By Jonathan Camuzeaux

Currently, about 12% of the world's greenhouse gas emissions are covered by carbon pricing. More details about this map can be found in the Doubling Down on Carbon Pricing report by EDF and IETA.

There are a number of signs we are entering a golden age for carbon pricing. Perhaps the most important one is that many countries around the world are currently considering carbon pricing policies to achieve their greenhouse gas emissions reduction goals.

And for good reason.

A price on carbon gives emitters a powerful incentive to reduce emissions at the lowest possible cost, it promotes innovation while rewarding the development of even more cost-effective technologies, it drives private finance, and it can generate government revenue.

This spring, World Bank Group President Jim Yong Kim and International Monetary Fund Managing Director Christine Lagarde convened the Carbon Pricing Panel to urge countries and companies around the world to put a price on carbon. On April 21, 2016, the Panel announced the goals of doubling the amount of GHG emissions covered by carbon pricing mechanisms from current levels (about 12 percent, as illustrated in the map below) to 25 percent of global emissions by 2020, and doubling it again to 50 percent within the next decade.

EDF and the International Emissions Trading Association (IETA) worked together to explore a range of possible, though non-exhaustive, scenarios for meeting these goals. You can see the results in a series of maps which show how carbon pricing can be expanded worldwide.

Achieving the Carbon Pricing Panel’s goals will be a crucial stepping stone to realizing the ambition of the Paris Agreement, which aims to hold the increase in the global average temperature to well below 2°C above pre-industrial levels. Meeting that objective will require countries not only to implement the targets they have already announced, but to ratchet up their efforts dramatically in the years ahead. Carbon pricing will have to play a key role in that effort.

Explore how the world can reach the Carbon Pricing Panel’s ambitious goals.

This post originally appeared on Climate Talks.

By Susanne Brooks

Co-authored with Martha Roberts

If someone was tallying up all the benefits of energy efficiency programs, you’d want them to include reducing climate pollution, right? That’s just common sense.

Thankfully, that’s what our government does when it designs energy efficiency programs—as well as other policies that impact greenhouse gas emissions. And just this month, this approach got an important seal of approval: For the first time, a federal court upheld using the social cost of carbon to inform vital protections against the harmful impacts of climate change.

So what is the social cost of carbon and why does it matter? It’s a crucial part of the development of climate safeguards and essential to our understanding of the full costs of climate pollution. We know that climate change is a clear and present danger now and for future generations—one that will result in enormous costs to our economy, human health and the environment. And yet, these “social” costs are not accounted for in our markets, and therefore in decision making. It is a classic Economics 101 market failure. Every ton of carbon dioxide pollution that is emitted when we burn fossil fuels to light our homes or drive our cars has a cost associated with it, a hidden one that is additional to what we pay on our utility bills or at the gas pump. These costs affect us all – and future generations – and are a result of the negative impacts of climate change. If we don’t recognize these hidden costs—we aren’t properly protecting ourselves against the dangers of climate pollution.

The social cost of carbon (or SCC) is an estimate of the total economic harm associated with emitting one additional ton of carbon dioxide pollution into the atmosphere. To reach the current estimate, several federal agencies came together to determine the range and central price point – roughly $40 per ton – through a transparent and rigorous interagency process that was based on the latest peer-reviewed science and economics available, and which allowed for repeated public comments.

It’s critical that we protect against the damages and costs caused by climate pollution. So it’s a no-brainer that when considering the costs and benefits of climate safeguards, we must take into account all benefits and costs – and that means including the social cost of carbon.

In their court opinion, the Federal Court of Appeals for the Seventh Circuit agreed wholeheartedly. Harvard Law Professor Cass Sunstein noted that their decision “upholds a foundation” of “countless” climate protections. In particular, their opinion made two important findings:

• First, the court affirmed that the DOE was correct to include a value for the social cost of carbon in its analysis. The judges concluded that “[w]e have no doubt” that Congress intended for DOE to have authority to consider the social cost of carbon. Importantly, this conclusion reinforces the appropriateness of including the SCC in future carbon-related rule-makings.
• Second, the court upheld key choices about how the SCC estimate was calculated. The court agreed that DOE properly considered all impacts of climate change, even those years from now, or outside our borders. These choices, the court concluded, were reasonable and appropriate given the nature of the climate crisis we face.

DOE itself acknowledged “limitations in the SCC estimates.” We couldn’t agree more. As new and better information about the impacts of climate change becomes available and as our ability to translate this science into economic impacts improves, regulators must update the current social cost of carbon estimate. There is still much we do not know about the full magnitude of climate impacts and much that cannot be quantified (as is true of all economic impact analysis) – which means that SCC estimates are likely far lower than the true impact of climate change. But as the Seventh Circuit recognized, their inclusion is a vital step in the right direction for sensible policy-making.

This decision already has positive implications more broadly—in particular, for the Clean Power Plan, our nation’s historic program to reduce carbon pollution from power plants. Just last week, EPA submitted a letter in the Clean Power Plan litigation noting that the Seventh Circuit’s decision further demonstrates the error of challenges to the treatment of costs and benefits in the Clean Power Plan rulemaking. It’s just another affirmation of the rock-solid legal and technical foundation for the Clean Power Plan.

By Beia Spiller

By: Beia Spiller and Kristina Mohlin

The price of most goods we purchase is generally based on the costs associated with the goods' production, including the raw materials used to generate them, the labor associated with their manufacturing, and so on. However, when it comes to pricing residential electricity, many regulators choose to use a flat price per unit of electricity (kilowatt-hours, or kWh) that unfortunately fails to adequately reflect the underlying costs of generating and delivering energy to our homes.

This creates incorrect incentives for conservation and investments in distributed energy resources (like rooftop solar, energy storage, and demand response). Getting these incentives right can go a long way in creating more opportunity for efficiency and clean energy resources.

Pricing electricity generation

The cost of generating electricity from large-scale power plants varies significantly over the course of a day. When demand is low, electricity providers call upon the most efficient and inexpensive power plants to produce electricity. As demand increases, they must also utilize more inefficient and expensive power plants. So, for the price of generation to accurately reflect these costs, it too must vary with the time of day. Time-variant pricing charges customers more for using electricity during periods of high demand (such as during hot afternoons) and less when demand is not as great. This pricing system is an accurate reflection of generation costs.

In contrast, flat rates that don’t vary over time incentivize customers to consume more electricity when it’s most valuable to them, even though consuming during times of high demand places a larger cost on the system. Thus, the current, static pricing system creates incorrect incentives for conservation and electricity use.

Pricing electricity delivery

At the other end of the system, we have the local delivery of electricity, which relies on infrastructure such as substations and distribution lines. To understand the challenges associated with pricing this part of the electricity system, a useful analogy can be found in bike share programs – such as Citibike in New York City.

These programs are made up of certain resources – a number of stations and bikes at different locations – that are difficult to increase in the short run even though demand for these bikes is shifting throughout the day, year, and location. Currently, customers usually pay a fixed fee for having access to bikes at any location and time. However, this way of pricing can cause problems: during peak times in the morning and afternoon, increased demand from commuters reduces the availability of bikes at the most popular stations. Accurate pricing could alleviate this.

For example, customers could be charged extra for using bikes during peak periods, and potentially even charged more for renting at popular locations. This would reduce the demand for bikes at these key times and locations. We can extrapolate the same kind of logic to pricing electricity delivery, where the infrastructure and, thus, the costs are generally fixed in the short run. However, high demand can cause constraints, forcing utilities to replace strained infrastructure or expand the system, leading to greater costs in the long run. Unfortunately, similar to the Citibike example, most customers pay only a flat fee per unit of electricity they use in order to pay for these infrastructure costs. This charge does not send the signal that high demand during peak times causes constraints and increased costs on the delivery system.

There are different possible approaches to efficiently recovering the costs associated with the delivery system. One option is to implement time-variant pricing as described above, where electricity use during the delivery system’s peak hours is more expensive.

Another option is to use peak demand charges. These charges make it more expensive to use a lot of electricity simultaneously during certain high demand hours of the day (e.g., running your dishwasher, dryer, and TV all at once). This is because in doing so, you are demanding more from the electric grid at one time, increasing the need to expand the system over time. It’s like timed lights for merging onto a freeway. If all the cars were to merge at once, there would be constant back up at high traffic times and locations, which could lead to a widening of the freeway on-ramp. Instead, the lights stagger the cars, lessening the traffic and the need for expensive construction. So, by incentivizing customers to stagger their appliance usage throughout the day, the maximum demand can decrease and grid planners can reduce the size of the system, saving money.

