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Economics of the Environment

The seventh edition of Economics of the Environment: Selected Readings has just been published by Edward Elgar Publishing, and I’m pleased to bring this new volume to your attention. The book is a compendium of some of the best and most timely articles by a dream team of environmental economists. Previous editions have served as a valuable supplement to environmental economics text books or as a stand-alone reference book of key, up-to-date readings from the field. In addition to being valuable for anyone studying environmental economics, environmental policy, or climate change policy, the book can be a useful resource for practitioners in government, private industry, as well as advocacy groups and other NGOs working on environmental policy.

In today’s essay, I first describe the background and motivation for the book, summarize its contents – chapter by chapter, highlight its key messages, and then conclude with some reflections and an invitation.

Background and Motivation

Environmental and natural resource problems are both more widespread and more important today than they were 100 years ago when the discipline of modern economics was marking its emergence with the publication of the first volume of the American Economic Review. A century of economic growth and globalization have brought unparalleled improvements in societal well-being, but also unprecedented challenges to the carrying capacity of the planet. Increases in income and population that would have been inconceivable 100 years ago have greatly heightened pressures on the natural environment.

The stocks of a variety of renewable natural resources – including water, forests, fisheries, and numerous other species of plant and animal – have been depleted below socially-efficient levels, principally because of market failures. Open-access – whether characterized as externalities or public goods – have led to the degradation of air and water quality, inappropriate disposal of hazardous waste, depletion of stratospheric ozone, and the atmospheric accumulation of greenhouse gases linked with global climate change.

Over the same century, economics as a discipline has gradually come to focus more and more attention on these problems, first considering natural resources and subsequently environmental quality. Economic research within academia and think tanks has improved our understanding of the causes and consequences of excessive resource depletion and inefficient environmental degradation, and thereby has helped identify sensible policy solutions.

Despite the generally positive influence economics has had on policy, the problems have overall not diminished, and the lag between understanding and action can be long. While some environmental problems have been addressed successfully, others continue to emerge. Some, such as the threat of global climate change, are both more consequential and more difficult than problems of the past. Fortunately, economics is well positioned to offer better understanding and better policies to address these new and ongoing challenges.

The Book

Approximately six years have passed since the previous edition of this volume was published, and it is now close to 50 years since the first edition appeared in 1972, edited by Robert and Nancy Dorfman. I have had the pleasure of editing the fourth (2000), fifth (2005), sixth (2012), and now the seventh edition (2019) of this book. Whereas the first six editions were published by W.W. Norton & Company, the new edition has been published by Edward Elgar Publishing Limited.

Over this span of time, environmental economics has evolved from what was once a relatively obscure application of welfare economics to a prominent field of economics in its own right. The number of articles on the natural environment appearing in mainstream economics periodicals has continued to increase, as has the number of economics journals dedicated exclusively to environmental and resource topics.

There has also been a proliferation of environmental economics textbooks. Many are excellent, but none can be expected to provide direct access to timely and original contributions by the field’s leading scholars. As most teachers of economics recognize, it is valuable to supplement the structure and rigor of a text with original readings from the literature.

With that in mind, this new volume consists of 34 chapters that instructors will find to be of tremendous value as a complement to their chosen text and their lectures. The scope is comprehensive, the list of authors is a veritable “who’s who” of environmental economics, and the articles are timely, with more than 94 percent published since 1990, and well more than a third published over the past five years. Overall, more than half of the chapters are new to this edition.

In order to make these readings broadly accessible, one criterion I used in the selection process is that articles should not only be original and well written – and meet the highest standards of economic scholarship – but also be non-technical in their presentations. Hence, readers will find little or no formal mathematics in the book’s 688 pages.

The 34 chapters are grouped into nine parts of the book: (1) Overview; (2) Costs and Benefits of Environmental Protection; (3) Assessing the Goals of Environmental Policy: Economic Efficiency and Benefit-Cost Analysis; (4) The Means of Environmental Policy: Cost-Effectiveness and Market-Based Instruments; (5) Economics of Natural Resources; (6) Global Climate Change; (7) Sustainability, the Commons, and Globalization; (8) Behavioral Economics and the Environment; and (9) Economics and Environmental Policy Making.

Overview

Part I of the volume provides an overview of the field and a review of its foundations. Don Fullerton and I (Chapter 1) start things off with a brief essay about how economists think about the environment. This is followed by the classic treatment of social costs and bargaining by Ronald Coase (Chapter 2).

