 Good afternoon and welcome to today's Energy Seminar, our second for winter quarter, 2021. It's my great pleasure to introduce our speakers today, two of the most fun people and also two of the most knowledgeable people I know anywhere on their subject for today, which is what to do about climate policy. If I went through all my personal history and endorsements of them as I sometimes do, that would take more than 40 minutes, I fear. So I'll try to be brief in introducing them. David Victor is a former Stanford colleague in Stanford Law and the founder of the program on energy and sustainability, among many other things in his career in many places. He is currently a professor of industrial organization and innovation at the School of Global Policy and Strategy at UC San Diego, thereby combining all my interests in a single chair title and school title and more. Of course, David has even more interests than that, as you'll see. Secondly, his partner in writing this particular book, Danny Cullenward, who's a teacher at Stanford Law School and his policy director, fairly recent position at the Carbon Plan, which is a very up and coming impactful research institute. Danny has not one, not two, not three, but four degrees from Stanford. You can read about them in the bio. He uses them all well. So I think the way I would like to introduce these two is they are kind of mostly working in the political science legal space, but extremely knowledgeable for such people about things like economics, engineering, and technology. And they are also good, as you'll see in today's talk, out of the box thinking. I actually like out of the box thinking, but most people I know who try to do it, I find irritating. On the contrary, this team, partly because of their personalities and background, I always find spell-bindingly interesting, and I hope you do too, so they're gonna talk today about their new book, Making Climate Policy Work, in a seminar with the same name. So take it away, Danny and David. Excellent. Well, thank you very much, John, for that kind introduction. Thank you to Stanford for the invitation to have us back. Our goal at minimum is not to be irritating, so thank you. Set that bar right out of the box. It's really a pleasure to come and talk about a project that on the one hand, we wrote fairly quickly, but on the other hand, we've been thinking about in various ways for a long, long time. And the project is about what's really gone right and wrong with the use of market-based instruments for climate policy. And so what we're gonna do is, I think we're gonna talk for 25 minutes or so, and then put it open to questions. I'm gonna talk first. We could put the slides up. Terrific, thank you very much. So we're gonna be talking about the core messages in a book that just came out in the U.S. in December called Making Climate Policy Work from Polity Press. And you can buy it on Amazon. You can buy more than one copy on Amazon if you'd like to. And so, but we would like to talk today about what some of the bigger messages are. And also, what does this mean for this community of folks at Stanford who are studying these policy issues and also interested in how policy is gonna ultimately affect the climate problem and technological innovation associated with fixing the climate problem. So next slide. When you look in the world, you see a whole lot going on. And now that we have a new administration in Washington, you see a lot going on at the federal level. These are the elements of that going on the federal level. Once the U.S. has in place its goal of net zero by 2050, there'll be fully two thirds of the world's emissions under some form of a pledge of net zero 2050 or 2060 is in the case of China. What you also see in the world is that that activity around getting serious about the climate problem, not serious enough yet, but it's better than where we've been before and higher than it's been at any other time. That seriousness correlates very closely with the spread of the use of market-based instruments, cap and trade and carbon tax systems. This is some data here from the World Bank annual study that looks around the world at what kinds of policy instruments are being used with a particular emphasis on market-based instruments. And this shows the fraction of global emissions, which is a vertical axis over time that are under some kind of a carbon pricing regime. And as of this year now, we have fully one quarter of world emissions that are in one way or another in a cap and trade system or a tax system. And so that seems to be part of the evidence that these instruments are gonna be doing the heavy lifting around the climate change problem. And there's been a lot of academic theorizing and now quite a lot of real-world experience to look at how these instruments might actually work. And the core of what we're doing in this book is trying to understand what explains the real-world experience with these instruments. How could you make market instruments better? And if you're pessimistic about the ability of market instruments to do the heavy lifting, which you'll see we are, then what could you do in addition that plays nice with market instruments, but is also gonna have a bigger impact on ultimately moving the needle. If you go to the next slide, what's really striking about these global emissions is that while a large fraction of the world emissions now, a quarter on rising are under some kind of a pricing regime, when you look at the price levels, the price levels are really low. So this is a slightly different data set organized in a different way, where still a lot of the world's emissions have no price at all. A lot of the emissions are down in the kind of $15, $16, $17 range. California is now $17, $18 tons a little bit higher than when we first put this slide together, also based on analysis Jesse Jenkins did