 Thank you very much. It's President Lagarde, Mr. Lane. Thank you so much for this opportunity to address you. I particularly want to start by saying a word about the European Central Bank and the European Union because later on in this talk I'm going to talk about the need for international organizations to deal with climate change. And in my own thinking I've been very much affected by the growth and structure of the European Union in the European Central Bank as models that we can use for international governance and in particular the EU system as a kind of what I'll call later a compact climate compact was the very model that I had in mind. So let me now get started. I'm going to share my screen with you because I'll have some some of what I'll say will be more easily seen with pictures than with words alone. So let me share my screen. So what I want to talk about today is climate change policy and I'll talk a little bit about finance and green central banking but most of my discussion will cover issues of climate change and what I'd like to do is bring you up to date on where the economics and some of the sciences are but I'll just touch on those before I get to the policy issues. Many of you are well aware of this. This is something that's not a stranger to the audience here but I think I'd like to also put it in the context later on of monetary policy and some of the other crises we face. So the major themes I want to talk about today is first I want to emphasize that there has been very little progress in slowing emissions. That may be in your that may have occurred to you. You may know that but I want to show you some of the quantitative aspects of that. Then I'll talk about the challenges for climate policy and some of the solutions that economists have come up with and then I'll end with a little bit on green finance and banking. So the first thing I want to show is just bring you up to date on the linkage on the economy and emissions. This is global CO2 emissions as best we can measure back to 1900 and the blue dots are the actual and the red line is the trend. This is a logarithmic graph so you trend is a straight line and what I focused on is well it's a picture of the last roughly 120 years but what I also want to picture is what's happened in the last 30 years and the thing I would emphasize is that there's been relatively little slowdown in the growth of emissions globally that there have been periods of obviously you can see the ups and downs. You see the downs of the depression. You see the ups of the very rapid growth after World War II. You see the impact of the energy crisis with the higher energy prices leading to slightly slower growth of emissions. One of the things you do not see in this however is any strong impact of climate policies. If you go back to the Kyoto Protocol of 1997 which is right about here or the Paris Accord which is just not very long ago you really cannot see a strong impact of these climate policies on global emissions. Of course there's much going on here and behind this aggregate curve but there's also the basic point that emissions are continuing to grow. Now this is something that a scientist would look at but I think as economists we would more naturally look at carbon intensity. I should mention this is industrial carbon it does not include land use changes which are more difficult to measure actually than actually very difficult to measure and quite controversial particularly before the last 30 years but industrial emissions are relatively well measured but for economists what we want to look at is the carbon intensity which I haven't shown here but the carbon intensity has actually not changed either so the carbon intensity has been declining at about two percent a year and the that also has not changed very much but what something I'd like to show you which is probably you haven't seen is actually quite interesting is the question about how CO2 concentrations have changed during the pandemic. We have probably the only thing that's measured in this area with great precision from the very beginning to the very end is the CO2 concentrations in the atmosphere that's something that's subject to very careful and low air measurement that these measures of atmospheric concentrations in Hawaii go back to 1957 it was one of the great triumphs of earth science to have thought of that and continued it and what I have here is the concentrations through September of 2020 and the red the blue lines are the actual ones they have seasonal fluctuations because of uptake of the biosphere and the red line is seasonally adjusted and what you can see here is that even though emissions we know have declined we don't know quite how much since February of 2020 you if you didn't know that we were in the middle of a pandemic you would not see anything happening to concentrations there's it's basically constant growth plus noise now the reason I say this it's an interesting fact in itself but the reason I say this is that it emphasizes the enormous inertia of the earth system uh not particularly of emissions but of concentrations and other downstream events that follow on in the earth system after emissions that even though we have had a very sharp decline in emissions since February of this year we cannot actually see it in the concentrations data as of yet and the other downstream effects for example temperature which will be a function of concentrations and other things sea level rise ice sheet melding agricultural losses and the other issues that president lagarde mentioned necessarily also are ones that will be slow to respond so the one of the very very first points here which is is critical for thinking about policy is the very long time lags between human events that cause the emissions on the one hand in the ultimate geophysical consequences and then economic consequences that follow those so this is a this was I have to say this was a big surprise when I looked at this I assumed there would be a decline but that's that's science full of surprises now I want to talk next about the role of economics and climate policy and there are basically three things I'm going to mention here one having to do with what kinds of instruments to use another