Allison Nathan: How should we think about the tradeoff between promoting economic growth and mitigating the costs of climate change? Isn’t there an unsolvable dilemma in that the developing countries that need to reduce future emissions the most also have the greatest need for cheap energy?

Michael Greenstone: That dilemma is what I call the Global Energy Challenge-how societies around the world, but especially developing countries, balance the need for cheap and reliable energy that is so critical for economic growth with the need to manage pollutants that result from that energy consumption and increase the odds of disruptive climate change. Societies are going to reach different conclusions about that delicate balance based on a range of factors, including economics, values, and preferences for redistribution today and across generations. But figuring out the right balance on a global basis is one of the most pressing challenges of our time and one where I think facts and evidence can make a contribution.

Allison Nathan: Is it realistic to think that the lion’s share of energy developing economies need to propel growth is going to come from anything but fossil fuels?

Michael Greenstone: Not given the way that energy markets are constructed currently where pollution, be it local air pollution or greenhouse gases, is not priced. The result is an uneven playing field that favors fossil fuels, and this is especially so in today’s developing countries. In the absence of fundamental changes in the construction of these markets or the private costs of fossil fuels versus low-carbon energy sources, we should expect developing countries to continue to prioritize the use of fossil fuels. We don’t have many instances of economies achieving high living standards without high energy consumption, and by 2040 energy demand in OECD countries should remain fairly stable while roughly doubling in developing countries. So any solution to the global climate problem will require changes in developing economies’ energy markets or technological breakthroughs to address their energy needs.

Allison Nathan: Is it possible to shift the economics of energy in a way that favors cleaner energy sources?

Michael Greenstone: Yes. Climate change is the result of two market failures. The first is that there is no cost to generating pollution and the damage it inflicts on people and the planet. The simple solution to that failure is to put a price on carbon so that people have to pay to pollute. That would effectively raise the cost of carbon-intensive energy sources. The complication to that solution is that it reduces the purchasing power of consumers. But that could be mitigated, for example, by governments refunding the revenues from a carbon tax to the public, and in a progressive way that would ensure that the costs of the tax would be borne by higher income households.

The second market failure is that there is too little incentive to invest in R&D for low-carbon technologies because investors are unlikely to reap all of the benefit of this R&D; even if the R&D produces commercial ideas-which is not a given-basic advances will inevitably spillover to others who didn’t incur the investment costs. Again, there is a simple solution to this failure, which is government funding/subsidization of basic R&D for low­carbon energy sources or other technological solutions that will make cleaner energy sources cheaper-and competitive with fossil fuels-or carbon-intensive energy sources less polluting. Another possibility is that rich countries could directly subsidize the use of low-carbon energy sources in developing countries. However, I would not want to run for Senator in Massachusetts, Alabama, or really any state on a platform of “let’s pay for India and China to have cheaper energy.”

Allison Nathan: What’s the right price for carbon?

Michael Greenstone: Ideally, the price of carbon should reflect the value of the damages associated with the pollution it creates. During my time in the Obama administration, I co-led, with Cass Sunstein, an effort to develop such a “social cost of carbon” for the US government that added up the costs associated with the release of a ton of carbon dioxide into the atmosphere in terms of changes in mortality rates, crop yields, labor supply, flooding, and so forth. The value that we came up with was $51/ton. So we found that every ton of CO2 released into the atmosphere caused $51 worth of damages in present value terms.

This estimate can be used for thinking about the “right” price of carbon, and several proposals for carbon taxes in the US and elsewhere have loosely pegged the tax to it. The estimate also provides a bright line to assess which policies are worth pursuing, and which ones cost more than they’re worth. For example, research I conducted on home energy efficiency programs, such as attic insulation, found that the cost per ton of CO2 abated was several hundred dollars versus only $51/ton of benefit. Given these practical uses of the social cost of carbon, I think it’s the most important number you’ve never heard of.

Allison Nathan: How much confidence do you have that this $51/ton estimate is still accurate today?

Michael Greenstone: At the time that we developed the initial estimate, it was clear that the understanding of the science and economics of climate change was advancing rapidly, and a framework for how to ensure that the estimate remained current was required. The Obama administration tasked the National Academy of Sciences with developing recommendations on such a framework-which they’ve done-but those have been totally ignored by the current administration. Under President Trump, a series of changes have been made that have reduced the original $51/ton number to somewhere between $1 and $7, but none of the changes are justified by frontier science or economics research-they were political decisions.

Seeing a clear need for robust research that could keep the social cost of carbon current with the latest developments in the field, myself and a few of my colleagues have established something called the Climate Impact Lab, which aims to produce an updated social cost of carbon that reflects the National Academy of Science’s recommendations. This is a work in progress, but I think the $51/ton estimate will likely change once we follow the recommendations and incorporate the latest evidence. At least in the area of mortality, the most updated evidence suggests that the costs of the release of a ton of CO2 for mortality alone appear to be 10 or 15 times larger than what was embedded in the Obama-era social cost of carbon.

