Hunt Allcott, Allan Collard-Wexler, and Stephen D. O’Connell published a paper on the impact of electricity shortages in India. It's one of those how-did-this-get-into-the-AER type of papers.* Perfectly competent, but not particularly novel or exciting. They find that power rationing is bad for industry.
*well, we know, don't we
-
Holland, Mansur, Muller and Yates have a paper on the environmental benefits of electric vehicles. Carbon dioxide emissions and climate change play a role, of course, but the authors adopt the Obama social cost of carbon without further ado. The emphasis is on spatial differences in air quality and spillovers from one state to the next.0
Add a comment
-
Daniel, Litterman and Wagner have a paper in PNAS, arguing that optimal climate policy starts with a high carbon tax that falls over time. This conclusion runs counter most of the literature. The argument for rising carbon taxes are sixfold. As shown by Wigley, Richels and Edmonds in 1996, cost-effective carbon taxes rise because (a) capital turns over slowly, (b) technological change makes future emission reduction cheaper, (c) carbon dioxide degrades from the atmosphere, and (d) future costs are discounted. These arguments carry over to efficient carbon taxes. There two reasons why the social cost of carbon rises over time: (e) it is warmer in the future and (f) the economy is bigger.
Daniel et al. omit (a) and, as far as I can see, (c).
Daniel et al. suggest that Epstein-Zin preferences are the main reason that they find something different than most everyone. However, other papers have used Epstein-Zin to find rising carbon taxes. Epstein-Zin allows for higher risk aversion without lowering the discount rate.
Their result is probably due to their calibration. They do not say much about their regular impact function, except that it follows a log-displaced-gamma distribution. They give the parameters but not the moments. (There is no closed-form relationship between parameters and moments.) However, on top of regular impacts, there are tipping points that, if crossed, lead to catastrophic damages. Figure S4 shows that already at 450 ppm, there is a 3% chance of losing 50% of economic output.
With high risk aversion and high impacts of climate change, the initial carbon tax would be large.
Table S1 reveals that, in 2030, a carbon tax of $100/tCO2 would reduce emissions by two-thirds.
A higher carbon tax plus cheap emission reduction implies rapid emission cuts. (Gernot Wagner has confirmed this interpretation.)
Daniel et al. assume learning-by-doing, so that emission reduction would be even cheaper in the future, and emission cuts even deeper.
They essentially take away most of the climate problem in the first two periods. (The paper does not show emission trajectories.) Having removed the bulk of the problem, the optimal tax unsurprisingly falls. This is not a new result. The Pigou tax should fall as the externality disappears.
The true surprise in Daniel et al. is that they send climate change in reverse in 2030.
0Add a comment
-
Robert Mendelsohn organized a session at the Annual Conference of the Allied Social Sciences Association on extreme climate change and its impacts.
Mendelsohn himself presented a paper on the ecosystem impacts of severe warming. They find large shifts in biomes, but no global collapse. Indeed, net primary production increase.
Delavane Diaz and Klaus Keller write about a possible collapse of the West-Antarctic Ice Sheet. Because this would probably happen in a remote future, this prospect increases the optimal carbon tax only by a bit. At the same time, optimal emission reduction leads to a sharp drop in the probability of a collapse.
David Anthoff, Francisco Estrada and me published a paper on the impact of a slowdown of the thermohaline circulation. This would lead to cooling in most places, but this cooling only partly offsets the background warming. This is a benefit. As the thermohaline circulation transports rather than generates energy, warming would accelerate in a few countries. This is a loss, but as these countries are few, the global impact is positive.
Stephen Colt and Gunnar Knapp study the impact of ocean acidification. Because so little is known, quantitatively, about the effect of ocean acidification, they do a bounding exercise. The impact of ocean acidification lies somewhere between 0.01% and 0.1% of GDP in 2100.
