Emissions Reductions Under Various Scenarios

Source: Author’s calculations

From the U.S. Energy & Climate Roadmap, Energy Policy Institute at the University of Chicago

When only a subset of countries restrict emissions, energy-intensive industries—and their emissions—may move offshore to countries with few or no restrictions, a phenomenon known as “leakage.” Border tax adjustments force other countries to pay a tax on goods imported in and a rebate for exported goods. In this way, consumers often don’t care where the goods are made as long as the price is competitive, and producers can sell goods to other countries and still be on a level playing field.

Border adjustments (red line) don’t just keep producers from leaving—leaving jobs behind—they also reduce emissions more than a straight carbon price (blue line) because they force reductions across borders. The European Union, having started its emissions trading scheme more than a decade ago, is now considering border tax adjustments for these reasons. However, border adjustments are difficult to impose and enforce and may be considered an illegal trade barrier.

The key to confronting this challenge is understanding the root cause of leakage. If there is a tax on domestic production (a typical carbon tax) industry sees a lower price of energy abroad.  This lower price of energy is what drives them to move. So, when improving the policy, one must pay close attention to the price of energy that industry sees. If a tax is imposed on domestic extraction of fossil fuels, it will cause foreign producers to see a higher price of energy because domestic firms produce less, decreasing the global supply, and raising the cost of energy globally.

With this in mind, UChicago Law School’s David Weisbach, along with Yale University’s Samuel Kortum, propose a more effective alternative for policymakers interested in implementing a carbon price. Policymakers could combine an extraction tax with a partial border adjustment (e.g., at a lower rate than the extraction tax) on energy products (yellow line)—effectively combining an extraction tax and a production tax (a tax on supply and a tax on demand). Doing so pushes the price of energy in opposite directions, moderating the effects on the price of energy and minimizing leakage.

Policymakers could also combine an extraction tax with a partial border tax on both energy and goods, effectively creating a combination of an extraction tax and a consumption tax and similarly moderating the effects on energy prices (grey line). This approach, however, would be more difficult to impost than a tax on energy alone.

The effect of these hybrid taxes on emissions is dramatic. A combination of extraction and production taxes reduces emissions by 6.2 gigatons of CO2; a combination of extraction and consumption taxes reduces emissions by 7.3 gigatons of CO2. This approach easily outperforms conventional carbon taxes.

To go one step further, Weisbach and Kortum say countries using this approach should seek to expand, rather than just maintain, its exports so as to expand the carbon price to other countries and allow for greater emissions reductions. It should do so through a policy of tax rebates and if necessary, subsidies, for exports (green line).

Current U.S. Policy is Piecemeal and Often Expensive

From the U.S. Energy & Climate Roadmap, Energy Policy Institute at the University of Chicago

The Biden administration is rightly making climate change a priority. But will its approach achieve the largest carbon emissions reductions per dollar spent? How can the United States get inexpensive carbon reductions?

The United States’ current approach to reducing carbon relies on a range of piecemeal sector- and technology-specific policies that chip away at emissions, but often in a way that makes them unnecessarily expensive. The chart shows estimates of the cost per ton abated for a range of proposed or implemented carbon reduction policies. While some policies, such as the Obama administration’s Clean Power Plan, show a high level of emissions reductions per dollar spent, others, such as the Weatherization Assistance Program, cost several hundred dollars per ton reduced. The price society pays for a given unit of climate mitigation varies widely across programs, and frequently far exceeds conventional estimates of the climate change damage caused by each ton of emissions (the social cost of carbon is currently set at $51 per ton).

Regulations that prescribe a specific mechanism for reducing emissions have been an unreliable path to cutting emissions. The Biden administration could instead put a price on carbon. This approach, widely held by economists as the most cost-effective method to combat climate change, will ensure that firms and consumers choose the lowest cost actions that reduce emissions, thereby maximizing the emissions reductions that can be achieved for a given cost to the economy.

To design an optional carbon price policy, Michael Greenstone and Ishan Nath propose a few ingredients. First, carbon pricing minimizes costs by maximizing flexibility, and therefore should not include mandates on specific technologies and methods for reducing emissions that could make it more expensive to achieve the emissions reductions. Second, policymakers can choose between using a tax or a cap-and-trade system depending on their goals—both are efficient ways to reduce emissions. Third, because of market failures that hold back some private sector investment into clean energy, some of the revenue from a carbon price could be used to supplement government clean energy R&D, while some could be refunded to low-income households to ensure that the policy is equitable. Finally, it is vital that a carbon pricing policy encourage climate action in other countries. U.S. policymakers should align goals and harmonize policy mechanisms across countries.