Utilities have not implemented peak demand charges in a widespread manner for residential customers, but they present a promising new price option when carefully and thoughtfully carried out.

There is an important caveat. While employing these tools can have positive effects on the electric grid and reduce costs, regulators and utilities need to ensure they do not harm low-income customers – people who already bear a heavier energy burden than others. Studies show solutions like time-variant pricing work well for these customers, but education and technology enablement are essential for success. By providing people with tailored information about these tools and access to technology that can help them take advantage of them, they can shift their energy use and save money on their monthly bill.

Pricing environmental impacts

Electricity charges that more accurately reflect the cost of generating and delivering electricity can help send the correct price signals to customers for conservation and distributed energy resource investments. But, something is still missing: how do we price the environmental costs of electricity production? These external costs (including greenhouse gas emissions, water consumption, and local air pollutants) can be quite large, and are currently not reflected in the price we pay for electricity.

Importantly, each unit of electricity has a different amount of external costs associated with it, depending on the efficiency and cleanliness of the power source. If each generator were responsible for paying the external costs, then cleaner, more efficient generators would pay less than their dirty counterparts, making clean electricity cheaper. This would have two impacts:

• First, in a well-functioning market, the dirtier generators would have higher costs, and would therefore be utilized less, leading to a reduction in harmful pollution from these sources.
• Second, because these prices would be passed on to customers, electricity would be cheaper when it is cleaner. Time-variant pricing that incorporates these environmental costs can thereby incentivize customers to use less energy during times of the day when the system relies on dirty power.

By ensuring these costs are internalized by the generators, time-varying electricity prices can reflect these external costs, helping us reduce harmful pollution and other negative impacts on the environment.

When electricity prices reflect costs, everybody wins

Electricity pricing that accurately reflects the underlying internal and external costs of producing electricity can lead to better, more efficient use of energy, more targeted distributed energy resource investments, and a direct reduction in emissions, resulting in a cleaner and more efficient electric system for all.

This blog post is part three in a three-part series that takes a deep dive into economics of the electric system and the role pricing can play in accelerating the clean energy economy. Part one of the series examines Transforming the Electric System to Reduce Costs and Pollution. Part two of the series explores The True Cost of Electricity: What We’re Not Paying for Through Our Utility Bills.

Photo source: Eastern General Electric

By Kristina Mohlin

New York is preparing for a future in which clean, distributed energy resources – such as energy efficiency, electric vehicles, rooftop solar panels, and other types of local, on-site power generation – form an integral part of a more decentralized electric grid. This is the future the New York Public Service Commission (PSC) wants to see realized through its signature initiative, Reforming the Energy Vision (REV).

This vision means the role of the customer is changing: from recipient to both user and provider of electricity and other grid services. By investing in clean, distributed energy resources, customers can make the electric system more efficient and contribute to a cleaner environment, while gaining greater control over their energy bills.

As part of REV, the Commission is now considering how to compensate distributed energy resources for all the benefits they provide to the electric system and society at large. These benefits vary by time and location, which should be taken into account when deciding how to compensate customers who contribute to the grid. Doing so will help reduce system costs and pollution.

Broadly, these time- and location-specific benefits can be classified into three main categories: avoided energy, infrastructure, and emissions costs. Let’s use a rooftop solar system to examine how these benefits might play out.

Avoided energy costs

By generating electricity on-site, rooftop solar makes it possible for the customer to buy less electricity from a utility. Furthermore, because this electricity is generated locally and does not have to be transmitted hundreds of miles from the power plant to the customer, energy losses that happen along the way can be avoided. This means less electricity needs to be generated by large-scale power plants, and the costs of generating that electricity can be avoided.

The amount of avoided energy costs, however, depends on when the solar system generates its electricity and where on the grid it is located because these factors determine what kind of generation – coal, natural gas, renewables, etc. – would otherwise serve that customer. For example, if the solar system generates electricity at a place and time when a natural gas generator would have otherwise supplied that electricity, the cost savings are greater than if the solar power would substitute for another renewable energy source, such as a wind farm.

Avoided infrastructure costs

By reducing demand for utility-provided electricity, the rooftop solar system cuts down on the amount of costly infrastructure necessary for the generation, transmission, and distribution of electricity. At any point in time, power plants need sufficient capacity to meet the electricity demand from all customers. This also requires transmission and distribution infrastructure to deliver that electricity to the customers’ homes and businesses. If customers require less electricity from central power plants because they install a rooftop solar system, less investment in generation, transmission, and distribution capacity is needed, and related costs can be reduced.

Time- and location-specific benefits can be classified into three main categories: avoided energy, infrastructure, and emissions costs.

Just as with avoided energy costs, the amount of avoided infrastructure costs depends on when and where the solar panel is generating electricity, which is most valuable at times and locations where the grid is close to reaching capacity.

Avoided emissions

By reducing demand for power plant-generated electricity, the rooftop solar panel also helps avoid emissions coming from those plants. As with avoided energy and infrastructure costs, the time and location at which the solar panel generates its electricity determines the amount of avoided emissions. During times and in locations where electricity demand is high and fossil fuel-fired power plants are in operation, clean electricity from rooftop solar can serve as a substitute, avoiding harmful emissions like carbon dioxide, nitrogen oxide, and sulfur oxide.

Fairly valuing benefits

All of these avoided costs have value in the form of environmental and electric system benefits. Specifically, one study (see figure below) suggests that we can value a unit of electricity (kilowatt-hour) generated by a rooftop solar system at, on average, 15 cents per kilowatt-hour in New York. But, because the avoided infrastructure costs vary across different locations, this value is much higher for solar systems installed in places on the grid where transmission and distribution infrastructure is constrained.

For example, in New York City, parts of Brooklyn and Queens are seeing unprecedented growth in electricity demand, and Con Edison is struggling to serve them because the utility’s distribution infrastructure is reaching capacity. A new rooftop solar system installed in those neighborhoods might have more value to the overall electric system versus a similar solar array installed in Manhattan. This would mean the rooftop solar owner in Brooklyn or Queens should get compensated more per kilowatt-hour of solar she produces. However, the way New York’s electricity rates are currently structured, these locational factors are not taken into consideration. This is a huge missed opportunity for the environment, as well as for electric rate payers who end up paying for utility infrastructure upgrades.

Fig 1. Total average benefits of a kilowatt-hour (kWh) generated by a solar system in New York State (Source: The Benefits and Costs of Net Metering in New York. Prepared by E3 for New York State Energy Research and Development Authority and New York State Department of Public Service, p. 43)

In Environmental Defense Fund’s comments to the REV proceedings, we continue to advocate for compensation that fully captures the value of all energy, infrastructure, and environmental benefits provided by clean, distributed energy resources, and in a manner that reflects how these benefits vary by time and location. This way, customers who want to invest in these clean energy solutions will be fairly compensated for doing so and be able to save money, while at the same time, reducing system-wide costs and helping the environment.

By Beia Spiller

By: Beia Spiller and Kristina Mohlin

Electricity markets around the world are transforming from a model where electricity flows one way (from electricity-generating power plants to the customer) to one where customers actively participate as providers of electric services. But to speed this transformation and maximize its environmental and cost benefits, we need to understand how customer actions affect the three distinct parts of our electric system: generation, transmission, and distribution.

Generation

Generators – or power plants – convert an energy source such as natural gas, coal, wind, or sunshine into electricity that flows across wires and into your building, allowing you to turn on lights and use appliances. Although the electricity is no different whether it is generated by solar or coal, the environmental and economic costs associated with different energy sources vary significantly.

Not all generators are created equal in terms of efficiency, pollution, and how much they cost to build and run. Some generators produce electricity very cheaply and with fewer carbon emissions, but are expensive to build and maintain. Other generators are more polluting than clean energy alternatives and cost more per unit (or kilowatt-hour) of electricity generated, but can be turned on when demand for electricity skyrockets (for example, during heat waves). As demand increases, a variety of generators are used to provide the needed electricity – relying first on the cheapest generators (such as wind and solar) in order to keep costs low, and only turning on expensive and inefficient “peaker” generators (such as natural gas-fired power plants) during periods of high demand.

Because higher demand for electricity from power plants drives up cost and pollution, reducing demand for power plant-generated electricity can reduce both the overall cost of the system and harmful environmental impacts.

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Transmission

Electricity is transported from power plants to local communities via transmission lines. In addition to exporting energy from traditional power plants, transmission lines also allow communities to “import” clean and cheap energy from distant areas. But long transmission lines are expensive, and as more electricity flows through them, power is lost through heat, requiring greater amounts of electricity to be produced. Thus, different areas in the same state can face different prices for electricity depending on that area’s overall demand and distance from the generation sources.

