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What’s the Proper Role of Individuals and Institutions in Addressing Climate Change?

This may seem like a trivial question with an obvious answer. But what really is the proper role for individuals and institutions in addressing climate change? An immediate and natural response may be that everyone should do their part. Let’s see what that really means.

Decisions affecting carbon dioxide (CO₂) emissions, for example, are made primarily by companies and consumers. This includes decisions by companies about how to produce electricity, as well as thousands of other goods and services; and decisions by consumers regarding what to buy, how to transport themselves, and how to keep their homes warm, cool, and light.

However, despite the fact that these decisions are made by firms and individuals, government action is clearly key, because climate change is an externality, and it is rarely, if ever, in the self-interest of firms or individuals to take unilateral actions. That’s why the climate problem exists, in the first place. Voluntary initiatives – no matter how well-intended – will not only be insufficient, but insignificant relative to the magnitude of the problem.

So, the question becomes how to shift decisions by firms and individuals in a climate-friendly direction, such as toward emissions reductions. Whether conventional standards or market-based instruments are used, meaningful government regulation will be required.

But where does this leave the role and responsibility of individuals and institutions? Let me use as an example my employer, a university. A couple of years ago, I met with students advocating for a reduced “carbon foot-print” for the school. Here is what I told them.

“I was asked by a major oil company to advise on the design of an internal, voluntary tradable permit systems for CO₂ emissions. My response to the company was ‘fine, but the emissions from your production processes — largely refineries — are trivial compared with the emissions from the use of your products (combustion of fossil fuels). If you really want to do something meaningful about climate change, the focus should be on the use of your products, not your internal production process.’ (My response would have been different had they been a cement producer.) The oil company proceeded with its internal measures, which – as I anticipated – had trivial, if any impacts on the environment (and they subsequently used the existence of their voluntary program as an argument against government attempts to put in place a meaningful climate policy).”

My view of a university’s responsibilities in the environmental realm is similar. Our direct impact on the natural environment — such as in terms of CO₂ emissions from our heating plants — is absolutely trivial compared with the impacts on the environment (including climate change) of our products: knowledge produced through research, informed students produced through our teaching, and outreach to the policy world carried out by faculty.

So, I suggested to the students that if they were really concerned with how the university affects climate change, then their greatest attention should be given to priorities and performance in the realms of teaching, research, and outreach.

Of course, it is also true that work on the “greening of the university” can in some cases play a relevant role in research and teaching. And, more broadly — and more importantly — the university’s actions in regard to its “carbon footprint” can have symbolic value. And symbolic actions — even when they mean little in terms of real, direct impacts — can have effects in the larger political world. This is particularly true in the case of a prominent university, such as my own.

But, overall, my institution’s greatest opportunity — indeed, its greatest responsibility — with regard to addressing global climate change is and will be through its research, teaching, and outreach to the policy community.

Why not focus equally on reducing the university’s carbon foot-print while also working to increase and improve relevant research, teaching, and outreach? The answer brings up a phrase that will be familiar to readers of this blog – opportunity cost. Faculty, staff, and students all have limited time; indeed, as in many other professional settings, time is the scarcest of scarce resources. Giving more attention to one issue inevitably means – for some people – giving less time to another.

So my advice to the students was to advocate for more faculty appointments in the environmental realm and to press for more and better courses. After all, it was student demand at my institution that resulted in the creation of the college’s highly successful concentration (major) in environmental science and public policy.

My bottom line? Try to focus on actions that can make a real difference, as opposed to actions that may feel good or look good but have relatively little real-world impact, particularly when those feel-good/look-good actions have opportunity costs, that is, divert us from focusing on actions that would make a significant difference. Climate change is a real and pressing problem. Strong government actions will be required, as well as enlightened political leadership at the national and international levels.

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Epilogue: After I posted the above essay, I was reminded of an incident that took place many years ago (before I came to Harvard for graduate school, in fact) when I was working full-time for the Environmental Defense Fund in Berkeley, California, under the inspired leadership of the late (and truly great) Tom Graff, the long-time guru of progressive California water policy. EDF was very engaged at the time in promoting better water policies in California, including the use of trading mechanisms and appropriate pricing schemes for scarce water supplies. A prominent national newspaper which was not friendly to EDF’s work sent a reporter to EDF’s office to profile the group’s efforts on water policy in the State. A staff member found the reporter in the office bathroom examining whether EDF had voluntarily installed various kinds of water conservation devices. Our reaction at the time was that whether or not EDF had voluntarily installed water conservation devices was simply and purely an (intentional) distraction from the important work the group was carrying out. After several decades, my view of that incident has not changed.

