The Yale Environment 360 Debate Continued

An Email Exchange with EDF's Gernot Wagner on the Role of Pollution Pricing and Innovation in Energy and Climate Policy

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Spring 2012 | Ted Nordhaus, Michael Shellenberger,

Wagner emailed us after his article was published, suggesting that we continue the debate here at the Breakthrough Journal. We happily agreed and continued the debate via email. Here's the exchange in full:



From: Ted Nordhaus
Sent: Tuesday, April 03, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Dear Gernot,

We were happy to see your response to our article in Yale 360. With the failure of cap and trade legislation in the U.S. Congress and the collapse of global efforts to cap carbon emissions, the time is ripe for a proper debate about why the twenty year effort to cap emissions has failed and how that might inform the focus of climate and energy policy going forward.

In recent years, a growing chorus of opinion leaders and policy makers have concluded that the time has come to chart a new course forward, one predicated upon advancing pragmatic, bottoms up approaches to decarbonization and adaptation, rather than the top down carbon pricing and regulatory regimes that have dominated climate policy efforts for the past two decades. Your Yale 360 response to our article fairly well captures the alternate view: that caps and pricing are the only way, in the long run, to achieve significant, sustained emissions reduction.

The debate between the climate pragmatists and the carbon cappers and pricers has, to date, largely been waged around the question of political efficacy. Which path toward climate mitigation seems more viable politically? However, in our Yale 360 article, we've actually made a different case, which is that the pragmatist path is the more effective path irrespective of its relative political merits. In our view, climate pragmatism is not Plan B. It should have been Plan A all along.

The purpose of this debate is to more closely interrogate the critical assumptions and evidence that underlie our respective views on this question. However, before doing so, we believe it is necessary to clarify what is actually at stake in this debate.

In your Yale 360 response, you mischaracterize our argument. First you claim that we are arguing that continuing investment in technology R&D can, alone, drive a transition from fossil energy to clean energy. This misrepresents our argument. We are, and have always been very clear that making a full transition to low or zero carbon energy would require some level of either regulation or pricing. In our Yale piece we said,
 

Conventional air pollution regulations do represent a very low, implicit price on carbon. And a lot of good grassroots activism at the local and regional level has raised the political costs of keeping old coal plants in service and bringing new ones online. But those efforts have become increasingly effective as gas has gotten cheaper. The existence of a better and cheaper substitute has made the transition away from coal much more viable economically, and it has put the wind at the back of political efforts to oppose new coal plants, close existing ones, and put in place stronger EPA air pollution regulations.


That doesn't, however, mean that we must have either an explicit price on carbon or a cap on emissions, much less that those strategies must represent the central or primary focus of climate policy presently. As we point out in the Yale 360 article, air pollution regulations, combined with a cheap and widely available substitute, are driving both emissions reductions and the decommissioning of coal plants right now, with no explicit price on carbon or cap on U.S. emissions.

You also mischaracterize our view of innovation, claiming that, as in the case of emissions mitigation, we argue for an R&D only approach to technology innovation as well, neglecting the critical role that deployment plays in the process of innovation. In fact, we have long been leading advocates of large public investments in the deployment of clean energy technology. In the Yale 360 article, we write:
 

All of these [zero-carbon energy] technologies have a long way to go before they are able to displace coal or gas at significant scale. But the key to getting there won't be more talk of caps and carbon prices. It will be to continue along the same path that brought us cheap unconventional gas -- developing and deploying the technologies and infrastructure we need from the bottom up.


By mischaracterizing our argument, you obfuscate your own, which is that explicitly capping or pricing carbon is the only way to effectively achieve emissions reductions and the deployment of clean energy technology at significant scale.

In this, our dispute is centrally about whether decentralized, market based climate policies are the best way to achieve significant technology innovation, clean energy deployment, or carbon emissions reduction.

You suggested a point by point debate on this question, so please forgive us for the length of this opening email. What follows is our case for why a strong focus on energy technology innovation and investment paired with very modest regulatory and/or pricing measures, is more likely to accelerate the decarbonization of the global economy than are cap and trade policies at the national level or carbon caps at the international level.

1. The claim that pricing, is the most effective or likely path to global decarbonization is profoundly ahistorical.

Between 1970 and 2006, only five developed nations achieved a sustained decarbonization rate greater than double the historic global average: Sweden (3.6% per year), Ireland (3.2%), France and the United Kingdom (both at 2.8%), and Belgium (2.6%). 

Sectoral shifts account for much of observed decarbonization in the UK, Ireland, and Belgium. But while off-shoring all of your manufacturing economy might be one way to get your national emissions down, it does not constitute a credible global climate mitigation strategy as it simply shifts emissions to other economies. France and Sweden, by contrast, do provide historic precedent for a policy-driven path to accelerated decarbonization. Notably, both did so by shifting their energy supply systems to zero carbon energy sources, largely by developing state run and subsidized nuclear power programs, not by trying to get firms or individuals to respond to price signals from the market in decentralized fashion. By contrast, there is little historical precedent or evidence that pricing policies are capable of driving a similar rate of sustained decarbonization.