one about science and technology and a third about international policy so there are three insights that economics brings to this one having to do with technology the second have to do with pricing and a third to do with international coordination so key economic insight one is the inadequate investment in low carbon technologies now this is widely known it's widely intuitive if you like it's that we are not investing as much as we can in some of the important low carbon technologies carbon capture and sequestration is still in the laboratories if you think of things like low high temperature superconductivity of which there have been some breakthroughs which would be important for the electricity sector different different forms of low carbon energy hydrogen economy and so on these require vast changes in technology and we're investing relatively little so the economics of this is pretty straightforward and it is that innovation itself has big spillovers and we know from the history of invention and innovation that the public returns on innovation are many times larger than the private returns and you can all take your favorite example but my favorite example is the copy machine which was invented by Chester Carlson and he did not die a poor man but if you think of the kinds of the the savings of all the scribes of the world since that was invented approximately 60 years ago many many many times larger than the returns that he and other got from this fabulous invention and even if you take other inventions more modern ones maybe more complex ones maybe more important ones like the smartphone it is true that some of the inventors of the smartphones are wealthy people but if you look at the value of the smartphones to the people who use them that the four billion people with smartphones around the world it's many many times larger than the private returns so that's the first feature we know that that's innovation green innovation brown innovation neutral innovation innovation in computers innovation in biotech whatever it is the public returns are many times larger than the private returns but here is where this is where environmental issues spillover issues and particular climate change comes in that there's a double externality here there's not just the externality of the innovation the spillover the innovation but there's a climate impact externality as well and so when you're thinking of a say a U.S. company is thinking of inventing or develop invention research development commercialization deployment of a zero carbon technology or a negative carbon technology then in the current environment that firm will realize that the value to that to the to the public is doubly larger than the value to the firm it's doubly valuable because to begin with the firm will only get a small part of the return to that innovation but in addition the impact on climate change through reducing co2 and other greenhouse gases will also be under rewarded because the price on co2 is below its social cost so the first thing first critical economic insight about climate change is this double externality and how this will hobble investments in research development and commercialization of the low zero and negative carbon activities this is important obviously but it's particularly important in the long run because of the need to turn over replace our capital stock if you look at the capital stock of most of our countries about 75 percent of it in terms of the fuel use is fossil fuel if we're going to get to a low carbon or a zero carbon future which is what many gold what our goals are in many cases what many of our political figures have aimed for what are the aspirations of the green new deal in this country and in britain also which was one of the innovators of the green new deal it's a zero carbon society but that means that the capital stock of our country will need to change this means the fossil fuel industry this means the electrical generating plants that run on natural gas or coal this means the gasoline stations this means the way we fly deploy our aircraft many many areas will have to change but to change we're going to need new technologies in almost all these areas if you take something like a hydrogen economy you can imagine how much change would be needed but this in turn will face this enormous hurdle of the double externality so the first key economic insight is that policy requires fixing not just the climate externality but also special incentives for low carbon technologies i won't talk about those now that's another subject but i will just emphasize that because i think in the public discussion even in the specialized discussion this double externality is not sufficiently appreciated so key economic insight too this is one that's well known to people probably most everybody in this audience and that is the idea of use of carbon prices and a little more a little more subtle is the idea of harmonized carbon prices so for economists it is just the staple fair of meal of breakfast lunch and dinner that a high price on co2 emissions is the key to sharp emissions reductions that you need to face agents around the world economic agents around the world need to face strong incentives to reduce their carbon footprint not just the incentives of being moral people not just the incentives of doing what is recommended by your neighbors or your town or your state but the incentives of keeping profitable and of reducing and making your budget as a household go further the way this works is very subtle and this is why it's so important to rely on price because there's so many agents around the world there are literally billions of consumers probably making trillions of decisions a year there are hundreds of governments there are millions of firms thousands of governments if you include the lower level ones and all of these need to do their part and their part will be best incentivized if they face high prices so that's half of it but the other half is that the level of price of price should be harmonized across countries across sectors across jurisdictions to meet whatever your climate target is now your climate target might be a cost benefit optimum it might be a two degree c target it might be a