a while ago. And then you've got a tiny fraction of world emissions that approximates something like the social cost of carbon, at least the social cost of carbon, as we understood it before, a whole series of new studies is now raising the social cost of carbon. So Sweden, Norway, Switzerland, a couple of other countries that have pricing regimes that are north of $50, $60 a ton. And so that's great for them, but they are less than 1% of global emissions. And that's the core puzzle we're trying to explain in this book. What's new in the book is we are trying to explain this variation in effort through market-based instruments by adding politics and by adding politics systematically to the explanation, not just saying, you know, gee whiz it's hard and therefore politics is responsible for all this. But what we do in the book is work through fairly systematically which groups are organized and not organized to have a voice, political voice. How does that affect the kinds of policy instruments that get adopted in a particular? How does it affect the design of those instruments such that we observe things like what you see on this slide, which is a lot of emissions under pricing regimes, but the actual price levels are extremely low. It's not that the effort is very low. And quite often, we'll show you some data in a little bit, quite often the actual effort going on in different jurisdictions is 10 times or even 20 times greater than the price levels. It's that the policy instruments being used for that effort are different kinds of policy instruments, their forms of industrial policy regulation and so on. So that's what we do that's new in the book, that's our contribution. What we'd like to do in our talk today is try and organize some of our insights into the book around three questions. So we talk about the first question, which is really the critical core question, which is why are carbon prices low, even though ambition often is very high? Ambition is ultimately what we care about. We think market instruments are a way to get that at lower economic cost, greater economic efficiency or at least greater cost effectiveness. And the simple explanation when we explore in the book is the question of whether, maybe the problem is that politicians weren't awake during economics 101 when you taught about externalities and when they learned about, when you should have learned about different kinds of policy instruments. And had they been more awake or better educated or whatever it is that they would have, that they would today be using market-based instruments more extensively and much more effectively. And the argument that we make in the book is the exact opposite, that they were wide awake, they knew exactly what they heard and they were horrified by it because a lot of what we as analysts like about market-based instruments, transparency, fungibility across different sectors, that those are actually very difficult attributes for politicians who are trying to stay in office and who are trying to help manage the costs and benefits of different kinds of policy instruments. And those costs and benefits can vary a lot across different sectors. So that's what the job of the politician is and that job runs exactly contrary quite often to the notion of ideal design of the policy instruments. We may not want it to be so, but those are the logic, that's the logic of political survival if you like in the political sphere. And one of the ways you see this is that the actual prices that real world market instruments are applying vary enormously by sector. Even within the same country, you have different effective price levels by sector. There's a terrific data set that Jeffrey Dolphin who was at Cambridge University, I think is now at RFF put together that we've used in the data set that allows us to look at the difference between the nominal carbon price. So if you go to the law or you go to the market and say, what's the price of carbon? That's the nominal carbon price compared with the price that is sector by sector. And that's what we're showing on this chart here. The 45 degree diagonal line is the nominal carbon price. So this is the price that everyone talks about when they say that Sweden has a carbon price north of $100 a ton. That's what they have in mind. But what Dolphin was able to do and we reanalyzed with his help is show sector by sector and then weighted by emissions show the actual, the average economy-wide price which in every case is about half of the 45 degree line price. So that's pretty important. And to some degree people have made the argument that we sometimes exempt sectors because of administrative feasibility and so on. And that's certainly true. There are some sectors and some activities that can't be included in carbon pricing regimes for administrative reasons. The argument we're making in the book is that beyond the administrative reasons that there are important political reasons and crucially the politics are organized sector by sector. And that's gonna be very, very important because the core logic around making market instruments as effective as possible is to have as wide as coverage as possible and to make them fungible. So that the same price of carbon is seen across all different sectors of the economy, capital can move around and figure out where the effort is gonna be most efficient. The problem is that the politics are different sector by sector. And so by linking together multiple sectors, you in effect tether the entire market-based system. You tether it to the least ambitious sector of the sector where the politics are organized in a way that it's the hardest to make high prices and to make the mechanism effective. So that's a pretty common, a lot of moving parts there. I wanted to show you one slide that gives a kind of summary of the arguments that we've been, that we're