2. There is little evidence to date that the ETS has had any impact upon the carbon intensity of European economies.

The carbon intensity of EU economies has declined at a rate that is slightly above the long-term average since the imposition of the ETS in 2005. But there is little evidence that the ETS had anything to do with it. The higher average decarbonization rate is entirely the result of one exceptional year, 2007, when industrial output in the European Union collapsed dramatically after the financial crisis. In 2010, the last year for which there is data available, the EU was actually recarbonizing - one of only three years in the last 30 in which the carbon intensity of the EU economy actually increased.

The ETS, it turns out, has proven no impediment to Germany's continuing deployment of coal and gas powered power plants. Nor does it appear to present any obstacle to Germany shutting down its entire zero carbon nuclear fleet.

3. Economic models and pricing advocates conflate external energy price shocks with intentional pricing mechanisms.

While the evidence suggests that pricing policies, including high fuel taxes in EU economies (which constitute a very high implicit carbon price) have had at best very modest impacts upon emissions and energy use, pricing advocates often point to external price shocks and the economic response to them, as evidence that pricing can drive significant emissions reductions. But in so doing, they treat the political economic responses to price shocks as if they were market responses to prices, assuming that macro-economic demand elasticities in response to energy price increases are entirely market responses, when they are in fact the result of concerted efforts on the part of political economies around the world to mitigate their economic vulnerability to energy price volatility.

In response to energy price shocks, political economies take all manner of actions to stop the pain. They sometimes impose energy taxes to discourage wasteful behavior, but they also put in place a range of policies to directly shift to cheaper and more available energy resources. In response to the oil shocks of the 1970s, France practically eliminated all coal and oil from electricity generation in favor of nuclear power. In the United States, we put in place a range of policies at both the federal and state levels to shift electrical generation from oil to nuclear and gas, while driving automotive efficiency via fuel economy regulations (CAFE standards). These policy responses, made in largely centralized fashion by policy-makers, not decentralized fashion by markets, all, from the bird's eye view of the macro-economist, look like market responses to price increases. But on the ground, when one looks closely at where the changes in national emissions and energy sources have come from, they are, in most cases, clearly attributable to non-pricing policies and mechanisms.

4. "Adaptive" or "innovative" efficiency, not "allocative efficiency" will be the key to achieving decarbonization.

Whether through a cap and trade program or a carbon tax, "getting prices right" is the underlying objective of all carbon pricing strategies. By internalizing the externalized cost of carbon emissions, the theory goes, markets will establish a new equilibrium at a new corrected carbon price and will then efficiently allocate the costs and benefits associated with mitigating emissions.

These assumptions follow from standard neo-classical welfare economics. By properly pricing a scarce resource, in this case the right to pollute, markets will most efficiently allocate that resource toward the highest value uses, thereby minimizing the social costs associated with mitigating climate change. But what virtually all studies of the costs associated with mitigating climate change consistently find is that the greatest determinant of the cost of mitigation is not how economically efficient the allocation of pollution rights are, but rather the pace at which low cost low carbon technologies become widely available. The rate of technological change, not allocative efficiency will largely determine the social costs of climate mitigation.

The effort to decarbonize the global economy will require one of the most far reaching technological transformations in human history. Finding an optimized market equilibrium at which costs can be efficiently allocated, the central objective of all carbon pricing policies, is almost beside the point. If the next few decades are not characterized more by economic transformation, entrepreneurial "churn," and creative destruction than they are by market equilibrium, climate efforts will have gone badly off track.

5. The economic models that you cite, and upon which the case for carbon pricing is almost entirely dependent, can't account for how technological change actually happens.

Economic models that assess the costs and benefits of various strategies to address climate change assume steady rates of technological change that the economists who design the models, by their own admission (including the elder Nordhaus) don't know how to model. Moreover, most economic models of the costs of mitigating climate change can not be resolved at all without the inclusion of a backstop technology - an assumed zero carbon technology available in unlimited quantities at a predetermined (by the modeler) cost.

Yet neither the economics profession, nor leading environmental organizations, have had much to say about where those technologies might come from. Most, including your employer, simply assume, with little empirical or historical evidence to support the assumption, that technological change would be induced by a carbon price, once one was established.

6. There is scant evidence that cap and trade programs, either in Europe or in the United States, have driven significant technological innovation.

Where relatively cheap and readily available substitutes for conventional practices are available, cap-and-trade has proven to be a good way to encourage their efficient adoption. There is little evidence, however, that cap and trade programs have been significant drivers of technological innovation. Indeed, it now appears that in some circumstances, cap and trade programs actually retard innovation. A new paper by Lawrence Berkeley Lab's Margaret Taylor examined two US cap-and-trade policies - SO2 and NOx - and found that patenting and innovation in technological replacements declined during the planning and operation of the programs in comparison to "traditional environmental regulation" composed of federal rules and mandates. In the case of the Title IV SO2 cap-and-trade regime, emissions reductions were achieved primarily through a switch to less sulfurous coal in power plants and an ongoing transition to natural gas power that predated the planning of the cap-and-trade regime. In the case of the NOx trading program, reductions were driven principally by switching to generation from already existing natural gas and nuclear plants.