Again, reducing demand and increasing local sources of generation helps control these transmission costs. The less electricity needed from large, distant power plants, the less electricity needs to be moved.

Distribution

Finally, local utility companies distribute electricity via the traditional electric wires we’re used to seeing on city streets. Some utility costs, such as billing and metering, are not affected by customers’ usage of electricity. However, very expensive grid infrastructure – including substations, transformers, wires and poles – is significantly affected by how much electricity customers demand.  Local utilities must also conduct costly maintenance and operations on this infrastructure to avoid blackouts and meet safety requirements. Importantly, as local demand peaks, the system needs to expand accordingly, causing distribution costs to increase even further. For example, New York City’s local utility (Consolidated Edison) foresees a billion-dollar investment in a new substation to accommodate increased demand in the Brooklyn-Queens area.

Reducing demand for utility-provided electricity helps each part of the system

Consider how residential rooftop solar affects the entire system. Each home equipped with solar panels requires less electricity from its local utility. Thanks to this reduction in demand and its related costs, the utility can use funding it would have needed for new transformers or substations to invest in improving energy efficiency or incentivizing more customers to generate their own electricity. Consolidated Edison is currently pursuing this type of effort in the Brooklyn-Queens area by identifying multiple alternatives to try to avoid the billion dollar substation investment. Other utilities are also experimenting with home energy batteries, which can store excess solar energy during daylight hours for use at night, further reducing each customer’s daily electricity use and impact on the distribution system. And because solar reduces demand for utility-provided electricity, less electricity has to be generated at power plants and transmitted from distant regions, reducing generation, transmission, and environmental costs. Many initiatives across the country are attempting to capture the opportunities offered by these technologies to change the fundamental way we interact with the electric grid.

Reducing the amount of electricity that needs to be generated by traditional power plants, transmitted long distances, and distributed locally, reduces the overall cost and environmental impact of our energy system.

For example, the Reforming the Energy Vision (REV) initiative in New York and the Public Utilities Commission-mandated Distribution Resource Plans in California require utilities to consider alternatives to traditional infrastructure investments to deal with peak demand. These initiatives encourage customers to install rooftop solar or adopt energy efficiency, storage, and demand response to reduce their use of grid-supplied electricity at peak times.

And, in Texas, the Distributed Resource Energy and Ancillaries Market Task Force (DREAM TF) is working to guarantee that customers who generate electricity are able to actively participate in the Texas electricity market. This will ensure distributed energy resources are paid appropriately for the benefits they provide to the system.

These efforts in New York, California, and Texas are on the right track. Reducing the amount of electricity that needs to be generated by traditional power plants, transmitted long distances, and distributed locally, reduces the overall cost and environmental impact of our energy system. That’s not just clean, it’s smart.

This blog post is part one in a four-part series that takes a deep dive into economics of the electric system and the role pricing can play in accelerating the clean energy economy.

By Gernot Wagner

Lucy Nicholson / Reuters / Zak Bickel / The Atlantic

Reason for despair: Climate change. It’s the perfect problem: more global, more long-term, more irreversible, and more uncertain that virtually any other public-policy problem facing us. Climate change is a lot worse than most of us realize. Almost regardless of what we do on the mitigation front, we are in for a whole lot of hurt.

On the policy front, we have now talked for more than 20 years about how we need to turn this ship around “within a decade.” Not unlike the ever-elusive fusion technology, that hasn’t happened yet. Global carbon emissions declined slightly this year—for the first time ever without a global recession—but the trends are still pointing in the wrong direction. Worse, turning around emissions is only the very first step. It’s not enough to stabilize the flow of water going into the bathtub when the goal is to prevent the tub from overflowing. We need to turn around atmospheric concentrations of greenhouse gases. That means turning off the flow of water into the tub—getting net emissions to zero and below. It doesn’t help our efforts that many people seem to confuse the two. A study involving over 200 MIT graduate students faced with this same question revealed that even they confuse emissions and concentrations—water flowing into the tub and water levels there. If MIT graduate students can’t get this one right, what hope is there for the rest of us?

Reason for hope: Climate change. Many signs point to some real momentum to finally tackle this momentous challenge.

The Paris Climate Accord builds an important foundation. It enables transparency, accountability, and markets to help solve the problem. Many governments are moving forward with pricing carbon: from California to China, from Sweden to South Africa, we see ambitious action to reign in emissions in some 50 jurisdictions. Meanwhile, lots is happening on the clean-energy front. That’s particularly true for solar photovoltaic power, which has climbed up the learning curve—and down the cost curve—faster than most would have expected only five years ago. That has also provided an important jolt for sensible climate policy. Then there’s R&D for entirely new technologies. Bill Gates leading an investment coalition with $1 billion of his own money is only one important sign of movement in that direction. The excitement for self-driving, electric vehicles is palpable up and down Silicon Valley, to name just one potentially significant example. In the end, it’s precisely this mix of Silicon Valley, Wall Street, and, of course, Washington that will lead—and, in part, is already leading—to the necessary revolution in a number of important sectors, energy and transportation chief among them.

Excerpt from The Atlantic's year-end feature on Hope and Despair: "Can the Planet Be Saved?"

By Beia Spiller

Over the past decade, Pennsylvania has seen a huge increase in natural gas production due to technology advancements. Horizontal drilling combined with hydraulic fracturing, the process of cracking rock open deep underground to release the gas trapped inside, has made Pennsylvania the nation’s second largest natural gas producer. While a thriving natural gas industry is a boon for the state’s economy, well-documented accounts of air and water pollution have been associated with its development.

But do the benefits and risks of natural gas production impact Pennsylvania’s communities equally? In particular, while the broad economic benefits (more jobs, cheaper gas prices, etc…) may accrue to all members in the community, the local environmental impacts may only affect those living in close proximity to a shale gas well.

A recent paper published this month in the American Economic Review examines the impact of increased drilling activity on the property values of homes located in close proximity to a well, and in particular, estimates whether this impact differs for homes dependent on groundwater for drinking compared to those with publicly supplied water. To determine how property values for these different types of homes may be affected, EDF, working with economists from the University of Calgary and Duke University, utilized transaction level data across the state to conduct comparisons in three different dimensions simultaneously:

• properties very near a well to those further away;
• properties dependent on groundwater for drinking to those with access to piped water;
• and properties sold prior to a shale gas well being drilled with those sold after the well was drilled.

Furthermore, to account for the fact that many groundwater-dependent properties may be located further away from urban centers, the data were restricted to homes located near the piped water boundary. This helps eliminate differences in neighborhood characteristics that could affect both the price of the home and its proximity to a shale gas well.

The analysis determined that property values are impacted by proximity to a shale gas well, though results differ depending on the property’s drinking water source. Those with piped water can economically benefit from being very near a well (a value increase of 3 percent for properties within 1.5km of a well), potentially due to royalties and bonuses companies pay to develop on a homeowners land. However, the property values of homes that are dependent on groundwater and located within 1.5km of a shale gas well declined by an average of 13 percent. Importantly, the impact on both types fades with distance; showing that both the benefits (increased royalty payments) and costs (increased groundwater contamination risk) of proximity diminish as one moves further from shale gas development.

This analysis does not draw information from observed air or water contamination. Instead, the data reflects public perception and brings to focus two important observations.

The first is that oil and gas communities are becoming more aware of the environmental risks posed by development. Managing these risks is critically important, as nearly 10 million Americans live within one mile of a hydraulically-fractured oil or gas well.  Smart policies that improve operations and create more opportunities for public transparency are necessary to ensuring communities in close proximity to drilling feel adequately protected from the inherent risks of oil and gas development.

But the study also highlights another key issue – the economic and environmental consequences of oil and gas development (both positive and negative) do not impact communities evenly. There is a clear detriment to some populations – as there often is with any industrial activity.  And rigorous, economic and scientific analyses are important tools for helping policy leaders understand these discrepancies to respond effectively.

Economic research can provide insights into how markets internalize the environmental costs of economic activities, even if these costs do not have a monetary value associated with them (for example, you can’t buy greenhouse gases, but economic research has demonstrated that the social cost of a ton of carbon is around $40). This analysis demonstrates that the threat of drilling activity causing groundwater contamination – which has no market value – still has true costs. Rigorous economic analysis allows us to quantify these costs, leading to more informed policy decisions and better outcomes for both the environment and the local community.