Costs and Benefits of Environmental Protection

Part II examines the costs and benefits of environmental protection. It begins with an article by Antoine Dechezleprêtre and Misato Sato (Chapter 3) that examines an often-controversial area, namely the theory and empirical evidence regarding the relationship between environmental regulation and so-called “competitiveness.” The remainder of Part II focuses on the other, more challenging side of the analytic ledger – the benefits of environmental protection. This is an area that has been even more contentious, both in the policy world and among scholars. Here the core question is whether and how environmental amenities can be valued in economic terms for analytical purposes. Trudy Cameron (Chapter 4) provides a valuable guide to a concept that is both important in assessments of the benefits of environmental regulations and is also widely misunderstood – the value of a statistical life. Then we turn to a provocative debate on the stated-preference method known as “contingent valuation,” including two supportive essays – by Richard Carson (Chapter 5) and by Catherine Kling, Daniel Phaneuf, and Jinhua Zhao (Chapter 6) – followed by a critique by Jerry Hausman (Chapter 7).

Assessing the Goals of Environmental Policy: Economic Efficiency and Benefit-Cost Analysis

There are two principal policy questions that need to be addressed in the environmental realm: how much environmental protection is desirable; and how should that degree of environmental protection be achieved?

In Part III, the criterion of economic efficiency and the analytical tool of benefit–cost (net present value) analysis are considered as ways of assessing the goals of environmental policies. In an introductory essay, Kenneth Arrow and his co-authors (Chapter 8) ask whether there is a role for such analysis to play in environmental, health, and safety regulation. Then, Lawrence Goulder and I (Chapter 9) focus on a key ingredient of benefit–cost analysis that non-economists often find confusing or even troubling – intertemporal discounting. Next, Kenneth Arrow and another set of co-authors (Chapter 10) focus on the possibility of a declining discount rate, which can be very important for analyzing long-term phenomenon, such as climate change. Finally, Ted Gayer and Kip Viscusi (Chapter 11) provide a critique of what they perceive to be the ways in which the principles of benefit–cost analysis have been abused in some regulatory impacts analyses carried out by the federal government.

The Means of Environmental Policy: Cost Effectiveness and Market-Based Instruments

Part IV examines the policy instruments – the means – that can be employed to achieve environmental targets or goals. This is an area where economists have made their greatest inroads of influence in the policy world, with tremendous changes over the past 30 years in the reception given by politicians and policy makers to so-called market-based or economic-incentive instruments for environmental protection. Richard Schmalensee and I (Chapter 12) start things off by identifying lessons that have been learned from three decades of experience with cap-and-trade systems in Europe and the United States. In the next chapter, Schmalensee and I (Chapter 13) examine the ironic history of one particularly important application – the SO₂ allowance trading system, enacted by the Clean Air Act Amendments of 1990. The following article, by Karen Fisher-Vanden and Sheila Olmstead (Chapter 14), recognizes that virtually all prominent applications of emissions trading systems have been for air pollutants of various types, and examines the opportunities and challenges of using such instruments to address water quality problems.

Economics of Natural Resources

Part V consists of four essays on the economics of natural resources, beginning with Robert Solow’s classic, intuitive explication of Harold Hotelling’s seminal contribution to the economic theory of nonrenewable natural resources (Chapter 15). A natural extension is provided by Thomas Covert, Michael Greenstone, and Christopher Knittel (Chapter 16) in an article in which they ask whether market forces of supply and demand will lead to severe reductions in the use of fossil fuels. Then Sheila Olmstead (Chapter 17) applies similar thinking to the management of water resources, and Severin Borenstein (Chapter 18) examines the economics of renewable electricity generation.

Global Climate Change

The next four sections of the book treat a set of timely and important topics and problems. Part VI is dedicated to analysis of economic dimensions of global climate change, which appears to be the most significant environmental problem that has yet arisen, both in terms of its potential damages and in terms of the costs of addressing it. First, a broad overview of the topic is provided in a survey article by Joseph Aldy, Alan Krupnick, Richard Newell, Ian Parry, and William Pizer (Chapter 19). Next, William Nordhaus (Chapter 20) critiques the well-known Stern Review on the Economics of Climate Change, and Nicholas Stern and Chris Taylor (Chapter 21) respond. Following this, Richard Newell, William Pizer, and Daniel Raimi (Chapter 22) examine what was accomplished with the use of carbon markets in various parts of the world in the 15 years after the global climate agreement known as the Kyoto Protocol. Of course, after Kyoto, the next major global agreement in this realm was the landmark Paris Agreement of 2015. Daniel Bodansky, Seth Hoedl, Gilbert Metcalf, and I (Chapter 23) analyze how linking heterogeneous national policies can lower the cost of achieving national targets and thereby facilitate increased ambition under the Paris Agreement. Finally, Richard Tol (Chapter 24) turns from the cost side to the benefit side of climate policy by examining the anticipated economic impacts of unabated climate change.