Enacting a national, market-based framework to put a price on carbon can achieve ambitious climate change goals while minimizing the cost to the American economy. The most effective climate policy will be one that establishes a national carbon price and that incentivizes other countries to reduce their emissions as well.

Where does climate and energy policy go from here? In the new podcast miniseries The Roadmap, The Atlantic‘s Rob Meyer joins EPIC scholars to take a deep dive into timely climate and energy issues and the evidence behind needed policy changes, as described in the U.S. Energy & Climate Roadmap.

For the first episode, Rob talks with EPIC Director Michael Greenstone and UChicago Law’s David Weisbach about one of the most important and political issues in climate policy: carbon prices. They also discuss one of the biggest questions surrounding carbon pricing, which is how to impose a carbon price without driving industry overseas and without exporting carbon emissions—a phenomenon called carbon leakage.

Energy Efficiency Delivers Lower than Expected Savings

From the U.S. Energy & Climate Roadmap, Energy Policy Institute at the University of Chicago
Sources: Boomhower & Davis, “Do Energy Efficiency Investments Deliver;” Burlig, Knittel, Rapson, Reguant, and Wolfram, “Machine Learning from Schools;” Allcott and Greenstone, “Measuring the Welfare Effects;” Christensen, Francisco, Myers, and Souza, “Decomposing the Wedge;” Graff-Zivin and Novan, “Upgrading Efficiency and Behavior;” Fowlie, Greenstone, and Wolfram, “Do Energy Efficiency Investments Deliver;” Davis, Fuchs, and Gertler, “Cash for Coolers;” Davis, Martinez, and Taboada, “How Effective is Energy-Efficient Housing;” Davis, Fuchs, and Gertler, “Cash for Coolers.”

Energy efficiency measures are often an attractive climate policy because using less energy offers a win for consumers in the form of lower energy bills and a win for the climate through lower greenhouse gas emissions. However, mounting research suggests that energy efficiency programs substantially underdeliver on their promises to reduce consumption. Across a sample of nine empirical evaluations of energy efficiency programs in the United States and Mexico, which spanned a range of programs and contexts, the most optimistic found energy efficiency upgrades delivered only 63 percent of expected savings. Further, several studies of the flagship U.S. residential energy efficiency program, the Weatherization Assistance Program, have found it to be less effective than expected—delivering 58 percent of expected savings in Wisconsin, 51 percent in Illinois, 50 percent in California and 38 percent in Michigan.

These programs’ failure to deliver is due in large part to overly optimistic energy savings predictions from engineering models. This has real consequences: because they generate far lower energy savings than expected, the costs of the programs often end up being substantially higher than their societal benefits. The Weatherization Assistance Program, for example, has an annual rate of return of -7.8 percent. As policymakers look to further invest in energy efficiency programs, they should build in ongoing evaluations of the programs, in order to identify which upgrades are and aren’t working. This would enable them to invest only in the energy efficiency upgrades that are cost-effective moving forward.

Where does climate and energy policy go from here? In the new podcast miniseries The Roadmap, The Atlantic‘s Rob Meyer joins EPIC scholars to take a deep dive into timely climate and energy issues and the evidence behind needed policy changes, as described in the U.S. Energy & Climate Roadmap.

This piece was co-authored by Erica Myers is an assistant professor at the University of Illinois.

Energy efficiency programs promise to be a “win-win”: by reducing energy consumption, they lower households’ electricity bills and greenhouse gas emissions at the same time. That’s why when lawmakers are allocating spending with an eye to both the pocketbook and the climate, energy efficiency is always a go-to—filled with what appears to be low-hanging fruit. It’s therefore no surprise that energy efficiency is an important part of the Biden administration’s efforts to boost affordable and sustainable housing through the infrastructure plan.

During the last economic downturn, then-Vice President Biden helped to inject millions into energy efficiency. Funding for the nation’s flagship energy efficiency policy—the Weatherization Assistance Program, which provides funding for changes like furnace replacements, attic and wall insulation, weather stripping, and more—shot up from $450 million in 2009 to nearly $5 billion in the 2011-2012 program year. Yet, studies by both economists and engineers have found that energy savings from the program consistently fall short of expectations.  And, this weatherization program is not an outlier.  Studies of various U.S. efficiency programs, ranging from K-12 schools in California (a study by one of us) to households in Illinois, Michigan, and Wisconsin, found actual savings were between 38 and 63 percent of expected savings.

But we shouldn’t abandon energy efficiency. Instead, we need to improve these programs. This means figuring out what works and what doesn’t, and targeting funding accordingly. The first step is understanding the challenge. Why do energy efficiency programs underdeliver? One of us dug into the details of the Illinois Weatherization Assistance Program and found that 41 percent of the performance gap comes from optimistic projections of the savings.  These projections are based purely on engineering equations, and don’t do enough to take differences between homes and inhabitant behavior into account.  For example, they do not incorporate information on a home’s historical energy use.  This is problematic because these projections are used to decide which energy efficiency upgrades to install.

