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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.

Misleading Talk about Decoupling CO2 Emissions and Economic Growth

You can call it my pet peeve or even my obsession, but whenever I read about the claimed “decoupling” of CO₂ emissions and economic growth, I get annoyed. Webster’s Dictionary defines decoupling as “eliminating the interrelationship” between two processes. But the interrelationship between CO₂ emissions and economic growth has certainly not been eliminated.

Decoupling is the wrong word and metaphor to describe what has been happening. When a caboose is decoupled from a train, it stops moving altogether. A better metaphor, although less linguistically appealing, would be a “slipping clutch.” The engine continues to transmit power, and as a result the driveshaft continues to rotate, but with less velocity than when the clutch was new.

What Has Been Happening

True enough, the carbon intensities of many economies in the world, particularly those of the industrialized nations, have – for many years – been falling, as those economies have become less energy intensive (less energy use per unit of economic activity – Gross Domestic Product or GDP), and therefore less carbon intensive. For each dollar of economic activity, CO₂ emissions are less than they used to be. For each unit of economic growth, there is less growth in CO₂ emissions than previously.

Furthermore, in some cases, as economies grow, CO₂ emissions can actually fall. First, picture an economy which is growing exclusively in its services sector. In this case, economic growth might be accompanied by no change in CO₂ emissions. Now picture an economy which is growing in its services sector, while shrinking in its manufacturing sector (sound familiar?). In this case, economic growth might be accompanied by reduced CO₂ emissions. Now add to this picture the presence of some public policies, such as those that cause the closure of coal-fired electric generation plants, as well as greater dispatch of electricity from natural gas-fired plants. The result: economic growth continues, with falling CO₂ emissions. But there has been no decoupling.

Confusion Due to Failure to Employ Appropriate Counterfactual

The problem and the confusion arises from a very common mistake in the popular press and, for that matter, in many casual conversations: failure to use the right counterfactual for analysis. The fact that GDP is rising while emissions are falling does not mean that GDP is not affecting emissions. The appropriate counterfactual for comparison is how much would emissions have fallen had there been no growth in GDP. Presumably, emissions would have fallen even more. The excess of emissions in the factual case, compared with the counterfactual case, is the magnitude of emissions growth due to (actually, “associated with”) economic growth. There has been no elimination of the relationship between the two, although the nature and the magnitude of that relationship has changed.

What Factors Affect CO₂ Emissions?

So, why have CO₂ emissions been declining in some countries? Or, more broadly and more to the point, what factors have affected CO₂ emissions? Four stand out (although there are others).

First, energy comes at a cost in all economies, and so economic incentives exist to economize on energy use through technological change. The energy-intensity of the U.S. economy has gradually fallen – almost monotonically – since early in the twentieth century.

Second, putting aside energy-intensity and focusing on carbon intensity, some technological change has worked against the use of carbon-intensive sources of energy. The most dramatic example, specific to the United States, has been the combination of horizontal drilling and hydraulic fracturing (fracking), which has caused a significant increase in supply and dramatic fall in the market price of natural gas, which has thereby led to a massive shift of investment and electricity dispatch from coal to natural gas.

Third, in the richer countries of the world, including this one, the process of economic growth has led to changing sectoral composition: heavy industry to light manufacturing to services. The deindustrialization of California is a graphic example. Does the fact that California’s economy has grown while emissions have fallen mean that decoupling has occurred? Of course not. And, in the California case, there has also been a fourth factor …

Fourth, public policies have in some jurisdictions of the world (Europe, the United States, and most of the other OECD countries) discouraged carbon intensity. In the USA, this has happened both through climate policies and other, non-climate policies. Some non-climate policies, such as EPA’s Mercury Rule, discourage investment, encourage retirement, and discourage dispatch of coal-fired electricity, while other non-climate policies, such as CAFE standards for motor vehicles, bring about greater fuel efficiency of the fleet of cars and trucks over time. Climate-specific policies have also mattered, such as in California, where the Global Warming Solutions Act of 2006 (AB-32) has brought down emissions through a portfolio of policies, including an economy-wide CO₂ cap-and-trade system.

The Bottom Line

So, yes, the carbon intensity of many economies continues to fall – for a variety of reasons, including but by no means limited to public policies. And, in some cases, the combination of energy price changes, technological change, changes in sectoral composition, and climate and other public policies has meant that emissions have fallen in years when economic growth has continued. But don’t be fooled. Economic growth does affect CO₂ emissions. There has been no decoupling; just some (desirable) slipping of the clutch.

Of course, this is not an anti-environment message. On the contrary, a belief in decoupling per se could lead to a misguided laissez-faire attitude about the path of CO₂ emissions. Being honest and accurate about the links between (desirable) economic growth and (desirable) CO₂ emissions reductions puts our focus and emphasis where it ought to be: finding better ways to have both.