Sustainability, the Commons, and Globalization

Part VII examines another important area of exploration in environmental economics: sustainability, the commons, and globalization. Robert Solow (Chapter 25) begins with an economic perspective on sustainability. This is followed by Elinor Ostrom’s development of a general framework for analyzing sustainability (Chapter 26), and my own historical view of economic analysis of problems associated with open-access resources (Chapter 27). Then, we turn to the topic of corporate social responsibility and the environment, discussion of which has too often been characterized by more heat than light. Forest Reinhardt, Richard Vietor, and I (Chapter 28) provide an economic perspective by examining the notion of firms voluntarily sacrificing profits in the social interest. The essays in the book can apply in the context of a diverse set of countries, but developing countries face a special set of challenges. So, this section closes with Michael Greenstone and Kelsey Jack (Chapter 29) providing a broad examination of the relationship between economic development and environmental protection.

Behavioral Economics and the Environment

Next, in Part VIII, we feature applications of the emerging area of behavioral economics to environmental issues, beginning with an overview of this terrain by Jason Shogren and Laura Taylor (Chapter 30). Then, Cass Sunstein and Lucia Reisch (Chapter 31) examine the implications of behavioral economics for the types of public policies that are most likely to be effective. Lastly, a specific application of behavioral economics to environmental questions is considered by Todd Gerarden, Richard Newell, and myself (Chapter 32), as we examine potential explanations for the so-called “energy paradox” or “energy efficiency gap” – the apparent reality that energy-efficiency technologies that would more than justify their upfront costs through life-cycle energy-cost savings are nevertheless not adopted.

Economics and Environmental Policy Making

The final section of the book, Part IX, departs from the normative concerns of much of the volume to examine some interesting and important questions of political economy. It turns out that an economic perspective can provide useful insights into questions that might at first seem fundamentally political. Myrick Freeman (Chapter 33) reflects on the benefits that U.S. environmental policies have brought about since the first Earth Day in 1970. And Robert Hahn (Chapter 34) addresses the question that many of the articles in this volume raise: what impact has economics actually had on environmental policy?

Key Messages

Preparing the various editions of this book has caused me to review hundreds of articles, and this has allowed me to identify some common themes that have emerged. First, there is the value – or at least, the potential value – of economic analysis of environmental policy. The cause of virtually all environmental problems in a market economy is economic behavior (that is, imperfect markets affected by externalities), and so economics offers a powerful lens through which to view environmental problems, and therefore a potentially effective set of analytical tools for designing and evaluating environmental policies.

A second message, connected with the first, is the specific value of benefit–cost analysis for helping to promote efficient policies. Economic efficiency ought to be one of the key criteria for evaluating proposed and existing environmental policies. Despite its limitations, benefit–cost analysis can be useful for consistently assimilating the disparate information that is pertinent to sound decision making. If properly done, it can be of considerable help to public officials when they seek to establish or assess environmental policies.

Third, the means governments use to achieve environmental objectives matter greatly. Different policy instruments have very different implications in terms of both benefits and costs, including abatement costs in both the short and the long term. Market-based instruments can enable the minimization of these costs.

Fourth, an economic perspective is also of value when reflecting on the use of natural resources, whether land, water, fisheries, or forests. Excessive rates of depletion are frequently due to the nature of the respective property-rights regimes, in particular, common property and open-access. Economic instruments – such as ITQ systems in the case of fisheries – can and have been employed to bring harvesting rates down to socially efficient levels.

Fifth and finally, policies for addressing global climate change, linked with emissions of carbon dioxide and other greenhouse gases, can benefit greatly from the application of economic thinking. On the one hand, the long time-horizon of climate change, the profound uncertainty in quantitative links between emissions and actual damages, and the possibility of catastrophic climate change present significant challenges to conventional economic analysis. But, at the same time, the ubiquity of energy generation and use in modern economies means that only market-based policies – essentially carbon-pricing regimes – are feasible instruments for achieving truly meaningful emissions reductions. Hence, despite the challenges, an economic perspective on this grandest of environmental threats is essential.

