An Economic View of the Environment - Page 42 of 78 - One Economist's Perspective on Climate and Other Policy

This is Not a Time for Political Neutrality

I have been writing essays at this blog for over seven years, and throughout that time, through perhaps 100 more-or-less-monthly essays, I have tried very hard to keep politics at bay, and to view each and every issue I discussed from a politically neutral, yet analytical economic perspective. But I find it difficult to remain neutral in the current U.S. Presidential election cycle.

Since before the summer, I had resolved to write today’s essay, but I decided to wait until one month before the November U.S. election to post it, simply because I thought this was the point in time when people would be paying most attention to the upcoming election but would not yet have completely made up their minds. In particular, I want to address this message to people who – like me – are political independents.

Background

I have been teaching at Harvard for close to 30 years, and every year I take pride in the fact that at the conclusion of my 13-week course in environmental economics and policy, my students cannot say – on the basis of what I have said in lectures or what they have read in the assigned readings – whether I am a tree-hugging environmental advocate from the political left, or an industry apologist from the political right (actually, I am neither, although hostile voices in the blogosphere have sometimes wanted to peg me as being on the opposite of whatever extreme they occupy).

Likewise, I have remained bipartisan in politics, ever since I directed Project 88 more than 25 years ago for the bipartisan coalition of former Democratic Senator Timothy Wirth and the late Republican Senator John Heinz. Starting with the White House of President George H. W. Bush, and continuing with every administration – of both political parties – since then, I have worked on substantive matters of environmental and energy policy, in some cases closely and intensively, and in some cases indirectly and on the periphery.

Such professional bipartisanship and political neutrality have been important to me, and have been consistent with my voter registration, as I am officially registered as an independent (in Massachusetts, this goes by the designation of “unenrolled”).

So, over the years, I have voted for Democrats and I have voted for Republicans, for various offices ranging from the Mayor of my town to the President of my country. And in each and every one of those elections, although I preferred one of the two principal candidates (sometimes very strongly), in no case did I fear for the future of my community, my state, or my country if my candidate lost and the other candidate won.

This time is different. In all honesty, I fear for the United States and I fear for the world if Donald Trump is elected President. The time for my professional bipartisanship and political neutrality has ended – at least temporarily. And so I apologize to my readers for using this platform – An Economic View of the Environment – to express my broader, personal views on the upcoming election. This is a departure that I hope never again will be necessary.

I am not part of a campaign, and I am not recommending a candidate. Rather, I am recommending that everyone vote! Of course, today’s essay, like all my posts at this blog, expresses only my personal views, and is not written on behalf of my employer, nor in my capacity as a faculty member of the Harvard Kennedy School.

What Drives My Fear of a Trump Presidency? His Views on the Environment?

My fear of the consequences of a Trump victory in the Presidential election is not simply because of Mr. Trump’s misleading, (consistently) inconsistent, and fundamentally incorrect statements in the realm of environmental and energy policy.

Let me be clear. I do find Mrs. Clinton’s policy positions in my area of expertise – environmental and energy economics and policy – to be superior to Mr. Trump’s positions. I will not repeat here my views of Trump’s environmental and energy positions, because I have frequently been quoted in the press as critical of his pronouncements and positions in this realm (Climate Central, E&E News, Scientific American, New York Times, Washington Post, The Verge, New York Times, The Week, Law Street, Climate Central, New York Times, The Hill, Newsmax, Climate Central, Grist, and National Public Radio). And a few times I have been quoted as criticizing Hillary Clinton’s policy prescriptions in the environmental and energy realm (New York Times, Denver Post, and High Country News). (For that matter, I have been quoted perhaps hundreds of times over the past seven and a half years as sometimes supportive and sometimes critical of Obama administration environmental and energy policies.)

So, yes, I believe that the world would be worse off with what I anticipate would be a Trump administration’s environmental and energy policies. But that is not what really frightens me.

What Really Does Scare me about a Trump Presidency?

What frightens me is much broader and more profound. I worry about what a Trump presidency would mean for my country and for the world in realms ranging from economic progress to national security to personal liberty. This comes not from any analysis of policy proposals, but from Trump’s own words in a campaign in which he has substituted impulse and pandering for thoughtful politics. From the first day – his June 16, 2015 announcement of his Presidential bid (in which he described Mexican immigrants as drug smugglers, criminals, and rapists, and promised to “build a great wall”) – until today, Mr. Trump has built his populist campaign on false allegations about others, personal insults of anyone who disagrees with him, and displays of breathtaking xenophobia, veiled racism, and unapologetic sexism.