three degree c target whatever it is you would want to have your carbon price harmonized across the different agencies across the different countries across the different sectors to meet your goal most efficiently so let's turn back to reality and ask what are prices look like so this this is a somewhat complicated table but I'll walk you through it but basically this is the carbon price landscape in 2019 and the there are regions countries or states within countries and then the four columns are the first is the percent of the region covered by whatever the price is the carbon price then the carbon price in dollars per ton of co2 in that second numerical column then the effective price which is the carbon price multiplied by the percent so column three is column one comes column two and divided by a hundred and then the last one is the percent of global emissions that that represents so if we start at the top of this list which is sweden sweden has a very high carbon price in 2019 had a very high carbon price of a hundred and twenty seven dollars a ton but it covered only 40 percent of the of the emissions and therefore the effective price was about fifty dollars per ton and one of the things you know if you look at the first column is that countries tend not to cover the entire economy some are pretty low for example 18 percent where I live some are pretty high like California and Norway and Japan France is relatively low the ETS which is in the middle of this the european trading system covers 43 percent of the european economy then if you look let's go to the right hand column and look at those numbers so there there are some countries with relatively high carbon prices sweden norway switzerland bc well we'll go down to france california ETS but notice that at least at the top they cover only a very small fraction of global emissions and if you come down to the bottom one well the price is zero and so that covers a hundred percent and that is 80 percent of global emissions so the point about the carbon price landscape the point is that it's well let me just i'm sorry let me just finish you look at the very bottom line here which is the global average carbon price 2019 was a little under two dollars a ton of carbon dioxide so not zero but almost rounds to zero so there are two points i'd like to make as we look at this graph just to conclude first is and most important that the carbon price which is in a measure of the effectiveness of the power i would say this the strength of policy the power of carbon policy around the world that the average price is very low so this actually then relates back to the very first slide i showed which showed that there has not been a decline in the growth of emissions emissions and it's not surprising that there's no growth in the there's no decline in the growth of emissions that we haven't bet the curve down very much because the central policy that we would be using which is carbon price is basically zero then the other thing which i would emphasize is the great deal of variability the lack of harmonization of carbon price among the different regions from say united states china india which are either in the 80 percent or slightly above the 80 percent of with essentially zero carbon price up to basically european countries in a few others with relatively high carbon prices so we have the landscape is very uneven it's it's very low but it's very uneven the third point which actually follows quite after the quite nicely after the second is the key economic insight about international policy now those of you who had followed international climate policy know that it goes back for almost 40 years for the framework convention climate change in the early 1990s which was a voluntary agreement but then there were a number of important international agreements and treaties since then the Kyoto Treaty a protocol of 1997 the Copenhagen Accord and most recently the Paris Accord of 2015 but the fact is that after 30 years of policy international policy is it a dead end it's it's at a dead stop maybe a better way to put it that we have policies but they have not been effective and they are getting us basically nowhere in terms of strong policies and that was really the point of this last slide that if you look at the international carbon price of $1.7 per ton of CO2 in 2019 we basically have gotten nowhere we're dead stop we're a dead stop and a dead end having made no progress now why is that the basic reason is that climate change policy is hampered by the free rider problem and what is the free rider problem the way I like to think of the free rider problem is when I go to a I might go to a city I might go to I'd go to Frankfurt I might go to Paris I might go to Vienna and if I just there's a trolley take a take something like Vienna or Zurich where you have a trolley and you get on and there's no there's no barrier to getting on and you have to decide are you going to pay or are you going to ride free well there's some there are some incentives not to ride free because you might get caught and be penalized but in many cases that that incentive is so low as to be as to be useless in terms of an enforcement mechanism so the free rider problem is you are people in certain situations are tempted to ride free on the investments of others and to make no contributions of their own and that is basically the way international climate policy has been designed you can choose to take abatement policies either limited ones or modest ones or strong ones or you can choose not to but if you sign an agreement like the Kyoto protocol and you decide not to participate or not to fulfill your agreements then there's no penalty well you might get a little complaint you might get some complaints from your friends or your non your people are not your friends but there's no serious penalty because the agreements are voluntary and there are no penalties for non participation and if you look at the what what the results are the results are just what economic theory or common sense for that matter would predict that the verdict is that the actual carbon prices today are very low and the emissions reductions have been minimal so this is um this is part of the package of along with