0Add a comment
-
Not nearly as much as expected, according to this paper by Arik Levinsohn. California has had building codes for energy since 1978, and they are tightened every so often. Levinsohn compares the energy use of buildings build before and after a code change, compares Californian houses to houses elsewhere in the USA, and compares the weather sensitivity of houses with different building codes. He finds that codes save energy, but the ex post estimates are lower than the ex ante ones on which the regulation was based.0
Add a comment
-
When Lint first described this paper, I thought she was bluffing. I was wrong. She wrote a paper that I thought was beyond us. Lint moved the frontier in a way that is technically sophisticated and policy relevant. It is rightly published in one of the best journals.
The models used to advice climate policy almost exclusively assume a first-best intervention in an economy with a single market failure, the externality of greenhouse gas emissions. There is plenty of material on regulation in the second-best, but this is often comparative static and rarely makes it into, say, the reports of the Intergovernmental Panel on Climate Change.
Barrage first notes that the optimal tax rate on capital income is zero, because governments should not distort savings' decisions. She shows that if capital income taxes are zero, the Pigou tax on carbon dioxide is indeed optimal.
She then notes that climate income taxes are, in fact, not zero. Because carbon dioxide accumulates in the atmosphere and affects agriculture and other aspects of economic production, the climate is a de facto capital good. A tax on the income derived from physical capital is thus distortionary, as it treats different capital stocks differently. The Pigou tax should be corrected for this. Barrage shows that, theoretically, the Pigou tax can go up or down. However, a carefully calibrated model shows that the Pigou tax is 3-36% too high.
In order to get to this result, she had to do four things. First, she extended the Chari-Kehoe model to two capital stocks, energy and the rest. Second, she extended the Nordhaus model to two impacts, those that affect economic output and those that directly affect utility. Third, she replaced Nordhaus' perfect economy with Chari-Kehoe's imperfect one. And, fourth, she calibrated and optimized the whole thing. All in one paper. A tour de force.
0Add a comment
-
Meredith Fowlie, Michael Greenstone and Catherine Wolfram have a paper in the QJE that studies Michigan's Weatherization Assistance Program (WAP), which subsidizes residential energy efficiency improvements. 30,000 people were surveyed, a quarter of whom were encouraged and assisted to apply. Treatment raised the application rate sixfold, from 1% to 6%, at a cost of $1000 per weatherized household. The WAP reduces energy use by 10-20% but this justifies only about half of the $5000 investment.0
Add a comment
-
Brexit would come early, I wrote, and £400 million would tumble down the cliff edge. On New Year’s Day 2018 the UK government would lose the right to grant free emission permits to UK emitters. A clever but morally dubious bit of backstage politicking has saved the day.
Key is an amendment to Directive 2003/87/EC. That amendment has now been amended. The UK has committed to an early validation of its 2018 emissions of greenhouse gases, before Brexit day. The integrity of the EU Emissions Trading System (ETS) is preserved, and chaos in the UK is averted.
Rumour has that the UK had threatened to vote against a reform of the EU ETS that would take effect in 2021. Besides some technical tweaks, the main change is that between 2021 and 2030 carbon dioxide emissions will have to fall by 2.2% per year, compared to 1.7% per year between 2013 and 2020. The UK had championed that stricter target, but it tactically pretended to have ditched its green convictions. Member States in Eastern and Southern Europe are not keen on EU climate policy, and found an unexpected (if temporary) ally in the UK. This reminds us that, post-Brexit, EU environmental policy will be less ambitious.
In the end, the EU backed down and the UK withdrew its threat. This is a double win for the UK. First, the UK maintains its full participation in the EU ETS for 2018. Second, the UK secured stringent climate policy in the EU for the period 2021-2030.
There was no pitched discussion on television, no dramatic showdown in the House of Commons. Nameless, faceless, unelected bureaucrats in London and Brussels found a workaround for a problem created by their political masters. We owe them our gratitude.0Add a comment
-
On 1 June 2017, Donald J. Trump, 45th President of the United States of America, announced that the USA will withdraw from the Paris Agreement of the United Nations Framework Convention on Climate Change. Article 28.1 of that Agreement specifies that notification can be given three years after the Agreement entered into force (4 November 2016). Article 28.2 specifies that withdrawal takes effect a year later. The USA will thus leave the Paris Agreement at the earliest on 4 November 2020, the day after the next presidential elections.