Any Hope for Meaningful U.S. Climate Policy? You be the Judge.

The current conventional wisdom – broadly echoed by the news media and the blogosphere – is that comprehensive, economy-wide CO₂ cap-and-trade legislation is dead in the current U.S. Congress, and perhaps for the next several years.

Watch out for conventional wisdoms! They inevitably appear to be the collective judgment of numerous well-informed observers and sources, but frequently they are little more than the massive repetition of a few sample points of opinion across the echo-chamber of the professional news media and the blogosphere.

Keep in mind that the conventional wisdom as recently as June of 2009 had it that – with the Waxman-Markey bill having been passed triumphantly by the House of Representatives – Senate action would follow; the only question raised by many commentators was whether the final legislation could be sent to the President for his signature by the time of the Copenhagen climate talks in December. My, how the conventional wisdom has changed!

But over the past nine months, the politics have not fundamentally changed. In June of 2009, passage of meaningful climate legislation in the Senate was already unlikely, because of the terrible economic recession in which the country found itself, and – of even greater political salience – lingering high rates of unemployment. And with the lack of Republican support for the stimulus bill, the relatively small (partisan) margin by which the House passed Waxman-Markey, the then-upcoming challenges of health care and financial regulatory reform dominating the legislative calendar, and concerns voiced about climate legislation by moderate Senate Democrats, success in the Senate was always a long-shot.

What is the Likely Legislative Outcome?

In addition to ongoing consideration of an economy-wide cap-and-trade system, another possibility now receiving attention is a utility-only cap-and-trade system, which some members of the Congress inexplicably find more attractive than an economy-wide approach. The result of such a system would be much less accomplished (forget about the President’s “conditional commitment” under the Copenhagen Accord), and at much greater cost. This would be equivalent to taking the Northeast’s Regional Greenhouse Gas Initiative (RGGI) as a model for national action. Not a good idea.

Even more likely is that the Congress would develop a so-called energy-only bill, which would – to a large degree – consist of killing the one part of Waxman-Markey worth saving (the comprehensive CO₂ cap-and-trade system), and moving forward with the worst parts of that legislation – the smorgasbord of regulatory initiatives. As I’ve written previously, those additional elements of the legislation are highly problematic. When implemented under the cap-and-trade umbrella, many of those conventional standards and subsidies would have no net greenhouse-gas-reducing benefits, would limit flexibility, and would thereby have the unintended consequence of driving up compliance costs. That’s the soft under‑belly of the House legislation.

Without the cap-and-trade umbrella, that same set of standards and subsidies will accomplish very little, and do so at exceedingly high cost. Take just one example that seems to be popular among politicians – “renewable portfolio standards” (RPS), requirements that all states or all electricity utilities derive some fixed share of their power, say 20%, from renewable sources. Note, for example, that such an approach does not distinguish between coal and natural gas, despite the dramatically different impacts these fuels have on CO₂ emissions (and a host of other environmental outcomes). Furthermore, although an RPS may displace some new coal-fired generation with other types of generation, there is little, if any, effect on the operation of existing coal-fired power plants.

If those other, regulatory parts of the climate legislation are so ineffective and so costly, why are they so popular with politicians? The reason is simple. The costs are hidden. The government simply mandates that electric utilities or manufacturers take particular actions, employing the best technology available. Where’s the cost? Unlike a cap-and-trade system, there’s no analysis and debate about the cost of allowances (and the marginal abatement costs they represent); and unlike a carbon tax, there’s no analysis and no focus on the dollar amount of the tax and the aggregate cost. That is the unfortunate but fundamental political economy behind much of U.S. environmental policy since the first Earth Day in 1970.

What about Court-Ordered Regulation?

Whether “best-available-control technology standards” are crafted by the Congress or put in place by the Environmental Protection Agency (EPA) under the court-ordered mandate stemming from the Supreme Court decision in Massachusetts v. EPA and the Obama administration’s subsequent “endangerment finding,” such an approach will be relatively ineffective and terribly costly for what is accomplished. The EPA route would essentially apply the mechanisms of the Clean Air Act, intended for localized, “criteria air pollutants,” to CO₂, resulting in ineffective and costly regulations.

