New York Times Archives - An Economic View of the Environment

Prospects for Climate Policy under the Incoming Biden Administration

It is now more than two weeks since the November 3rd U.S. election, and 12 days since the Biden-Harris ticket was declared the victor in the electoral college by all of the major news media, but President Trump still refuses to concede, citing (totally discredited) claims that the election was stolen from him by widespread voting fraud. While litigation continues, as well as the war of words, in my most recent podcast, recorded yesterday and released today, we examine the implications of the Presidential and the Congressional elections for climate change policy – both domestic and international.

Usually in my podcast – “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program – I talk with well-informed people from academia, government, industry, or NGOs. But, as I wrote in my blog last week, I worry that advocates and other well-informed people may engage in wishful thinking when making predictions about the next administration’s future climate policy initiatives. It is better for this purpose that I engage with people who are knowledgeable and make it their business to examine such questions objectively – I’m talking about practicing journalists, and not ones from the opinion pages, but rather reporters.

I was therefore delighted to welcome someone whom I greatly respect and with whom I have had the pleasure of working – from my perch in academia – for many years, Coral Davenport, who covers energy and environmental policy for The New York Times from the newspaper’s Washington bureau. You can hear our complete conversation here.

Coral Davenport joined the New York Times in 2013, having first covered environment for Congressional Quarterly, then Politico, and then the National Journal, which is where she was when she and I first spoke. I should note that she began her ascendency in the profession of journalism at the Daily Hampshire Gazette in Hampshire County, Massachusetts, fresh out of Smith College.

Our conversation in the podcast is wide-ranging and nearly comprehensive on the prognosis for climate change policy during the next two to four years, including: how the climate issue may have affected the election outcome; the international dimensions of climate change policy, including the Paris Agreement; the outlook for major climate legislation in the Congress; other, non-climate legislation that can have significant impacts on greenhouse gas emissions, such as economic stimulus packages and infrastructure bills; and regulatory approaches to climate change, including executive orders (Oval Office directives) and rulemaking, as well as the court challenges they may face. That is a great deal of territory, but all of it is covered!

At the outset of our conversation, Coral Davenport credits President-elect Biden with tapping into voter sentiment on climate change, and using it to his advantage during the campaign.

“This is the first presidential election with climate change emerging as a top-tier issue, and a lot of that was because Biden as a candidate chose to do that. He chose to bring it up in a way that no other candidate ever has,” she says. “It’s clear that the political calculus had changed on that [issue] and campaign advisers saw it as something that would at least not drive away voters, and could attract and excite other voters.”

Despite the Biden victory, Coral expresses skepticism that the new administration will muster the support that it needs, both from the left and the right, to pass meaningful energy and climate legislation in the near-term. She notes, however, that the president is expected to re-commit the United States to the Paris Agreement immediately, which will be one step toward reestablishing U.S. credibility on the issue.

“The U.S. has a long way to go to build back its credibility on the world stage on climate, and I think that the Biden Administration will be received with open arms in the international climate community,” she says. “The Biden Administration, I know from interviewing people on the transition [team] and during the campaign, anticipates from day one starting to move forward aggressively with executive authority to put back in place at least some of the big climate regulations that the Trump Administration rolled back.”

For example, she cites the incoming administration’s likely move to reinstate aggressive vehicle fuel economy standards, which were scaled back by the Trump Administration.

“Trump didn’t eliminate it, but he rolled it so far back that essentially he basically canceled it out. We do expect to see a Biden Administration come in and reinstate it very quickly, probably with some new stronger terms. That one is actually pretty straightforward. The federal government has imposed fuel economy standards for decades. And I don’t think it’s ever been questioned that it has the legal authority to do that.”

Coral also expresses some cautious optimism that Congress might agree on a Clean Energy Standard, which would mandate a percentage of zero-carbon sources in the U.S. electricity grid, and for the possibility of green energy components to be folded into a COVID-19 economic relief package and an infrastructure funding bill.

All of this and much more is found in the latest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” I hope you will listen to this latest discussion here. You can find a complete transcript of our conversation at the website of the Harvard Environmental Economics Program.