Withdrawal from the Paris Agreement was a campaign promise by Mr Trump. The rhetoric during the campaign and in the Rose Garden speech that announced the withdrawal suggests that Mr Trump objects to the intended nationally determined contribution (INDC) submitted by the administration of President Barack H. Obama – rather than to the Paris Agreement itself – and to US contributions to the Green Climate Fund. The USA had an important voice in designing the Paris Agreement. Unlike the binding targets of the earlier Kyoto Protocol, which were doomed to fail, the Paris Agreement has the more realistic pledge and review at its core. Article 4.11 states that “[a] Party may at any time adjust its existing nationally determined contribution”, albeit “with a view to enhancing its level of ambition”. As the word “ambition” is undefined, Mr Trump could have chosen this route. Article 15 states that “compliance with the provisions of [the Paris] Agreement” shall be done “in a manner that is transparent, non-adversarial and non-punitive”. Mr Trump need not have feared repercussions under international law had he decided to change or ignore Mr Obama’s plans.
It may be that the White House judged that the US federal courts would have interpreted the word “ambition” in its usual and intended sense, rejected Mr Trump’s alternative climate policy as insufficient, and compelled him to a climate policy at least as strong as Mr Obama’s. In his speech, Mr Trump indeed referred to a “legal liability”, suggesting that he fears legal action if had simply ignored Mr Obama’s plans. The courts have yet to test the reality of such liability. If real, Mr Trump is bound by Mr Obama’s international commitments until the final two months of his first term.
It may also be that Mr Trump in fact intends to alter the US INDC. In his speech, Mr Trump said he wants to “withdraw” from the Paris Agreement but “begin negotiations to re-enter” – and indicated that those negotiations would be with the leaders of the Democratic Party, rather than with the leaders of the other countries that signed the Paris Agreement. The INDC is a matter of US policy, the Paris Agreement a matter of international negotiations. If Mr Trump wants to talk with the Democrats, it can only be about the INDC. One interpretation is that the rhetoric about withdrawal is a ruse to hide the breaking of a campaign promise, and a set-up for a future (false) claim of successful renegotiation of an international agreement.
Whatever he exactly plans to do and why, in the short term, the impact of Mr Trump’s decisions on climate change are small. A President Clinton, and certainly a President Clinton with a Republican Congress, would have pursued a weak greenhouse gas emission reduction policy. President Trump is likely to pursue a weaker policy, but he will have to do something. Carbon dioxide is a pollutant under the Clean Air Act and therefore has to be regulated. Mr Trump has abolished the InterAgency Working Group on the Social Cost of Carbon, but this does not nullify the court order that greenhouse gas emissions are an externality that must be costed in regulatory impact assessments. Executive Order 12866 demands that federal agencies use the best available science to set the social cost of carbon – and the overwhelming majority of published estimates puts the social cost of carbon well above zero.
The Obama Administration tightened energy efficiency standards whenever regulations came up for renewal. Unable to point to legislation, case law or research that goes against this, the Trump Administration will probably continue to impose stricter technical standards, perhaps at a slower pace. In its first five months, the Trump Administration published 3 new energy efficiency rules, using climate change as a partial justification. In the same period in 2016, 12 new rules were adopted, and in the first five months of the Obama Administration, 2 such rules.
Emissions in 2020 will not be much different than what they would have been. Regulations change gradually, the capital stock turns over slowly, and people change job and house only every so often. Coal is phased out from power generation because natural gas is cheap, and gas is now under pressure from wind and solar power, which are increasingly able to compete without government support. Mr Obama’s Clean Coal Plan, now shelved, would not have killed coal, but made sure that coal would never revive. The US economy will continue to decarbonise gradually, whether Mr Trump likes it or not.