 

By Gernot Wagner

Q&A accompanying a re-broadcast of a PBS NewsHour segment featuring Climate Shock:

Everyone is talking about 2 degrees Celsius. Why? What happens if the planet warms by 2 degrees Celsius?

Martin L. Weitzman: Two degrees Celsius has turned into an iconic threshold of sorts, a political target, if you will. And for good reason. Many scientists have looked at so-called tipping points with huge potential changes to the climate system: methane being released from the frozen tundra at rapid rates, the Gulfstream shutting down and freezing over Northern Europe, the Amazon rainforest dying off. The short answer is we just don’t — can’t — know with 100 percent certainty when and how these tipping points will, in fact, occur. But there seems to be a lot of evidence that things can go horribly wrong once the planet crosses that 2 degree threshold.

In “Climate Shock,” you write that we need to insure ourselves against climate change. What do you mean by that?

Gernot Wagner: At the end of the day, climate is a risk management problem. It’s the small risk of a huge catastrophe that ultimately ought to drive the final analysis. Averages are bad enough. But those risks — the “tail risks” — are what puts the “shock” into “Climate Shock.”

Martin L. Weitzman: Coming back to your 2 degree question, it’s also important to note that the world has already warmed by around 0.85 degrees since before we started burning coal en masse. So that 2 degree threshold is getting closer and closer. Much too close for comfort.

What do you see happening in Paris right now? What steps are countries taking to combat climate change?

Gernot Wagner: There’s a lot happening — a lot of positive steps being taken. More than 150 countries, including most major emitters, have come to Paris with their plans of action. President Obama, for example, came with overall emissions reductions targets for the U.S. and more concretely, the Clean Power Plan, our nation’s first ever limit on greenhouse gases from the electricity sector. And earlier this year, Chinese President Xi Jinping announced a nation-wide cap on emissions from energy and key industrial sectors commencing in 2017.

It’s equally clear, of course, that we won’t be solving climate change in Paris. The climate negotiations are all about building the right foundation for countries to act and put the right policies in place like the Chinese cap-and-trade system.

How will reigning in greenhouse gases as much President Obama suggests affect our economy? After all, we’re so reliant on fossil fuels.
Gernot Wagner: That’s what makes this problem such a tough one. There are costs. They are real. In some sense, if there weren’t any, we wouldn’t be talking about climate change to begin with. The problem would solve itself. So yes, the Clean Power Plan overall isn’t a free lunch. But the benefits of acting vastly outweigh the costs. That’s what’s important to keep in mind here. There are trade-offs, as there always are in life. But when the benefits of action vastly outweigh the costs, the answer is simple: act. And that’s precisely what Obama is doing here.

And what steps should the countries in Paris this week take to combat climate change?

Martin L. Weitzman: If it were entirely up to me, I would have a very simple solution: negotiate one uniform price on carbon dioxide applicable to everyone. That doesn’t mean some imaginary world government would be in charge — not at all. Every country — every government — can implement their own policy, keep the revenue and decrease taxes elsewhere. But the price is universal across the world.

Gernot Wagner: Pricing carbon, of course, is indeed the answer. It’s the obvious one or at least it should be. Now, the negotiations themselves, of course, are messy, and there currently is no negotiation around a uniform, globally applicable carbon price. Instead, what’s happening is many large countries — the U.S., the EU, and chief among them China — are putting forward internal policies that will put a price on carbon and other greenhouse gases. That’s also where Paris comes in: putting a framework on all these country actions.

Are you hopeful?

Gernot Wagner: I am. The climate problem is, in fact, a lot worse than many people realize. The climate shock is real. But there are solutions. They work. They are getting better and cheaper by the day. And we are largely moving in the right direction.

Martin L. Weitzman: Climate change is an extremely difficult problem to solve, certainly among the most difficult I have seen in my lifetime. But I’m guardedly optimistic, yes.

Gernot Wagner: In the end, it’ll take Washington, Wall Street and Silicon Valley to make this right by pricing carbon, deploying clean technologies at scale and investing in research and development that will lead to new, even cleaner technologies we can’t yet even imagine. A lot is happening on all these fronts. A lot more, of course, needs to be done.

Originally published on the PBS NewsHour Making Sen$e blog, on December 3rd, 2015.

By Jonathan Camuzeaux

This post was co-authored by Jonathan Camuzeaux and Derek Walker.

As we pointed out in August, no news is good news when it comes to California’s cap-and-trade quarterly allowance auctions, which have been running effectively and without hiccups since November 2012. That’s right, last Tuesday’s auction marks the three-year anniversary of the program’s first auction, and the fifth time that California and the Canadian province of Quebec have conducted a joint auction. Time flies by when you settle into a routine, and another set of consistent, stable results indicates once again that California has a strong, well-functioning cap-and-trade program.

Steady results equal a healthy carbon market

Over 75 million current vintage allowances – which covered entities can use for compliance as early as this year – were offered at last Tuesday’s auction, and 100% of these allowances were purchased at a price of $12.73. This price, known as the settlement price, is 63 cents above the floor price set by the California Air Resources Board (CARB) for this auction, and is in line with previous auctions where allowances have cleared at prices slightly above the floor. In the advanced auction for 2018 vintage allowances – which can only be used starting in 2018 – over 10 million allowances were offered and 100% of these were purchased at a price of $12.65.

The absence of significant changes in results from one auction to the next is a positive sign that California has designed and implemented a well-functioning and mature carbon market, and that companies are integrating the requirements of the cap-and-trade regulation into their everyday business practices without difficulty. The high level of demand for future allowances also shows there is confidence in the program’s longevity and that forecasting of future compliance needs is being incorporated into many companies’ long-term planning.

California is paving the way for others

Other states and countries continue to keep an interested eye on California’s cap-and-trade program, in part because it has succeeded at cutting emissions while growing the state’s economy. This success is laying the groundwork and creating the momentum for the adoption of similar solutions elsewhere.

In fact, the idea of pricing carbon – through cap and trade or related mechanisms – is rapidly taking hold all around the world. Last week, Ontario released draft design options for a proposed cap and trade program that is scheduled to launch in 2017 and to link with the existing California-Quebec system in 2018. What’s more, almost half of the countries that have submitted emissions reductions pledges – called Intended Nationally Determined Contributions, or INDCs – have stated an interest in using market-based tools to meet their post-2020 commitments, according to an analysis by the U.N. Framework Convention on Climate Change (UNFCCC).

For many countries, California’s experience launching cap and trade and linking with Quebec to create the largest carbon market in North America provides an inspiring, real world example that can be studied, replicated and adapted elsewhere.

Image Source: Flickr

By Gernot Wagner

Climate finance is lots of things to lots of people. For some, it’s the $100 billion “Copenhagen commitment”. For others, it’s Citi’s latest sustainable finance pledge of $100 billion. It’s Bill Gates’s $1 billion clean energy investment. It’s public and private monies; mitigation and adaptation; loans, bonds, equity stakes, high-risk ventures, Kyoto-style allowances, offset credits, and private and public grants. It’s all of the above. When it comes to carbon markets, climate finance is often about what happens with allowance revenue. That's important. But the primary goal is, or ought to be, appropriately pricing the climate externality.

It’s about nudging massive private investment flows from the current high-carbon, low-efficiency path toward a low-carbon, high-efficiency one. That, in turn, means focusing on the incremental dollars necessary to sway private investments. In the end, it’s all about the margin.

Righting the wrong incentives

The incentives facing many private actors today are clearly misleading. Benefits, for the most part, are fully privatised, while many costs are socialised. That goes in particular for environmental and climate costs. The ‘hidden’ costs of energy investments are large and negative. While largely invisible to those doing the polluting, these costs are all too visible to society as a whole: in form of costs to health, ecosystems, and the economy. In the United States, for example, every additional tonne of coal, every barrel of oil, causes more in external damages than it adds value to GDP. That calculation does not even consider the large carbon externality.

There, one of the more important metrics is the so-called ‘social cost of carbon’. The US government’s central estimate is $40 per tonne of CO2 released today. The true number is likely a lot higher, especially when considering the many ‘known unknowns’ not quantified (and sometimes not quantifiable). Regardless of the precise amount, it’s the cost to society — to the economy, health, ecosystems, the whole lot — of each tonne of CO2 released today over its lifetime.

The social cost itself is inherently a marginal concept. While all of us seven billion pay a fraction of a penny of the social cost for each of the billions of tonnes emitted today, few of those doing the actual polluting pay themselves. A price on carbon, through cap and trade or a carbon tax, ensures that anyone covered by the market forces faces the right incentives. Polluters face a direct cost of pollution and, thus, are driven to pollute less. The law of demand at work.