As disturbing as Trump’s stated positions are in economic policy, national security, and personal liberties, possibly even worse is the reality that Donald Trump, if elected President, would – intentionally or unintentionally – provide cover and support for the ignorant, racist, and xenophobic tendencies that sadly inhabit a substantial fraction of the U.S. population. In many ways, Trump represents not the best that my country has to offer, but rather the worst excesses of American culture.

Trump is clearly a politician who seeks support by appealing to popular desires and prejudices rather than by using rational argument. That is the definition – word for word – of a demagogue.

The Bottom Line

If you are an independent, like me, please do not sit on the sidelines of the upcoming election, condemning both candidates for their failings.

It has been said many times by many people that Hillary Clinton is not an ideal candidate for President. I do not disagree with that sentiment. Nor can I dispute the fact that her primary campaign against Senator Bernie Sanders pushed her to adopt positions of the left, including her unfortunate reversal regarding the Trans-Pacific Partnership Agreement.

But Mrs. Clinton would bring significant, positive experience to the presidency from four decades of public life, including as a member of the U.S. Senate and as Secretary of State. In contrast with Mr. Trump, she has surrounded herself with legions of smart and experienced advisers in dozens of key policy realms. Her campaign has produced detailed proposals on the most important challenges facing the country (although I do question some of her environmental positions). But she is, if anything, a realist – not an ideologue, and certainly not a demagogue, which is precisely how I would characterize Mr. Trump.

I recognize that many people harbor very negative feelings about Mrs. Clinton. The low approval ratings (of both candidates) validate that. I respect those voters who have serious concerns about a Clinton presidency.

My core argument is that there are great differences between the two major candidates. I disagree strongly with those of my fellow political independents (and others) who say that because both candidates are flawed, they will not vote.

In my view, that would be a mistake. The fate of the United States and the fate of the world are really in our hands. If you are an independent, please do not sit out this election. It is much too important.

A Key Moment for California Climate Policy

The past year has been a crucial time in international climate negotiations. In December, 2015, in Paris, negotiators established an agreement on the next round of targets and actions to succeed the Kyoto Protocol, which was signed in 1997 and will effectively close down in 2020. In Paris, negotiators set up a new and meaningful agreement for multinational action through individual country “Intended Nationally Determined Contributions” (INDCs). The Paris round was crucial, because it expanded the coalition of contributions from countries responsible for 14% of global emissions under Kyoto (Europe and New Zealand) to 187 countries responsible for 96% of emissions under the Paris Agreement.

California’s Role in Global Climate Change Policy

California sent a delegation to the Paris talks. While not officially a party to the negotiations, California government officials attended to show support for broad and meaningful action. For many years, spurring action beyond California’s borders has been the key rationale for developing a California-based climate policy. This began with Assembly Bill 32 (AB 32), the Global Warming Solutions Act of 2006. Initially, the focus was on encouraging action within the United States, including federal legislation, state-level actions, and multi-state compacts, but subsequent domestic action turned out to be much less than originally anticipated. As a result, California’s focus shifted to the international domain.

This is a good time to consider how the State can best demonstrate leadership on this global stage. Action by all key countries, including the large emerging economies – China, India, Brazil, Korea, and South Africa – will be necessary to meaningfully address the climate problem. Significant multinational contributions will be necessary to avoid having California’s aggressive in-state actions be for naught. Absent such multilateral action, ambitious California policies do little or nothing to address the real problem.

But California can play a very important role by showing leadership – in two key ways. One is to demonstrate a commitment to meaningful reductions in (greenhouse gas) GHG emissions. In this regard, California has more than met the bar, with policies that are as aggressive as – if not more aggressive than – those of most countries.

The other way is to show leadership regarding how reductions of GHG emissions can best be accomplished – that is, in regard to progressive policy design. California has a sophisticated GHG cap-and-trade system in place, which while not perfect, has many excellent design elements. Countries around the world are now planning or implementing cap-and-trade systems, including in Europe, China, and Korea. These countries are carefully watching decisions made in California, with particular attention to the design and implementation of its cap-and-trade system. California’s system, possibly with a few improvements, could eventually be a model for even larger systems in other countries.

