externalities Archives - An Economic View of the Environment

How Have Companies Responded to the Coronavirus Pandemic and Climate Change?

We have just released the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” In this latest episode, I engage in a conversation with Rebecca Henderson, the John and Natty McArthur University Professor at Harvard University. She shares her perspectives on how large organizations are changing in response to the coronavirus pandemic and global climate change. A full transcript of our conversation is available here.

Rebecca makes her home at Harvard Business School, where she was the founding co-director with Professor Forest Reinhardt of the Business and Environment Initiative. She is also a Research Fellow of the National Bureau of Economic Research, and a Faculty Fellow of the Harvard Environmental Economics Program.

In this podcast episode, we first discuss how the attention given to environmental matters has changed at business schools in the three decades since she received her Ph.D. in Business Economics at Harvard and joined the faculty at the MIT Sloan School of Management, prior to moving on to Harvard Business School.

Henderson’s research and writing explore how organizations respond to large-scale technological shifts, most recently in regard to energy and the environment. This has also given her a special perspective to think about the role of the private sector in responding to the Covid-19 crisis. In this regard, she notes that she is reminded that “when organizations decide they must change, they can change,” pointing to the quick shift to remote work across many sectors, the effort by biomedical firms to speed up supply changes, and the ways in which retail and grocery distribution channels are mobilizing their resources. “You’re seeing profound changes in methods of operation across the economy,” she remarks.

“The potential upside is that this emergency is making it very clear that the stability of the entire community is critical to the success of business,” Rebecca states. “I think the emergency is also highlighting that one needs a strong, effective federal government to deal with problems like this. I think both of those insights could conceivably translate into business pressure for coherent climate policy in ways that could be very helpful.”

“Climate change can seem distant; it can seem invisible. Why should I worry about it? To see the whole economy mobilized when the threat becomes very, very concrete reminds me that, as we think about climate change, we have to find a way to make that threat as concrete as possible. So that’s one thing I take away from the current moment.”

All of this and much more is found in the newest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” Listen to this latest discussion here, where, by the way, you can also find a complete transcript of our conversation.

My conversation with Rebecca Henderson is the ninth episode in the Environmental Insights series. 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

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

A Firsthand Account of European Carbon-Pricing Evolution

We have just released the newest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” In this latest episode, I engage in a conversation with Jos Delbeke, currently a professor at the European University Institute in Florence and at the KU Leuven in Belgium.

Professor Delbeke is probably best known for his long service at the European Commission, including as Director-General of the Commission’s DG Climate Action from its creation in 2010 until 2018. Even before that, he was very heavily involved in the development and implementation of the European Union Emissions Trading System (EU ETS), and for several years was the European Commission’s chief negotiator at the United Nations Framework Convention on Climate Change (UNFCCC) Conferences of the Parties.

In this new episode of our monthly podcast, Jos Delbeke recounts the evolution of carbon pricing in Europe and around the world, and comments on the current state of international climate change negotiations. You can listen to the interview here.

Recalling his early days working on climate policy in Europe, Delbeke says that “emissions trading was an alien idea at that time … As an economist, I followed very much how the United States was developing the sulfur experiment.”

Delbeke maintains that the EU-ETS has been very successful. “The latest statistics show that between 2005 when we started, and today … the emissions reduction is 29%, and that is for all the installations in Europe, all big installations, and the energy and the manufacturing industry. So, 29% down in less than 15 years, I think is quite remarkable when we compare it to emissions from transport that are roughly 20% up,” he states.

Delbeke believes that the emerging Chinese ETS could be transformative in the global effort to combat global warming. “Once the Chinese have their act together, I think that may serve as a source of inspiration for a lot of other nations,” he says.

Delbeke’s interview is the fifth episode in the Environmental Insights series. Previous episodes have featured conversations with:

Gina McCarthy, former Administrator of the 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

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

Fifty Years of Policy Evolution under the Clean Air Act

Fifty years ago, in 1970, the first Earth Day was celebrated, the U.S. Environmental Protection Agency (EPA) was established, and the U.S. Clean Air Act was passed. Much has transpired with air pollution policy in the United States since that time. Given the current state of Federal clean air policy in this country, it may be helpful to reflect on these fifty years of policy evolution, which is what Richard Schmalensee (of the MIT Sloan School of Management) and I do in a new article that appears in the Journal of Economic Perspectives (Volume 33, Issue 4, Fall 2019), “Policy Evolution under the Clean Air Act.” I hope this brief essay will stimulate you to download and read the full article.