making here. So you can think about different sectors of the economy oriented around two different dimensions. On one dimension, which is the vertical dimension that we're showing here, voters or politically organized groups are highly aware to the top or less aware at the bottom of the costs and sensitive to the costs, visible costs from a policy instrument. And the horizontal axis is a measure of the extent to which government has skills, has tools available to it to compensate or adjust the incidence of costs and benefits onto those sectors such that the politics can be managed. And in some sectors of the economy, that toolkit is extremely large. Think electric power, for example, either state-owned or heavily regulated essentially everywhere in the world. And so if you have a system that imposes costs through the electric power sector and there are well-organized groups that might be averse to those visible costs and to the impact of those costs on their trade position and so on, that those groups can organize and get an adjustment from government through variations in tariff or direct compensation in one way or another, because the industry is highly regulated in that way. At the opposite extreme, for example, are refined products where in much of the world they are essentially commodity prices and people are extremely sensitive, you see this all the time in the Yellow Vests protests in France, for example, and people's sensitivity to gasoline prices, they'll drive an extra few miles just to save that extra cent invisible on the sign on the gasoline station. So people are very sensitive to prices and the policy instruments available to politicians who wanna deal with that sensitivity, those policy instruments, frankly, are relatively small and weak. So you've got the variation across these two different dimensions that helps explain a lot of what we observe in the real world, which is that cap and trade systems and carbon tax systems tend to have the highest prices in the sectors for which government has a large toolkit and both organized firms and voters are less sensitive to variation of prices, electric power in particular. And we see the opposite extreme in the case of transportation. And California, one of the big mistakes that California made in creating its cap and trade system was that by expanding it out and linking all of the different sectors together, including transportation fuels, in effect, California guaranteed that its cap and trade system could be no more ambitious than the squeakiest wheel, if you like. And in that case, it's the transportation sector. So the capacity to do more in the power sector and electric utility services capacity is there, but the cap and trade system as a whole is tethered to the politics of the transportation sector. And indeed, in the utility sector, we do a lot more with other kinds of policy instruments, renewable power standards and so on. So this is what we're explaining in the book. The logic that we lay out here is particularly powerful, we think, for cap and trade systems because cap and trade systems, unlike carbon tax systems, cap and trade systems are by design, they trade the residual that's left over after all kinds of other policy instruments have done their work. And so if you have a regulatory instrument that's doing most of the work of reducing emissions and a variety of other policy instruments that are there, and then you have a cap and trade system operating there, operating alongside, that the emissions are reduced as a result of the regulatory instruments, and then what's left over under the cap is that residual of the cap and trade system trades. And so all else equal, prices are low in those kinds of systems, volumes are high in those kinds of systems, and they're actually often volatile, which you see in this chart here, which is a summary of global carbon market prices. So we call this in the book a Potemkin Market because it's like the fabled Potemkin Village's the czarist era where you bring the czar out to see what a great rural project you've done with this village and the facade looks beautiful, it looks like everything's going on perfectly, but if you look behind the facade, nothing's going on. In our case, if you look behind the facade of the cap and trade system, what's going on is that most of the real work of emission reductions is being done by regulatory instruments, not by the market instrument, and indeed by design, the market instrument has low prices. It creates the illusion that prices, that the cost of the program is low, when in reality the costs are totally unrelated to the market-based instrument. So that's the first big question that we grapple with in the book, which is why are prices so low? And in particular, why do cap and trade systems generate these outcomes that you have low prices that are totally divorced from the actual level of effort? And now I'm gonna hand the floor over to Danny who's gonna talk about the other two questions that we wanna summarize for you today. Alrighty, thanks, David, and thanks, John, for the warm welcome. Appreciate the chance to be here. I'm gonna talk about the next two questions in our presentation just to give you a flavor of some of the big issues that are in the book, and we think some of the key moving parts in the political model we're trying to describe. So the second question's actually kind of a straightforward question, which is where does all the money go? And it's a question I'm really fond of asking these days because in a lot of the discussion around carbon pricing, particularly in the academy, many people point to the possibility of using carbon revenues collected from charging polluters and ultimately consumers for the emissions associated with these programs. Some of that money people think maybe even all of it could be used to either create direct rebates to people