 I hope you've enjoyed, I trust you've enjoyed the proceedings up to now and will continue to enjoy them over the next few days. As indicated, I am a professor in the economics department. I focus on environmental policy and a lot of my work has been focused on issues of climate change policy at the national level in the U.S. and also in California. I've also begun to do some work on some very exciting developments in China to introduce a nationwide emissions trading program in China, which will be very relevant to what Hajim and Casey are going to talk about immediately following my talk. So I'll talk for maybe 20 minutes. I'd like to leave a little time for your questions and discussion. If as I go along you have questions, comments, that's fine too. So the title here is U.S. Climate Policy and I'm going to say something about climate policy in the U.S., both at the federal level and at the state level. And as the subtitle indicates, I want to go beyond looking just at issues of what can we do with low cost, what are the costs. I want to talk about issues of fairness. How can you make sure that the policy distributes the benefits and costs, especially the costs in a way that's equitable across parts of the country, across income groups, across generations, across ethnic groups, and how can you try to get it through the political filters. That's a lot to do in 20 minutes. So I'll just speak briefly about each, but I'm going to try to see if there's a way that one can, as you say, thread the needle. Come up with a combination that deals with all three dimensions. And just to start, I'm going to plug the book, you'll get the book. The book we completed last December and maybe the most poorly timed release of a book in history. But my only answer to that is we're playing the long game here. Maybe after the midterms things will change or after the next presidential election. What we've put in the freezer will still be digestible. And we look at four different kinds of policies. These are all at the national level, though I will be talking about policies, state policies a bit. And do I dare? Up and down. That doesn't sound right. Oh, okay. Okay. Carbon tax, revenue neutral, meaning that whatever money brings in from the tax is then recycled back to the private sector in some form, maybe by cutting other taxes. Cap and trade, which is very similar to carbon tax, and you'll talk about that more after this talk, after my talk. A clean energy standard. We already have energy standards in the form of renewable portfolio and renewable fuel standards in about, well, at least renewable portfolio standards. We have them for about 29 states already, but this would make it nationwide, or an increase in the gas tax. Now let me start with some cost considerations. I'll throw some economics at you, but then we'll move on to other dimensions like fairness and political feasibility. Economists tend to embrace these instruments over other approaches to reducing greenhouse gas emissions. And there are a number of attractions I'm going to emphasize too. One of them is that is cost effectiveness. Cost effectiveness is measured by how much it costs to achieve a given target, like a certain percentage reduction in emissions. And at least in theory, and a lot of the empirical studies bear this out, these approaches by pricing carbon, by putting a price on emissions, either through a carbon tax or through cap and trade, they encourage reductions where they can be achieved most cheaply. And that saves you money in terms of reaching a given target most cheaply. This gives the facilities flexibility to decide how they're going to avoid tax or avoid having to buy more cap and trade emissions permits. And they reduce up to the point where it's still worthwhile for them. They don't reduce so it's too costly or though it's not costly enough relative to the tax. That has nice properties. In economics jargon, it means that the marginal costs of abatement are equated to the price of the tax or the price of emissions allowances. That maximizes cost effectiveness. A clean energy standard, and I have a paper that says a clean energy standard would be a nice alternative, as well as in the book. But it may not be quite as good because it's not quite as flexible. It's hard for regulators to know where to set the standard across different technologies or across different industries in a way that's as cost effective. The second main attraction of carbon taxes and cap and trade, and they're very similar in that they both effectively put a price on emissions, is the gains from whatever revenue you might get from the tax, or in the case of cap and trade if you're auctioning some of the emissions permits, whatever revenue you get from the auction, those revenues can be put to a good purpose. One is they can be part of a tax swap. That is we're going to instead of having such taxes on good things like income or on labor, we're going to devote taxes more to problematic things like pollution, use the revenue to cut the good taxes. That kind of tax swap can make the economy work better. And that's one thing, it produces efficiency gains at lower costs because it avoids what economists call the distortions or deadweight loss. Those of you that have some economics, you're familiar with that concept that comes from ordinary taxes. But not all taxes are equal. Not all taxes are created equal in the sense that a tax on an externality like pollution emissions or in particular carbon dioxide emissions, that's not creating a distortion. That's in fact help remedy or reduce the distortion from