My conversation with Coral Davenport is the 17th episode in the Environmental Insights series, with future episodes scheduled to drop each month. 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
Rebecca Henderson, John and Natty McArthur University Professor at Harvard University, and founding co-director of the Business and Environment Initiative at Harvard Business School.
Sue Biniaz, who was the lead climate lawyer and a lead climate negotiator for the United States from 1989 until early 2017.
Richard Schmalensee, the Howard W. Johnson Professor of Management, and Professor of Economics Emeritus at the Massachusetts Institute of Technology.
Kelley Kizier, Associate Vice President for International Climate at the Environmental Defense Fund.
David Hone, Chief Climate Change Adviser, Shell International.
Vicky Bailey, 30 years of experience in corporate and government positions in the energy sector.
David Victor, professor of international relations at the University of California, San Diego.
Lisa Friedman, reporter on the climate desk at the New York Times.

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

Both Are Necessary, But Neither is Sufficient: Carbon-Pricing and Technology R&D Initiatives in a Meaningful National Climate Policy

For many years, there has been a great deal of discussion about carbon-pricing – whether carbon taxes or cap-and-trade – as an essential part of a meaningful national climate policy. It has long been recognized that although carbon-pricing will be necessary, it will not be sufficient. Economists and other policy analysts have noted that policies intended to foster climate-friendly technology research and development (R&D) will also be necessary, but likewise will not be sufficient on their own.

Some recent studies and press accounts, which I reference below, have identified these two approaches to addressing CO₂ emissions as substitutes, rather than complements. That is fundamentally inconsistent with decades of research, and so my purpose in this essay is to set the record straight.

Carbon Pricing: Necessary But Not Sufficient

First of all, why is there so much talk among policy analysts and policy makers – not simply among academics – about carbon‑pricing as the core of a meaningful strategy to reduce CO₂ emissions? Why, in fact, is this approach so overwhelmingly favored by the analytical community? The answer is simple and surprisingly pragmatic.

First, there is no other feasible approach that can provide meaningful emissions reductions, such as the 80 percent reduction in national CO₂ emissions by 2050 that was part of the legislation passed by the U.S. House of Representatives and proposed in the Senate and part of the Obama administration’s conditional pledge under the Copenhagen Accord. Because of the ubiquity and diversity of energy use in a modern economy, conventional regulatory approaches –standards of various kinds – simply cannot do the job. Only carbon pricing – either in the form of carbon taxes or cap-and-trade – can significantly tilt in a climate-friendly direction the millions of decentralized decisions that are made in our economy every day.

Second, carbon-pricing is the least costly approach in the short term, because abatement costs are exceptionally heterogeneous across sources. Only carbon-pricing provides strong incentives that push all sources to control at the same marginal abatement cost, thereby achieving a given aggregate target at the lowest possible cost.

Third, it is the least costly approach in the long term, because it provides incentives for carbon-friendly technological change, which brings down costs over time.

For these reasons, carbon-pricing is a necessary component of a truly meaningful national climate policy. [I’ve written about this in many previous blog posts, including on June 23, 2010, “The Real Options for U.S. Climate Policy.”] However, although it is a necessary policy component, carbon-pricing is not sufficient on its own. This is because there are other market failures that dilute the impacts of price signals on decision makers.

Technology R&D Policies: Also Necessary, Also Not Sufficient

The most important of these “other market failures” is the public good nature of information. Companies carrying out research and development (R&D) incur the full costs of their efforts, but they do not capture the full benefits. This is because even with a perfectly-enforced system of intellectual property rights (such as patents), there are tremendous spillover benefits to other firms. Decades of economic research – much of it by my former colleague and co-author, Professor Adam Jaffe, now Dean of Arts and Sciences at Brandeis University – has analyzed with empirical (econometric) analysis the remarkable degree to which inventions and innovations by one firm provide valuable information that leads to new inventions and innovations by other firms.

So, firms pay the costs of their R&D, but do not reap all the benefits. The existence of this positive externality of firms’ R&D – or put differently, the public-good nature of the information generated by R&D – means that the private sector will carry out less than the “efficient” amount of R&D of new climate-friendly technologies in response to given carbon prices. Hence, other public policies are needed to address this “R&D market failure.”

New path-breaking technologies will be needed to address climate change, and public support for private-sector or public-sector R&D will be crucial to meet this need. But, at the same time, to address the climate-change market failure itself (that is, the externality associated with greenhouse gas emissions), carbon pricing will be necessary, for all of the reasons I gave above. This is an application of an important and fundamental principle in economics: two market failures require the use of two policy instruments.