Can California Provide a Good Model of Progressive Policy?

Unfortunately, California’s climate policy has not relied heavily on its cap-and-trade system to achieve state targets. Furthermore, rather than increasing reliance on this innovative market-based climate policy over time, recent proposals have doubled-down on the use of less efficient conventional policies to achieve GHG reductions. While some of these so-called “complementary policies” can be valuable under particular circumstances, they can also create severe problems.

One example of this is the attempt to employ aggressive sector-based targets through technology-driven policies, such as the Low Carbon Fuels Standard (LCFS). In the presence of a binding cap-and-trade regime, the LCFS has the perverse effect of relocating carbon dioxide (CO₂) emissions to other sectors but not reducing net emissions, while driving up statewide abatement costs, and suppressing allowance prices in the cap-and-trade market, thereby reducing incentives for technological change. That is bad news all around. These perverse outcomes render such policies of little interest or value to other regions of the world.

The magnitude of the economic distortion is illustrated by the fact that allowances in the California cap-and-trade market have recently been trading in the range of $12 to $13 per ton of CO₂, while LCFS credits have traded this summer for about $80 per ton of CO₂.

While reduction in transportation sector GHG emissions is clearly an important long-run objective of an effective climate policy, if the approach taken to achieving such reductions is unnecessarily costly, it will be of little use to most of the world, which has much less financial wealth than California and the United States, and will therefore be much less inclined to follow the lead on such costly policies.

The Path Ahead

With China now the largest emitter in the world, and India and other large developing countries not very far behind, California policies that achieve emission reductions through excessively costly means will fail to encourage other countries to follow, or even recognize, California’s leadership. On the other hand, by increasing reliance on its progressive market-based system, California can succeed at home and be influential around the world.

Market Mechanisms in the Paris Climate Agreement: International Linkage under Article 6.2

The Harvard Project on Climate Agreements hosted a research workshop in Cambridge, Massachusetts, on July 14–15, 2016, the purpose of which was to identify options for elaborating and implementing the Paris Climate Agreement, and to identify policies and institutions that might complement or supplement the United Nations Framework Convention on Climate Change (UNFCCC) process. We were motivated by our recognition that while the Paris Agreement sets forth an innovative and potentially effective policy architecture for dealing with global climate change, a great deal remains to be done to elaborate the accord, formulate required rules and guidelines, and specify means of implementation.

Participants in the workshop – International Climate Change Policy after Paris – included twenty-one of the world’s leading researchers focusing on climate-change policy, representing the disciplines of economics, political science, international relations, and legal scholarship. They came from Argentina, Belgium, China, Germany, India, Italy, Norway, the United Kingdom, and the United States. (A list of workshop participants is here, biographies here, and the agenda here.)

The Harvard Project will next focus on communicating the ideas, insights, and recommendations of workshop participants to climate negotiators and policy makers, in the expectation that they might prove useful in elaborating and implementing the Paris Agreement. Each participant is preparing a brief—based largely on her or his presentation during the workshop. These briefs, together with a workshop summary, will be conveyed to participants in the Twenty-Second Conference of the Parties (COP-22) of the UNFCCC in Marrakech, Morocco in November 2016. This will be done in meetings with negotiators representing UNFCCC member governments and in a side-event panel at COP-22.

Today I wish to share with readers just one of these draft briefs – namely, my own – on the topic of “International Linkage under Article 6.2 of the Paris Agreement.”

A Key Challenge for Sustained Success of the Paris Agreement

For sustained success of the international climate regime, a key question is whether the Paris Agreement with its Intended Nationally Determined Contributions (INDCs), anchored as they are in domestic political realities, can progressively lead to submissions with sufficient ambition? 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. By “linkage,” I mean connections among policy systems that allow for emission reduction efforts to be redistributed across systems. Such linkage is typically framed as being between two (or more) cap-and-trade systems, but national policies will surely be highly heterogeneous under the Paris climate regime. Fortunately, research – by Gilbert Metcalf of Tufts University and David Weisbach of the University of Chicago – indicates that linkage between pairings of various types of domestic policy instruments may be feasible.