the fact that you've got this external effect that ordinarily facilities don't take into account. The other thing you can do from recycling is you can use the revenue to help finance investments in, let's say, green projects. And in the state of Washington, initially there was an initiative to have a revenue neutral carbon tax and it got voted down because environmental groups didn't like the way that the revenues are being used, they were being used to cut taxes. They much preferred that the revenues be used to finance green projects and it looks like they're working out a compromise where the revenues will be used both ways. But both of these are attractions. But their drawbacks, one is you might argue it's not fair, carbon tax or even cap and trade could disproportionately hurt low income households because it's going to raise the prices of electricity in general and transportation, goods and services that are disproportionately large share of the budget of low income households. So they would disproportionately suffer a greater loss of real income in proportion to their original income. So what do you do about that? And I'll suggest there are ways to avoid that. The other issue is they may be less politically feasible. Taxes are salient, you see them. In contrast, when you introduce technology standards, the cost may not be as easily observed. There still is a cost but it's not as obvious and a lot of people just don't trust taxes. They don't like the fact that you're going to get some money into the government. They're not sure that the money is going to actually be recycled and instead may feed the beast in the sense that it'll just enlarge government spending in general. So there are drawbacks and I want to look at these. George Schultz, I don't know if he talked about this but he and several other very eminent economists, Marty Feldstein was previously head of the Council of Economic Advisors. So was Greg Mankiw, he's a Republicans by the way, Hank Paulson, head of the Treasury. James Baker was Secretary of State. Eminent Republicans have come out in favor of a carbon, basically they don't call it a tax. They don't use the T word but it's the case for carbon dividends and hopefully this will have some effect but currently in the current political climate, big, big challenges. Just to give you an idea of some of the political challenges as well as opportunities, I just suggested that a carbon tax may be good on economic grounds, cost-effectiveness grounds, so could cap and trade but notice, and this is the recent Stanford ABC News RFF Resource for the Future study, the public's opinion or support varies a lot depending. If it's involving raising taxes, which a carbon tax would do, it actually would raise the price of both electricity and gasoline. The public tends to be more opposed, whereas if it's tax breaks to build nuclear plants or for renewable energy or tax breaks for smokestack scrubbers, there's less opposition, much more support. So maybe one needs to be very flexible here but I think there's a certain handicap faced by anything that involves taxes and indeed some of this also applies to cap and trade, more on this in a sec. But in terms of the economic case, growing a little more economics at ya, the fundamental concept in economics is that markets don't work well when there's something called an externality, when there's a cost that's not being generally taken account by those that decide how to produce. And a paradigm case of an externality is the damage to climate and human beings and other species, generally quality of life, that comes when you combust certain fuels that release CO2 and other greenhouse gases. That externality means that the market isn't really getting folks to economize or to wean themselves enough from these damaging activities and what a tax, a price on carbon does, whether it's through cap and trade or through carbon tax is it makes individuals, producers and consumers take account of these costs when they make decisions just in the way they take into account the usual costs that you face when you pay for electricity or gasoline or when you buy food or when you decide what car to drive. It's a matter of internalizing a cost that ordinarily isn't taken into account. And that's the theory is that when you do that, the benefits you get in terms of the avoided damage to the environment be it in the form of climate change or local pollution or water pollution or species loss, those benefits will exceed whatever economic sacrifices are involved. And just to get one example from the book, we measured the benefits in terms of the so-called social cost of carbon, the central value used by the Obama administration. How many of you have come across the term social cost of carbon? It's a measure of what the environmental damage would be per ton of carbon released in the atmosphere as in the form of global climate change or equivalently it's a measure of the benefit from reducing by one ton emissions of carbon dioxide. When we calculate those benefits against the cost, the net benefits, environmental and health gain, climate gain, benefits to climate and benefits to health, they far exceed the cost. It depends how much emissions reduction you do but you see these benefits continually exceed the cost and we do it depending on what discount rate you're using to measure the future benefits. The higher the discount rate, the more we're discounting or lowering the future benefits but even with a high discount rate, this is in the positive orphanage that is the benefits exceed the cost. So it says it's may