Reflections and an Invitation

Environmental economics is a rapidly evolving field. Not only do new theoretical models and improved empirical methods appear on a regular basis, but entirely new areas of investigation open up when the natural sciences indicate new concerns or the policy world turns to new issues. Therefore, this volume of collected essays remains a work in progress. I owe a great debt of gratitude to the teachers, students, and other readers of previous editions who have sent their comments and suggestions for revisions. Thanks are also due to Patrick Behrer, who provided superb research assistance in producing this Seventh Edition. Looking to future editions, I invite all readers – whether teachers, students, or practitioners – to send me your suggestions for improvement.

Climate Negotiations in Poland Advanced Implementation of the Paris Agreement

During two weeks of sometimes boisterous plenary sessions and equally energetic backroom discussions, the 197 Parties of the Twenty-Fourth Conference of the Parties (COP-24) of the United Nations Framework Convention on Climate Change (UNFCCC), meeting in Katowice, Poland, sought to reach consensus on rules and guidelines for implementing the Paris Agreement. That landmark 2015 accord came into force in 2016, and is scheduled to begin operations in earnest in 2020. The fault lines at the Katowice negotiations were, as usual, largely between two groups: the 43 industrialized countries, and the 154 developing nations.

Hanging over the negotiations was the reality that U.S. President Donald Trump announced in June 2017 that the United States would withdraw from the Paris Agreement (in November, 2020, the soonest that any Party can actually withdraw). Since Trump’s announcement, the former co-leadership by the United States and China, which had been critical to the passage of the Paris Agreement, has evolved into something between sole leadership by China and co-leadership by China and the European Union.

Not long before midnight on Saturday, December 15^th, a full 24 hours after COP-24 was scheduled to conclude, consensus was reached on the 156-page Rulebook, with considerable credit due to the Polish presidency of the Conference (not to be confused with the presidency of the Polish nation), in the person of Michał Kurtyka, Poland’s Deputy Minister of Energy. As Jean Chemnick wrote in E&E News, the Rulebook represents a transition from an “idealized expression of world solidarity” in the Paris Agreement to a “set of mechanisms that countries hope will deliver results.”

But was COP-24 Really a Success?

A simple “yes” or “no” response to this question would be misleading. There were literally dozens of aspects of the Paris Agreement on which the delegates to the Katowice meetings wanted to make progress by filling in details in the 29 articles of the skeletal Paris Agreement. In my mind, two areas stood out. One is referred to as “transparency,” and other is characterized (somewhat inaccurately) as “markets.” Combining the achievements and lack thereof on both fronts, I assess the outcome of the Katowice talks to be more than a half-full glass of water (or wine, if you prefer).

First of Two Key Issues: Transparency

Transparency refers to the credibility of each nation’s measurement of its own performance – in terms of its emissions and its policies. The Paris Agreement gave significant wiggle room to the vast majority of countries – the 154 developing countries – by granting them flexibility in meeting the transparency requirements (which were to be established for the industrialized countries). The U.S. delegation – consisting of civil servants led by long-time State Department official Trigg Talley – again worked closely with the Chinese delegation to foster a remarkable consensus that all countries must follow uniform standards for measuring emissions and tracking the achievement of their respect targets (Nationally Determined Contributions or NDCs). This was a significant achievement, and a major step forward toward a level playing field among the countries of the world.

Conceivably, it could make it easier for the Trump administration to remain in the Paris Agreement (if the President were to become convinced that such action would be politically advantageous in the run-up to the November 2020 U.S. presidential election). And, likewise, it will make it easier for a future (Democratic or Republican) administration to rejoin the Paris Agreement if the current President follows through on his promise to withdraw. That is a significant success.

Second of Two Key Issues: Article 6.2 and Carbon Markets

Turning to the second key set of issues at COP-24, I have frequently written that there are two necessary conditions for ultimate success of the Paris Agreement: adequate scope of participation, and adequate ambition of the individual national contributions. The first condition has surely been met, with 97% of global emissions associated with countries taking on responsibilities under Paris, compared with 14% under the current commitment period of the predecessor international agreement, the Kyoto Protocol of 1997. But the factor that brought about such broad participation – namely, that each country’s target is anchored in its own national circumstances and colored by its domestic political reality – suggests that the individual contributions will not be collectively sufficient (due to the global commons nature of the problem).

Because of this, a key question has been whether there are ways that the Paris Agreement itself, as it is fleshed out, can enable and indeed facilitate increased ambition over time? One answer, on which I have carried out extensive research with colleagues, can be provided by the linkage of regional, national, and sub-national policies – connections among policy systems that allow emission reduction efforts to be redistributed across systems.