The White House (and most member of Congress) recognize that this is an inappropriate way to address climate change, but they seem determined to go forward, claiming that this threat will force the hand of Congress to do something more sensible instead. Unfortunately, this is akin to my telling you that if you don’t do what I want, I will shoot myself in the foot – not a very credible or intelligent threat. What I am referring to is that costly Clean Air Act regulation of CO₂ will play into the hands of right-wing opponents of climate action, creating a poster-child of excessive regulatory intervention that will bring about a backlash against sensible climate policies. EPA claims that there will be no such excessive regulatory actions, because it will exempt small sources through a so-called “tailoring rule.” But legal scholars have noted that the tailoring rule stands on questionable legal grounds and could be invalidated by the courts. In this regard, note that the first lawsuits to stop EPA from exempting small sources are coming from groups on the right, not the left.

Perhaps Senator Murkowski’s proposed joint resolution (H.J. Res. 66), introduced on January 21, 2010, disapproving (stopping) EPA’s regulatory action under the endangerment finding could save the Administration. The conventional wisdom is that Senator Murkowski’s resolution has no political future, but with a bi-partisan list of 40 co-sponsors, that’s a total of 41 votes (more than the current total of 40 “Yes” and “Probably Yes” votes in the Senate for serious climate legislation, according to Environment and Energy Daily). And remember that the disapproval resolution requires only 51, not 60 votes in the Senate, under the rules of the enabling statute, the Congressional Review Act of 1996 (signed by President Clinton, and part of the Republican “Contract with America”). Of course, House action, not to mention signature by President Obama, would also be required for the resolution to take effect. But a positive vote in the Senate will send a strong political message.

So Is There No Hope for Good Climate Policy?

Here is where it gets interesting, because as much as the current political environment in Washington may seem increasingly unreceptive to an economy-wide cap-and-trade system or some other meaningful and sensible climate policy, there is one promising approach that could actually benefit from the national political climate.

In these pages, I have expressed support for cap-and-trade mechanisms to address climate change, including the system embodied in the Waxman-Markey legislation that emerged from the House in June of last year. Although that approach is scientifically sound, economically sensible, and may still turn out to be politically acceptable, there’s a modified version of cap-and-trade that could be much more attractive in this era of rampant expressions of populism, coming both from the right (“no new taxes”) and the left (“bash the corporations”). Neither of those views, of course, is consistent with sound economic thinking on the environment, but it’s nevertheless possible to recognize their national appeal and build upon them.

This could be done with a simple upstream cap-and-trade system in which all of the needed allowances are sold (auctioned) – not given freely – to fossil-fuel producers and importers, and a very large share – say 75% – of the revenue is rebated directly to American households through monthly checks in a progressive scheme through which all individuals receive identical payments.

Such an approach could appeal to the populist sentiments that are increasingly dominating political discourse and judgments in this mid-term election year. Such a system – which would have direct and visible positive financial consequences (i.e., rebate checks larger than energy price increases) for 80% of American households – might not only not be difficult for politicians to support, but it might actually be difficult for politicians to oppose!

Importantly, even though this is a specific type of cap-and-trade design (which has been known, studied, and proposed for decades), for better political optics, it should be called something else. How about “cap-and-dividend?”

A CLEAR Answer?

What I’ve described bears a close resemblance to the “Carbon Limits and Energy for America’s Renewal (CLEAR) Act,” sponsored by Senators Maria Cantwell (D-Washington) and Susan Collins (R-Maine). So, the politics of their proposal looks appealing, and the substance of it looks promising – a simple upstream cap-and-trade system (called something else), with 100% of the allowances auctioned (with a “price collar” on allowance prices to reduce cost uncertainty), 75% of the revenue refunded to all legal U.S. residents, each month, on an equal per capita basis as non-taxable income, the other 25% of the revenue dedicated to specified purposes, including “transition assistance,” and some built-in measures of protection for particularly energy-intensive, trade-sensitive sectors (not unlike Waxman-Markey).

That’s the good news. The bad news, however, is that the proposal needs to be changed before it can promise to be not only politically attractive, but economically and environmentally sensible. In particular, as it is currently structured, only producers and importers of fossil fuels can buy the carbon allowances. In an up-stream system – an approach I have endorsed for years – it is producers and importers that are subject to compliance, that is, must eventually hold the allowances. That’s fine. But there is no sound reason to exclude other entities from participating in the auction markets; and doing so will greatly reduce market liquidity.

Furthermore, the Senators’ proposal says that holders of carbon allowances are actually prohibited from creating, selling, purchasing, or trading carbon derivatives, thereby tremendously reducing the efficiency of the market and needlessly driving up costs. While no doubt borne out of a well-intentioned desire to protect consumers (remembering the recent impacts of mortgage-backed securities on financial markets), the Senators’ approach is akin to responding to a tragic airplane crash by concluding that the best way to protect consumers from air disasters in the future is simply to ban flying.