Incentives at work

One of the guiding principles of economics is that people are motivated by incentives. That’s not too surprising. It would be surprising if people were not motivated by what is designed to motivate them. When faced with a price on carbon, emissions go down, and investments change course.

At the level of individual businesses, solid evidence points to how existing carbon prices have incentivised investment in clean technology, research and development.

In places with no external carbon price, investments can be affected by internal carbon pricing. The Carbon Disclosure Project counts over 400 companies with an internal, ‘shadow’ carbon price, either independently or in reaction to an external market price. That price, in turn, figures into day-to-day decisions from where to site a new facility to how to source energy.

In 1999, the World Bank conducted a study to determine the impact of a shadow price for carbon on the Bank’s investments. At an internal price of $40, the highest evaluated price, almost half of the analysed investments would have had a negative net present value, and, thus, would likely not have been made. For the rest, profitability would have been significantly reduced.

Individual investments, if organised at a large enough scale, make the difference. Take the Clean Development Mechanism (CDM), a market-based mechanism that channels funding to emission reduction projects in developing countries. Countries and investors can invest in CDM projects as a way of meeting domestic reduction goals, or complying with domestic carbon prices. Through the CDM, hundreds of billions of private sector dollars have gone towards funding GHG mitigation.

With a government-imposed carbon price, reflecting the true cost of carbon to society, investment portfolios would change. Drastically. We’ve seen it in practice, but the current scale is not large enough to sway the majority of investments that matter. Today, in fact, much of firms’ investments towards mitigating climate change are made voluntarily.

From Climate Finance to Finance

Climate finance often is ‘concessional’ finance. That might be outright development aid. It also includes voluntary commitments like Citi’s $100 billion. Citi, of course, is not alone. Goldman Sachs committed $40 billion in 2012, Bank of America $50 billion in 2013, all made over 10 years. Meanwhile, these three banks alone underwrite hundreds of billions of loans every year. Total global Foreign Direct Investment is in the trillions.

These massive financial flows won’t be redirected overnight. But they do follow incentives. In fact, that’s all they follow.

Enter carbon markets. They ensure that anyone covered by the market faces the right incentives. The prevailing allowance price is one good proxy of the level of ambition of any particular market. It’s also what helps nudge investments into the right direction. In econ-speak, it’s all about internalising externalities. In English, it’s about paying your fair share and no longer socialising costs.

None of that renders what’s traditionally called ‘climate finance’ unnecessary. There are still plenty of uses for additional monies. In particular, carbon markets are all about mitigation. Adaptation might dovetail nicely on some forms of mitigation, but it’s not the primary goal. That’s where foreign aid as well as government and private grants come in. If anything, those amounts need to be scaled up, too.

But the true scaling happens on the investment front. That’s no longer “climate finance.” It’s simply “finance.” Re-channelling only 0.1% of total wealth under active management globally amounts to around a $100 billion shift. Efforts, of course, must not stop there. It’s about channelling the full $100 trillion into the right direction.

Gernot Wagner is lead senior economist at the Environmental Defense Fund, and co-author, with Harvard’s Martin L. Weitzman, of Climate Shock (Princeton University Press, 2015).

This article was first published in IETA's Greenhouse Gas Market 2015 report "Making Waves". Download the full text in PDF form.

By Jonathan Camuzeaux

(This blog post was co-authored with Tim O’Connor and originally posted on California Dream 2.0.)

Many people have been following the AB 32 cap-and-trade program since it kicked off on January 1, 2013. After all, it’s the most comprehensive carbon market in the world; it has created billions in investments for pollution reduction in California communities and garnered intense international attention. Now, based on data showing the program has cut climate pollution during its first compliance period, the chair of the California Air Resources Board (CARB) has dubbed it “officially a success.”

Under California’s Mandatory Greenhouse Gas Reporting program, the largest polluters in the state across all sectors must report their emissions every year. This data is then collected and counted by CARB. Yesterday, the agency released the final tally of the 2014 greenhouse gas (GHG) emissions covered by cap-and-trade, and with data, we get the final word on what happened during the program’s first compliance period (for years 2013 and 2014).

Covered emissions went down…            

According to CARB’s report, although GHGs in 2014 experienced a slight increase compared to the year before, total climate pollution across the compliance period (2013 and 2014) decreased by over three percent to approximately 146 million metric tons (MMt) of carbon dioxide-equivalent. This means California’s emissions were nine percent under its 2014 cap of 159.7 MMt, putting the state well on its way to achieve its short-term emissions reduction target: bringing emissions back to 1990 levels by 2020. It also shows how cap-and-trade is best evaluated across compliance periods: since businesses have the incentive to cut pollution as quickly and deeply as possible, reductions in one year of the program may outpace those in another year.

… While California’s economy continued to prosper

Total emissions reported under the Mandatory Greenhouse Gas Reporting program, including those not covered under cap and trade, also decreased between 2012 and 2014, by about 1.3 percent. Meanwhile, the state’s gross domestic product (GDP) increased by almost three percent in 2014, surpassing the two percent GDP growth California’s economy underwent the year before. So while emissions were declining under AB32, the state’s economy grew, proving once again that economic output and emissions don’t necessarily go hand in hand.

California also experienced remarkable job growth during the same period. In 2013, California saw total employment increase by 2.1 percent, beating the national average. In 2014, job growth in the state reached an impressive 3.2 percent. As a comparison, the rest of the United States experienced only an average 2.2 percent growth in jobs that year.

Companies are complying with cap and trade

Under California’s cap-and-trade program, regulated polluters are also required to surrender some of their emissions allowances every year. Yesterday, they did just that, turning in allowances needed to cover the remainder of 2013 emissions and all of 2014 emissions. Total allowances for the first compliance period represent approximately 290 MMt of carbon dioxide-equivalent.

According to data released by the agency, over 99 percent of the required allowances were surrendered in the first compliance period, barely short of a perfect score, proving companies are prepared to incorporate cap-and-trade obligations in their everyday business practices.

Looking ahead

Starting on January 1 of this year, transportation sector emissions are also regulated under California’s cap-and-trade program. This is another important step forward: emissions from transportation represent almost 40 percent of the state’s GHG emissions. It is also a crucial building block, putting California on the right track to achieve its ambitious medium and long-term targets – with the ultimate goal of reducing emissions 80 percent below 1990 levels by 2050.

Today’s results confirm that the cap-and-trade program’s first compliance period was a success and that California has a strong foundation to build upon as it takes the next critical steps towards its climate change goals.

By Gernot Wagner

Illustration by Kelsey King/Ensia

There’s nothing quite like biking down clogged city streets, weaving in and out of traffic. For short distances, it’s faster than driving. It’s liberating. It’s fun.

It also makes it painfully clear that most roads aren’t made for bikes. Make one mistake, and you might end up dead. If you do everything right and the 4,000-pounder next to you makes a mistake, you still might end up dead. Few regular urban cyclists remain entirely unharmed throughout the years: A broken bone (“cut off by a van”), a scraped shin (“car door”), or perhaps simply drenched on an otherwise dry road (“I avoided the mud puddle; the car didn’t”).

Blame it on my day job, but as I was cut off by yet another driver fixated on his phone while cycling to work, I got to thinking that this is how wind and solar electrons must feel as they try to navigate the electric grid. There, too, the infrastructure and rules were designed for the conventional, fossil fuel-based generators, not their smaller, greener counterparts.

We need to get off gasoline-powered vehicles, the same way we need to get off fossil-powered electricity. Biking alone, of course, can’t eliminate fossil fuel-based transportation. It’s a niche alternative that chiefly works in densely populated cities filled with environmentally concerned citizens. What works in Berkeley, Boulder, Brooklyn and Boston won’t work everywhere. Neither can trains, by the way, another favorite of environmentalists. Most U.S. cities have a lot of catching up to do with their European counterparts, but, if anything, it will be electric vehicles that will truly help us make this transition.

Similarly, wind and solar can’t singlehandedly eliminate fossil fuel-based electrical generation. They have great potential, much more so than biking ever will. But there, too, are limitations — chiefly the (eventual) need for storage to eliminate all fossil fuel-based generation: coal, petroleum and natural gas.

Meanwhile, there are great benefits to pushing both green technologies. Biking helps get previously sedentary drivers to move, which, in turn, extends their lives and decreases societal health care costs, assuming injuries can be avoided by appropriate bike infrastructure. Every dollar invested in that infrastructure can pay for itself many times over.