key economic insight two is key economic insight three key economic insight two is you're going to get strong emissions reductions if you have high harmonized carbon prices key economic insight three is the global free rider problem of the way we've structured our international agreements would suggest very very little costly emissions reductions and that's what we have so um one possible solution is what i've called a climate club or climate compact and it's a way of overcoming free riding and it's basically to replace the current structure of climate agreements with what i call a club structure so what is a club structure a club structure is one where when you join a club but let's think of an organization or a compact or an international organization or a multilateral agreement you have privileges and you have obligations i said at the beginning that this idea had really been inspired by my looking at the european union and looking at the its structure the structure of the EU and i remember exactly when it was when i when i saw this it was during the the crisis in greece and you might say why in the world would greece want to go along with these obligations uh because they're so costly and the answer at least i said to myself the answer is because there are privileges there are that you have from being a member of the EU the obvious ones being the participation in the common market in the in the single market and those even though there's short run a great deal of pain from having to meet your obligations they're also currently in the long run very privileges and benefits from being part of this club like structure or or EU structure and so the idea is move from a structure such as the current climate agreements which are ones where you basically are voluntary uh there are no privileges and there are no obligations though it's it's basically a empty kind of club structure to move on with a club structure uh i might just say a word on um so we did i'll just say a word before we go on because i'm gonna talk a little bit about some of our modeling at Yale on this but it turns out that this is a problem of coalition formation turns out to be one of great complexity it sounds like a simple idea let's just get together and and form a club or form a compact but it's one that when you actually do it analytically is as hard a problem computationally as you can find it's a like a traveling salesman problem for those of you who studied computer science it's an extremely complicated problem and so that's what one of the things that makes it interesting but it also suggests how difficult it is to form these clubs or coalitions or compacts so after having looked at the different possibilities this is one that uh i thought of and have modeled as a way to form a climate compact and this compact involved a regime with two features the first is that the obligation of different countries in in the compact would be a target carbon price and just to suggest might say 50 per ton of co2 and then the second would be a penalty tariff on non-participants and we might say three percent penalty penalty tariff and in this one this is a uniform penalty a uniform tariff so just a couple of features i'll just mention about this before moving on there are two things about this that would be a little unusual you might look at the european trading system for co2 as a kind of model and it is it is a model but it differs in a couple of respects to bring it to the larger world first is the suggestion is that the target be carbon price rather than emissions reduction for the reason that it's actually much easier to negotiate and much easier to measure we've seen in the very many attempts to negotiate emissions regimes how difficult it is and it's not surprising because you have to difficult you have to go once you've got a global cap on emissions you have to negotiate n-1 individual caps whereas with a carbon price all you have to do is negotiate one price i should say this was an insight martin whitesman who many of you may have known in one of his last papers so the first is the target would be carbon price not quantities as a performance and the second is and this is widely when you ask okay what kinds of obligate what kinds of obligations what kinds of penalties could you have and as you look at the possible variety of penalties it becomes very clear that some kind of trade related sanctions are the most flexible easy to use and have the right structure incentive structure and then within those after some liberation it could it seemed to me that a tariff of a uniform tariff kind rather than a tariff on the carbon content of trade was actually more effective and easier to enforce and implement so but the basic point is you have two parts of a compact one is you have a target and here i recommend a carbon price and the others you have a penalty tariff of some kind and those would be the necessary elements to make it work now we have other international agreements that are like this and obviously the world trade association and the example where you have targets of your tariff your tariffs that you've agreed to and your penalties in terms of authorized retaliation but the structure there is the same of a of a compact or club where you have obligations and you have privileges so we've done a fair amount of modeling at Yale and there's been work elsewhere as well that actually took this and put it in a modeling framework a multi-country modeling framework costs and benefits both of the of the climate side and of the trade side the complicated trade model and this suggests that this kind of structure is an effective way to combat free riding you put this structure with a zero tariff which is basically the way the you had a protocol work and it goes to nothing you put a uniform tariff of say 3% penalty tariff and it can't support a carbon price of about $50 a ton so that that's a bigger subject but the main point I want to get across here is that we need to rethink the architecture of our international climate agreements the current architecture has failed it's we've been working with us for more than 20 years and it has failed in the in its goal of getting steep abatement history of international agreements and