in the form of periodic checks or to reduce taxes in what's called revenue recycling mechanisms. Again, you either cut money directly to people or you reduce the incidence of taxes on the income or capital elsewhere in the economy. And one of the most striking things is when you look at the global pattern of revenue that's collected across all these carbon pricing systems around the world, you see very interesting patterns. And this is as far as we can tell the only complete data set that's out here. This is initially was based on a paper that David Fedor and Jeremy Carl wrote at Stanford and Hoover a couple of years back. It's been updated by a group of economists in Paris and published undercover of a World Bank report looking at data here from the year 2018. And there's on the order of $45 billion a year flowing in these systems. Now, from the standpoint of the global energy transition that's not a particularly large number but from the standpoint of global public goods and the mobilization of global public goods directed specifically at climate, it's nothing to sneeze at either. And perhaps the most interesting pattern is when you break down the revenue according to the type of instrument whether you see a carbon market or a tax, you see often very different patterns of revenue use. In carbon market systems and the largest in the world is the European Union's program. California has a large program as well and there's a handful of other programs. The predominant model is something we call green spending. And this refers to basically any expenditure mechanism that directly targets new greenhouse gas reductions. So you charge polluters for their pollution, you bring in the money and the government spends that money on additional pollution reductions. For example, subsidies for electric vehicles or mandates to procure other clean devices. In tax systems, there's a much stronger preponderance of money going directly into the general fund of the country or the sub national government imposing the carbon price to begin with. And in fact, we think a lot of these tax instruments look a lot more like standard tax policy when you look at them. There are very few places where you can see significant uses of revenue recycling where the money is used to compensate people directly or to offset taxes. And I think one of the most interesting things to think about as we think about the role of these instruments and ways to increase their ambition beyond the very superficial levels that are at almost everywhere in the world is the importance of revenue use to the politics of doing that. I think David and I both appreciate the benefits of equitably oriented carbon pricing systems that rebate the money or the cut taxes, particularly in ways that primarily benefit lower income households. When you look at the political organization around these systems, all of the politics center on the money and all of the money goes to much more concentrated interests. And that potential to potentially, again, harness some of those things for positive good is something we need to think about because in a lot of instances, we think the money has not always been spent very well at all. And this is a figure showing the situation in California which is arguably one of the best places to look in terms of the quality of the available data but also extremely opaque. And to the extent California is opaque, many systems around the world are completely invisible in terms of what's going on underneath the surface. What I'm showing here is a couple of different data series here. On the left-hand side of the figure is the actual price in the state's cap and trade program which is traded between about $10 and $18 per ton of carbon dioxide equivalent. A recent study from the state's nonpartisan legislative analyst office put the cost of California's ambitious renewable portfolio standard for clean electricity in the neighborhood of $60 to $70 a ton. We also have an emissions reduction program called the low carbon fuel standard which requires progressively cleaner transportation fuels. That trades almost at $200 a ton these days. When you look at all of the policy measures that the state identified to pursue its ambitious 2030 climate target they all clocked in at $200 or less and many of them on the upper end of that range. So you see in California climate policy fairly ambitious measures from the standpoint of the both the cost of these programs requiring a lot of action. But when you compare that to the explicit price on carbon dioxide it's off by basically an order of magnitude. When you go to the final element of this figure the right-hand side data this is the data reported by the climate regulator that shows the estimated carbon benefits and therefore the cost effectiveness of these green spending programs. And the average clocks in at almost $500 a ton. Now I want to be clear. I think people who study serious climate transformation know that there are important activities we need to pursue at $500 a ton. And that's particularly true when you have really innovative technology that's just leaving the laboratory it's getting close to commercialization but it's not ready yet. There are lots of important things we can and should be doing at that price point. But that is not a very effective price point if you're trying to increase basically broad-based system-wide mitigation and the spread and the costs from the very low and superficial price in the explicit cap and trade program to the cost effectiveness of the spending programs illustrates both the different levels of ambition in the program as well as variation in the cost effectiveness of what's going on and maybe the most pernicious thing that's going on in the context of the California program is that the spending side of the program is very easy to basically insert anything and call it climate. I