7. Nor is there any significant evidence that the ETS has driven significant deployment of clean energy technology, rather than very modest fuel switching from coal to gas in existing energy infrastructure.

You claim that the ETS has driven deployment of clean energy technology in Europe. But there is no evidence to support this contention. To the degree that the ETS has had any impact on Europe's energy choices, it has driven very modest fuel switching from coal to gas, not the disposition of new investment capital to new clean energy infrastructure.

Europe has deployed a lot of new solar and wind generation over the last decade, but that has been driven neither by caps nor carbon pricing, but by enormous direct investments and subsidies for those technologies. Measured as an implicit price on carbon, in order to allow an apples to apples comparison, German feed in tariffs are in many cases ten times larger than the average carbon price established through the ETS. You claim that the ETS has helped make Europe a leader in green technologies, but the ETS has had little to do with it. What has made Europe a leader in green technologies are enormous direct subsidies for green technology, not pricing.

In closing, our dispute is not about the need for innovation and yes, breakthroughs, it is about where we expect those breakthroughs to come from, and what policies will be the primary driver of both the technological innovation and deployment of new technologies that is needed.

We both agree that we need policy to accelerate the deployment of low carbon energy technologies. We differ as to what policies can best achieve that objective. You argue that carbon pricing will both drive the deployment of current low carbon technologies and incentivize firms to make them better. We argue that strategies that are primarily dependent upon pricing attempt to wag the technology dog with the pricing tail and are unlikely to succeed.

Herein lies our real difference. You propose centrally to make dirty energy expensive, while we propose to make clean energy cheap. While past is only prologue, the history of energy transformations would suggest that we are much more likely to achieve the energy transition that we currently must make by making clean energy cheap than by attempting to dramatically increase the price of incumbents through pricing.

Ted and Michael



From: Gernot Wagner
Sent: Wednesday, April 04, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Dear Ted,

Thank you for your detailed response. While tempting to engage on this, I will need to restrain myself and not engage on this further beyond this quick response here.

How can you start with the premise that "the twenty year effort to cap emissions has failed" when it's so clearly the case that from lead in gasoline in the 80s to acid rain in the 90s to, yes, carbon now (and, of course, fish all along, in a different context) it's worked--if anything--surprisingly well. (Taylor's piece is yet another point in support of this: The point isn't to increase the patent count; the point is to decrease emissions. Capping emissions decreases emissions, and does so more cost-effectively than anticipated.)

As I say in my Yale piece, we can and do all agree that we need more RD&D funding. Of course we do. And if your efforts get us more RD&D funding, great. There's great value in writing papers detailing how government funding plays an important role in anything from basic R&D to the shale gas revolution. But if in doing so, you somehow try to dismiss decades of economic theory and practice and something as fundamental as the 'polluter pays' principle, you are not doing anyone--including yourself--any favors.

Best,
Gernot



From: Ted Nordhaus
Sent: Wednesday, April 04, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

What do lead paint and acid rain have to do with carbon? We phased out lead paint neither through pricing or trading. We addressed acid rain cost effectively because we had already developed cheap substitutes. And last I checked, global carbon emissions continue to rise unchecked, most of the world has rejected both carbon caps and cap and trade, and Europe's emissions, as we document below, have been largely unaffected by the policies that you claim must be the central strategy to mitigate global warming. Do you really consider this success?

I will give you points for creativity on the Taylor study though. What the Taylor study documents is that early estimates of the costs of mitigating SO2 were massively overestimated, not that pollution trading was the reason that costs were so much lower. Trading, as we note in our response, helped keep the costs in phase II of the program modestly lower than they would have been under a command and control regime, once regulatory and other policies drove the development of cheap substitutes. But the lion's share of the cost savings were the result of the development of low sulfur coal reserves and cheaper pollution control technologies, not the trading program.

Ted and Michael



From: Gernot Wagner
Sent: Wednesday, April 04, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Lead in gasoline, not lead paint.

Yes, acid rain was mostly about deployment--which is/was my point.

And no, you say little about the EU's emissions. You talk about emissions intensities, which, yes, do jump around year by year (mainly of course because the denominator jumps around when you go in and out of recessions), but even there the long-term trend has been clear. And in the end it's absolute emissions the planet notices. (Follow the orange lines in
http://e360.yale.edu/slideshow/innovation_is_not_enough_why_polluters_must_pay/75/1/)

Gernot



From: Ted Nordhaus
Sent: Wednesday, April 04, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

The phase out of leaded gasoline was driven by regulations and standards in most places, not pricing. All new cars in the US since the mid 70's have been incompatible with leaded gasoline. Pricing, where it has been implemented, was at best a sideshow. You concede our point on acid rain. it was development and deployment of new technologies and a cheap, widely available fuel, low sulfur coal, that drove the low costs, not pricing or trading. And you also concede our point on EU emissions. The long term trend that you reference long predates the imposition of the ETS and even Kyoto. The long-term trend of decreasing emission intensity has been consistent since at least 1980. There is no evidence, irrespective of the short-term jumping around, that any of the policies that you advocate have had any influence upon it.