economic theory and common sense says of course it fails because of the architecture and therefore we need to change the architecture this is one proposal there are many other proposals but we need to change the architecture let me say I'll use five minutes or so to talk a little bit about green finance but before I do I'll just say a word about something else which is this this this I'm writing a book on the green the green society and in that I discussed something called societal catastrophes and it's something I hadn't really thought about as a conceptual framework until March of this year when we were hit with the current catastrophe but it was kind of interesting when you thought about it and you when you think about the catastrophes from the catastrophes of war the catastrophes and then there are many economic catastrophes there's the catastrophes of financial crises there's the catastrophes of deep depressions and then there are non-economic catastrophes such as pandemics which cause economic catastrophes and then there's the one that we're talking about today which is climate change which is another and they all have interesting different structures but one of the things I hadn't really appreciated until I thought about this systematically was that I mean they're obviously different scale they're actually different dimension they're actually different scientific knowledge but I hadn't really appreciated the importance of the time scale in how these these different catastrophes work and they they vary in time scale from what I'll call the atomic scale which are like nuclear nuclear weapons or atomic meltdowns through scales of days and weeks of pandemics and financial crises financial meltdowns if you like through months and years which is business cycles through what we're talking about I've talked about up to now which is decades and centuries so the time scale of these are so different and of course that means that the time scale on which we can contemplate and think about and deliberate about these disastrous catastrophic events is also so different and for example with a pandemic you basically don't have time to think if you don't have something in place you don't have your plan in place or on war if you don't have your plan in place before it starts you're done and that's what we've seen in our countries climate change is at the other extreme it involves very slowly there's a long time lag between cause and effect it gives you time to think it gives you time to plan it gives you time to measure it gives you time to strategize you might say it gives too much time because we can always say well we'll worry about that next year well we we've got a lot of things to worry about this year we worry about climate change next year and then you have this intermediate and I think in some way as I look at this the time scale of these different catastrophes I kind of think monetary policies is just at the right time scale because it's slow you meet once a month things things things evolve slowly it's it's not so far in the future you can ignore but it's not so fast that you can't deal with it and it's a kind of interesting time scale where of the where you have time to deliberate about something that's imminent but not too soon to act so I I thought this interesting relation between the different catastrophic events was uh useful now the other thing I want to talk about then is as green finance is an interesting mixture of climate change which is this long time scale and then the time scales of financial policy which are the very short time scale of financial crises and the month the year time scale of business cycles so I had really a couple of things to say about that first is what are the challenges for financial institutions so these are the institutions that the central banks regulate and influence and have powerful influence on and these are both these are not companies but they are investors and they're financial institutions and so maybe we'll start with with the companies so it's clear that and President Lagarde mentioned this uh that companies need to incorporate the climate risks into their long-term planning now companies are pretty good at long-term planning they're actually I think better than governments they're probably better than households they're probably among the best planners in our society and so they already have actually in many cases incorporated climate risk but not all of them the electric utilities have clearly incorporated those but not all the other companies and so companies need to incorporate these as they do the other risks that they face and then if you think of institutional investors or banks they also need to analyze and hedge these climate-induced risks and they need to face squarely the trade-off between return and ESG goals now there's one insight from economics that I'd like to show here that that is not obvious until you think about it and that is the trade-off between profits and your say carbon reductions or ESG goals and first is that many companies need to just think about their ESG goals in terms of increasing returns in profits so they might be not thinking about it carefully and they can actually improve their profits a return by moving from A to B so moving from short-termism to long-termism capturing the in just improving the quality of their workforce and so on they can actually improve their returns or improve their profit but the other interesting feature is for institutional investor that maximizes return or a company that maximizes profit is you can actually do a fair amount of ESG or fair amount of carbon reduction with virtually no impact on your profits or returns so this is the point being if you're at the top of the hill and you move a little bit away from the top of the hill you can actually move often quite a ways without any impact on your any significant impact on your returns on your profits so this is the point you can reduce you can return down your third as a household you can turn down your thermostat one degree or up one degree depending on what time of year it is and essentially no impact on your comfort and substantial impact on your energy use carbon footprint but when all is said and done I just want to