When Reasonable Policy Discussions Become Unreasonable Personal Attacks

Recently I was reminded of the controversy that erupted late in 2014 about remarks made by the distinguished health economist, Jonathan Gruber, professor at MIT for two decades. Professor Gruber, one of the country’s leading experts on health policy, had played an important role in the construction of the Obama administration’s Patient Protection and Affordable Care Act, subsequently derided by its political opponents as “Obamacare.”

A brief but intense political controversy and media feeding-frenzy erupted when videos surfaced in which Professor Gruber – largely in a series of academic seminars and conferences – explained how the Act was crafted and marketed in ways that would make it easier to develop political support. For example, he noted that insurance companies were taxed instead of patients, fundamentally the same thing economically, but vastly more palatable politically. He went on to note that this was possible because of “the lack of economic understanding of the American voter.” His key point was that the program’s “lack of transparency is a huge political advantage.” Is that a controversial or even unique observation?

A Truism of Political Economy

Any economist who has worked on the development or analysis of public policy – in areas ranging from health care policy to environmental policy to financial regulation – recognizes the truth of the key insight Gruber was communicating to his audiences. It is inevitably in the interests of the advocates of a policy to make the policy’s benefits transparent and to make its costs vague, even unobservable; just as it is in the interests of the opponents of a policy to make that policy’s benefits obscure and its costs as clear as the light of day.

The specific construction of hundreds of public policies are explained by this truism. In the United States, Corporate Average Fuel Economy Standards (or “CAFE standards”) have been a bipartisan Congressional success, despite the fact that the costs they place on the American public per unit of fuel savings are vastly greater than the costs of a commensurate increase in gasoline taxes. Likewise, when conservative opponents of CO₂ cap-and-trade wanted to stop the House-passed bill in its tracks, they resorted to demonizing it as “cap-and-tax.”

So, the central lesson Professor Gruber was offering is hardly controversial, and its enunciation ought not lead to the terrible attacks that he suffered. He doesn’t need me to defend him, but he was unfairly demonized, simply because people disagreed with him politically regarding the merits of the public policy he had helped develop and support.

Unfortunately, I was reminded of this recently when I found myself subject to attempted demonization, because someone did not agree with a policy I supported. What happened to me is trivial compared with what Professor Gruber has gone through, but it prompts me to write about it today.

Can We Agree to Disagree?

I have written before at this blog about the reasons why I support my university’s decision not to divest its endowment of its fossil-fuel company holdings. I won’t repeat those arguments here, but will note that I have gone out of my way not to draw conclusions or make recommendations about what other universities or other institutions ought to do in this regard, including when I agreed to write an essay on the subject for Yale Environment 360. My analysis and conclusions were not developed in spite of my decades of research, teaching, and outreach on global climate change policy; rather, they were developed because of my years of work in this area.

There are people, some of whom I greatly respect, who have different perspectives on this issue, and have come to very different conclusions than have I. We have essentially agreed to disagree. They haven’t cast aspersions on me, nor I on them. As my writings on this topic have illustrated, there are many facets to the issue, including economics, politics, ethics, and even religion. No one has cornered the market on wisdom.

And What About the Keystone XL Pipeline?

Likewise, on a quite different topic, on January 8, 2015, Coral Davenport wrote a story in the New York Times about the political debates in Washington regarding the proposed Keystone XL pipeline, and stated that “… most energy and policy experts say the battle over Keystone overshadows the importance of the project as an environmental threat or an engine of the economy. The pipeline will have little effect, they say, on climate change, production of the Canadian oil sands, gasoline prices and the overall job market in the United States.” She went on to quote me (accurately) as having said, “The political fight about Keystone is vastly greater than the economic, environmental or energy impact of the pipeline itself. It doesn’t make a big difference in energy prices, employment or climate change either way.” What I said was consistent with the evidence at the time (note, however, that as oil prices fall, the possibility increases that the Canadian oil sands would be uneconomic to develop without the pipeline). Once again, the analysis is not one-dimensional, and reasonable people can respectfully disagree.

When Policy Debates Become Personal Attacks

But these two topics – the Keystone XL pipeline and fossil-fuel divestment – have increasingly become engulfed in highly-charged campaigns and exceptionally heated political debates. As part of this, my integrity was recently attacked, because of my views. A young and – I’m sure – well-intentioned climate activist and journalist, writing in the Huffington Post, implied that my assessment in the New York Times of the Washington political debates regarding Keystone XL and my support for Harvard’s divestment policy, are because “Stavins has done consulting work for Chevron, Exelon, Duke Energy and the Western States Petroleum Association.”

The author of the Huffington Post piece selected those three companies and one trade association from a list of 92 “Outside Activities” that I voluntarily provide as a means of public disclosure. The author chose not to note that the vast majority of my outside engagements are with universities, think tanks, environmental advocacy NGOs, foundations, the U.S. Environmental Protection Agency, other federal agencies and departments, international organizations, and environment ministries around the world (not to mention a set of Major League Baseball teams, but that’s another story altogether).