Ted and Michael



From: Gernot Wagner
Sent: Wednesday, April 04, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Ted,

For lead in gasoline, please see http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=17209 and related publications.

Yes, acid rain was about deployment. Similarly, we can achieve US emissions reduction goals for 2020 and possibly even 2030 through deployment of existing technologies. (Does that mean new technologies are unnecessary? No. See "induced technical change.")

Re EU: Yes, there's a long-standing, secular trend around decarbonizing growth. Absolute, production-based emissions have also been relatively flat or even declining. Still, orange lines below (historic) purple line = emissions down:
http://e360.yale.edu/slideshow/innovation_is_not_enough_why_polluters_must_pay/75/1/

See Ellerman et al's Pricing Carbon for much more on that--or for that matter my book, or Bill's forthcoming one, or decades of enviro-econ literature.

To briefly elaborate on that last point, I do think that this 'debate' around 'climate pragmatism' is about much more than any of these particular points you'd like to debate here. Try this parallel--pasted from someplace else, so apologies for shortcut language at times:

The main points from climate science are no longer up for debate: the planet is warming; humans are the cause of it; we need to limit emissions. 97% of climate scientists agree. If you disagree, you are factually wrong.

The main points from climate economics are no longer up for debate: carbon is a pollutant; we need make polluters pay, either through a cap or a price. Virtually all economists agree--from Holtz-Eakin, Laffer and Mankiw on one side to Stieglitz, Sachs, and Krugman on the other.

Once again, this one is not up for debate. You can argue that politically we can't get there, so we need to do other things in the short term, but it's not up for debate whether this is the economically correct solution.

So yes, you can have commentators debate the political realities of doing one versus the other, and you can have economists debate the cost-effectiveness of EPA standards versus feed-in-tariffs, etc. You can also have serious people debate whether we need to subsidize clean energy more than we are now. (Yes, we should.) And lastly, you can have very real economic debates around whether to tax or cap carbon.

But it's not up for debate whether "carbon = pollutant" leads to the need to cap or price carbon. It does.

So to go with your line, "does climate science tell us to pass cap and trade?" No it does not. But it does tell us to limit emissions. And century-old economics tells us to cap or tax them.

Gernot



From: Ted Nordhaus
Sent: Wednesday, April 04, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

The first paper you cite concedes in the very first page that:

"The eventual phasedown of lead in gasoline is largely attributable to the decreasing share of leaded gasoline that resulted from the transition to a new car fleet."

Your citation concedes our point, even if you have not. Tradable permits, as I stated in my last email were a sideshow. The main event was the result of an explicit technology forcing policy, the mandate that all cars after 1975 run on unleaded gasoline and that all gas stations sell unleaded gasoline.

You note that we will meet 2020 emissions targets with existing technology. You neglect to mention that we will likely come very close to doing so with no climate policy to speak of, by replacing coal with cheap gas developed through direct government investments in technological innovation, not pricing or caps. With modest CO2 standards, continuing cheap gas, and continuing support for renewables and nuclear, it's entirely possible we will hit 2030 goals as well, all without imposing a massively complicated, economy wide cap and trade scheme and handing out trillions in free permits to polluters.

Finally, your comparison of climate economics to climate science suggests a brand of hubris that doesn't serve you well. Climate science offers us a physical theory backed by physical observations of mean global temperature going back tens of thousands of years. The reason that climate change is broadly accepted is that climate scientists have demonstrated that global temperatures have diverged significantly from the historical trend over the last hundred years in ways that are consistent with the physical theory.

By contrast, you offer us economic theory that depends upon a broad generalization and extrapolation of micro-economic observations to overly broad macro-economic conclusions. As a result, your case that the ETS has driven recent emissions declines in Europe is based entirely upon a counterfactual model, one rife with all sorts of assumptions about what would have happened in the absence of the ETS. Our case that the ETS has had little impact, on the other hand, is based upon comparing the actual rate of EU decarbonization since the ETS was established with the long-term historical decarbonization trend among EU economies.

Now ask yourself, which of these evidentiary claims looks more like the evidentiary basis for establishing that human emissions are warming the planet? Climate science looks at the long term global temperature trends, controls for short-term variations like sun spots and sea temperature oscillations, and finds that since human carbon emissions began rapidly accumulating in the atmosphere, temperatures have diverged substantially from the long term trend in a manner consistent with the theory. Similarly, we can look at the long term decarbonization trend among EU economies, control for events such as recessions, and then look to see whether, since the imposition of the ETS, EU emissions have diverged significantly from that trend in a manner consistent with your theory. And when we do that, what we find is that they have not. This represents a rather stark contrast to the two examples of decarbonization that we gave. France and Sweden both decarbonized at double the historic rate, and double the rate of most of their EU neighbors by directly deploying a new, low carbon technology, nuclear energy. Given that, which path to decarbonization seems more likely to work?

Ted and Michael



From: Gernot Wagner
Sent: Wednesday, April 04, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Ted,



This 'debate' is exactly the reason why science -- including the dismal science -- advances in scientific papers and not on blog posts or on email exchanges.