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There’s no denying the world is already paying for climate change. The price is stronger hurricanes, bigger wildfires, and unpredictable heat waves. So, how can people living on a changing globe literally pay to mitigate the effects of climate change? One solution is to utilize the social cost of carbon, says economist Michael Greenstone. He co-led the development of the US government’s social cost of carbon as chief economist for President Obama’s Council of Economic Advisers. President Biden has raised carbon’s value back to Obama-era levels after the Trump Administration lowered it. Greenstone, who leads the Energy Policy Institute at Chicago, speaks with Pulitzer Prize-winning Washington Post journalist Juliet Eilperin about how we’re just beginning to experience what the climate has in store.

Via Aspen Ideas

Thank you Chair Castor, Ranking Member Graves, and members of the Committee for inviting me to speak today.

My name is Michael Greenstone, and I am the Milton Friedman Distinguished Service Professor in Economics and Director of the Becker Friedman Institute and Energy Policy Institute at the University of Chicago. I also serve as co-director of the Climate Impact Lab, a multi-disciplinary collaboration of researchers working to quantify the long-term impacts of climate change. My own research focuses on estimating the costs and benefits of environmental quality, with a particular emphasis on the impacts of government regulations.

I appreciate the opportunity to speak with you today about the growing risk of climate change and the costs of inaction.

The best way to summarize the economic impacts of climate change and the benefits of regulations to slow it is with a number known as the social cost of carbon (SCC). The SCC is the monetary cost of the damages caused by the release of an additional ton of carbon dioxide into the atmosphere. Simply put, it reflects the monetary cost of inaction—measured in the destruction of property from storms and floods, declining agricultural and labor productivity, elevated mortality rates, and so forth.

The SCC is arguably the most important component of regulatory policy in this area because, by calculating the costs of climate change, the social cost of carbon allows for the calculation of the monetary benefits of regulations that reduce greenhouse gases. So, for example, a regulation that reduces carbon dioxide emissions by 10 tons would have societal benefits of $510 if the value of the social cost of carbon was $51, which is the value currently being used by the Biden administration. These benefits can then be compared to the costs that the regulation imposes to determine whether the regulation is beneficial on net. Since the establishment of the United States Government’s SCC in 2010, it had been used to guide the design of more than 80 regulations as of 2017. These regulations have resulted in more than $1 trillion of gross benefits.

Critically, the SCC can also be used to determine an efficient price for market-based policies for combatting climate change, such as a carbon tax or cap-and-trade system. If set at the value of the SCC, these pricing approaches will ensure that we are pursuing policies where the benefits exceed their costs. A great appeal of these approaches is that they unleash market forces to uncover the least expensive ways to reduce emissions, thereby minimizing the costs to the economy, and do not require the ex-ante knowledge of which sector they will emerge from.

Regardless of the policy approach used, a social cost of carbon based on the best available peer reviewed research is a key ingredient in beneficial policy to confront climate change. To detail how we get there, it’s important to first understand where the SCC came from, what it tells us about the costs of inaction, and how it can be improved to better guide policy action. In the remainder of my statement, I will make the following points:

1. The original SCC was created in 2010 after a year-long process that included intense assessment of the best available peer-reviewed research and careful consideration of public comments. Updated to reflect scientific advances, it was set at $51 per ton in 2016. The Trump administration then lowered the SCC to roughly $4 based on decisions that were not scientifically justified and ran counter to recommendations from the National Academy of Sciences issued in 2017. Following an executive order on the first day of the Biden administration, the SCC was returned to $51 in February on an interim basis while they evaluate the advances in economics and science.
2. An interdisciplinary team I co-direct, the Climate Impact Lab (CIL), is calculating an updated, data-driven social cost of carbon. Its broad aim is to capture the rapid advances in the economics and science of climate change that have taken place over the last decade and use them to update the SCC.
3. Our approach seeks to project changes in mortality, energy use, agricultural yields, labor productivity, and coastal vulnerability due to an additional ton of CO2; and then monetize those costs to society. The first sector-specific projections relate to climate change’s impact on mortality, finding that continuing a high emissions trajectory raises global mortality risk by 85 deaths per 100,000 people by 2100. To put this in context, it is roughly between the annual mortality risk of cancer and infectious diseases.
4. The mortality consequences will be largest in places that today are hot and/or poor. In the United States, the mortality risk will be 10 deaths per 100,000, about on par with the current fatality rate from auto accidents in the United States. Many areas will experience mortality risks that are significantly higher. That includes areas represented by members of this committee, which I will detail.
5. Policy has the potential to deliver some of the most significant public health gains in human history. Bringing global emissions down to moderate levels—not even as low as the Paris Agreement’s long-term targets—would reduce the mortality risk by 84% compared to the high emissions pathway. Under this moderate emissions scenario, climate-induced temperature changes are projected to be responsible for 14 additional deaths per 100,000 globally at the end of the century. In the United States, that risk would be 1.3 deaths per 100,000, eliminating almost all of the mortality risk.
6. We estimate that the release of an additional metric ton of CO2 will cause about $37 worth of mortality damages—about three-quarters of the overall or total SCC used by the Obama administration and by the Biden administration on an interim basis. The fact that this is almost twenty times larger than the mortality costs underlying the current SCC underscores the need to update the SCC.
7. As the Biden administration comprehensively updates the SCC, I recommend several changes to the way the SCC is calculated. These include using the latest climate modeling, applying a new valuation of climate damages, employing lower discount rates, accounting for uncertainty and equity, and better incorporating socioeconomic projections.
8. While my work suggests that the social costs from climate change are projected to be large—both in dollars and in terms of human lives— robust climate policies guided by an updated SCC based on the latest knowledge would lay the foundation for some of the greatest public policy benefits in history.