Setting the Stage

In the article, Professor Schmalensee and I review and assess the evolution of air pollution control policy under the Clean Air Act with particular attention to the types of policy instruments used. After outlining key provisions of the 1970 act and its main changes over time, we trace and assess the historical evolution of the policy instruments used by EPA in its clean air regulations. This evolution was sometimes driven by the emergence of new air quality problems, sometimes by innovation and experimentation within EPA, and sometimes by changes in the Clean Air Act itself.

It is striking that until about 2000, EPA made increasing use of market-based instruments, enabled by major amendments to the Act in 1977 and 1990, which passed with overwhelming bipartisan support. In recent years, however, environmental policy has become a partisan battleground in the United States, and until now, it has not been possible to provide an effective response to climate change or to address other new and evolving air quality problems.

Policy Instruments Used under the Clean Air Act

Three major types of policy instruments have been employed under the authority of the Clean Air Act: technology standards, which specify the equipment or process to be used for compliance; performance standards, which specify the maximum quantity of emissions or maximum atmospheric concentrations that are allowed; and emissions trading systems, either in the form of emissions-reduction credit (offset) systems or cap-and-trade. In addition, taxes have sometimes been employed, although their use under the Clean Air Act has been peripheral.

The Evolution of Air Quality Policy Instruments

Under the 1970 Clean Air Act, all federal air pollution regulation involved either technology standards or performance standards. At that time, some environmental advocates argued that facilitating greater flexibility through tradable emission rights would inappropriately legitimize environmental degradation, while others questioned the very feasibility of such an approach. But over time, as the Clean Air Act was amended and as its interpretation by EPA evolved, air pollution regulation evolved from sole reliance on conventional, command-and-control regulations to greater use of emissions trading.

In the article, we examine EPA’s early experiments with emissions trading in the 1970s, and then turn to the leaded gasoline phasedown in the 1980s, implemented via a tradable performance standard by the Reagan administration. We also take a look at the U.S. approach to complying with the Montreal Protocol for stratospheric ozone protection, which involved both an excise tax and a trading system.

Next up in our review and assessment is the path-breaking sulfur dioxide allowance trading program, under the Clean Air Act amendments of 1990. We also examine several regional programs that were executed under the authority of the Clean Air Act, including the Regional Clean Air Incentives Market (RECLAIM) in southern California, NO_x trading in the eastern United States, and the NO_x budget trading program.

To bring this up to date, Dick Schmalensee and I also examine climate change policies, including those of the Obama administration, as well as those of the current, Trump administration.

Conclusions

We conclude that the supporters of the 1970 Clean Air Act, who no doubt hoped that it would produce major environmental benefits, would be pleased that despite the fact that real U.S. GDP more than tripled between 1970 and 2017, aggregate emissions of the six criteria pollutants declined by 73 percent.

On the other hand, the original supporters of the 1970 Clean Air Act might be quite surprised by some aspects of the evolution of clean air regulation under the Act. For example, it is difficult to imagine that any of the supporters of the 24-page 1970 Act would have predicted how complex air pollution regulation would become over the subsequent half century. And we suspect that the evolution toward more intensive use of market-based environmental policy would also have been a surprise to those involved in passage of the 1970 Clean Air Act.

However, those involved in the bipartisan passage of the 1970 Clean Air Act would likely be disappointed that environmental policy has become a partisan battleground. It has become impossible to amend the Clean Air Act or to pass other legislation to address climate change in a serious and economically sensible manner.

The Path Ahead

In the final part of the article, we note that an implication of these five decades of experience may be that policies to address climate change and other new environmental problems should be designed in ways that make them more acceptable in the real world of politics. This could mean, for example, giving greater attention to suboptimal, second-best designs of carbon-pricing regimes, such as by earmarking revenues from taxes or allowance auctions to finance additional climate mitigation, rather than optimizing the system via cuts in distortionary taxes, or using such revenues for fairness purposes, such as with lump-sum rebates or rebates targeted to low income and other particularly burdened constituencies.

Economists might also be more effective by sometimes working to catch up with the political world by examining better design of second-best non-pricing climate policy instruments, such as clean energy standards, subsidies for green technologies, and other approaches. At some point the politics may change, of course, which is why ongoing economic research on climate policy instruments of all kinds is important.