It is, in fact, economics 101 that tells us to cap or tax pollution. It's economics 102 that teaches us about the process of technical progress, a place where Breakthrough could serve a very useful purpose. Denying economics 101 while trying to make an economics 102 point, though, isn't the way to go.

Best,
Gernot




Pl excuze brevity and typos. For a typo-free, book-length argument, go to: www.maketheplanetnotice.com




From: Ted Nordhaus
Sent: Wednesday, April 04, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

Your retreat to "scientific papers" rings a bit hollow, given that it was you, not we, who suggested that we have a point by point debate on our blog!

There is in fact a rather large body of peer reviewed literature challenging many of the verities neoclassical economists have insisted are "not up for debate" including "polluter pays," it's just mostly not published in the neoclassical economic literature. That is unfortunate, as a more ecumenical debate about the foundational underpinnings of economic theory and policy would serve both the discipline and policy makers much better.

But when all you have is a hammer, to borrow an old saw, the whole world looks like a nail. and the result of the neoclassical economist's preoccupation with allocative efficiency is that every problem looks like a market failure and the solutions is always the same: price it. Environmental economists recast what is centrally an innovation challenge as a distributional challenge and then tell us that the most important thing is to "get the prices right." If only it were so.

Repeatedly in the course of this debate, you've offered case studies (leaded gasoline and acid rain) for the efficacy and centrality of pricing that upon further interrogation, you are forced to concede were at best ancillary to the main event. In virtually every case, pricing turns out to be the tail, technological change the dog. It's not that there is no place for pricing. In the right context, at the right point in the trajectory of a technological transformation, pricing can be an efficient way to allocate mitigation costs. But the insistence that it has been the central driver of pollution mitigation strategies historically, much less that it will be the central driver in the effort to mitigate global carbon emissions, a technological challenge that dwarfs acid rain or leaded gasoline or any of the other environmental challenges in which pricing has played any role at all, is not well supported either historically or empirically.

Ted and Michael



From: Gernot Wagner
Sent: Thursday, April 05, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Ted,

I did suggest to debate these points in the Breakthrough Journal--before I realized it was neither. The fact that you liken it to a blog is indeed telling. (Not that there's anything wrong with blogs, but again, there's a reason why science advances in journals and then gets broadcast via blogs, not the other way around.)

It would be good, for example, to figure out conclusively how EU ETS drives emissions reductions. The way to have that debate is to figure out why absolute emissions have declined since 2008 when the system came into force. (Yes, there are real discussions to be had around the role of fuel switching vs deployment of new technologies vs Germany's renewables policy vs recession, etc.) It's not much of a debate when one of us points to the fact that absolute emissions have gone down, and the other counters by pointing to emissions intensities (absolute emissions divided by GDP). It's absolute emissions the planet notices.

And no, this isn't a philosophical debate around 'neoclassical' vs 'behavioral' vs other kinds of economics. It's just good economics, or in other words organized common sense. (Take a look at www.youtube.com/watch?v=hiPz5JQWF-s for more on that.) I bet if you asked Dan Kahneman himself, he'd still tell you that 'carbon = pollutant' implies cap or tax carbon.

Best,
Gernot



From: Ted Nordhaus
Sent: Thursday, April 05, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

I suspect that your beef is not with the venue for this debate but rather the direction the debate has taken. Was it really so inconceivable to you that we might question neoclassical dogma on questions like pricing pollution? In this, you seem rather confused about the distinction between theory and fact. The fact that in various contexts, you can observe a relationship between prices and behavior does not mean that relationship holds in every context or circumstance. Your theory tells you that emissions go down when you price them. But that doesn't mean that EU emissions have gone down because there is a price on carbon. The latter is a testable proposition.

EU emissions have been declining at a fairly consistent rate for many decades. A fair test of your theory would be to ask whether EU emissions have declined more rapidly since the imposition of the ETS than they were before. To answer that question, one must not simply look at absolute emissions which can decline for all manner of reasons, like say the deepest recession since the Great Depression, which happens to exactly coincide with the period that you have cherry picked in order to claim that the ETS is responsible for the decline in EU emissions between 2007 and 2009. How do we know that it was the ETS, and not the recession that is responsible for the decline in emissions?

You have implicitly acknowledged that you can't just look at absolute emissions to answer that question, as you have repeatedly cited the chart that you posted with your Yale 360 article, which compared absolute EU emissions with a counterfactual baseline. The counterfactual baseline is the level of EU emissions that you claim would have resulted had the ETS not been established. Given the same rate of economic growth and the same recession, your chart attempts to estimate what EU emissions would have been otherwise. You are, in other words, comparing EU emissions intensity with the ETS to an estimate of EU emissions intensity without the ETS.