Mr Obama’s climate policies had a minimal effect on the economy. Mr Obama’s proposed policies would have had a small, negative effect on economic growth over the next decade. Mr Trump’s dismantling of these policies will have a similarly small effect. Over the last decade, US greenhouse gas emission intensity fell by some 2% per year. Over the next decade, Mr Obama would have emissions falling by some 2% per year – a substantial acceleration of ambition, although proposed policies were not commensurate with the stated goals. Policies, not targets, drive costs, so Mr Trump’s claim, that scuppering Mr Obama’s plans is a big boost to the economy, is unfounded.
Beyond 2020, the Trump Administration may have a bigger impact. Should Mr Trump win a second term in office, and be succeeded by a like-minded candidate, then we can expect a large effect on emissions and, perhaps, the economy. This is hard to predict, but Mr Trump’s budget proposals and policy intentions are known. The USA has been a leader in developing technologies for greenhouse gas emission reduction, be it alternative energy sources, energy efficiency improvements, or disruptions of the way we make, use or transport things. The National Laboratories and grants to universities from the US federal government have played a key role in pre-competitive technological progress. These budgets may well be cut, perhaps severely so. This would have a bigger, longer-lasting effect on energy use and carbon dioxide emissions than the largely symbolic withdrawal from the Paris Agreement.
Private funding has played at least as big a role in decarbonising the US economy, but private investments in innovation and diffusion are made, at least partly, in anticipation of future policy support. You innovate now because you expect sales later. Mr Trump has changed the expectations of innovators. Without subsidies or mandates, expected sales are lower. Innovation in low- and no-greenhouse gas energy, transport and agriculture will therefore slow down, mildly if Mr Trump’s tenure is short, and more severely if he stays on for longer.
In response to Mr Trump’s announcement, many US cities have announced that they will stick to Mr Obama’s plans. This is good politics, but city hall has only limited control, through building standards, planning, and local transport, over greenhouse gas emissions – although cities do have some control over the urban climate.
States have more control over energy and agriculture policy, and thus over greenhouse gas emissions. Indeed, Republican objections to Mr Obama’s climate policies are in part about whether the primacy for energy policy lies with the states or with the federal government. Most states are controlled by the Republican Party, but some of the larger ones are Democratic and have pledged to stick with Mr Obama’s climate and energy plans.
Internationally, the US withdrawal from the Paris Agreement has a negative impact on emissions too. A country that adopts more stringent environmental policy than its trading partners puts itself at a comparative disadvantage. The rational response of particularly Canada and Mexico would be to reduce their ambition of climate policy. They will not do so immediately, and they may not admit this to the electorate, but if Mr Trump persists, climate policy will be weakened elsewhere in North America. By the same reasoning, although California is eager to pursue a greener energy policy than other US states, the prospect of investment and jobs fleeing across state borders limits options.
Further afield, Mr Trump has set an example and provided cover for governments that are less keen on greenhouse gas emission reduction – although no government has publicly announced to follow Mr Trump’s lead. The pledge and review system of the Paris Agreement works through social pressure. The private provision of a public good is hard. It is easier if everybody is seen to contribute – and becomes harder if one of the big players walks out. Mr Trump has reduced the stigma of noncompliance with pledges under the Paris Agreement.
On the other hand, Mr Trump is keen to increase the export of shale gas. This will put downward pressure on the world market price, and induce a substitution from coal- to gas-fired power generation in energy importing countries.
The main international effect, however, is political. With his decision to withdraw from the Paris Agreement, or renege on his predecessor’s international commitment, Mr Trump has once again expressed his disregard for a rules-based, multilateral world order. Mr Trump has displayed a similar attitude towards trade agreements and military alliances. Once more, Mr Trump has taken a position that is sharply at odds with the US’ traditional allies, such as Canada, Europe and Japan. Climate policy is important to the leaders of these countries. Snubbing their wishes does not further relationships. Going back on your predecessor’s word does not build trust. Mr Trump’s withdrawal from the Paris Agreement is only one manifestation of his attitude towards international relations. That attitude may cause more problems than his actions on energy and climate change.
Update (5+7 Aug 2017) The US has notified the UN of its intent to withdraw. An intent to withdraw is not a withdrawal, of course.
This post was commissioned by a wannabe high profile journal, which dithered over publication until the piece lost its currency.0Add a comment
View comments