Less important structurally, but most important environmentally, an analysis by the World Resources Institute (which I have not validated) indicates that the caps – as currently set – would not bring about emissions reductions by 2020 that would even come close to the President’s announced goal of 17% reductions (equivalent to the Waxman-Markey targets), as submitted by the United States under the Copenhagen Accord.

But these and other problems with the CLEAR proposal can – in principle – be addressed while maintaining its basic structure and political attraction.

An Economic Perspective

It is interesting to note that many – perhaps most – economists have long favored the variant of cap-and-trade whereby allowances are auctioned and the auction revenue is used to cut distortionary taxes (on capital and/or labor), thereby reducing the net social cost of the policy. Cap-and-Dividend moves in another direction. This system (which was introduced several years ago in the “Sky Trust” proposal) has some merits compared with the economist’s favorite approach of tax cuts, namely that the Cap-and-Dividend scheme addresses some of the distributional issues that would be raised by using the auction revenue to fund tax cuts (which could favor higher income households). On the other hand, it eliminates the efficiency (cost-effectiveness) gains associated with the tax-cut approach. In fact, Stanford’s Larry Goulder has estimated that the tax-and-dividend approach would cost 40% more than an approach of combining an auction of allowances with ideal income tax rate cuts. (By “ideal,” I mean focusing on tax cuts that would lead to the lowest net cost.)

In general, there are sound reasons to seek to compensate consumers for the energy price increases that will be brought about by a cap-and-trade system, or any meaningful climate change policy. But it is important not to insulate consumers from those price increases, as diluting the price signal reduces the effectiveness and drives up the cost of the overall policy. Thus, “compensation” as in Cap-and-Dividend is fine, but “insulation” is not.

The most politically salient question with the Waxman-Markey approach of freely allocating a significant portion of the allowances to the private sector is how to distribute (that is, who gets) those allowances which are freely allocated. In this regard, contrary to much of the hand-wringing in the press, the deal-making that took place in the House and may still take place in the Senate for shares of free allowances is an example of the useful and important mechanism through which a cap-and-trade system provides the means for a political constituency of support and action to be assembled without reducing the policy’s effectiveness or driving up its cost.

The ultimate political question seems to be whether there is greater (geographic and sectoral) political support for the Waxman-Markey (H.R. 2454) approach of substantial free allocations and targeted use of auction revenue, or if there is greater (populist) political support for the full auction combined with lump-sum rebate which characterizes the “cap-and-dividend” approach. Alas, the textbook economics preference — full auction combined with cuts of distortionary taxes — appears to be a political, if not academic, orphan.

Another Copenhagen Outcome: Serious Questions About the Best Institutional Path Forward

Whether you like it or not, for the time being the most important product of the December meeting in Copenhagen of the Fifteenth Conference of the Parties (COP-15) of the United Nations Framework Convention on Climate Change (UNFCCC) is the “Copenhagen Accord,” which I assessed in my December 20^th blog post (“What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord”). In the long term, however, it is quite possible that another outcome of the December meetings may prove to be equally or more consequential. I’m referring to the decreased credibility of the UNFCCC as the major institutional venue for international climate policy negotiation and implementation.

One has to be cautious about taking too seriously some of the assertions that have been made in the printed press and the blogosphere about the death of the UNFCCC, partly because many of those commentaries come from people in the press and NGOs who – like me – suffered in Copenhagen because of the terrible logistics provided by the UNFCCC, which kept thousands of people standing outside in the bitter cold for 8 hours waiting to receive their credentials (for which they had been pre-registered) only to be turned away from the Bella Center. I’ve written about that in my December 18^th blog post (Chaos and Uncertainty in Copenhagen?). However, the problems with the UNFCCC that became so apparent in Copenhagen are more fundamental than the logistical failures.

Problems with the UNFCCC Process

The two weeks of COP-15 illustrated four specific problems, most of which were apparent long before the Copenhagen meetings. First, the UNFCCC process involves too many countries – about 196 at last count — to allow anything of real significance to be achieved. As my colleague, Professor Jeffrey Frankel, observed in a panel session in which he and I participated at the ASSA meetings in Atlanta, “it’s difficult enough to reach agreement in a room with 30 people, let alone close to 200.” What is particularly striking about involving 196 parties in the discussion of international climate change policy is the reality that just 20 of them account for about 90% of global emissions!