So let us dispense with the canard that the test of the efficacy of the ETS is absolute emissions not emissions intensity. The only way to determine whether the ETS resulted in any ADDITIONAL emissions reduction beyond what would have happened without it is to assume that EU GDP would be the same over the period in question in either scenario. You are calculating your no ETS counterfactual by assuming a rate of emissions intensity decline without the ETS and then estimating what absolute emissions would have been given actual GDP over the period. You acknowledge this at the bottom of your chart. In order to demonstrate that the ETS has reduced emissions, you assume that the EU economy would have decarbonized at an annual rate of 1% had the ETS not been in place. Seems reasonable until you check that against the actual historic decarbonization rate of the EU economy. From 1980 to 2010, the EU's annual decarbonization rate was 2.1%, more than twice the rate you assume in your counterfactual. From 1989 to 2010, it was 1.7%. From 2002 to 2010, it was also 1.7%. Choose any sustained time period over the last three decades, and the annual decarbonization rate is substantially higher than the rate that you assume in your counterfactual.

You know as well as we do that the test of the ETS is whether it has reduced emissions more rapidly than they would otherwise have declined without it. That is why you compared EU emissions under the ETS with a counterfactual that estimates what they would have been without it. It is hard not to conclude that the reason you chose to show a counterfactual that dramatically understates the EU's historic decarbonization rate was so that you could claim that EU emissions under the ETS were consistent with pricing theory. We would suggest that a real scientist, even a dismal scientist, would reconsider his theory when the facts fail to conform with it rather than misrepresenting the facts in order that they fit the theory.

Ted and Michael



From: Gernot Wagner
Sent: Friday, April 06, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Now you are on to something. Yes, there's indeed a testable hypothesis here: Does capping or pricing pollution lead to a decline in pollution?

I'd challenge you to go out and tally the number of studies and other examples you can find that support this hypothesis, and then compare it to those that show the opposite. My prior would be that something very close to 100% of examples you find will point to the fact that pricing or capping pollution does indeed lead to declines in said pollution.

And again, that has little to do with 'neoclassical' or any other type of economics. I'd call it common sense: price goes up, demand goes down. Economists typically call it the "law of demand"--one of the very few laws we've got. Plenty have looked long and hard for counterexamples, mostly in vain. Here's one very rare exception: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.4.1553

From page 2:

"Perhaps as persuasive a proof [of the "Law of Demand"] as is readily summarized is this: if an economist were to demonstrate its failure in a particular market at a particular time, he would be assured of immortality, professionally speaking, and rapid promotion while still alive. Since most economists would not dislike either reward, we may assume that the total absence of exceptions is not from lack of trying to find them." Stigler (1966, 24).

There are also plenty of more intricate hypotheses to test. One is whether EU ETS has led to additional emissions reductions. That's indeed a tougher one precisely because of the recession and all the other renewables and related policies in place in Europe. Once again, though, and at the risk of oversimplifying an indeed difficult problem, I'd urge you to look at the orange lines in the graph and follow the trend. Did the recession help in achieving the first target? Of course. Was it all recession and no ETS? Highly unlikely. Ellerman et al (2010) is the most comprehensive account I know of, and it presents fairly convincing evidence that ETS has played a significant role. And when you follow the ETS targets past 2012, you see that it will all but guarantee further reductions.

By the way, the 1% assumed decarbonization rate used by Ellerman (2010) to draw the counterfactual line is for EU sectors covered by the emissions trading system, not all of the EU. Pages 164 onward have all the details. Does Ellerman use the perfect measure? No. (He divides ETS emissions by EU GDP, for example, for lack of better sectoral output data.) And yes, he projects out trends from earlier in the decade, not from the full time series he could find, for all the obvious reasons that the most recent trends are most relevant.

Moreover, the counterfactual actually seems to be fairly conservative precisely because of the recession. There seems to be a negative correlation between growth and carbon intensity. So, normally, during a recession of this magnitude, carbon intensity would increase as the economy falls back on less high-tech and more carbon intensive goods and services. That's in fact what you appear to find in your Yale piece (and then mistakenly try to ascribe that to the ETS rather than the recession).

Yes, there are real debates to be had around all of this. And there's real value in you drawing attention to the fact that we need investment for RD&D. But once again, denying econ 101 realities ('polluter pays' works in theory and practice) to make econ 102 points (around induced technical change--where once again the price incentive is crucial) isn't the way to go.

With that, I hope you understand that it's about time to get back to real work.

And in the meantime, happy holiday weekend,


Gernot



From: Ted Nordhaus
Sent: Friday, April 06, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

Your problem is not that we can't read your graph, it's that we can. Assuming a 1% historical decarbonization rate for your counterfactual, whether done by you or Ellerman is simply misleading and ahistorical. There is a brief period from early in the last decade, just a few years, when decarbonization rates approached the rate that Ellerman assumes. But this is cherry picking of the highest order. You acknowledge this yourself, earlier in this debate, when you wrote, "You talk about emissions intensities, which, yes, do jump around year by year (mainly of course because the denominator jumps around when you go in and out of recessions), but even there the long-term trend has been clear." Yes, the long term trend is clear, it is roughly double the assumed rate of decarbonization that you and Ellerman cherry pick to show that EU emissions comport with your theory.

