is carbon is emitted by a car in Geneva or lawnmower in Wisconsin. The damage is the same. However, actions to reduce emissions incur costs for a national economy even those the benefits of that action are shared globally – the free rider problem.

Economists like Stavins favour market-based instruments because there are millions of emissions sources (from cars to lawnmowers to power station) with hundreds of millions of decision-makers. Each source has a different short term marginal cost to reduce emissions.

Conventional command and control policies (e.g. emission standards) are not cost effective because they impose a regulation that requires compliance in different marginal costs.

Market-based instruments like a carbon tax or cap and trade controls emissions at the same marginal cost. In the longer term, pricing sends signals for low carbon technology development.

Why is carbon pricing a hot political issue?
Because it makes the costs transparent. Politicians want to make constituents think they have something for nothing. Win-win policies don’t exist. For example a gas tax is transparent. A fuel efficiency standard not, so more acceptable politically.

He said a carbon tax not likely in next few years, but that there is some climate policy in the US, e.g.
• 80 billion commited for renewable and energy efficiency
• Energy efficiency standards for auto and appliance
• US Supreme court decision. EPA endangerment findings and CAA triggered to put in place for CO2
• Air pollution leg

He said that carbon pricing is a necessary but not sufficient incentive for low carbon tech development. Why? Because R and D is eventually a public good, even with strong IP systems. For example, Apple spent millions on developing the smart phone. New entrants to the market (Android) have enjoyed the benefits of that development. Apple did not capture all the benefits of their investments. So positive externality mean that low carbon technology development will be undersupplied without government funding.

He then described the prospects for Durban. These are covered in his blog but essentially because of the pressure to extend Kyoto Protocol, the conference risks failure like Copenhagen. He noted that keeping KP going is v important to DCs. Why? They get benefits (reduced damage) but at no cost.

Interesting point about how carbon regulation can develop outside the UNFCCC process. We are now seeing decentralized approaches like the EU ETS and the Australian carbon tax. These can be linked through equivalence schemes (like with private standards). There is pressure to do that to reduce overall costs, market power and price volatility. Systems are already linked when they are both linked through use of the CDM offsets.

Carbon tax versus cap and trade

There is an endless stream of articles about the climate impact of our daily lives and shopping choices. Today, it transpires that surfing the internet is bad. This lengthens the list of daily activities that we are told is causing climate change. One minute you think you are doing the right thing (like buying local food) and then an expert points out that it depends what time of year you are buying it, what country is comes from, if it was grown in a greenhouse or not, what energy sources were used, whether it come it by road, rail or air, how you got to the shop and how you prepared it (oven, boiled or fried).

All this needless to say is a) disconcerting and b) a complete waste of our time c) ineffective way to deal with global warming.

The alternative promoted by economists and endorsed by some politicians is to price carbon. This means raising the price on carbon to account for its environmental damage. This will change the relative price of energy in favour of low carbon technologies and energy conservation measures. Whilst most agree that this is a good idea (some industry groups disagree), there is disagreement about whether a carbon tax or cap and trade emissions scheme is the best approach. I will leave it to the chief proponents of these respective economic instruments to argue which is the best approach.

Greg Mankiw of Harvard University on carbon taxes as the best approach to reduce carbon emissions and Robert Stavins also of Harvard on cap and trade.

Creating green jobs

Obama talked in his presidential campaign about mitigating climate change through stimulating green technologies and so creating millions of new jobs and at the same time energy independence - a "win win win".

What is the reality behind this comforting vision? Can environmental policies really work in stimulating the economy. Would the number of jobs created by expanding solar industry would be greater than the number lost through, say, a shrinking coal-mining industry. Professor Stavins at Harvard, via the Wall Street Journal offers the following analogy:

“Let’s say I want to have a dinner party. It’s important that I cook dinner, and I’d also like to take a shower before the guests arrive. You might think, Well, it would be really efficient for me to cook dinner in the shower. But it turns out that if I try that I’m not going to get very clean and it’s not going to be a very good dinner. And that is an illustration of the fact that it is not always best to try to address two challenges with what in the policy world we call a single-policy instrument.”
Photo by phault, flickr