What Can an Economist Possibly Have to Say about

slide1. What Can an Economist Possibly Have to Say about Climate Change? Robert N. Stavins
A. J. Meyer Professor of Energy and Economic Development
John F. Kennedy School of Government, Harvard University
Cambridge, Massachusetts, USA

A.D. White Professor-at-Large Keynote Public Address
Cornell University
Ithaca, New York, USA
October 29, 2024<br>
slide2. 1 “What business are you in?” “I’m an environmental economist.”<br>
slide3. Environmental economics is not oxymoronic The causes of environmental problems (in a market economy) are economic – unintended side-effects of market activity (“externalities”).

The consequences of environmental problems have important economic dimensions.

Therefore, an economic perspective is helpful for …

A full understanding environmental problems

And therefore can be very helpful for the design of solutions that will be effective, economically sensible, and (perhaps) politically feasible.

Economic thinking is particularly important for the formulation of effective, sensible, and politically feasible climate policies … 2<br>
slide4. Science  Economics  Geopolitics of Climate Change Greenhouse gases mix in the atmosphere, so the location of emissions has no effect on impacts – in economic terms, climate change is a global commons problem
Any jurisdiction taking action incurs the costs of its actions
But climate benefits are distributed globally
Therefore, for virtually any jurisdiction, the climate benefits it reaps from its actions will be less than the costs it incurs ….
despite the fact that the global benefits may be greater – possibly much greater – than the global costs
This presents a classic free-rider problem, ….
which is why international, if not global, cooperation is essential, and why the highest levels of effective governance (typically countries) are key.
There’s also a temporal dimension that takes us from science to economics to politics & policy … 3<br>
slide5. More Science  Economics  Geopolitics of Climate Change Greenhouse gases accumulate in the atmosphere (100+ years for CO2)
Damages are a function of the stock, not the flow
If global CO2 emissions begin falling tomorrow by 5%/year, the rate of warming won’t begin to change in a detectable way until after 20 years (Nature 2020)
So, greatest benefits of climate policies will be over the long term, but climate change policies and the attendant costs of mitigation will be up front
This combination of up-front costs and delayed benefits presents a great political challenge
Political incentive in democracies is to give benefits (to voters) today, and place costs on future generations
The climate problem asks politicians to do precisely the opposite!
Together, the global commons nature of the problem plus its intertemporal asymmetry make climate change a very tough political challenge. 4<br>
slide6. Economists (& Policy Analysts) Tend to Favor Carbon-Pricing Two major forms: Carbon Tax & Emissions Trading
Carbon Tax (levy)
Tax on carbon content of fossil fuels, not on CO2 emissions per se
Revenue can be used for variety of purposes, including reducing distortionary taxes, compensating burdened parties, funding R&D
Compliance cost is certain, but quantity of resulting emissions is uncertain
Carbon Emissions Trading System (Cap-and-Trade)
Allocate allowances for carbon content of fossil fuels, not emissions
Allocation can be via free distribution or by auction
Auction revenue can be used for same purposes as above
Allow trading: supply & demand for allowances generates a price
Quantity of resulting emissions is set, but compliance cost is uncertain 5<br>
slide7. Why do Policy Analysts Favor Carbon-Pricing? No other feasible approach can provide meaningful emissions reductions
Least costly approach in short term (heterogeneous abatement costs)
Least costly approach in long term: incentive for carbon-friendly technological change -- innovation (& diffusion)
Note: carbon pricing may be necessary, but is not sufficient. Why?
Other market failures: principal-agent problem (e.g. energy-efficiency investments in renter-occupied buildings)
… And public-good nature of information spillovers (e.g., Apple & Blackberry) 6<br>
slide8. Worldwide Status of Carbon Pricing Major CO2 emissions trading regimes in place & announced (as of October 1, 2024)
European Union Emissions Trading System $63/ton (2008-)
Washington State Cap-and-Invest $30/ton (2022-)
New Zealand Emissions Trading Scheme $39/ton (2008-)
California’s AB-32/398 GHG Cap-and-Trade System $30/ton (2013-)
Regional Greenhouse Gas Initiative $26/ton (2009-)
South Korea Emissions Trading Scheme $10/ton (2015-)
China’s National Carbon Trading Market $10/ton (2022-)
Selected carbon (and related energy) taxes (no prices given, because many not CO2 taxes but energy taxes, and exemptions very common)
Finland (1990), Norway (1990), Sweden (1991), Denmark (1992), Costa Rica (1997), British Columbia (2008), Switzerland (2008), Ireland (2010), Iceland (2010), Japan (2012), Mexico (2012), United Kingdom (2013), Chile (2014), France (2014), South Africa (2016)
Other jurisdictions will not employ carbon pricing, but will use performance standards and/or technology standards instead
Less cost-effective than carbon pricing
Muted/distorted price signals
Still, will place an implicit shadow-price on carbon 7<br>
slide9. Carbon Prices and Emissions Coverage of Implemented Policies ~25% of Global CO2e Emissions Some carbon taxes at much higher levels that cap-and-trade allowance prices. But combining stringency (price) with scope (coverage), cap-and-trade more important in application. Of 70+ carbon-pricing systems in place, about half are carbon taxes and half trading 8<br>
slide10. 48 European Union Emissions Trading System (2005) First phase of China national emissions trading system California Cap-and-Trade System (2012) Carbon Pricing Implemented Worldwide, 1990-2021 Source: World Bank, State and Trends in Carbon Pricing content (worldbank.org)<br>
slide11. Basic Consequences of Carbon Pricing for Fossil Fuels Coal
Greatest impacts globally due to high carbon content (electricity generation)
Immediate impacts on electricity dispatch
Long-term impacts on investment in new capacity
Long-term impacts on retirement of existing capacity
Natural Gas
Smaller impacts, because of lower carbon content
And demand increase – in short term – due to substitution for coal (in USA)
But likely effects of anticipated carbon pricing small compared with effects of increased supplies due to horizontal drilling & hydraulic fracturing
Oil
Potentially significant impacts muted in the very short term …
Limited substitutes for liquid fuels in transportation sector means relatively high marginal CO2 abatement costs; so a cost-effective portfolio would not target oil
But increasing penetration of EVs, growth of biofuels (ag waste, used cooking oil), and greater fuel efficiency  petrol demand may decline post-2026
Effect muted by growing demand for aviation fuel and for petrochemicals 10<br>
slide12. Economic Impacts will Vary Across & Within Sectors Fuels & Energy Generation
Bad news for coal (ceteris paribus), even in short term; mixed for natural gas, possibly muted for oil
Good news for renewables, and possibly for nuclear (again, ceteris paribus)