think this is one of the most challenging things we face when we talk about climate spending because the climate problem is so big basically everything touches it. And that means you can label almost anything pork if you need to. The last question I want to address before we get to audience questions is this question that I think is actually one of the most fundamental issues you can think about in the context of carbon pricing programs and that is why do carbon offsets always end up with low quality outcomes? The reason this program or this question is so important is because it turns out the vast majority of compliance in a lot of these programs comes from the use of carbon offsets which credit reductions that occur purportedly outside the system but are reflected in the form of essentially legal tender that's usable for compliance purposes within the system. And we think the experience with offsets has been an abysmal failure almost everywhere they've been tried in compliance markets. The primary reason for this is that the people who demand offsets are the large compliance industries and the buyers who are the incumbent industries that emit CO2 and other greenhouse gases. Their primary interest is in achieving the highest volume at the lowest possible price. In that world, quality is not a primary consideration and almost every single time quality suffers as understaffed regulators and sympathetic environmental nonprofits and some academics, all of whom are pursuing and very interested in the notion of using these revenue streams to address and protect other climate priorities end up sort of funneling and capturing those rents into low quality programs that rarely achieve the quality outcomes that are needed to get to a serious climate outcome. Here I'm showing just a couple of references folks may be interested. There was a big Bloomberg green story from Ben Elgin looking at the experience of particularly forest-based carbon offsets in the voluntary markets where there's just enormous systematic problems. And a lot of these efforts are being scaled right now in the form of task forces and other efforts to standardize and massively grow these contracting systems. We think ultimately this is an effort that is destined to fail, particularly if nobody thinks really seriously about the quality issue, which again in the context of compliance markets has never been the focus. Just to give another data point on this, the role of carbon offsets in California's cap and trade program is massive. It could end up being more than the cumulative reductions from the program counterfactually relative to the baseline scenarios expected through 2020. These are often the heart of many of the compliance programs. And so the quality of carbon offset outcomes are just utterly fundamental to the overall climate implications of this climate policy strategy. So the last thing I'll say, and then I'll close it out and look forward to the discussion that follows. We have five major implications for climate policy strategy coming out of this book project. The first is that policymakers should focus primarily on industrial policy instead of carbon prices. Carbon pricing helps, but it's not a replacement for the fundamentally transformative work that needs to happen sector by sector. When it comes to carbon pricing, our second recommendation is that policymakers focus on carbon taxes rather than carbon markets. The politics of enacting carbon taxes can be more challenging, but because they provide a fixed price, they interact more favorably with the politically easier to enact industrial policies that we think are the heart and will likely continue to be the heart of climate policy strategies. And therefore choosing a carbon tax is the easier way to combine these two strategies into an effective portfolio. When pursuing a carbon pricing strategies, we think it's important to focus on sector specific policies rather than economy-wide programs. For the reason David identified, the more sectors you put in, the better the economic gains, but the harder the political problem of moving these programs into an ambitious and functional setting. Our fourth recommendation is to focus on effective public spending with greater oversight on the public benefits and the political outcomes that are generated by clear effective public spending strategies. Revenue recycling has its benefits, but is likely to be politically ineffective on a dollar per dollar basis because the benefits are diffuse and they go to people who are not particularly well organized the stakeholders in these key policy fights. And the last recommendation is to focus on direct reductions rather than nebulous carbon offsetting contexts. Almost all of the functions, in fact all of the functions of offsets and compliance markets can be better replicated through a combination of cost controls and targeted public spending that directs revenues to the recipients that policymakers and interest groups want. There is no good rationale for carbon offsets in compliance strategies and they've taken down basically every major program that's attempted to use them at scale. So I think with that, I will stop sharing my screen and welcome the chance to dialogue with you all. So usually I moderate questions, but because there's two of you, David already has a few that he wants to answer online. How do you want to proceed? David, do you want to take those off the top just to get the ball rolling? These are, if I could scroll back up, do you want to start with them? I'll take one or two and then I'm gonna, Danny's gonna want to have some comments. Do you want to pick your poison or I could queue them up for you or whatever? Let me select my poison first and then just make sure we, you know, fully. Okay, keep the questions coming. We have quite a bit of time for questions. Thanks for our efficiency of