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The U.S. federal government owns vast acreage of resource-rich public lands; $25 billion of oil and gas was produced from federal lands in 2019 alone. But thanks to decades of stagnant policies, these resources are being all but given away to oil and gas companies, to the detriment of taxpayers and the environment. The current pause on new oil and gas leasing offers the opportunity to turn these resources into a larger source of federal funds, while better protecting the local environment and helping to confront climate change.

Improving federal leasing policies doesn’t require novel policy ideas. The government can generate benefits for taxpayers and the environment simply by following practices that private landowners and major oil and gas producing states have pursued for years: high royalty rates, short lease lengths, high minimum bids, and strong bonding requirements.

Private landowners capture a high share of production revenue by demanding royalty rates that are often as high as 25%. These robust royalties help landowners earn fair value for their oil and gas, even when they are dealing with a sophisticated firm that knows more about the resource size than they do. Private landowners also demand that the work gets done quickly, giving firms 3 to 5 years to either start producing or surrender their drilling rights.

Individual states closely follow the private market. Texas sets royalties of 20 to 25% and lease lengths of 3 to 5 years on Texas state land. The lowest royalties used in Louisiana, New Mexico, and North Dakota are 20%, 18.75%, and 16.67%, respectively. None of these states awards leases with terms longer than 5 years.

Being the largest landowner in the United States, one would think the federal government would follow similar successful practices. It doesn’t. The royalty rate on federal leases is only 12.5%, and firms that sign federal leases get 10 years to develop them.

These shortcomings are compounded by the fact that firms don’t need to pay much up-front to get this sweetheart deal. The minimum up-front purchase “bonus” to get a federal oil and gas lease via auction is just $2 per acre. In Texas lease auctions, minimum bids are often as much as $5,000 per acre.

To make matters worse, firms can avoid even the $2 per acre payment by not bidding at all and then paying a small fee to obtain a lease through a “non-competitive” award process. As a result, firms with little interest in drilling can easily speculate on federal leases with no up-front expenditure. No wonder that 53% of all federal onshore leased acreage is not producing.

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Renewable Resources and Load Centers

Achieving a carbon-free power sector by 2035 will require enormous growth in U.S. renewable power generation. But equally important is ensuring that clean power can move from renewable-rich areas to where people live. That is not currently the case in the United States, as the chart shows large swaths of the country with no local access to abundant renewable resources. This means wind and solar energy are generally used around the areas where it is plentiful. Areas where it is not plentiful often rely on tools like renewable portfolio standards to encourage renewable generation in that area. But it is inefficient to encourage the use of these resources in areas not abundant with them.

The United States needs a high voltage grid to move renewable power the way its train and pipeline network currently makes fossil fuels widely available around the country. But “not in my backyard” arguments and jurisdictional fights are time and again becoming obstacles to prevent the expansion of high-voltage transmission line projects. The federal government can step in using two complementary approaches. First (the hammer), make the Federal Energy Regulatory Commission the primary venue for electricity transmission permitting (a role it already has for interstate oil and gas pipelines). This can be done either through legislation or more aggressive use of the Department of Energy’s power to designate National Interest Electric Transmission Corridors between wind and solar resources and population centers. Second (the feather), the government can provide conditional or supplementary funding to encourage the building of transmission lines along existing rights-of-way such as waterways, railroads and highways. This is the approach the Biden administration is taking in its American Jobs Plan. However, with the threat of the former, which would impose eminent domain on unwilling property owners, states may be more amenable to the latter.