In other sectors, climate policies increase energy costs, so simple rule-of-thumb:
Bad news for sectors that use energy (i.e., all sectors), but …
Can be good news for producers of energy-consuming durable goods (Boeing, Airbus)
Particularly bad news for consumers of those same energy-consuming durable goods (United Airlines, Lufthansa, etc.) 11<br>
slide13. What about Subsidies? Politicians strongly prefer giving out benefits rather than imposing costs
So, why not subsidize use of renewable energy rather than taxing fossil fuels? (see the IRA, for example)
Aren’t these policy instruments symmetric, in which case a subsidy would be potentially cost-effective?
When climate externality is taxed, less fossil fuels and less overall electricity, for example, are used, given higher prices
Can this outcome be achieved by subsidizing clean energy?
No, by subsidizing clean energy, market-clearing price for all electricity is reduced, so overall electricity demand (use) increases
Also, can provide other perverse incentives – the rebound effect: effect of subsidized (cheaper) insulation (vs effect of energy tax): change thermostat to keep house warmer in winter & cooler in summer
And requires large public expenditures per unit of effect, because not only marginal units receive the subsidy, but all of the infra-marginal ones as well (those who “would have done it anyway”)
Reminder: It’s a global commons problem, so international cooperation is necessary … 12<br>
slide14. 13 A Major Step Forward
A landmark climate accord, a dramatic departure from previous 20 years (UNFCCC, 1992; Kyoto, 1997)
Provided a broad foundation for meaningful future progress
So, new approach could be key step toward reducing threat of climate change
Fundamental Structure: Hybrid International Policy Architecture
Top-down (like Kyoto Protocol, 1997): Centralized oversight, guidance, and coordination
Bottom-up: “Nationally Determined Contributions” (NDCs – targets and actions) that arise from – or at least are consistent with – national policies and politics
But whether the Agreement is truly successful may not be known for decades
Paris Agreement provides an important opportunity going forward
Key necessary condition met: adequate scope of participation (14% KP  97% PA)
Other key necessary condition: adequate ambition of NDCs and national policies