our speakers, David. I want to pick up on a point raised by Larry Goulder. Also thank Larry for some very helpful conversations as we were putting the book together about the difference between cap and trade systems and taxes and in particular this Potemkin point that we make about cap and trade systems that the price that comes out of the market, it can be completely unrelated to the real cost of abatement inside the market. So it's precisely that logic that leads us to favor tax-based or price-based instruments much more than cap and trade systems. We think cap and trade systems are prone to generate all of these kinds of Potemkin effects and that those are severely debilitating. Whereas if you have a system that is a tax-like system then at minimum you're guaranteed that the tax is always gonna interact with the effect of the regulatory instruments and the marginal prices will be more effective. There are a lot of interesting questions about how to make a tax system, especially because some jurisdictions have constitutional rules or other kinds of rules to make it harder to pass fiscal measures compared with environmental measures. EU, for example, is done as those kinds of rules. And so one of the things we do, we have a whole chapter in the book about how to make the most out of market-based instruments and the chapter is basically on how to convert cap and trade systems into tax-like instruments and how to have as much effective sectoral coverage in those instruments. One way you can do this with the cap and trade system is adopting price floors and price ceilings. So such that the system behaves like a tax even though it may be formerly a quantity instrument. And the EU, which has an emissions trading scheme, that's exactly what they've done with floors and de facto ceilings with the price reserve mechanisms. Well, I guess another biggie that several people have mentioned is if the transparency characteristic price mechanisms are bad wouldn't something like a carbon fee and dividend perhaps turn that into a plus as it becomes visible that you're returning the revenues to people, citizens and whatnot. So just to be crystal clear on this, when you run the numbers on a policy, and this is a policy that some economists have been pushing for for a while, a group, Citizens Climate Lobby has been advocating for this approach nationally in the US for many years. When you run the numbers on policy efforts that rebate the money on a per capita basis, that ends up having a net progressive impact because the size of the rebate is bigger than the cost incidents for the lower income households. In this country and basically everywhere else I've seen that's studied this issue. So I wanna be really clear that that's the sort of econ 101 or 201 answer about the nature of that policy and what we'd likely expect from it. I think the problem is that it's not at all clear that people care in the way that we sort of assume they might rationally on this. And the best example I can give you is the experience Canada has had with some of these programs so far. And it'll be one of the central points as the Canadian government under Prime Minister Trudeau has committed to a very aggressive form of carbon pricing where if they can bring the carbon price levels up to $170 a ton Canadian by 2030 is their goal. That'll be an extraordinary sort of outcome from the standpoint of the ability of that carbon price to make a difference on emissions. The problem is they're rebating all this money back to people and it's not clear that that makes people happy with the outcome. The limited evidence so far with the much lower price system we see in several of the provinces suggests that voters are not happy with the program even though on the dollars and cents you can make an actuarial table that says this is good for many people. It's not clear that solves the politics. The other point that I think is important to keep in mind in all of this is it takes basically most or all of the revenues in the system to achieve that progressive outcome. So you have to spend an enormous share of the resources in these systems to get that done. That is potentially a much less politically efficient way to reallocate those resources. It might be easier to build different sets of stakeholder constituents based on more targeted support regimes rather than diffusing this out over the sort of general population. So those are the sort of two perspectives I wanted to share on that. It's not that it's a bad approach. It's that it's not clear that it actually achieves the political thesis that it sets out. And maybe the one last thing to say on this is I tried to help write a bill to do this in California. It got nowhere. It got almost no support from environmentalists. The industry certainly hated it. And I helped work on an effort to do this federally. It's something I've thought a lot about and I care a lot about but I just have seen it many, many times failed to gain the traction that its strongest supporters believe make the case for that policy being done. I have a general theme and a few questions for David that really plays to his considerable expertise in this area. And that has to do with what would, could you give some examples of egregious forms of green pork number one? And similarly, how do you define low quality offsets in terms of offset programs? And I've probably asked you this myself. Shouldn't we be satisfied with a bit of distortion given that we have a hope that we'll get some positive improvements in that regard? I know you've done deep work in both of these areas. That's just Danny. Yeah, so I'm actually gonna say one thing about the offset side I'm gonna ask Danny to talk about offsets and pork because those are areas where he's been looking more closely. I have to say I learned a huge amount in the process of writing this book. And two things