Something similar holds for subsidizing infrastructure for renewables (and, for that matter, some energy efficiency measures). The reduction in the large and risky global warming externality typically offsets the costs of subsidies and other sensible policy interventions. Many of the right policies are indeed being put in place.

Still, some traditional utilities continue to fight the integration of rooftop solar and other renewables, the way New York City did with bikes in 1987 when it tried to ban them altogether from midtown Manhattan. Today, New York is decidedly friendlier to cyclists, with Mayor Michael Bloomberg adding over 300 miles of bike lanes to city streets, and a popular, still-expanding bike share program. Renewables, for their part, are increasingly welcomed onto the grid, with increased open access and grid management tools aimed at integrating intermittent renewable energy sources. Much more needs to be done.

Getting the Job Done

There’s one more parallel that might well dwarf all else: Biking for biking’s sake is fun on a sunny Sunday afternoon. On a Monday morning, when it’s about getting to a meeting on time and looking professional, transport choice comes down to getting there reliably, quickly, cheaply and without sweat stains.

Electricity is no different. Solar panels may be an interesting, even fun, choice for some. The feeling of energy independence and doing good is a bonus. But many times, it doesn’t matter where electrons come from, just that they do — reliably, cheaply and cleanly.

The ideal policy solution for energy is as clear as it is seemingly difficult to implement: Pay the full, appropriate price for electricity at the right time and place, including currently unpriced environmental costs. Once every electron comes with the appropriate price tag, the solar panel on your roof — or the solar farm down the road — may well carry the day. Or it might not. That’s OK, too. Having the right energy mix matters more than any one technology. The energy system is a system, after all.

Biking, too, is but one form of getting around. Appropriate gas taxes, congestion charges and parking fees help incorporate the full costs of gasoline-powered engines and encourage more alternative modes of transport — from electric vehicles to public transport and bikes. Meanwhile, outright subsidizing those alternative modes is surely the right step. Pushing those alternatives at scale is as sensible as pushing renewables, especially when it also means moving closer to the ideal pricing policies in the first place.

But pushing biking or any one form of alternative transport is no end goal in itself. At the end of the day, it’s about getting from A to B. That means — as it does for energy — getting the entire system right.

Published on Ensia.com on October 1st, 2015.

By Gernot Wagner

Bjørn Lomborg reviewed my book, Climate Shock (Princeton University Press, 2015), joint with Harvard's Martin L. Weitzman, for Barron's over the weekend. He started it by stating that "global warming is real."

So far, so good.

But the book is not about whether the climate is changing. It is.

The book is about whether we are getting the order of magnitude of its effects right. Weitzman and I argue forcefully — in prose in the text, supported by a significant amount of research going into the 100-page end notes — that it's what we don't know that really puts the "shock" into Climate Shock. Lomborg asks how we can know that, if apparently we don't.

The answer is simple, and it's a statistical point that can't possibly be lost on Lomborg, a former lecturer on statistics. The set of distributions that most directly represent climate uncertainty — the link between concentrations of carbon dioxide and eventual temperature outcomes — is inherently skewed. We know, and Lomborg agrees, that adding carbon dioxide increases temperatures. (Back to 19th century science.)

So we can very clearly cut off the distribution linking a doubling of pre-industrial concentrations to temperatures at zero. In fact, we can cut it off at least at around 1 degree Celsius (almost 2 degrees Fahrenheit). The world, after all, has already warmed by over 0.8 degrees Celsius (around 1.5 degrees Fahrenheit), and we haven't yet increased pre-industrial concentrations by even 50 percent.

Reprinted from Climate Shock, with permission from Princeton University Press.

That skewedness of the underlying distribution is real. It's important. The correct response, then, to those who are too sure about where the climate system will go isn't to say, "cool it." It's to take the uncertainties seriously. Those, sadly, are skewed in one direction.

Climate risk is not our friend. It ought to prompt us to rethink not just how we talk about climate change. It should also inform our response. The burden of proof clearly rests on those who argue against these statistical facts.

First posted on Climate411.

By Gernot Wagner

"Business Book Award longlist: must-read titles of 2015" by Andrew Hill (Financial Times, 12 August 2015).

By Gernot Wagner

By Gernot Wagner and Martin L. Weitzman:

Two quick questions:

Do you think climate change is an urgent problem?

Do you think getting the world off fossil fuels is difficult?

This is how our book “Climate Shock” begins.

In fact, it’s not our quiz. Robert Socolow from Princeton has posed versions of these questions for a while. The result is usually the same: most people answer “Yes” to one or the other question, but not to both. You are either one or the other: an “environmentalist” or perhaps, a self-described “realist.”

Such answers are somewhat understandable, especially when looking at the polarized politics around global warming. They are also both wrong. Climate change is incredibly urgent and difficult to solve.

What we know is bad

Last time concentrations of carbon dioxide were as high as they are today — 400 parts per million — we had sea levels that were between 20 to at least 66 feet higher than today.

It doesn’t take much to imagine what another foot or two will do. And sea levels at least 20 feet above where they are today? That’s largely outside our imagination.

This won’t happen overnight. Sea levels will rise over decades, centuries and perhaps even millennia. That’s precisely what makes climate change such an immense challenge. It’s more long-term, more global, more irreversible and also more uncertain than most other problems facing us. The combination of all of these things make climate change uniquely problematic.

What we don’t know makes it potentially much worse

Climate change is beset with deep-seated uncertainties on top of deep-seated uncertainties on top of still more deep-seated uncertainties. And that’s just if you consider the links between carbon dioxide concentrations in the atmosphere, eventual temperature increases and economic damages.

Increasing concentrations of carbon dioxide are bound to lead to an increase in temperatures. That much is clear. The question is how much.

The parameter that gives us the answer to this all-important question is “climate sensitivity.” That describes what happens to eventual global average temperatures as concentrations of carbon dioxide in the atmosphere double. Nailing down that parameter has been an epic challenge.

Ever since the late 1970s, we’ve had estimates hovering at around 5.5 degrees Fahrenheit. In fact, the “likely” range is around 5.5 degrees plus-minus almost three degrees.

What’s worrisome here is that since the late 1970s that range hasn’t narrowed. In the past 35 years, we’ve seen dramatic improvements in many aspects of climate science, but the all-important link between concentrations and temperatures is still the same.

What’s more worrisome still is that we can’t be sure we won’t end up outside the range. The Intergovernmental Panel on Climate Change calls the range “likely.” So by definition, anything outside it is “unlikely.” But that doesn’t make it zero probability.

In fact, we have around a 10 percent chance that eventual global average temperature increases will exceed 11 degrees Fahrenheit, given where the world is heading in terms of carbon dioxide emissions. That’s huge, to put it mildly, both in probability and in temperature increases.

Climate Shock graph. There’s at least about a 10 percent chance of global average temperatures increasing 11 degrees Fahrenheit or more. Source: Climate Shock (Princeton 2015), reprinted with permission.

We take out car, fire and property insurances for much lower probabilities. Here we are talking about the whole planet, and we haven’t shown willingness to insure ourselves. Meanwhile, we can, in fact, look at 11 degrees Fahrenheit and liken it to the planet ‘burning’. Think of it as your body temperature: 98.6 degrees Fahrenheit is normal. Anything above 99.5 degrees Fahrenheit is a fever. Above 104 degrees Fahrenheit is life-threatening. Above 109.4 degrees Fahrenheit and you are dead or at least unconscious.

In planetary dimensions, warming of 3.6 degrees Fahrenheit is so bad as to have been enshrined as a political threshold not to be crossed. Going to 11 degrees Fahrenheit is so far outside the realm of anything imaginable, we can simply call it a planetary catastrophe. It would surely be a planet none of us would recognize. Go back to sea levels somewhere between 20 and at least 66 feet higher than today, at today’s concentrations of carbon dioxide. How much worse can it get?

Do we know for sure that we are facing a 1-in-10 chance unless the world changes its course? No, we don’t, and we can’t. One thing though is clear: because the extreme downside is so threatening, the burden of proof ought to be on those who argue that these extreme scenarios don’t matter and that any possible damages are low. So how then can we guide policy with all this talk about “not knowing”?

What’s your number?

We can begin to insure ourselves from climate change by pricing emissions. How? By charging at least $40 per ton of carbon dioxide pollution. That’s the U.S. government’s current value and central estimate of the costs caused by one ton of carbon dioxide pollution emitted today.

We know that $40 per ton is an imperfect number. We are pretty sure it’s an underestimate; we are confident it’s not an overestimate. But it’s also all we have. (And it’s a lot higher than the prevailing price in most places that do have a carbon price right now—from California to the European Union. The sole exception is Sweden, where the price is upward of $130. And even there, key sectors are exempt.)