emphasize even though we like companies to do their things we like the institutional investors to do their analysis and hedging and so on so forth government action is essential we cannot we're not going to get we can get a little bit of changes a little bit of improvement through this ESG and through that moving down the hill a little bit but we need universal carbon pricing and technology support if we're going to come anywhere near our goals final let me just say a word about green central banking is there an impact of central climate change on central banking yes yes because climate change is one of the many long-term risks so if you were to write down you could write a list of short-term risks and you could write down a list of long-term risks and long-term ones being the long-term effect of the pandemic on the health the demography robots artificial intelligence then climate change should be added to that list of risks and we should see what effect it would have on different areas maybe as Layle Brainard said in one of her recent governor Layle Brainard in one of her recent speeches maybe this would affect our star the the equilibrium interest rate real interest rate so yes climate change has moved from not seen as important 30 years ago to seen as important now and will be put on the list of long-term risks and influences that we need to analyze and yes particularly in this area because it may affect financial stability through its impact on financial firm and it may require regulatory response so there are some places where now that it's become clearly important more important some areas than others more important some sectors the others more important for some countries and others but yes it will be now a new concern for our central bankers all right well that wraps it up and I'll just just remind you of the four key points here that one is that there's been little progress to date on climate policy a second is that the key policies are to invest in low carbon technologies and to impose high high and carbonized high and harmonized carbon prices a third is we need to combat free riding with an international climate compact and that the current architecture is basically does not support is not on a firm foundation and finally green finance can support but collective action is essential for dealing with climate change thank you very much and that concludes my remarks okay well thank you so much for that I think very wide-ranging overview which really I think zeroes in on some of the big policy challenges as you've been talking in the webex a few people have written in some questions so let me maybe collect these questions and then you can see if there's any of these questions or comments you'd like to pick up so one is from Marcus Brunnermeyer who you know in relation to the difficulty of having effective global agreements asked the question given given the problems so far with with the you know global efforts to combat CO2 can you comment about why the Montreal protocol was effective maybe in helping to save the ozone layer so so what what is similar what is different between these that episode and the current episode so that's one question okay should I just start with that okay just because it's fresh on my mind the question is fresh so sure that's a really good question an important question it's been well studied I would point to the work of environmental scholars Scott Barrett who is written on this and my response basically draws into the search so there are really three things that are different three major things that are different one is that if you looked at the cost-benefit analysis of the Montreal protocol and the follow-up protocols there were ones that individual countries would find in their benefit to have a protocol so in the case of global climate change individual countries generally don't find it in their interest to take appropriate action whereas for the Montreal protocol the United States when it did its environmental assessment found that it should ban chlorofluorocarbons even if there were no benefits anywhere outside the United States so the cost-benefit analysis was much much more favorable for chlorofluorocarbons than it is for CO2 the second reason is it's just much more it's just much cheaper the the amount of the total investments that were needed to not just reduce chloroforms but ban them and replace them with other chemicals was just it literally in order of magnet three orders of magnitude smaller smaller by a fraction of a thousand than the cost of we're contemplating with climate change and a third is a kind of interesting political point which is the company that was the lead producer of chlorocarbons which was DuPont actually had substitutes for chlorofluorocarbons that were pretty quickly ready to go as substitutes they were a little more expensive than the ones that were banned but they could do the they could do the job they could cool your houses for example and they could do it relatively inexpensively the more expensive than the ones that were banned but still relatively inexpensively so you had in dust in country now where you have industrial opposition and actually worse on climate change and fossil fuel companies for the chlorofluorocarbons you had industrial support i don't know i i've not seen the studies on this but i don't know if DuPont actually profited in the long run but that's an interesting but they didn't weren't driven into the grave sure very good okay so uh philip hartman is asking we if you go back to the idea of how to form a club how do you take into account the stock versus flow issue which is of course the cumulative stock for emissions has been mostly by the rich countries and if you're trying to include the emerging markets developing countries who on a flow basis might be high emitters but were have contributed less to the cumulative stock of of emissions can can you design a club that allows for for that if you like climate justice point about differentiating between the stock versus the flow i think this is part of the broader issue of you might call environmental justice across countries and climate justice across countries i would tend myself to think more not in terms of contributions or lack of