So, plenty of challenges remained for international negotiations … from COP 21 to COP28 … The Paris Climate Agreement (COP21, 2015)<br>
slide15. COP28 in Dubai, United Arab Emirates (December 2023) Press hailed COP28 a great success or a distinct failure, …
… largely based on one sentence in closing statement (officially the “Decision of the First Global Stocktake” and unofficially the “UAE Consensus”) about the future of fossil fuels:
Endorsement of “transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner …”
Compromise
Above endorsement (instead of “phasing down” or “phasing out” fossil fuels) was combined with endorsement of “renewables, nuclear, abatement and removal technologies,” plus …
… endorsement of tripling global renewable-energy capacity and doubling annual rate of energy-efficiency improvements
Hence, approved by rich oil-producing Middle East countries, industrialized nations, & developing countries
Vacuous Statement … or a “Paradigm Shift?” (COP 28 President Sultan Al Jaber)
Essentially a non-binding resolution about future ambitions, but statement – and its press coverage – may have symbolic, signaling value 14<br>
slide16. So, Was COP28 a Success or a Failure? Most COPs are neither successes nor failures
Except when a new agreement is reached (Kyoto Protocol, 1997; Paris Agreement, 2015), the COPs have more in common with annual World Economic Forum (in Davos, Switzerland) than with WTO meetings
COPs and Davos are complex get-togethers, based on bottom-up processes.  
Corporate CEOs in Davos do not agree to take action, then go home to their Boards of Directors to implement their Davos commitments 
Causality runs in opposite direction
So too with COPs, the delegations from the 195 “Parties” bring to the COPs their domestic priorities. 
Each COP’s outcome is essentially the aggregation of those
What really drives action around the world (cuts in GHG emissions) is combination of market realities and public policies.
Policies are largely enacted at the national level (and sometimes sub-national level)
Those policies are linked with what happens at the annual COPs, but the direction of causation is fundamentally bottom-up, not top-down. 15<br>
slide17. So, what was the most important COP28 development? Most important development occurred 8,000 miles away in California two weeks prior
U.S. President Joe Biden and China President Xi Jinping met in Sunnylands, California, and signaled in writing renewed cooperation on climate change
Statement of cooperation trickled down to leaders of two negotiating teams – John Kerry and Xie Zhenhua
U.S.-China cooperation is essential for meaningful progress on climate change
Without that cooperation (during Obama years), Paris Agreement would not exist!
… and the Sunnylands Statement — jointly signed by the two presidents in November 2023 – may ultimately be more important than any individual accomplishment at COP-28 in Dubai. 16<br>
slide18. Structure of UNFCCC and Evolution of the Annual COPs UNFCCC specifies any non-governmental entity, which is qualified re topics of Convention can be represented at the Conference of the Parties as an observer (UNFCCC 1992, Article 7, paragraph 6)
An explicit role for observer organizations from civil society (NGOs, trade associations, universities, etc.)
Evolution over Time
Gradual changes in relative importance and prominence of core country delegations of negotiators versus observers from civil society
Sixteen years ago (my first COP), 90-95% of meaningful action was in the negotiations, with 5-10% among the participants from civil society
By the time of COP28, 10% of meaningful action was within the negotiations, and 90% among the official “Side Events,” unofficial presentations and sessions, meetings, and interactions among gov’ts and civil society.
The COP is to a large degree a “trade fair” with entrepreneurs of all kinds promoting their products
The COP is a circus in which the “main event” is eclipsed with increasing frequency by the “side shows”
Hence, the festivities in Dubai were, in effect, “Climate Expo 2023”
Not cynicism or even skepticism, because like Davos, the annual “Climate Expo” plays a role
Great examples of this in Dubai were events targeting a specific non-CO2 greenhouse gas – methane. 17<br>
slide19. The Prominence of Methane at COP28 Methane received greatly increased attention from civil society (business associations, NGOs)
CH4 has much greater radiative forcing per unit than CO2, but much shorter atmospheric lifetime
Over 100 years, radiative forcing per unit of CH4 20 times > CO2; over 20 years, 80 times > CO2