How then do we decide on the proper climate policy? The answer is more complex than our rough cost-benefit analysis suggests. Pricing carbon at $40 a ton is a start, but it’s only that. Any cost-benefit analysis relies on a number of assumptions — perhaps too many — to come up with one single dollar estimate based on one representative model. And with something as large and uncertain as climate change, such assumptions are intrinsically flawed.

Since we know that the extreme possibilities can dominate the final outcome, the decision criterion ought to focus on avoiding these kinds of catastrophic damages in the first place. Some call this a “precautionary principle”— better to be safe than sorry. Others call it a variant of “Pascal’s Wager” — why should we risk it if the punishment is eternal damnation? We call it a “Dismal Dilemma.” While extremes can dominate the analysis, how can we know the relevant probabilities of rare extreme scenarios that we have not previously observed and whose dynamics we only crudely understand at best? The true numbers are largely unknown and may simply be unknowable.

Planetary risk management

In the end, this is all about risk management—existential risk management. Precaution is a prudent stance when uncertainties about catastrophic risks are as dominant as they are here. Cost-benefit analysis is important, but it alone may be inadequate, simply because of the fuzziness involved with analyzing high-temperature impacts.

Climate change belongs to a rare category of situations where it’s extraordinarily difficult to put meaningful boundaries on the extent of possible planetary damages. Focusing on getting precise estimates of the damages associated with eventual global average warming of 7, 9 or 11 degrees Fahrenheit misses the point.

The appropriate price on carbon dioxide is one that will make us comfortable that the world will never heat up another 11 degrees and that we won’t see its accompanying catastrophes. Never, of course, is a strong word, since even today’s atmospheric concentrations have a small chance of causing eventual extreme temperature rise.

One thing we know for sure is that a greater than 10 percent chance of the earth’s eventual warming of 11 degrees Fahrenheit or more — the end of the human adventure on this planet as we now know it — is too high. And that’s the path the planet is on at the moment. With the immense longevity of atmospheric carbon dioxide, continuing to “wait and see” would amount to nothing else than willful blindness.

First published by PBS NewsHour's Making Sen$e with Paul Solman. The accompanying NewsHour report aired on July 16, 2015.

By Gernot Wagner

As greenhouse gases accumulate and global temperatures slowly rise, what can we do to insure against the catastrophes of climate change? Economics correspondent Paul Solman talks to the authors of Climate Shock.

By Jonathan Camuzeaux

(This blog post was co-authored with Dominic Watson and originally posted on EDF Voices.)

If there were a competition for the most important number in the world, the price on carbon would certainly be a strong contender.

The World Bank has been a long-time supporter of carbon pricing and its recent report, Decarbonizing Development, adds a strong voice to the chorus of climate policy experts, economists, and business leaders who champion the economic, social and environmental benefits of pricing pollution.

The report underscores the importance of getting the economics of climate change policies right so we can transition cost-effectively to a carbon-neutral economy.

Because we live in a world of ‘bottom-up’ climate policy, the authors rightfully say, this will require multi-pronged policy solutions, each tailored to a country’s particular economic and political conditions.

At the heart of this broader approach, however, lies the holy grail of climate economics: a price on carbon.

Markets bring results – fossil fuel subsidies don’t

Global temperatures must stay below the 2°C threshold for the world to avoid catastrophic climate change. This requires that net carbon emissions are reduced to zero by the middle to the end of the century.

A price on pollution has been shown time and time again to be the most cost-effective way to reduce emissions. By internalizing the cost of pollution to firms – meaning, making polluters pay for the right to emit carbon – they will have an incentive to reduce emissions and look for the cheapest emissions reduction options.

A tax on carbon, or a cap-and-trade system where permits – or allowances to emit carbon – are auctioned to firms, have the added benefit of bolstering government coffers. The additional revenue can be used to, for example, offset costs low-income households incur should power rates or costs on goods rise.

It can also be used to reduce taxes, including taxes on labor and capital that can affect social welfare and create market inefficiencies.

The World Bank reminds us that getting the price right will include removing costly subsidies on fossil fuels – now estimated at $548 billion worldwide. In addition to encouraging the overconsumption of fossil fuels, these subsidies have proven ineffective for helping the poor or for promoting competitiveness.

A mix of policies can boost clean energy

A comprehensive climate policy package should include a mix of additional policies to help address other market failures, the report notes. Policy makers can help boost innovation in clean technologies, for example, by supplementing a carbon price with temporary support for investments, targeted subsidies, performance standards and technology mandates.

Case in point: California’s AB 32 program, which guarantees emissions reductions through a market based cap-and-trade program while supplementing the cap with a range of statewide regulations.

Among other things, the legislation incentivizes utilities to invest in renewables and requires building, vehicle and appliance efficiency standards that help consumers save on their electricity bills.

Next: A global price on carbon

Some countries may choose to rely on such regulatory measures alone and opt out of market-based solutions for the time being. Such policies will certainly bring countries closer to meeting their emissions goals.

In the long-term, however, a carbon price must form the linchpin of any viable national emissions reduction plan.

And ultimately, if we’re to meet that net-zero carbon emissions goal in the most cost-effective way, all countries should face the same global carbon price.

By Gernot Wagner

Shortly after September 11, 2001, Vice President Dick Cheney gave us what has since become known as the One Percent Doctrine: “If there’s a 1% chance that Pakistani scientists are helping al-Qaeda build or develop a nuclear weapon, we have to treat it as a certainty in terms of our response.”

It inspired at least one book, one war, and many a comparison to the "precautionary principle" familiar to most environmentalists. It’s also wrong.

One percent isn’t certainty. This doesn’t mean that we shouldn’t take the threat seriously, or that the precautionary principle is wrong, per se. We should, and it isn’t.

Probabilities matter.

Take strangelets as one extreme. They are particles with the potential to trigger a chain reaction that would reduce the Earth to a dense ball of strange matter before it explodes, all in fractions of a second.

That’s a high-impact event if there ever was one. It’s also low-probability. Really low probability.

At the upper bound, scientists put the chance of this occurring at somewhere between 0.002% and 0.0000000002% per year, and that’s a generous upper bound.

That’s not nothing, but it’s pretty close. Should we be spending more on avoiding their creation, or figuring out if they’re even theoretically possible in the first place? Sure. Should we weigh the potential costs against the social benefit that heavy-ion colliders at CERN and Brookhaven provide? Absolutely.

Should we “treat it as a certainty” that CERN or Brookhaven are going to cause planetary annihilation? Definitely not.

Move from strangelets to asteroids, and from a worst-case scenario with the highest imaginable impact, but a very low probability, to one with significantly higher probability, but arguably much lower impact.

Asteroids come in all shapes and sizes. There’s the 20-meter wide one that unexpectedly exploded above the Russian city of Chelyabinsk in 2013, injuring mored than 1,400 people. And then there are 10-kilometer, civilization-ending asteroids.

Size matters.

No one would ask for more 20-meter asteroids, but they’re not going to change life on Earth as we know it. We’d expect a 10-kilometer asteroid, of the type that likely killed the dinosaurs 65 million years ago, once every 50-100 million years. (And no, that does not mean we are ‘due’ for one. That’s an entirely different statistical fallacy.)

Luckily, asteroids are a surmountable problem. Given $2 to $3 billion and 10 years, a National Academy study estimates that we could test an actual asteroid-deflection technology. It’s not quite as exciting as Bruce Willis in Armageddon, but a nuclear standoff collision is indeed one of the options frequently discussed in this context.

That’s the cost side of the ledger. The benefits for a sufficiently large asteroid would include not destroying civilization. So yes, let’s invest the money. Period.

Somewhere between strangelets and asteroids rests another high-impact event. Unchecked climate change is bound to have enormous consequences for the planet and humans alike. That much we know.

What we don’t know — at least not with certainty — could make things even worse. The last time concentrations of carbon dioxide stood where they are today, sea levels were up to 20 meters higher than today. Camels lived in Canada. Meanwhile global average surface temperatures were only 1 to 2.5 degrees Celsius (1.8 to 4.5 degrees Fahrenheit) above today's levels.

Now imagine what the world would like with temperature of 6 degrees Celsius (11 degrees Fahrenheit) higher. There’s no other way of putting it than to suggest this would be hell on Earth.

And based on a number of conservative assumptions, my co-author Martin L. Weitzman and I calculate in Climate Shock that there might well be a 10% chance of an eventual temperature increase of this magnitude happening without a major course correction.