Allison Nathan: Are cap-and-trade schemes or carbon taxes more effective in achieving a price for carbon?

Michael Greenstone: Relative to where policy is today, I think the debate about whether a cap-and-trade scheme or a carbon tax is preferable is just a parlor game. The real issue is that the effective price on carbon in most parts of the United States and certainly around the world today is basically zero. So the first and most important step is to raise the price of carbon towards the social cost of carbon; whether we get there through a trading scheme or a carbon tax is less important.

Allison Nathan: That said, policymakers will ultimately have to decide which approach to take if we’re serious about putting a price on carbon. So how would you advise them?

Michael Greenstone: The primary advantage of a cap-and-trade scheme is you have certainty on emissions, and the primary advantage of a carbon tax is that you have certainty on price. The dilemma is you can’t guarantee both the price and the quantity. So choosing the best approach depends on political and societal judgments about the greater risk. If you think the greater risk lies with the politics-and that big energy price spikes would undermine the entire system-a carbon tax is more appropriate. But if you think the greater risk lies with larger climate damages in the event we end up getting more emissions than expected at a particular carbon price, a cap-and-trade scheme is preferable.

Allison Nathan: If countries take different approaches to establishing a price for carbon-and we end up with many prices of carbon-what implications would that have?

Michael Greenstone: We already see an exceptionally wide range of prices for carbon around the world; Sweden’s price is about $125/ton and the EU and California’s prices are in the high­teens or low- 20s/ton. But these differences are a second order problem. Right now, the average price for a ton of carbon across the world is roughly $2.50 because most of the world has a price of zero. So what strikes me as the most urgent problem are all of those zeros. Once all countries are above zero and committed to carbon pricing, I think the issue of different countries having different prices that you’re raising becomes a more important one. Of course, the ultimate solution is a global price for carbon, but I don’t see that happening in the foreseeable future, given very different fundamentals in India, China, and the US.

Allison Nathan: Should other policies beyond carbon pricing -like efficiency standards, conservation policies or sector-specific regulations-be part of the policy mix?

Michael Greenstone: The problem is that the primary policy/regulatory alternatives to carbon pricing tend to be more expensive on a per ton basis. This is especially the case for policies that are more opaque in how they would operate and less directly targeted at emissions reductions, such as energy efficiency policies that generally have a diffuse set of goals. My view is that if we end up choosing policies that are expensive, we’re going to run out of enthusiasm before we’ve made substantial progress against climate change. That’s why it’s so critical to ruthlessly search for the cheapest reductions in CO2. And, honestly, carbon pricing is our best bet to achieve carbon reductions on the cheap. That said, we should absolutely pursue non-pricing policies where the current or future benefits in terms of carbon reductions are projected to be larger than the costs. The climate problem has arrived and we need to get on with it.

Allison Nathan: There’s a lot of activity and innovation in low-carbon technologies. Which look the most promising?

Michael Greenstone: I think it’s hard to see a path to a green future that doesn’t run through more efficient batteries. In the power sector, renewables run into the well-known problem that the sun doesn’t shine all the time and the wind doesn’t blow all the time. Right now, we’re largely filling in those gaps with fossil fuels by using natural gas plants. A greener alternative would be to improve batteries so that they can provide the storage to smooth out the production of energy from renewables. And if the power sector becomes low carbon through the use of batteries, they can also be the key to reducing petroleum consumption in the transport sector. This would solve the problem that in some states currently the CO2 emissions from an electric vehicle exceed the CO2 emissions from an internal combustion engine car-this is because in these states the EVs are basically plugged into a coal plant. So I see batteries as potentially pivotal.

I also think that making serious progress on carbon capture and sequestration has got to be an important piece of the puzzle. The world is awash in inexpensive fossil fuels, and the idea that we’re just going to leave them in the ground strikes me as very unlikely. So I think it is incumbent on the world to find a way to use them that is consistent with climate goals, and the path to that is through capture and sequestration. I consider it a tragedy of policy that the world is not operating several demonstration coal and natural gas carbon capture and sequestration plants at scale.

All that said, my views that these technologies will be at the center of solving climate change are just guesses. The core problem today is that we have not yet unleashed the power of markets and innovators to come up with the right solutions. The contrast with fossil fuel recovery where there is a clear price incentive and the kind of miraculous technical achievement that hydraulic fracturing for gas and oil requires is striking. Until there’s a price incentive, and markets are allowed to do what they’re so good at-ruthlessly seek out the most economical way to do something-we’ll all be left just guessing as to what the most promising low-carbon technology really is.

Continue Reading at Goldman Sachs…

Areas of Focus: Climate Change
Climate Change
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
Climate Economics
Climate Economics
Climate change will affect every sector of the economy, both locally and globally. EPIC research is quantifying these effects to help guide policymakers, businesses, and individuals working to mitigate and...
Climate Law & Policy
Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.