not be a free lunch but as I often say it's a lunch worth buying because it may come at a cost to the economy but we're getting benefits that exceed those costs. So that's the economic side, it suggests to sum up. One, the carbon tax and camp and trade is a particularly cost effective way to go. They face political obstacles. They are worth the price in the sense almost all studies indicate. I can't even think of a study that doesn't. The real quibble is about whether it costs anything before you take into account the environmental benefits. That these benefits exceed the cost it's worth doing so why don't we do it? Well, there's such a thing out there as information and politics and special interests and what do you do about that? Well, let's talk first about ethics before we get to the politics. Can it be made fair? Again, I already mentioned that if you introduce a price on carbon dioxide emissions it could be unfair. It could disproportionately burden low income households. Is there a way around that? Well, let's take a look. This is from the book. If the question is whether the impact would be regressive, a regressive impact is one in which the loss of real income or the increase in the cost of your basket of good and services is higher for low income groups as a proportion of your income than for high income groups. Well, this from the book says, yeah, it looks unfair. But each of these downwards facing bars indicates the loss of real income as a result of the higher prices. And these are quintiles. So this is the lowest income fifth of the population. This is the highest income fifth and these are in the middle. As a proportion of their income the impact is worse for the lowest income folks. So that looks pretty bad, but there is a way around. Let's suppose you recycle the revenues and depending on how you recycle the revenues you can undo this. And here's what happens if you recycle the revenues depending on how you do it whether you give it back as a rebate check cut social security or payroll taxes cut individual income taxes or corporate taxes this no longer is sloping like this it's no longer worse for the lowest income groups. In fact, the overall incomes impacts on the higher income group on the lower income groups are positive after you rebate the revenues. And this is if you cut these tax rates all in the same proportion. So you get rid of the regressivity. So one thing that folks should keep in mind and policymakers are beginning to recognize this is that before we talk about fairness we have to think about the whole package. Don't just think about the effect of introducing the carbon tax. Look at the overall effect after you have done something with the revenue. And if you use the revenue for example to cut individual income tax rates or corporate tax rates proportionally or give it back as a rebate check it now helps the lowest income groups. Okay, so judicious recycling can eliminate the regressivity. I'm not saying that's a panacea there's other issues here as well but this is at least as one direction one can take that can help. What about fairness across industries? Some folks worry that the fossil fuel industries are gonna really lose their profits and owners of those corporations they're gonna suffer losses of wealth that are significant. This may seem unfair to burden some subgroup of US industry so much. And indeed if we simply take the revenue and use it to cut individual income taxes you'll notice these are the percentage losses and profits relative to the business as usual or no policy case. It's much bigger for these energy intensive industries like coal fired generation or other fossil fuel like natural gas. And natural gas extraction and coal mining. Don't be concerned about the exact numbers here but this is a general picture that many studies indicate that those industries would be disproportionately affected in terms of profits. You may say so what? Well as a matter of politics at the minimum it's important to try to perhaps spread the impact or even avoid it. Well there's a way to do it and here's just one of several ways in the book. Say you take the revenue instead of returning it as an equal rebate check to everybody return it through a cut in marginal tax rates on the corporate tax rates and we can do it and actually avoid the profit losses entirely. And this indicates the percentage reduction in the corporate taxes that would be needed in order to do that. I'm not saying that that's the only way to go but I think the main point here is it so much depends on what you do with the revenues that can undo what some might consider unfair impacts. So that was awfully brief but as I look at the equity of the fairness issues and some of the economic issues I'm arguing that on economic efficiency grounds where that is the net benefits, benefits minus costs it's a very strong case. On fairness grounds I think it's defensible it depends on what you do but it doesn't necessarily have to be the case that a price on carbon be it in the form of cap and trade or carbon tax has to disproportionately hurt low income households and you can broaden that point to apply to disproportionately affecting other demographic groups. I don't have time to get into that but that's been an important issue in California by the way issue in the environmental justice community had been very worried that cap and trade I guess you're gonna get into this right after this talk would disproportionately hit low disadvantaged neighborhoods and what can you do about that and I think something can be done about that and California has