Does the economic literature find a demand response to prices? Sure. But again and again in this debate, your claim that pricing policies have been the primary driver of pollution reduction have proven to be vastly overstated. 80% of the phase down of leaded gasoline had been achieved BEFORE tradable permits were introduced for refineries that were still producing leaded gasoline. The key economic and technological innovations that resulted in SO2 reductions at costs well below early estimates were underway long before tradable permits were introduced in Phase II of the U.S. acid rain program. Did pricing help manage costs, once cheap substitutes were available? Sure. But the suggestion that this shows why pricing or cap and trade ought to be the central strategy to address climate change is not remotely supported by these examples.

Similarly, if you asked us whether we thought that the establishment of a price on carbon had had any impact on EU emissions, we'd tell you it probably had had a very modest effect. But when you need to fabricate a counterfactual BAU emissions scenario based upon understating the historic rate of decarbonization by half in order to see any effect, that would suggest that the effect has been at best, extremely modest. Here you have imposed a significant carbon price on over 60% of the EU economy for almost a decade and you can't see any measurable change in the long term rate of decarbonization. This, it seems to me, would suggest that the major forces determining the long term trajectory of EU emissions and emission intensity lie elsewhere. Perhaps, once the smoke clears from the recession, we will see that the ETS and other policies have resulting in a sustained divergence of EU emissions intensity away from the historical trend. But to date, we haven't seen that, nor do the historical examples in the economic literature suggest that this is a likely outcome. The only basis for that claim at this point are models, which as we've demonstrated earlier in this debate, overgeneralize from much smaller scale experiences like lead in gasoline and acid rain and make a range of rather heroic assumptions about the rate of technological change, the availability of a backstop technology, and the existence of enormous amounts of "spontaneous" future decarbonization hidden in the baseline emissions scenarios from which climate economic models estimate the pace and cost of mitigation.

Ted and Michael




From: Gernot Wagner
Sent: Friday, April 06, 2012
To: Ted Nordhaus
Cc: Michael Shellenberger
Subject: Re: e360 piece


Seriously?

I realize research is hard work--it's called "re-search" for a reason--but please do read at least the few pages where Ellerman explains the methodology. If you disagree, let me know which points you disagree with. Again, it would be good to get to the bottom of any of this, and there are indeed some real debates to be had. That's difficult to do though when it's increasingly clear that you aren't actually interested in getting to the facts but are rather gunning for a few choice pull-out quotes that would sound good in your journal.

(Needless to say, I have no interested in seeing any of this 'debate' under your logo. I also just stopped by your blog for the first time. Pretty amazing how your entire operation seems to be geared toward propagating contrarian-sounding views that once in a while get you some attention and get picked up by an editor somewhere, but otherwise are just that: contrarian for the sake of wanting to be different from the pack.)

OK, so substance again very briefly. It's tough for me to see how Ellerman's assumed 1% decarbonization rate isn't conservative (i.e. it leads to a conservative estimate of the impact of EU ETS). But even if you doubled it, as you suggest in your last response, you'd still end up above the legal limit for all three applicable years: 2008, 2009, and 2010. So even with assumptions that are very hard to believe, you'd still get to EU ETS having a material impact.
 

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And once again, I'd encourage you to look to the horizontal lines in the graph. Even if the recession or something else was solely responsible for meeting the 2008 target (which evidently isn't the case), how do you assume we would get to the 2013-2015 target? Another recession? I'd put my money on EU ETS and all the other processes the policy set in motion.

Just for the record, let me end this 'debate' by going back to my Yale piece. Here's what I said verbatim:

It's difficult to determine the portion of emissions reductions achieved by each of these policies, especially given the economic downturn and other external factors. What is clear is that total emissions in the sectors covered by the EU's Emissions Trading System have declined by 4 percent from 2007 to 2010, the last year for which comprehensive data is available. [Why did I choose 2007 and 2010? Well, 2010, because it's the last year with comprehensive data; 2007 because it's the last year before the compliance phase came into effect. Yes, there was a trial phase before, but it was just that. By the way, even that trial phase with all its built-in design flaws--like overallocation and allowances expiring in 2007, which of course drove prices to zero--seems to have led to some small measurable emissions decreases.] The decline is expected to continue in the years ahead. (View a graphic).

Nordhaus and Shellenberger try to argue that Europe's cap has been counterproductive. To support their claim, they focus on emissions intensity -- emissions per unit of economic output. That is fundamentally the wrong metric. The planet doesn't care about emissions per dollar. It's absolute emissions that count.

Moreover, Nordhaus and Shellenberger are forced to cherry pick data to make their case.

They pick 2008-2009 and argue that energy intensity in the power sector increased despite cap and trade. It's true, EU energy intensity did increase slightly by around 0.3 percent that year. [By now I know that was in fact due to the recession, precisely because of the shifts to low-tech, emissions-intensive production during a downturn. Moreover, given the fact that intensity has actually gone up in 2008-2009, I think we can all agree now that the 1% assumed improvement overstates what happened at least for that one year--i.e. another reason to believe that the counterfactual Ellerman constructed was actually conservative.] More to the point, however, Europe's overall energy intensity -- much like the United States and most everywhere else on the planet -- has declined consistently over time. [So yes, there's a clear trend toward decarbonization. If we extrapolate the most recent, relevant trend, we get around 1% a year. Even if we double that, as you suggest, we still have the counterfactual point toward EU ETS having a material impact. And once we include everything--e.g. the actual re-carbonization during the recession--the case becomes even clearer.] Even in 2008-2009, absolute power sector emissions decreased, and that wasn't a fluke. The latest (partial) data show fossil generation in large EU states fell 3 percent in 2011. [Once again, in the end it's absolute emissions that matter.]