that I learned in this process that were completely the opposite of my priors. One is the really big part of the story is actually about using the revenues effectively. And so one of the problems with the tax and rebate approaches is they're politically very costly because you spend all the revenue on trying to hold the thing together politically. Whereas one of the things that's great about the tax systems all the tax systems cover much smaller emissions. Globally, they raise a huge amount of money and if you have much better in effect public finance controls over how that money gets spent, you can have a really big impact on a blend of just outright purchases of investment and activities to reduce emissions and crucially investing in a portfolio of technology. So that part, I used to think that the question of what you did with the revenue was kind of irrelevant. What really mattered was the marginal price and having gone through this whole experience and trying to figure out how the politics affect these systems, I've come to the exact opposite conclusion. The other area where I've come to the exact opposite conclusions about offsets. I thought, John, going into this book, Danny kept saying, David, you're wrong, you're wrong, you're wrong. And then finally, I agreed, I'm wrong. I thought going into this book that there was some space for, at least we should have some offsets and try to do better because we're getting something done and so on. And then when you look closely at the incentives in the compliance offset market, at least what you see is just deep pernicious incentive to maximize volume and not care about quality. That's the new Mark Carney report on how to jump starts the offsets market, which is focused mainly on the European market, commits the same error. All these companies that are doing net zero and then gonna rely on nature-based solutions, they're making the same error. So we come to this really extreme position in the book, which I was uncomfortable with. And then finally, I'm now comfortable with it, which is there should be no offsets. You should actually not allow them as a matter of compliance until you really figure out additionality and quality and so on. But right now, since all the incentives pointing out opposite direction, it's Gresham's law all over again, you're just polluting the market with garbage. Yeah, but I thought I've not mistaken on that one that in your extensive work on international offsets and AIJ, CDM and whatnot, you had found a lot of egregious examples of things that cost a lot of money and didn't have an appreciable effect on emissions. Yeah, so, and then I'm gonna bring Denny on this. Yeah, so it was egregious, but I just didn't understand just how egregious it was. Like you were watching fraud and then you realize you're just actually seeing the tip of the iceberg. So that to me was rattling, but I'm very confident we're correct about this. With Danny. I hope so. So I think this is a really important area because a lot of the activity right now that's happening both in the private and public sectors is around offsets. And I think it's time for a big wake up column this. We have a problem in the climate field and it reminds me of what I remember when I was in school and people talked about the problem in conservation was that people love pandas and they don't love earthworms and they don't love the microbial activity in soil that supports the whole ecosystem. We have a very similar problem right now in carbon offsets and climate policy because most of the offsetting activity affects forests and increasingly soils and regenerative agriculture is the next big sexy thing. And everybody wants clean, regenerative agriculture and everybody loves forests. And the honest truth and I think the Stanford community understands this very well we're not gonna make a complete solution to the climate problem if we don't have an effective answer for dealing with land use with stopping particularly tropical deforestation and cleaning up the agricultural sector. But I think our enthusiasm for the importance of those topics has helped us turn to blind eye to what is effectively an intractable political problem when the buyers of these credits demand high volumes of low prices, you get bad outcomes. And nobody has invested the time or the effort to basically police and watchdog these systems which have been set up largely by self-interested self-dealing actors in these systems and then stamped with the approval of popular governments or purportedly independent third party nonprofit organizations that are funded and financially implicated in the entire market system. It looks a lot to me, frankly like the mortgage crisis leading up into the financial crisis. And I think we need to wake up to this. The reason I'm so, I wanna emphasize this so much is because the need to address those areas of climate policy is real and we are actually not doing a good job of addressing those policies with bad offsets. And what we talk about in the book is how spending, effective public spending which is essentially what we're doing with offsets an offset is an opportunity to avoid paying the carbon price and to have an offset privately direct the funds from a polluter to a purportedly good activity. If you run that through the public sector and you do good government and clear public oversight on that process you have the potential to redirect those revenues to more meaningful outcomes. And the most important part of this is that in an offsetting regime, you need perfection. If you have anything less than perfection your imperfection and crediting a purportedly good activity allows an incumbent polluter to pollute more and anything short of perfection leads to a bad outcome on climate you need perfection to get a wash. That's not the case with public spending programs. Imperfection is an opportunity