Methane emissions account for 30% of warming since pre-industrial times, and nearly half this decade
Can be in financial interests of O&G companies to reduce emissions
Included Harvard Initiative to Reduce Global Methane Emissions (4 presentations, 20+ meetings) – Oct 31
Multiple Developments
New U.S. EPA regulations to cut O&G CH4 emissions by 80%, & $1 billion pledged help for poor countries
Global Methane Pledge (to cut global CH4 emissions by 30% by 2030) expanded to 155 countries – with Turkmenistan, Kazakhstan, & 3 others joining
U.S., China, & UAE held a methane summit
World Bank Global Flaring and Methane Reduction Partnership, Global Methane Hub, Oil and Gas Methane Partnership 2.0 (120 companies in 60 countries covering 35% of production), Oil and Gas Climate Initiative’s Satellite Monitoring Campaign
But will pledges and actions from private industry, NGOs, and governments yield real emissions reductions? 18<br>
slide20. Disappointments and Progress at COP28 Two Disappointments
Adaptation received great attention in COP28 Decision, but not Funding
Perhaps because of diverted attention: Loss and Damage Fund contributions reached $700 million (but less than 1% of likely eventual L&D demand)
Major Setbacks for Article 6
Some countries tried to re-open what had been settled issues regarding nature of Article 6.2 mechanism
General politicization of Article 6; steps toward implementation blocked
Path Ahead
“COP28 was a coming-out party for private-sector climate action” (Nathaniel Keohane, president, C2ES)
Hundreds of companies from diverse sectors showcased climate-friendly technologies, management practices, adaptation, and finance
A negative or positive development?
COP28 completed first 5-year Global Stocktake; countries will submit new NDCs by COP30
The marathon relay (not a sprint) continues to COP29 (Baku, Azerbaijan, 2024) & COP30 (Brazil, 2025) 19<br>
slide21. Copenhagen (COP-15) illustrated problems with process under United Nations
197 countries, but 20 account for 90% of global emissions; and default voting rule was consensus
Major Economies Forum – accounts for about 90% of global emissions; but initiated and led by USA, and forum for discussion, not negotiation
G20 – finance ministers; similar to MEF list
Climate Club
“Coalition of the Willing” -- Club of National Carbon Taxes or Carbon-Market Coalition
Benefits: greater c/e, reduced competitive distortions, free-riding, and leakage, and by providing exclusive membership benefits, club can encourage participation …
What if the major industrialized countries agree to price carbon domestically, and they agree to enforce border tariffs on non-participating trading partners? (Sounds like the CBAM)
Many countries might decide that it makes more sense to join the club, and collect their own carbon taxes (or auctioned allowance revenue), rather than to pay tariffs to the club (This is actually happening!) Key Options for the Institutional Path Ahead 20<br>
slide22. We will not know about ultimate success of Paris Agreement for many years
International cooperation essential, but key action will be at national levels
Paris Agreement provides important opportunity for new path forward
One key necessary condition met: adequate scope of participation
Other key necessary condition: adequate ambition of policies
Paris was only the first step, review NDCs every 5 years
But even first NDCs significant: 2100 political target 2o C; BAU was 5-7o C; Paris NDCs can lead to 3.0o C (Kigali Amendment to Montreal Protocol reduces HFCs by 80% over 30 years – will shave an additional 0.5o C) … if fully implemented in all jurisdictions
In years to come, major locus of international cooperation …
… may continue to be UNFCCC, other existing venues, or climate clubs
But under any of these venues, the value of an economic perspective remains! Beyond Paris 21<br>
slide23. 22 “Environmental Economics” is not an oxymoron. An economic perspective is essential for a
full understanding of environmental problems.

Economic analysis is key for design of solutions that are:
environmentally effective
economically sensible
politically pragmatic<br>
slide24. Thank You! 23<br>
slide25. For More Information

Harvard Project on Climate Agreements
www.belfercenter.org/climate
Harvard Environmental Economics Program
www.hks.harvard.edu/m-rcbg/heep
Website
www.stavins.com
Blog
http://www.robertstavinsblog.org/
Twitter
@robertstavins
Salata Institute Initiative on Reducing Global Methane Emissions
https://salatainstitute.harvard.edu/projects/methane/ 24<br>