Heterogeneous Linkage

Linkage is typically framed as between cap-and-trade systems, but regional, national, and sub-national policies will be highly heterogeneous, including a variety of types of emissions trading systems, carbon taxes, and conventional performance and technology standards. As my research in this area with Michael Mehling (M.I.T.) and Gilbert Metcalf (Tufts University) has found, linkage among such heterogeneous policies is not trivial, but is – in many cases – feasible.

This is important because linkage fosters: cost savings by allowing firms to take advantage of lower cost abatement opportunities in other jurisdictions; improved functioning of markets by reducing market power and price volatility; political benefits to linking parties; administrative economies of scale; and – perhaps most important – the possibility of satisfying the UNFCCC’s key criterion of distributional equity – “common but differentiated responsibilities” – without sacrificing cost-effectiveness.

Fortunately, such linkage can be consistent with the Paris Agreement, under the authority of its Article 6, focused on international cooperation. In particular, Article 6.2 provides for cooperative approaches among Parties, with Internationally Transferred Mitigation Outcomes (ITMOs) potentially serving as an accounting mechanism to ensure that international linkages do not result in double-counting or other errors when comparing each country’s emissions to its stated target.

So, What Happened in Katowice?

In Katowice, the delegates sought to write guidelines for Article 6 that could make its promise a reality. Negotiators had an opportunity to define clear and consistent guidance for the accounting of emissions transfers under Article 6.2. My view in advance of the Katowice talks was that a robust accounting framework for ITMO transfers could foster better linkage of climate policies across jurisdictions, but that if the guidance extended much beyond basic accounting rules, restrictive requirements could actually impede effective linkage, and be counter-productive.

In precisely this regard, two potential impediments arose in Katowice. Proposals were introduced to place an explicit tax on ITMO transfers under the rubric of “Share of Proceeds,” meaning a payment by the transferring parties to a fund intended to help vulnerable developing countries meet their costs of adaptation to climate change. Whereas the objective of financing adaptation has great merit, it is well covered and belongs in other parts of the Paris Agreement, not as a tax on trading.

The other potential impediment was in the form of proposals for an implicit tax on transfers, known as “Overall Mitigation in Global Emissions,” meaning that each transfer must result in a net reduction in overall emissions. Again, increasing ambition over time is important, but that is dealt with appropriately in other parts of the Agreement, not by making it an implicit tax on market activity.

Last-Minute Maneuvers

As the end of the second week of negotiations approached, it appeared that both of these potential impediments might be finessed, if not completely avoided. But then a single country – Brazil – decided to hold up the talks all night on the final Friday by insisting that it would not let there be any progress on rules for Article 6.2 unless the Conference agreed to state – under Article 6.4, viewed by most as an extension of the Kyoto Protocol’s Clean Development Mechanism (CDM) – that it could use its large surplus of CDM credits (of questionable credibility) to help meet its Paris commitments in a manner that would have resulted in double-counting. The Brazilian delegation refused to budge, and the result was that Article 6 was not included in the Katowice decision. Rather, it was punted to COP-25, to be held next year in Santiago, Chile.

So, the outcome with this second issue was clearly not a great success, but was it a complete failure, or was it something in between? This gets quite interesting. On first blush, a lack of agreement on the rules of the road for Article 6.2 would seem to render ITMO transfers impossible – and hence reduce the scope for bilateral international linkages.

Does the Cloud Have a Silver Lining?

As Nathaniel Keohane (Environmental Defense Fund) has pointed out, countries can move ahead with international transfers even without guidance under Article 6.2, because that article is explicit that countries may use transferred mitigation outcomes toward meeting their national targets whether or not additional rules have been written. The crucial phrase is that any transfer must be “consistent with guidance,” meaning that if guidance exists, it must be followed, but meaningful action does not depend on the existence of guidance. Keohane indicates that this language was intentionally written into the Paris Agreement precisely because the United States and others feared that Brazil would try to hold Article 6.2 hostage to Article 6.4 — exactly as they did in Katowice.

I hope very much that Dr. Keohane’s interpretation is correct. My lingering concern, however, is that in the absence of knowing what some potential future guidance and rules might bring, Parties may be very hesitant to pursue bilateral linkages (and try to justify those in the context of their national targets via ITMO transfers). Only time will tell.