Empirical analyses have repeatedly verified this crucial point – that combining carbon-pricing with R&D support is more cost-effective than adopting either approach alone. Included in this set of studies are the following: Carolyn Fischer (Resources for the Future) and Richard Newell (U.S. Energy Information Administration, on leave from Duke University), “Environmental and Technology Policies for Climate Mitigation”; Stephen Schneider (late of Stanford University) and Lawrence Goulder (Stanford University), “Achieving Low-Cost Emissions Targets”; and Daren Acemoglu (MIT), Philippe Aghion, Leonardo Bursztyn, and David Hemous (Harvard University), “The Environment and Directed Technical Change.”

Complements, Not Substitutes

An interesting, recent column, “Next Step on Policy for Climate,” by David Leonhardt in the New York Times (October 13, 2010, p. B1) might give some people the mistaken impression that technology policies are an adequate, even sensible substitute for carbon-pricing. That was not the intended message of the column. In fact, Leonhardt – perhaps the leading economic journalist writing today in the United States – indicates clearly in his column that he is skeptical of the notion of thinking of technology subsidies as an adequate substitute for carbon-pricing (in particular, cap-and-trade). And in a follow-up post at the New York Times’ Economix, he makes clear that “these two policies are not mutually exclusive.”

Nevertheless, Leonhardt’s original column (which included a very nice profile of my colleague, Professor Michael Greenstone of MIT) focused attention on a recent report – a report that could give the false impression that technology policies would be a sensible substitute for serious carbon-pricing. The report in question – “Post-Partisan Power” – received significant coverage, primarily because of its sponsorship: a combination of a prominent Republican-oriented Washington think tank, the American Enterprise Institute (AEI), and an equally prominent Democratic-oriented Washington think tank, the Brooking Institution (and a third partner, the Breakthrough Institute, a California-based environmental think tank).

The report may well garner some bi-partisan political support, because it promises a free lunch of painless, win-win solutions, a promise that will resonate with many elected officials. Indeed, the report’s sub-title is “how a limited and direct approach to energy innovation can deliver clean, cheap energy, economic productivity, and national prosperity.” What’s not to like? And the authors are presumably smart and politically shrewd. I know that’s the case with the AEI author, Steven Hayward, who I debated last year in the pages of the Wall Street Journal.

To its credit, the report lays out a menu of policies intended to stimulate carbon-friendly technological change, ranging from $500 million of Federal government funding of K-12 curriculum development and teacher training to $25 billion annually of direct Federal funding of energy innovation.

For the reasons I explained above (the “R&D market failure” and the “carbon emissions externality”), both direct technology R&D policies and serious carbon-pricing are necessary, but neither is sufficient on its own. Unfortunately, this new report – and some of the press coverage surrounding it – makes the claim that such direct government funding of technology innovation is a sufficient and sensible substitute for meaningful carbon-pricing. That claim is both unfortunate and wrong, as it is supported neither by sound reasoning nor empirical research, as I have described above.

Again, many of the individual technology policy recommendations offered by the AEI-Brookings-BI report are worthy of serious consideration (as a complement, not a substitute for an economy-wide carbon-pricing policy). But the specifics – indeed, much of the meat – are missing. “Reform the nation’s morass of energy subsidies” – yes, but exactly which subsidies (all of which have important political constituencies behind them) will be eliminated? “Recognize the potential for nuclear power” – yes, and both the House and Senate carbon-pricing schemes would have provided tremendous incentives for nuclear power investment.

Overall, there should be concern about how all of this will be funded. Where will the $25 billion per year come from? The report appropriately states that this should not come from general revenues, and thus add to the Federal debt. “Phasing out current subsidies for wind, solar, ethanol, and fossil fuels” could be meritorious on its own, but how much does this generate, and does it even pass a political laugh-test? Interestingly, beyond this, despite considerable rhetoric about moving beyond debates about carbon-pricing, the report recommends that in order to avoid adding to the Federal debt, it would be necessary to impose new taxes, including increased royalties for oil and gas extraction, a tax on imported oil, a tax on electricity sales, and a “very small carbon price” (presumably from a modest carbon tax or unambitious cap-and-trade system).

The actual numbers would be helpful, and the political feasibility remains a serious question. The political challenges that emerged in the effort to pass cap-and-trade climate legislation will not magically disappear if there’s an attempt to induce Congress to approve $25 billion in funding. As Tom Friedman noted on October 12^th in the New York Times, Congress has not come close to fully funding the outstanding requests for about $4 billion for ARPA-E (energy) research.