done something about that through recent legislation but they're political obstacles so the last few minutes I wanna just talk about the politics again very briefly what's the opposition? Well the Trump administration as you probably know is gonna pull out of the Paris Agreement and right now they're nullifying what Obama administration had pledged in terms of tightening the fuel economy standards on cars which is climate impacts because both standards affect miles driven and more often they affect emissions which contribute to climate change and they're about to replace the Obama administration's clean power plan which are applied to electric utilities with much weaker rule now by the way the Trump administration is obligated to have something to deal with carbon dioxide because Supreme Court ruling and the EPA are obliged under the clean air act now to deal with carbon that what they can do is they can probably do something much, much weaker and still satisfy the statutory responsibilities of the clean air act. So in terms of political opposition what these two pictures show up anything with a line through it is a climate denier if it's red it's Republican if it's white it's independent and if it's blue it's Democrat and in the Senate shows the alignment at this time of this it's 53 against out of the 100 senators enough to block stuff at the federal level and in the House similarly it's 232 to 435 the independence at least at this point were not deniers but still there weren't enough independence plus Democrats to get this through. So it's a close call and maybe the midterms will change something at least at the House level we'll see maybe the book will have some bearing there are some positive signs one is that at the grassroots level there is tepid support for climate policy tepid or let's say slight majority support so if the House and Senate changed to be more aligned with the grassroots then things could change this is some recent work done by a group at the University of Chicago the question here is what percent of Americans say a climate change climate change is a problem that the US government should address it varies along party lines but it's got a lot of support among Democrats and independents less by Republicans overall it's around 60% support also the question is what percent of the public would support a monthly fee to address climate change of at least $1 51% said yeah they would actually pay a fee that percentage declines although not evenly according to the study depending on how much you'd pay but this also indicates that there's less support for the putting a tax on than there's general support we saw earlier for doing something this is from the recent Stanford RFABC poll and I just wanted to show you how things have changed over time not all that much this is 2010 76% said the US should limit greenhouse gases through government action it's up to 78 now and this is all within sampling error so that hasn't changed a lot you can take that read that how you want timely in a way majority of Americans say climate change makes hurricanes more intense and what states are doing is important here's a piece that says that the states themselves are on track to hit a 24 or 29% cut in greenhouse yes you low 2005 levels in line with the Paris pledge so if the states meet their commitments we can get a long way without federal action so to me that's some good news here's another thing which indicates make it quick that there's a coalition of US state state attorneys general and cities that have made strong commitment and they already have 245 cities and nine states involved many colleges and universities representing 120 million Americans so one of the strategies might be while things are stalled at the federal level push more on the state level so here's my I think it's my last slide some potential strategies which I hope at least have some support from what we've seen in the last few minutes one is to be flexible don't have just the simple textbook policy that says just introduce a simple carbon tax don't worry about how the revenues are used be very judicious in how you use the revenues if you do it or perhaps in order to win over states like Washington state combine revenue cuts in the form of tax cuts with rebates to households so that you deal even more with distributional or fairness issues second support the state level efforts third push to influence election outcomes in swing states so the prospects might improve after the midterm elections we will see but I guess the bottom line I think is that there are ways to sagaciously combine concerns about cost minimization about distributional equity or fairness and political feasibility and hopefully if one is threading the needle pretty carefully over time more aggressive action on the US as a whole will take place there is one more challenge which I can't resist saying which is we have a problem of false news and that I think is a fundamental that gets in the way a lot as long as there's a lot of information coming to the public that suggests this is all a hoax that's gonna make it harder but that's way beyond what we can talk about right now so let me stop for just a few minutes maybe three or four minutes I'd be interested in your questions or comments yeah yeah I have a question about how we sort of pierce the zero sum game between the two political parties because regardless of what happens in the next election I think it's unlikely that there will stop being this divide between the two parties so how can they win support so that this is no longer a divisive issue