A Sideshow: The IPCC 1.5^o C Report and U.S. Schizophrenia

There were several sideshows at the climate talks. One revealed the schizophrenia that has marked U.S. participation in the annual negotiations during the Trump years. The State Department civil servants who continue to represent the United States in the climate negotiations, again played a helpful role, working constructively with other delegations, and in some cases, even played a (admittedly diminished) leadership role, as in the work on transparency I described above. But, in addition, the White House again sent a group of political people to make symbolic statements supporting the use of coal and doubting the urgency of action on climate.

This resulted in the bizarre reality of the United States joining Russia, Saudi Arabia, and Kuwait to block language that would have endorsed the findings of the recent Intergovernmental Panel on Climate Change (IPCC) report on the Paris Agreement’s aspirational target of limiting warming to a 1.5^o C increase this century. All other countries wanted to include text that would “welcome” the IPCC report, which would indeed have had the effect of endorsing it. The group of four countries maintained that the report should simply be “noted.” In what has become classic climate diplomacy, the final language said that the Conference “welcomes the timely completion” of the report, not necessarily its findings.

The Bottom Line

Any sound judgment of the ultimate success or failure of the Katowice climate talks – and more important, the success or failure of the Paris Agreement – will depend upon future climate negotiations and upon the domestic policy actions of the key countries of the world. For that, it remains too soon to observe or even predict the long-term outcome.

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A Few Additional References:

For a much more succinct assessment of the Katowice climate negotiations, see my column in The Conversation: “An Economist’s Take on the Poland Climate Conference.”

For a summary of the outcomes of the Katowice meetings, see this report from the Center for Climate and Energy Solutions.

For a detailed summary and assessment of the Katowice outcome, see Axel Michaelowa’s slide deck.

For an assessment that focuses on the process and outcome of the Katowice negotiations with regard to the role of carbon markets, see the COP24 Summary Report of the International Emissions Trading Association (IETA).

For a detailed description of the processes and outcomes on transparency, finance, and stock taking, see Jean Chemnick’s story in ClimateWire.

Martin Weitzman’s Contributions to Environmental Economics

Many of the world’s most eminent economists and climate scientists gathered on October 11^th, 2018, at Harvard Kennedy School to celebrate and honor the career of Martin L. Weitzman, professor of economics at Harvard University, who is “retiring” following four decades of research and writing which have illuminated thought and policy across a broad range of important realms. During his “retirement,” Marty will serve as a Research Professor in Harvard’s Department of Economics.

The October 11^th event, “Frontiers in Environmental Economics and Policy: A Symposium in Honor of Martin L. Weitzman,” which drew about 250 people, was organized and hosted by the Harvard Environmental Economics Program (HEEP), with additional support from the Harvard University Center for the Environment and the Mossavar-Rahmani Center for Business and Government at the Kennedy School.

A video of the entire event is available here.

Having learned so much from Marty Weitzman, including during the 26 years that he and I have been co-hosting the Harvard Seminar in Environmental Economics and Policy, I was delighted to moderate the symposium. From the earliest days of planning the event until the day of the symposium, my team – Rob Stowe, HEEP Executive Director, Jason Chapman, HEEP Program Manager, and Casey Billings, HEEP Program Coordinator – and I were inspired by the breathtaking contributions Marty has made to the once-emerging and now mature global discipline of environmental economics.

In my blog essay today, I want to provide for those who could not attend a sense of what it was like to be there, and remind those who did attend what transpired.

Introducing Professor William Nordhaus

I began the symposium by introducing our keynote speaker, William D. Nordhaus, who just a few days earlier had been announced as a recipient of this year’s Nobel Prize in Economics for his work on modeling the economics of climate change and related public policies.

The cliche that “our speaker needs no introduction” certainly applied here, and so I was very brief, noting first that for nearly four decades, Bill Nordhaus has written about the economics of the environment. Building on his background as a macro-economist concerned about economic growth, Bill began to give particular attention to the role of energy generation and use in the 1970s, not long after beginning his academic career. What is truly remarkable is that it was in the early 1980s that he began working on the economics of global climate change, long before most other economists were even aware of the problem, let alone analyzed it.

Bill has been on the faculty at Yale University since 1967, where he is the Sterling Professor of Economics, and Professor in Yale’s School of Forestry and Environmental Studies. He is a member of the National Academy of Sciences, a Fellow of the American Academy of Arts and Sciences, a Distinguished Fellow of the American Economic Association, and a Research Associate of the National Bureau of Economic Research. In addition to his many scholarly achievements, he served as a Member of the President’s Council of Economic Advisers in the Carter administration.