That’s both high-impact and high-probability.

Mr. Cheney was wrong in equating 1% to certainty. But he would have been just as wrong if he had said: "One percent is basically zero. We should just cross our fingers and hope that luck is on our side."

So what to do? In short, risk management.

We insure our homes against fires and floods, our families against loss of life, and we should insure our planet against the risk of global catastrophe. To do so, we need to act — rationally, deliberately, and soon. Our insurance premium: put a price on carbon.

Instead of pricing carbon, governments right now even pay businesses and individuals to pump more carbon dioxide into the atmosphere due to various energy subsidies, increasing the risk of a global catastrophe. This is crazy and shortsighted, and the opposite of good risk management.

All of that is based on pretty much the only law we have in economics, the Law of Demand: price goes up, demand goes down.

It works beautifully, because incentives matter.

Gernot Wagner serves as lead senior economist at the Environmental Defense Fund and is co-author, with Harvard’s Martin Weitzman, of Climate Shock (Princeton, March 2015). This op-ed first appeared on Mashable.com.

By Jonathan Camuzeaux

Originally posted on EDF's Energy Exchange.

The surge in natural gas production that has reshaped the American energy landscape has many in the commercial transportation sector considering whether to start shifting their heavy-duty vehicle fleets from diesel to natural gas fuel. Many are looking to an advantage in carbon dioxide emissions to justify the higher cost and reduced fuel efficiency of a natural gas vehicle.

But in fact, a study published today in Environmental Science & Technology finds that while there are pathways for natural gas trucks to achieve climate benefits, reductions in potent heat trapping methane emissions across the natural gas value chain are necessary, along with engine efficiency improvements. If these steps are not taken, switching truck fleets from diesel to natural gas could actually increase warming for decades.

Methane, the main ingredient in natural gas, has 84 times more warming power than CO2 over a 20-year timeframe. Reducing emissions throughout the natural gas value chain is an important opportunity to reduce our overall greenhouse footprint.

Growing Body of Research

The new study examines several different types of engine technologies, and both liquefied and compressed natural gas fuels, and concludes that a conversion from diesel could lead to greater warming over the next 50 to 90 years before providing benefits to the climate.

These results align with an earlier paper published by EDF scientists in 2012 in the Proceedings of the National Academy of Sciences (PNAS), but reach these conclusions through updated and more detailed data, as well as analysis tackling a wider scope of vehicle sizes, engine technologies, and fuel types.

Pathway to Positive Climate Benefits

By examining a range of assumptions, the new study finds there are indeed pathways for heavy duty natural gas vehicles to achieve climate benefits, provided methane emissions across the value chain are reduced both upstream and at the vehicle level.

Improvements in fuel efficiency could help ensure these vehicles are climate friendly. Today’s natural gas truck engines are typically five to fifteen percent less efficient than diesel engines. Consuming more fuel for each mile traveled reduces the relative CO2 savings. If that efficiency gap can be closed, natural gas trucks will fare that much better compared to diesel.

Upcoming Policy Opportunities

While emissions in the natural gas value chain are a serious challenge, they also represent an opportunity to achieve significant, cost-effective reductions in overall greenhouse gas emissions. Several policy mechanisms are in play that could improve the climate prospects of natural gas trucks. These include recently announced federal upstream methane regulations and upcoming federal fuel efficiency and greenhouse gas standards for heavy trucks.

More information is needed to estimate with confidence the current climate footprint of trucks, and to get a better understanding of methane loss along the natural gas value chain. Significant research is underway to update estimates of methane emissions across the U.S. natural gas system, including the ambitious scientific research effort to publish 16 field studies launched by EDF and its partners.

Advancing Understanding

The paper released today is distinct from this ongoing effort and does not use any data from those studies, but it serves complementary purposes: First, it emphasizes the importance of gathering more and better data on methane loss; second, one of its major contributions is the various “sensitivity analyses” it presents.

These ranges of potential results are designed to understand the implications of changing underlying assumptions about methane emissions and efficiency. Our new paper creates a framework to evaluate the climate impacts of a fuel switch to natural gas in the trucking sector as we gain better data on the magnitude and distribution of leakage and as both leakage and vehicle efficiency evolve due to policy changes and market dynamics.

Policymakers wishing to address climate change should use caution before promoting fuel switching to natural gas in the trucking sector until we are more certain about the magnitude of methane loss and have acted sufficiently to reduce emissions and improve natural gas engine efficiency.

For more detail on the paper released today, please see our Frequently Asked Questions.

Image Source: Flickr/TruckPR

By Gernot Wagner

By Gernot Wagner and Martin L. Weitzman

Each ton of carbon dioxide emitted into the atmosphere today causes about $40 worth of damages. So at least says standard economic thinking.

A lot goes into calculating that number. You might call it the mother of all benefit-cost analyses. It's bean-counting on a global scale, extending out decades and centuries. And it's a process that requires assumptions every step along the way.

The resulting $40 figure should be taken for what it is: the central case presented by the U.S. Government Interagency Working Group on Social Cost of Carbon when using its preferred 3% discount rate for all future climate damages. But it is by no means the full story.

Choose a different discount rate, get a different number. Yale economist Bill Nordhaus uses a discount rate of slightly above 4%. His resulting price is closer to $20 per ton of carbon dioxide. The Stern Review on the Economics of Climate Change uses 1.4%. The resulting price per ton is over $80.

And the discount rate is not the only assumption that makes this kind of a difference. In Climate Shock, we present the latest thinking on why and how we should worry about the right price for each ton of carbon dioxide, and other greenhouse gases, emitted into the atmosphere. There are so many uncertainties at every step—from economic projections to emissions, from emissions to concentrations, from concentrations to temperatures, and back to economics in form of climate damages—that pointing to one single, final number is false precision, misleading, or worse.

Of course, that does not mean that we shouldn't attempt to make this calculation in the first place. The alternative to calculating the cost of carbon is to use a big fat zero in government benefit-cost calculations. That's clearly wrong.

Most everything we know about what goes into calculating the $40 figure leads us to believe that $40 is the lower bound for sensible policy action. Most everything we know that is left out would push the number higher still, perhaps much higher.

It's not over 'til the fat tail zings

As just one example, zero in on the link between carbon concentrations in the atmosphere and eventual temperature outcomes. We know that increasing concentrations will not decrease global temperatures. Thank you, high school chemistry and physics. The lower bound for the temperature impact when carbon concentrations in the atmosphere double can be cut off at zero.

In fact, we are pretty sure it can be cut off at 1°C or above. Global average temperatures have already warmed by over 0.8°C, and we haven't even doubled carbon concentrations from preindustrial levels. Moreover, the temperature increases in this calculation should happen 'eventually'—over decades and centuries. Not now.

What's even more worrying is the upper tail of that temperature distribution. There's no similarly definitive cut-off for the worst-case scenario. In fact, our own calculations (based on an International Energy Agency (IEA) scenario that greenhouse gas concentrations will end up around 700 parts per million) suggest a greater-than-10% chance of eventual global average warming of 6°C or above.

Focus on the bottom row in this table. If you do, you are already ahead of others, most of whom focus on averages, here depicted as "median Δ°C" (eventual changes in global average surface temperatures). The median is what we would expect to exceed half the time, given particular greenhouse gas concentrations in the atmosphere. And it's bad enough.

But what really puts the "shock" into Climate Shock is the rapid increase in probabilities of eventual temperatures exceeding 6°C, the bottom row. While average temperatures go up steadily with rising concentrations, the chance of true extremes rises rapidly:

That 6°C is an Earth-as-we-know-it-altering temperature increase. Think of it as a planetary fever. Normal body temperatures hover around 37°C. Anything above 38°C and you have a fever. Anything above 40°C is life-threatening.

Global average warming of 3°C wouldn't be unprecedented for the planet as a whole, in all of it geological history. For human society, it would be. And that's where we are heading at the moment—on average, already assuming some 'new policies' to come into play that aren't currently on the books.

It's the high-probability averages rather than low-probability extremes that drive the original $40 figure. Our table links greenhouse gas concentrations to worryingly high probability estimates for temperatures eventually exceeding 6°C, an outcome that clearly would be catastrophic for human society as we know it.

Instead of focusing on averages then, climate ought to be seen as a risk management problem. Some greenhouse gas concentration thresholds should simply not be crossed. The risks are too high.

This kind of focus on temperature extremes is far from accepted wisdom. We argue it ought to be.

Gernot Wagner and Martin L. Weitzman are co-authors of Climate Shock (Princeton University Press, 2015). First published by The Institute for New Economic Thinking.