contributions to the stock of emissions of the stock of concentrate of emissions in the atmosphere you could do that but i would think in terms of the ability of different countries to pay and also the necessity of different countries to be part of a of a compact for example i think if you look at the just look at the raw numbers it's clear that china india brazil indonesia need to be part of any effective system but it's probably not necessary for uh tropical african countries to join up right away so you need to first you need to be realistic about what countries need to be in to make it effective and then which do not and then the other thing you might have you you could have different incentives for countries you could actually have transfers to help countries to join but i would make one point just a general point which is uh maybe not clear in my thinking about any of these international agreements i would emphasize that say if there's a carbon tax be absolutely absolutely emphatic that the revenues from the carbon tax in say india or china or indonesia stay within the country i'm not contemplating some going into some international fund so the incentive this is very important for the incentives of individual countries that they need to see if they join as a tax say with the reverence in the country and then the second point is that actually a carbon tax is a pretty effective tax for countries with weak tax systems country most countries need revenues for health systems for education and for infrastructure and so they can see this as a way of participating in an international agreement getting international of the tax system and helping the country and if they have too many revenues they can reduce other taxes so this is this is they're good this is a tax on a bad not a tax on a good so i think i would actually make a strong case that a carbon tax has strong benefits for individual countries even if they were not an international agreement very good okay so uh from alexander leap leap old uh who's has a a range of questions let me uh subdivide and one question since you mentioned uh that you've been thinking about societal catastrophes when you think about tail risk if you like in respect to climate change um how do you think about you know the fact clearly in uh worst-case scenarios it's kind of uh truly catastrophic at the potential impact uh so when when we talk about the kind of correct schedule for uh carbon prices and so on uh how do you work in this this tail risk and catastrophe risk into the cost benefit analysis yeah well this this is um as i'm sure many of you know a very controversial area in climate change science and climate change economics uh let me let me separate micro catastrophes and macro catastrophes there's just no doubt that you're going to have many micro catastrophes whether it's people with the wildfires burning their houses or whether it's small islands who are submerged or whether it's cities that are inundated or whether it's regions that are struck by hypercains there's just no doubt that you can have those and you probably have an increased frequency of those um and that that leads you down one path of how to deal with the insurance aspects of that or even with the transfers but if you think of macro catastrophes um that's that's a more complicated issue i'm actually on the side of that that says uh that that as argued that we that's it's possible but we have not seen any actual evidence of that um and so we would right regardless is uh as it's a tail risk of something where we're actually not sure whether there's a risk there that would be a tail that's a tail risk or a fat tail distribution but if it is then um if if we think it is or we think that the possibility of this tail risk is sufficiently high then that just emphasizes that we need to take strong policies so in almost every case where we're thinking of these tail risks there are ones with rapid accumulation of co2 and rapid climate change so if you think that the risk of that this tail risk are growing as you get higher and higher concentrations then that would argue for more um just stronger policies so i would say it adds it adds to the um to the need for policy but but i'm just gonna add one other point um we're not we're not we're not anywhere near what what where we should be if there were no tail risks so we still have a long way to go let's assume there are no tail risks at all we still have a very very long way to go to get where we ought to be so let's let's get there let's at least start and get there and then at that point once we're at the point where we haven't incorporated tail risk okay how much more do we want to add but we don't need to argue about tail risks because we're not even what we ought to be without tail risks so um i i think this leads me to to a question asked by luke levin which i suppose the connection now is if you go back to the other policy challenge in the double externality which is how to correct the under investment in uh technology again do you see a possible difference in type the types of policies we should have between promoting innovation that basically does a good general job of uh you know improving uh reducing the carbon intensity of the economic production versus innovation which is really focused on the tail risk so it's but you know so it's clearly you can imagine at the kind of uh you know an invent you know a scientist or a group of scientists or a group of entrepreneurs um do they have a bigger uh are there incentives more distorted in terms of uh trying to deal with with the tail risk or are there are there incentives more distorted trying to deal with just the general at shifting in the technology towards that lower lower carbon intensity or is there any clear way to think about that well i think i'd say i'd never actually thought of that that you saw there's a trip maybe there's a triple externality here then you have you have the externality of innovation you have the externality of the underpriced uh impact of emissions and then maybe i don't have to think about this a little more but maybe there's also another externality that we treat properly these tail events uh so i mean one of the things that in doing that in in thinking about