Linkage and the Paris Agreement

Experience indicates that linkage will bring both merits and concerns in most applications. To begin with the good news, linkage offers a number of important advantages. First, it offers the possibility of achieving cost savings if marginal abatement costs are heterogeneous across jurisdictions, which they surely are. In addition, linkage can improve the functioning of individual markets by reducing market power, and by reducing price volatility, although we should recognize that price volatility will also be transmitted from one jurisdiction to another by linkage. Finally linkage can allow for the UNFCCC’s important principle of Common but Differentiated Responsibilities (CBDR), but do so without sacrificing cost-effectiveness.

The possibility of linkage also raises concerns, including that there will be distributional impacts within jurisdictions, that is, the creation of both winners and losers. Also, linkage can bring about the automatic propagation from one jurisdiction to another of some design elements, in particular, cost-containment mechanisms, such as banking, borrowing, and price collars. In this and other ways, linkage raises concerns about decreased autonomy.

Linkage under Article 6.2 of the Paris Agreement

It was by no means preordained that the Paris Agreement would allow, let alone encourage, international linkage. Fortunately, the negotiations which took place in Paris in December, 2015, produced an Agreement that includes in its Article 6.2 the necessary building blocks for linkages to occur.

Under Article 6.2, emissions reductions occurring outside of the geographic jurisdiction of a Party to the Agreement can be counted toward achieving that Party’s Nationally Determined Contribution (NDC) via Internationally Transferred Mitigation Outcomes (ITMOs). This enables both the formation of “clubs” or other types of coalitions, as well as bottom-up heterogeneous linkage. Such linkage among Parties to the Agreement would provide for exchanges between compliance entities within the jurisdictions of two different Parties, not simply the government-to-government trading (of Assigned Amounts or AAUs), as was the case with the Kyoto Protocol’s Article 17.

Linkage among Heterogeneous Nationally Determined Contributions

There are three types of heterogeneity which are important in regard to linkage under Article 6.2 of the Paris Agreement. First is heterogeneity among policy instruments. As demonstrated by Metcalf and Weisbach (see above), not only can one cap-and-trade system be linked with another cap-and-trade system, but it is also possible to link a cap-and-trade system with a carbon tax system. In addition, either a cap-and-trade system or a tax system can be linked (via appropriate offsets) with a performance standard in another jurisdiction. (Linkage with systems employing technology standards are not feasible, however, because such systems are not output-based.)

A second form of heterogeneity that affects linkage and is potentially very important under the Paris Agreement is heterogeneity regarding the level of government action of the relevant jurisdictions. Although the Paris Agreement has as Parties both regional jurisdictions (in the case of the European Union) and national jurisdictions, sub-national jurisdictions are also taking action in some parts of the world. In fact, linkage has already been established between the state of California in the United States and the provinces of Québec and Ontario in Canada.

A third form of relevant heterogeneity is with regards to the NDC targets themselves. Some are in the form of hard (mass–based) emissions caps, while others are in the form of rate-based emissions caps, either emissions per unit of economic activity, or emissions per unit of output (such as per unit of electricity production). There are also relative mass-based emissions caps in the set of existing NDCs, such as those that are relative to business-as-usual emissions in a specific future year. Beyond these, there are other parties that have put forward NDCs that do not involve emission caps at all, but rather targets in terms of some other metric, such as the degree of penetration of renewable energy sources.

Combinations of various options under these three forms of heterogeneity yield a considerable variety of types of potential linkages, which may be thought of as the cells of a three-dimensional matrix. Not all of these cells, however, represent linkages which are feasible, let alone desirable.

The Path Ahead – Key Issues and Questions

There are a substantial number of issues that negotiators will eventually need to address, and likewise, there are a set of questions that researchers (including within the Harvard Project on Climate Agreements) can begin to address now. Among the key issues for negotiators will be the necessity to develop accounting procedures and mechanisms. Also, it will be important to identify means for the ITMOs to be tracked in order to avoid double-counting of emissions reductions. And a broader question is whether and how the UNFCCC Secretariat or some other designated institution will provide any oversight that may be required.

For research, three questions stand out. First, among pairings from the (3-D matrix) set of instrument–jurisdiction–target combinations that emerge from the three types of heterogeneity identified above, which linkages will actually be feasible? Second, within this feasible set, are some types of linkages feasible, but not desirable? And third, what accounting treatments and tracking mechanisms will be necessary for these various types of linkages? Future research will need to focus on these and related questions in order to achieve the potential benefits of Article 6.2 of the Paris Agreement. Please stay tuned as this work develops.