The second problem – again, illustrated in spades at the Copenhagen sessions – is that the UN culture tends to polarize many discussions into two factions: the developed world versus the developing world. This is troubling, because the world is much more diverse than such a dichotomous distinction would suggest. Clearly, emerging economies such as China, India, Brazil, Korea, Mexico, and South Africa have more in common – along some key economic dimensions – with some countries in the so-called developed world than they do with the poorest developing countries, such as those of sub-Saharan Africa.

The third problem is that the voting rules of the UNFCCC process require consensus for nearly all decisions, that is, unanimity. It was lack of unanimity, by the way, which resulted in the Conference not “adopting” the Copenhagen Accord, but rather “noting” it. After all, only 190 of 196 countries supported it. Six nations threatened to vote in opposition, ironically accusing the 190 of “undemocratic procedures:” Bolivia, Cuba, Nicaragua, Sudan, Tuvalu, and Venezuela.

Fourth and finally, the UNFCCC leadership in Copenhagen was – to phrase it politely – problematic, not only administratively, but substantively as well, according to delegates from a diverse set of countries. (It should also be acknowledged that some responsibility for the problematic leadership of the Conference — both administratively and substantively — rests with the Danish presidency of the Conference. Members of a diverse set of delegations, as well as other observers, have commented on this.)

These problems (as well as others on which readers will probably comment) have caused many observers (as long as eight to ten years ago in the case of some academic economists and political scientists) to question whether the UNFCCC is the best institutional venue for productive negotiations and action on global climate change policy, or at least whether it ought to be the sole venue. So, what are the possible alternatives?

Potential Alternative or Supplementary Institutional Venues

One promising venue was initiated in 2007 by the Bush administration as the “Major Emitter Meetings” – the “MEM process.” It was roundly condemned by environmental advocacy groups and by many supporters of the UNFCCC process. Greenpeace labeled it a “dead-end diversion” – “an attempt by the Bush Administration to deflect international criticism on their do nothing attitude on climate change.” Whether or not that was the Bush administration’s cynical motivation, the fact remains that it was a sensible venue for discussion.

Fortunately, the Obama administration recognized that this was a promising approach, adopted it, changed its name to the Major Economies Forum on Energy and Climate, and continued the process, now commonly referred to as the “MEF.” Several meetings have taken place – in Washington, Paris, and Mexico City – bringing together Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, South Africa, the United Kingdom, and the United States. Those 17 countries and regions account for about 90% of global emissions. The U.S. Deputy National Security Advisor for International Economic Affairs, Michael Froman, chairs the meetings. Naturally, some nations (and some advocates) are concerned about a small set of large countries reaching decisions; and no doubt some are not comfortable with a process chaired by the United States.

Another conceivable institutional venue would be the G-20, the “Group of Twenty Finance Ministers and Central Bank Governors,” established in 1999 to bring together the leading industrialized and developing economies to discuss key issues. They recently turned their attention to climate change policy (in Pittsburgh in September, 2009). The make-up of this group is similar to that of the MEF, but there are differences: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States. For some people, the good news about the G-20 playing a key role as a venue for negotiations is the presence of economic thinking; of course, this is precisely what troubles many others.

No doubt, there are other conceivable multilateral negotiations that could be convened, as well as bilateral approaches, including, of course, ongoing talks between China and the United States.

Don’t Nail Shut the Coffin

Anyone who predicts the death of the UNFCCC is probably letting their hopes infect their predictions. It is simply much too soon for obituaries to be written for this quite durable institution.

The Kyoto Protocol continues at least until the end of its first commitment period, that is, through 2012. The Clean Development Mechanism (CDM) and annual national reporting functions (such as those that are key parts of the Copenhagen Accord) are likely to work through the United Nations, most likely the UNFCCC.

Also, the UNFCCC has a very large constituency of support, including at a minimum most, if not all, of the G-77 group of developing countries, which actually numbers much closer to 140. In addition, the UNFCCC has significant international legitimacy, and is potentially key for implementation, no matter what the venue may be for initial negotiation.

The Path Forward

Whether the next steps in international deliberations should be under the auspices of the UNFCCC or some smaller deliberative body, such as the MEF or the G-20, is an important and open question. Given the necessity of achieving consensus in the United Nations processes as currently defined and the open hostility of a small set of countries, other bilateral and multilateral discussions could be an increasingly attractive route, at least over the short term.

There are many questions, however, that need to be addressed before anyone can identify the best institutional venue (or venues) for international climate negotiations and action. Such questions are now among the major foci of research by the Harvard Project on International Climate Agreements. More about this in future posts.