More broadly, despite the attraction of the AEI-Brookings-BI proposal as a potential complement to carbon-pricing (and I am serious that the proposal is of value in that context), one has to be very careful about comparing proposed new policies in idealized form (for example, precisely the right subsidies eliminated and precisely the right new subsidies introduced) with real policies with all their warts (for example, the cap-and-trade bill that was passed by the House last year). Making such comparisons can lead to flawed analysis and misleading results.

This is not a new issue. Robert Hahn and I wrote about this generic problem nearly 20 years ago in an article (“Economic Incentives for Environmental Protection: Integrating Theory and Practice”) which appeared the American Economic Review Papers and Proceedings (May 1992). At the time, our concern was that this mistake was being made not by the opponents but by the supporters of cap-and-trade and other (then essentially untested) market-based instruments. We worried that “many analysts use highly stylized benchmarks for comparison that ignore likely political realities,” and suggested that an appropriate “comparison would be between actual command-and-control policies and either actual trading [cap-and-trade] programs … or a reasonably constrained theoretical … program.”

Likewise today, when carrying out comparisons of policy alternatives, it is fine to compare two theoretical, idealized alternatives, or to compare two real-world policies, but it is problematic and usually misleading to compare a theoretical, idealized policy of one type with a real-world example of another type of policy.

The Bottom Line

Carbon-pricing – whether carbon taxes or cap-and-trade – will be an essential part of any truly meaningful national climate policy. Likewise, to address the “R&D market failure,” direct technology innovation policies will also be required. Both are necessary. Neither is sufficient. These are complements, not substitutes.

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Postscript: Four years ago, the U.S. Congressional Budget Office (CBO) — widely recognized for its non-partisan, first-rate research — produced a study on the same topic as the AEI-Brookings-BI report, but did so with rigor and without ideology. The CBO report — Evaluating the Role of Prices and R&D in Reducing Carbon Dioxide Emissions (September 2006) — was prepared by Dr. Terry Dinan, a long-time, respected CBO economist, and was peer reviewed by an impressive set of academic and other experts. Sadly, the CBO paper received little press coverage, despite its high quality and its relevance. For anyone interested in the topic of this post, particularly those who disagree with my theme, I hope you will read the CBO report.

Also, a reader of this blog post sent me a paper by David Hart and Kadri Kallas (from MIT’s Energy Innovation working paper series) that examines “Alignment and Misalignment of Technology Push and Regulatory Pull.” It’s worth reading in the context of combining carbon pricing and technology R&D policies.

Who Killed Cap-and-Trade?

In a recent article in the New York Times, John Broder asks “Why did cap-and-trade die?” and responds that “it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.” Mr. Broder’s analysis is concise and insightful, and I recommend it to readers. But I think there’s one factor that is more important than all those mentioned above in causing cap-and-trade to have changed from politically correct to politically anathema in just nine months. Before turning to that, however, I would like to question the premise of my own essay.

Is Cap-and-Trade Really Dead?

Although cap-and-trade has fallen dramatically in political favor in Washington as the U.S. answer to climate change, this approach to reducing carbon dioxide (CO₂) emissions is by no means “dead.”

The evolving Kerry-Graham-Lieberman legislation has a cap-and-trade system at its heart for the electricity-generation sector, with other sectors to be phased in later (and it employs another market-based approach, a series of fuel taxes for the transportation sector linked to the market price for allowances). Of course, due to the evolving political climate, the three Senators will probably not call their system “cap-and-trade,” but will give it some other creative label.

The competitor proposal from Senators Cantwell and Collins — the CLEAR Act — has been labeled by those Senators as a “cap-and-dividend” approach, but it is nothing more nor less than a cap-and-trade system with a particular allocation mechanism (100% auction) and a particular use of revenues (75% directly rebated to households) — and, it should be mentioned, some unfortunate and unnecessary restrictions on allowance trading.

And we should not forget that cap-and-trade continues to emerge as the preferred policy instrument to address climate change emissions throughout the industrialized world — in Europe, Australia, New Zealand, and Japan (as I wrote about in a recent post).

But back to the main story — the dramatic change in the political reception given in Washington to this cost-effective approach to environmental protection.

A Rapid Descent From Politically Correct to Politically Anathema

Among factors causing this change were: the economic recession; the financial crisis (linked, in part, with real and perceived abuses in financial markets) which thereby caused great suspicion about markets in general and in particular about trading in intangible assets such as emission allowances; and the complex nature of the Waxman-Markey legislation (which is mainly not about cap-and-trade, but various regulatory approaches).