So let me really end it here with this numbers 'debate.'

What's still amazing to me in all of this is that there would indeed be a crucial role for someone to call a spade a spade and for example provide some straight talk on the silliness of Earth Hour. But it seems like that you've gone so far off to one side of always wanting to be the contrarians in the room that you lack credibility even for something as clear-cut as making that particular point. I'm just glad I'm working for an organization that prides itself in putting science first and doesn't require me to twist myself into a pretzel to make my points.

Amazingly enough, it wouldn't even take all that much for you two to (re)gain a bit of that credibility. All you'd really need to do is drop the cheap talk against econ 101--the 'law of demand,' at the very least--and perhaps start the occasional public comment by saying that, yes, making polluters pay decreases pollution, as generations of grad students have shown in painstaking research. Yes, the two years of lead trading were an example of that. SO2 trading certainly was. The gazillion papers written on gas and carbon taxes would fall into that category. And by now we can point to examples from India's coal tax to China's seven regional cap-and-trade pilot systems to British Columbia's carbon tax to ETS's in Europe, New Zealand, California and elsewhere that are just waiting to be studied in a similar fashion.

Happy holidays,
Gernot



From: Ted Nordhaus
Sent: Friday, April 06, 2012
To: Gernot Wagner
Cc: Michael Shellenberger
Subject: Re: e360 piece


Gernot,

We've reviewed Ellerman. Have you bothered to look at a single link or citation we've sent you? Or even many of the citations you've sent us? The RFF paper on lead in gasoline that you claim shows that emissions trading was key to phasing out lead in gasoline concedes:

"The eventual phasedown of lead in gasoline is largely attributable to the decreasing share of leaded gasoline that resulted from the transition to a new car fleet."

The Margaret Taylor paper on acid rain shows that acid rain mitigation costs were much lower than expected due to technological innovation that occurred well before emissions trading began, NOT because emissions trading resulted in dramatically lower mitigation costs.

Ellerman, for his part, chooses to ask a very complicated question (did the ETS result in emissions reductions in capped sectors of the EU economy) rather than a simple one (has the ETS resulted in a significant decarbonization of the EU economy above and beyond what the historic trend would predict). By Ellerman's own acknowledgment, the former is very difficult to answer, because there is no good data for the sectors in question prior to the implementation of the ETS to compare emissions with, and because there are so many other confounding factors. As a result, Ellerman has to create a complicated counterfactual model, rife with all manner of assumptions about past emissions in capped sectors.

By contrast, there is a much simpler question to ask, requiring none of the faux precision which you impute to Ellerman's work. We've now had close to a decade to see what impact the imposition of a carbon price upon over half the EU economy has had on the emissions intensity of the EU economy. The long-term trend shows historic annual decarbonization at 2.1% (since 1980). The trend since the establishment of the ETS in 2005 is 2.3%. The deep recession alone is more than adequate to explain the modest difference between the short term rate since 2005 and the long term rate since 1980.

As I noted in my prior response, perhaps, after the smoke clears from the recession, it will become clear that emissions intensity since the imposition of the ETS has significantly diverged from the long term trend prior to its establishment. If that is the case, there will be no need for complicated models or elaborate counterfactuals to see that this is so. In the meantime, the complexity of the modeling necessary to observe any effect from the ETS would suggest that the impact has been both extremely modest and entirely inadequate to the rate and scale of decarbonization necessary to have any impact on the global climate.

In contrast to your theories, "laws," and models, we do have real world examples of policy driven decarbonization, in France and Sweden, and they don't look anything like the policies you prescribe. Because economists misspecify the problem - seeing it as a failure of markets to properly price an externality - they offer the wrong solution - price carbon to internalize and allocate the costs of mitigating emissions most efficiently.

In fact, most of the costs associated with mitigating carbon, as was the case with acid rain, will be determined by the pace of technological change, not the efficiency with which costs are allocated and most of the carbon externality associated with energy use has been the result of investments in energy and transportation infrastructure made either by public entities or closely regulated private monopolies responding to public desires for better and cheaper energy and transportation, not by private firms operating as profit maximizers in decentralized markets. Yet economists continue to fetishize allocation efficiency, even though technical change will determine the lion's share of the cost of mitigation and imagine that markets will remake our energy and transportation infrastructure even though they are still overwhelmingly owned and/or heavily regulated by the public sector. If all you have is a hammer, and all that...

It seems like this debate has pretty well run its course and we should probably at this point agree to disagree and allow others to make up their own mind.

best, and thanks for engaging.

Ted and Michael


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