that's a great question I don't have a good answer but I think that let us suppose that that the situation changes so that something at the national level does go through even though there's fierce opposition from the other side of the aisle I think one thing that helps is just history that if over time it shows that this doesn't kill the economy that can help lower the opposition I think that's happened in California the Republican side opposition to cap and trade has waned considerably because by and large it hasn't it certainly hasn't killed the California economy and it's not clear how much if at all the growth in income in California has been slower than it would have been had there been no client policy so that's the best I can offer right now Yeah, but that's a great question Yes How do you find a very significant difference between the two parties? Is that someone who says that originally that the country is at all in the same temperature or someone who follows these questions and who is at all in that very big time? You know, I have to check that but I think they are showing up they are simply opposing any effort to deal with climate change on the grounds that there's no clear anthropogenic cause so they may, in fact, even Senator Inhofe from California has acknowledged that the climate is changing but then he says it always has changed but he's clearly a denier so these are people who are opposed to the view of taking action and they justify that on the view that there's no clear connection between human activities and climate Yeah There was a question here If we have time we'll do some more Yes I think British Columbia, Canada has won the only partner economy in North America that has a carbon tax Do you know much about it and can it be a model for American states? Yeah, I think British Columbia is a good model cause they propose a revenue neutral carbon tax by which we mean that the money coming in would go back out to the economy it wouldn't be used to increase total government spending and I think the way they got it through is that they recycled in three different ways each kind of helping appease one stakeholder group part of it goes as a rebate basically a lump sum check to every household in British Columbia that also helps make things progressive rather than regressive part of it goes to finance green projects and thereby avoid having to raise money elsewhere for those projects and a part of it went to pay for corporate tax cuts so I think the lesson there at least one may draw is that in order to get something through you've got to have some heterogeneity in the way that you recycle the revenues which we'll see maybe there's an answer there here for the U.S. as well Okay, a couple more questions, yes and then go ahead I just wanted to know your point of equity are you just talking about the distribution of the cost of tax or are you also incorporating the effects that could occur from localized pollution from the reducing to what is the most possible benefit then but not necessarily the most regionally beneficial I may not have been consistent but any good discussion of fairness should include both the evenness in the distribution of the costs as well as the distribution of the benefits to a large extent here I focus mostly on the distribution of the costs but clearly a full fledged discussion of fairness should incorporate that as well and it's the distribution of the environmental impacts that is a great interest in California but I think California has gone a ways to deal with that But I guess my follow-up question is just if they're really hard to get money to address that are they doing it like a free approach? In brief I think it requires a supplement to many of these policies which is what California did that is a carbon tax alone isn't going to deal with the distribution of the climate benefits or environmental impacts so you need to accompany it with something else and what California did is it accompanied its cap and trade bill with something else which requires direct regulation to assure improved air quality and disadvantaged neighborhoods so I think maybe there's a general lesson here actually I'm glad is that one instrument often cannot do the job as much as I'm pushing for revenue neutral cap and trade or carbon tax I would argue that it needs to be accompanied by other regulations not to excess but in order to deal with other dimensions and another dimension I didn't have time to mention but now I will is the issue of technological change or invention and there are such things as market failures associated with innovation which would justify technology promoting policies like research and development subsidies in addition so no single instrument is generally able to deal with multiple market failures. Last question. About serious issues do you also worry that adoption of residential solar panels in California will also create a serious issue for low income people and there seems to be no revenue that can be re-adaptated in this kind of situation? Well you have to help me with this. What is the unfairness issue associated with residential solar? Oh, when we talk about residential solar the truth is it will also resist natural supplies like that. Okay, yes, fair enough and that may require some other again an additional instrument to deal with that a carbon tax or cap and trade is not going to address that. I think there you need another lever, another instrument. All right, well thank you. I hope that this was helpful and useful and enjoy the rest of your time and also I hope that you get the book.