But the most important factor — by far — which led to the change from politically correct to politically anathema was the simple fact that cap-and-trade was the approach that was receiving the most serious consideration, indeed the approach that had been passed by one of the houses of Congress. This brought not only great scrutiny of the approach, but — more important — it meant that all of the hostility to action on climate change, mainly but not exclusively from Republicans and coal-state Democrats, was targeted at the policy du jour — cap-and-trade.

The same fate would have befallen any front-running climate policy.

Does anyone really believe that if a carbon tax had been the major policy being considered in the House and Senate that it would have received a more favorable rating from climate-action skeptics on the right? If there’s any doubt about that, take note that Republicans in the Congress were unified and successful in demonizing cap-and-trade as “cap-and-tax.”

Likewise, if a multi-faceted regulatory approach (that would have been vastly more costly for what would be achieved) had been the policy under consideration, would it have garnered greater political support? Of course not. If there is doubt about that, just observe the solid Republican Congressional hostility (and some announced Democratic opposition) to the CO₂ regulatory pathway that EPA has announced under its endangerment finding in response to the U.S. Supreme Court decision in Massachusetts vs. EPA.

(There’s a minor caveat, namely, that environmental policy approaches that hide their costs frequently are politically favored over policies that make their costs visible, even if the former policy is actually more costly. A prime example is the broad political support for Corporate Average Fuel Economy (CAFE) standards, relative to the more effective and less costly option of gasoline taxes. Of course, cap-and-trade can be said to obscure its costs relative to a carbon tax, but that hardly made much difference once opponents succeeded in labeling it “cap-and-tax.”)

In general, any climate policy approach — if it was meaningful in its objectives and had any chance of being enacted — would have become the prime target of political skepticism and scorn. This has been the fate of cap-and-trade over the past nine months.

Why is Political Support for Climate Policy Action So Low in the United States?

If much of the political hostility directed at cap-and-trade proposals in Washington has largely been due to hostility towards climate policy in general, this raises a further question, namely, why has there been so little political support in Washington for climate policy in general. Several reasons can be identified.

For one thing, U.S. public support on this issue has decreased significantly, as has been validated by a number of reliable polls, including from the Gallup Organization. Indeed, in January of this year, a Pew Research Center poll found that “dealing with global warming” was ranked 21^st among 21 possible priorities for the President and Congress. (It should be noted some polls are not consistent with these.) This drop in public support is itself at least partly due to the state of the national economy, as public enthusiasm about environmental action has — for many decades — been found to be inversely correlated with various measures of national economic well-being.

Although the lagging economy (and consequent unemployment) is likely the major factor explaining the fall in public support for climate policy action, other contributing factors have been the so-called Climategate episode of leaked e-mails from the University of East Anglia and the damaged credibility of the Intergovernmental Panel on Climate Change (IPCC) due to several errors in recent reports.

Furthermore, the nature of the climate change problem itself helps to explain the relative apathy among the U.S. public. Nearly all of our major environmental laws have been passed in the wake of highly-publicized environmental events or “disasters,” ranging from Love Canal to the Cuyahoga River.

But the day after Cleveland’s Cuyahoga River caught on fire in 1969, no article in The Cleveland Plain Dealer commented that “the cause was uncertain, because rivers periodically catch on fire from natural causes.” On the contrary, it was immediately apparent that the cause was waste dumped into the river by adjacent industries. A direct consequence of the “disaster” was, of course, the Clean Water Act of 1972.

But climate change is distinctly different. Unlike the environmental threats addressed successfully in past legislation, climate change is essentially unobservable. You and I observe the weather, not the climate (note the dramatic difference of opinion about the reality of climate change between climatologists and television weathercasters). Until there is an obvious and sudden event — such as a loss of part of the Antarctic ice sheet leading to a disastrous sea-level rise — it’s unlikely that public opinion in the United States will provide the bottom-up demand for action that has inspired previous Congressional action on the environment over the past forty years.

Finally, it should be acknowledged that the fiercely partisan political climate in Washington has completed the gradual erosion of the bi-partisan coalitions that had enacted key environmental laws over four decades. Add to this the commitment by the opposition party to deny the President any (more) political victories in this year of mid-term Congressional elections, and the possibility of progressive climate policy action appears unlikely in the short term.

An Open-Ended Question

There are probably other factors that help explain the fall in public and political support for climate policy action, as well as the changed politics of cap-and-trade. I suspect that readers will tell me about these.