teaching this course on societal externals it's interesting to see in how many areas we have underest we we have actually not even incorporated the need for dealing with tail risk i mean you think of financial crisis which this group is available is very familiar with if you think one of the lessons of 2008 is that we really didn't understand properly the tail risks that were involved in many of these new instruments that were allowed now in takes of pandemics uh actually went back at this experience i'll just maybe a little story in march i went back and searched because i have i work on catastrophes and worst case scenarios all these friends are worried about it so i went back and i searched all my emails for the word pandemic to see if i ever ever got uh an email on pandemic and actually i found two or three but uh they were one the only one person one of them was just a long list of terrible things could happen but one person said do you think we're underestimating the risk of pandemics and uh i don't i didn't even look at my answer but i think the answer is clearly we were so maybe this is another i don't know it's not quite an externality but it's a more behavioral problem that you're bringing up which is should we do we need to deal with the fact that we're this third it's not an externality really but under under in the inability to respond appropriately to these tail events sure okay i'm going to gather or blend that some some comments and questions from alexander depot and that class mazuq and it's really one element which maybe goes to policy economy is we've seen this here with the pandemic it's hit some sectors very heavily other sectors been much less affected so there's a clear difference for example between travel tourism entertainment heavily hit versus other parts of the economy less hit equally with with climate change uh you know if you're providing for example a service which maybe doesn't very much use uh uh energy too much maybe maybe those sectors will be less directly affected than than a you know the energy producing sector or capital intensive sectors so so that's uh one in terms of building the coalition building the coalition who will support a forceful government action uh that's partly within every country partly it's global depending on the mix of industries across different countries but but maybe connected to that is also um you know the way you concluded you know i would very much agree that it'd be a mistake to focus on green finance as a substitute for fundamental public policy the fundamental public policies of carbon taxes promoting carbon reducing technology but but is there a risk that the political economy could get distracted by focusing on activities which which are kind of maybe half at the margin but at the margin and you know how do we balance the the effort and energy going into reforming the financial system versus advocating um you know these first order government challenges uh whether domestic or building that that government coalition so that's kind of blandiness some different questions coming in uh from the from the floor um i'm not i'm not sure i understand the question they won't you maybe more of a comment on the question in fairness as opposed to uh you know but but i suppose i mean uh maybe to try and save in a clearer or stronger way um in the end unless there are those serious anti-carbon policies whether it's carbon prices plus the pro-innovation policies everything else i'm asking you to see if you agree or disagree is secondary you know there's no there's no substitute for those first order policies but maybe connecting to that is that we have a good question about are you relying maybe too much on carbon price taxes versus quantity restrictions so again this issue about uh isn't the case we can find alternative maybe they're inefficient but maybe they're easier to to to get done now having more quantity restrictions yeah let me take the well those are those are two very different ones but let me take the last one which is fundamental and i think um i want to make clear i want to make clear my view on that which is i'm not so in the proposal i put forth for the carbon compact it was the benchmark was a carbon price but i didn't actually say that what the tool or instrument was to reach that and that would be left to different countries for example some countries might want to use a carbon tax and just put a $50 carbon tax on and other countries might want to use a cap and trade tax system um and that's really up to country and they can use a cap and trade system where they can auction them off or they can use a cap and trade system where they give them a way to worthy constituents um but they would need to find it if they did that they would need to find a cap and trade system with with a floor on it so that it won't be going fluctuating between 70 and 10 dollars so i would just say in this respect the the european trading system had this flaw very from the very beginning which i think has been not completely fixed but it actually been worked on in the last five years to make sure you don't have this falling down to going down the great volatility in the very low price but for myself i think it's critical that these are the kinds of decisions that you want to give the country's flexibility about you know we are not we country a we're just we we can only deal with taxes we country b can never deal with taxes because we have this strong federal structure and we can't uh another one because we have an anti tax movement so the point is you can have any consistent and you can have maybe there's another one i haven't thought of it the only two i know of that you can get the high carbon prices out of maybe there's another one uh but the point is you want to do it to get the carbon carbon price is basically a performance standard and you can meet this performance standard using different you can call administrative technologies and not like hail pipe technologies they're administrative technologies so it's really important that that's a way of measuring of putting the bar that countries have to get over but they can they can pull up backwards or forwards or upside down or whatever but they have to get over the bar of $15