But what about the four he did choose to highlight? First, I am very proud of my work supported by Chevron and the closely-related Western States Petroleum Association, in which I have carried out a series of analyses studying how to strengthen and improve California’s climate policy under AB-32. That’s right – developing and assessing ways to make the AB-32 cap-and-trade system and the related suite of “complementary policies” more environmentally effective, more cost-effective, and more equitable (I’ve written about this work several times at this blog).

Likewise, my work supported by Duke Energy began a decade ago when I helped the former CEO bring home to his senior management the importance of climate change and the importance of well-designed public policies (in particular, carbon cap-and-trade) to address it. All of my subsequent work supported by Duke Energy likewise has focused on the design of better market-based instruments – cap-and-trade – to reduce CO₂ emissions.

And, finally, what about Exelon? This was interesting and important work I carried out with my friend and colleague, MIT Professor Richard Schmalensee, Dean Emeritus of the Sloan School of Management (I wrote about this work at this blog and at the Huffington Post). In 2011, with support from Exelon, Professor Schmalensee and I analyzed EPA’s proposals for new rules to regulate the interstate transport of sulfur dioxide and nitrogen oxides emitted from electric power generation facilities. You can read in detail about our multi-faceted assessment, but the bottom-line is that we provided strong support for a stringent rule. Our brief summary at the University of Pennsylvania’s RegBlog concludes: “In sum, while imposing incremental costs to achieve reductions in SO2 and NOX emissions, the Transport Rule would produce significant benefits in terms of improved health outcomes, and better environmental amenities and services, which studies estimate significantly outweigh the costs.”

Sadness and Empathy

It is nothing less than absurd – and, frankly, quite sad – that someone would suggest that my views on divestment and my New York Times quote on the politics of Keystone XL were somehow due to my having received previous support for analytical work for an oil company, a trade association, and two electric utilities. This was an unfortunate move to question my credibility and damage my reputation in a misguided attempt to demonize me, rather than engage in reasonable discussion and debate. Unfortunately, most of those who have read the activist/journalist’s original commentary and have possibly repeated his claims to others will not see the essay you have just read.

This is surely nothing compared with what Professor Gruber has gone through, but it has certainly increased my empathy for him, as well as my admiration.

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Personal Attacks: An Even Sadder Epilogue

It’s nearly two months since I wrote the essay above, but a series of recent events prompts me to add this sad epilogue. My family and I have recently been subject to cyber-bullying, harassment, and threats, because of my public stance in support of Harvard’s decision not to divest from its endowment portfolio its holdings of fossil-fuel company stocks.

In particular, the most recent message sent to me said in part: “You may be assured that I will have a lot to say about your vocal public support of Harvard’s fossil fuel investments, … and that I have a particular interest in making sure that [your] financial connections to the fossil fuel industry are made fully public …” This threat to tarnish my reputation by publicizing a supposed conflict of interest is striking for a number of reasons:

In several essays at this blog and elsewhere, I have carefully explained my reasons for supporting Harvard’s decision not to divest;
In several essays at this blog and elsewhere, I have been completely up front about receiving support for (publically available) analytical work I’ve carried out for private-sector companies (and have long provided a list of all outside engagements at my website);
In the essay above, I documented the fundamentally pro-environment, policy-analytic work I had done for the specific companies mentioned; and
The claim that my position regarding Harvard divestment has somehow been influenced by my work with an oil company and an industry trade association defies logic.

The last item on this list – the fundamental illogic of such a claim – merits explanation. People on all sides of the divestment issue (including leaders of the student movement, and including the person who wrote the threat I quoted above) acknowledge that divestment will have no direct financial impacts on the respective companies. Rather, the merit of divestment that is most frequently cited by supporters is its symbolic value. Because divestment has no financial impacts on the fossil-fuel companies, those companies don’t care much about it. They would not care one way or the other what I might have to say on the topic. Hence, even if I did want to curry favor with those companies, that would not lead me (or anyone else) to take a particular position on the divestment issue.

The more important question to ask is whether my research, teaching, and outreach initiatives on climate change economics and policy have been biased by my having carried out consulting assignments for an oil company and trade association (two of a hundred outside engagements over the past several years)? That is, if there really was a conflict of interest, then in an effort to make those companies happy, I would presumably pull my punches regarding recommendations of what does matter to those companies – public policies that will reduce their profits by increasing their costs of doing business and/or by reducing demand for their products. But nothing could be further from the truth!

For a decade or more, my research, teaching, and outreach have focused on more enlightened, stronger, and better climate change policies. I have been outspoken in regard to the pressing need for well-designed carbon-price instruments at the national and sub-national levels, and for the need for better, more effective international climate policies, both under the United Nations Framework Convention on Climate Change and through other venues. This is reflected in my published research, my teaching, and my outreach efforts, including through this blog.

It is ironic, offensive, and sad that anyone would suggest that my support of Harvard’s divestment position is somehow tied to my outside engagements. That suggestion – and the recent threats I have received – defies logic and is contradicted by the record.