What is particularly striking about Bill Nordhaus’s contributions is that — as long as I can remember — he has made his path-breaking DICE model of global climate change economics accessible to and usable by other researchers around the world.

Keynote Address by Bill Nordhaus

Bill launched his presentation, “The Intellectual Footprint of Martin Weitzman in Environmental Economics,” by stating that Marty “has changed the way we think about economics and the environment.” He then went on to itemize Weitzman’s impressive body of work, including his series of studies on the share economy; his research on the Soviet Union and central planning; his seminal 1974 paper, “Prices vs. Quantities,” which provided fresh insight on how regulatory policy can best be leveraged to maximize public good; and his work on so-called “fat tails” and the “dismal theorem,” which questioned the value of a standard benefit-cost analysis when conditions could result in catastrophic events, even if the probability of such events is very low.

But Nordhaus devoted much of his talk to highlighting Weitzman’s extraordinary contributions to the field of environmental economics, in particular, the economics of climate change and climate change policy. It was Weitzman’s “revolutionary” series of papers on the ideal measures of national income, Nordhaus stated, that focused early attention on the need to take the harmful impacts of pollution into account when tabulating the gross domestic product (GDP), a concept referred to as “Green GDP.”

“Our output measures do not include pollution,” said Nordhaus. “They include goods like cars and services like concerts and education, but they do not include CO₂ that is pumped into the atmosphere.” He explained that pollution abatement measures are often blamed for causing a drag on the economy, but aren’t credited for the health and welfare benefits they create.

“If our incomes stay the same but we are healthier, and live a year longer or ten years longer, that will not show up in the way we measure things,” Nordhaus remarked. “But we can apply these Weitzman techniques to value improvements in health and happiness.”

“Those who claim that environmental regulations hurt growth are completely wrong, because they are using the wrong yardstick,” Bill continued. “Pollution should be in our measures of national output, but with a negative sign, and if we use green national output as our standard, then environmental and safety regulations have increased true economic growth substantially in recent years…For this important insight we applaud Martin Weitzman, a radically innovative spirit in economics.”

A Panel of Leading Environmental Economists

Following the keynote address by Nordhaus, I welcomed to the stage fellow economists Maureen Cropper, Lawrence Goulder, Michael Greenstone, Charles Kolstad, Richard Newell, Robert Pindyck, and James Stock for a lively panel discussion. Each of these economists have themselves made important contributions to scholarship and policy in the environmental realm.

To each panelist, I posed a question about a different aspect of Marty Weitzman’s key contributions – ranging from climate change policy to biodiversity and fisheries management.

First, Richard Newell, the President and CEO of Resources for the Future (RFF) and a former student of Weitzman when he studied for his Ph.D. in Public Policy at the Harvard Kennedy School, described Weitzman’s seminal paper, “Prices vs. Quantities”, as a “gift that keeps on giving” for economists and policy makers invested in improving regulatory policy.

Next, Charlie Kolstad, a Senior Fellow at the Stanford Institute for Economic Policy Research, focused on Marty Weitzman’s research on biodiversity, and cited it for its “significance and importance.”

Third up was Larry Goulder, the Shuzo Nishihara Professor of Environmental and Resource Economics at Stanford University and a former colleague of Weitzman in the Harvard Department of Economics. Larry described the importance of Marty’s work on long-term discounting, and commended his 1998 paper on declining discount rate profiles, noting that it has affected public policies in Denmark, France, and Norway, as well as public discussion in the Netherlands, Sweden, and elsewhere. Larry noted that “it’s very important, because it affects decisions as to how much we should invest in infrastructure, in mitigation, and in other realms.”

Fourth on the panel was Bob Pindyck, the Bank of Tokyo-Mitsubishi Professor of Economics and Finance at the Sloan School of Management at MIT, who is very familiar with Marty Weitzman’s work on fat-tailed distributions, and has contributed to that literature himself. Bob cited Weitzman’s prescient 2007 paper “Subjective Expectations and Asset-Return Puzzles” for its significant influence upon the later modeling of the economics of catastrophic climate change.

Next was Jim Stock, the Harold Hitchings Burbank Professor of Political Economy at Harvard University. I asked Jim to comment on the effect of Marty’s work on the policy world. Jim started by crediting Weitzman for the “tremendous influence” his ideas have had upon the formation of public policy in the United States and around the world, citing the nine-state Regional Greenhouse Gas Initiative (RGGI), and the Clean Power Plan introduced by President Obama in 2015.

Sixth on the panel was Maureen Cropper, Distinguished University Professor and Chair of the Department of Economics at the University of Maryland. Maureen had kindly agreed to talk about Marty Weitzman’s research and outreach in the realm of fisheries management. Maureen explained that his modeling work in Iceland and elsewhere had affected thinking and discussion around the world regarding the use of taxes and quotas to regulate fishing industries. “This is another example of the use of a simple model and treatment of uncertainly that really did start a conversation among fisheries economists when it came out,” she said.

Finally Michael Greenstone, the Milton Friedman Professor in Economics at the University of Chicago, agreed to reflect on how Weitzman’s theoretical insights were fundamental as the foundation for sound empirical analysis. Greenstone noted that Marty’s work “takes something you are kind of confused about, and then after you read it, you can’t understand how in the world you were confused beforehand. It just clarifies things in a way that is really beautiful.”

A Book of Testimonials

Many of those who attended the symposium — and many who were not able to join us — wanted to tell Marty directly how they feel about him and his work. And so we assembled and presented to Marty a book in which we had compiled 60 testimonial letters, including from some of his admirers who could not be with us at the symposium, such as: Orley Ashenfelter, Greg Mankiw, Kerry Smith, Bob Solow, Nick Stern, Cass Sunstein, and others. As I presented Marty with the book of letters, I took a moment to read aloud from just one of the letters from another person who could not be with us:

When I was an undergraduate in the economics department at MIT, you were a bright and rising young star. Later, as a faculty member, I routinely assigned your papers to my environmental economics students. Your scholarship and your leadership enriched their experiences — and mine — tremendously.

I will never forget when you announced that you were moving on to Harvard — what a blow! —but the universe has seen fit to bring us together once again. It is an honor to acknowledge your extraordinary contributions to the field, and to thank you for shining a light for all of us.

All the best,

Larry

Lawrence Bacow, President, Harvard University

More Memories

The book did not end with the testimonial letters. On a personal note, it has been 26 years since Marty Weitzman and I launched the Harvard Seminar in Environmental Economics and Policy. Over those 52 semesters, we have hosted a total of 398 seminars! In the very first semester — the fall of 1992 — the seminar presenters included, among others, in alphabetical order: Bill Nordhaus, Kerry Smith, Bob Solow, Rob Stavins, Kip Viscusi, and Marty Weitzman.

In virtually every one of these 400 seminars, everyone in the seminar room – including me — learned not only from each seminar’s presenter, but from Marty’s concise and relevant questions which would inevitably go directly to the heart of the matter. So, I was pleased to include in the book copies of all 52 seminar schedules, beginning with the fall of 1992 and culminating with the fall of 2018. I will not say “concluding” with the fall of 2018, because I trust that my collaboration with Marty, which I have valued highly, will continue.

Marty Weitzman has been a treasure for Harvard and for the global scholarly community. All of us are confident that his contributions will continue to be forthcoming.

Marty Weitzman Responds

Following the Symposium, Weitzman took several minutes to reflect on his remarkable career, recognizing that while he has pursued projects across multiple disciplines, his research would often hit dead ends.

“I’m drawn to things that are conceptually unclear, where it’s not clear how you want to make your way through this maze,” he said. “It’s difficult to describe a creative process, but I get some sort of an inspiration…Most of the time it’s a waste of time because I can’t formalize it, so I try and try and just nothing comes of it. But occasionally it clicks and since it’s typically in an area that’s been understudied, that’s why it’s so dispersed across different fields.”

Weitzman spoke proudly of his work in environmental economics, stating that he “took a decisive step in that direction a few decades ago…getting into the forefront rather than…following everything that went on.” Yet he admitted that he is not very optimistic about the current pace of efforts to combat the harmful mid- and long-term impacts of global climate change.

“It’s not merely sufficient to cut back on carbon emissions or to stabilize carbon emissions. We’ve more or less done that in the last few years, although it could go either way,” he said. “The stuff that does the damage is the stock of carbon dioxide. To get the stock of carbon dioxide to go down, it has almost nothing to do with stabilizing the flow. You have to get the flow down to net zero. That’s what’s so difficult. And the public does not realize that. Victory on the flow front doesn’t translate into victory on the stock front, and that’s what counts.”

As is typical of his style, Marty did not reveal his future plans, saying only that they remain to be determined. But certainly all those in attendance at the symposium hope that he will continue contributing to the academic and policy discussions surrounding climate change and other critically important environmental economic issues.