to improve but you still get gross benefits even if you have an imperfect but still good hearted public spending program. So we need to figure out how to channel those efforts into a policy structure that functions that has less pernicious political economy and one where we can talk more openly about the successes and failures of what's going on rather than have to essentially fight the oil industry every time you wanna talk about whether or not a forest offset is real. So let me make this a little bit like a presidential debate although you guys aren't actually debating each other and start with Danny and expand to David in the general area of so you all recommend with some great arguments recommending industrial policies that may be limited use of market instruments. I wanna start with Danny and California what would you recommend right now to the governor and carb and whatnot and then you can decide if you wanna start on national hand it off to David and then David can do global. Well, I think in California we've actually been pursuing that model we've been talking about using markets but we've actually been pretty successful in some of our industrial policies and the two that I think stand out where we're gonna need to continue to see ongoing effort. One is the cleanup of our electricity sector. California has one of the earliest ambitious 100% clean electricity targets. We're gonna need to really figure out what that looks like and what the investment and deployment trajectories look like that is a conversation that I think moves much more quickly because it's focused on one sector rather than focusing on multiple sectors and basically fighting the incumbents and all of them in electricity you have a set of technologies and political actors that are capable of moving in the right direction towards progress and you go much faster when you go sector by sector. So that's one example. Another example is the role of mobile source standards particularly accelerating the deployment of electric vehicles and ultimately to heavier duty classes as we think about medium and heavy duty trucks. This is gonna be an area where California will partner very closely with the new Biden administration. I would expect to see a lot of important discussion on the role of manufacturing, domestic manufacturing to accelerate that transition. Last thing we need to do which frankly in California we haven't really begun to touch is to think about the future of our industrial sector. We have a very heavy oil and gas sector and we do not have really a transition plan for what that sector needs to look like over the coming decades. Trying to solve that through carbon pricing has proved almost impossible and it's time to apply the lessons and tools we've figured out how to work with an electricity and in transportation to that problem as well. Thanks, you picked up a couple of more questions on what to do about the fossil fuel industry. So I appreciate that back to David to take us global. Well, let me, let's not forget about the nation state. So there's a little heartbeat at the national level. Although it's easy to overlook Washington these days. I think you wanna do what you can with carbon tax like instruments knowing that you're not gonna be very effective and also knowing that if you think about that as a sector by sector program, you're gonna be able in some sectors to put in place higher tax instruments than others. But the core of the work is gonna need to be industrial policy. And I was frankly a little horrified that we came to that conclusion. But one of the things that I think is interesting is this is not like your grandfather's industrial policy. This is not the technology pork barrel. To look at the California experience, for example, we have the same agency that actually CARB which does a very, very good job of conventional pollutants, air pollutants does a very good job of figuring out which parts of the automotive sector to beat up on and figure out where the technological frontier is and how to push it and so on. That's their playbook. That's regulation and industrial policy. Same agency runs the cap and trade system and it's a disaster of a cap and trade system but extremely effective regulatory system. And I think to me what's really striking is even in the United States that at the federal level our capacity to intervene in markets and steer technological development and energy is dramatically better than it was a generation ago. You look at the loan portfolio, the loan program, for all the attention to the cylinders the overall performance of the program is exceptional. You look at ARPA-E, which as an earlier stage incubator like program, the performance is exceptional. So I think that's the really big story is that in some sense Americans are scared to tell a story where government works and we need to be telling that story to a greater degree and this is an area where we actually have now a playbook that's mature and so we ought to be using that playbook. And then if you take it to global level I'll just pick up on a couple of questions there about what we need to do globally. There's been a lot of visions of linking together carbon markets and having global carbon tax and so on and those are visions, they will never happen. In the case of linking the different national systems it's for the same reason we don't have a global currency outside of jurisdictions like the EU where you have common institutions because it's like a form of money and so the underlying rules are different and so we're not gonna have a global system. We are gonna need to do more on the global cooperation front trade measures are gonna have to play a role in that. Some questions in the chat about border adjustments. I think one of the hopes in the carbon tax world was that if you have a clean carbon tax it would make border measures much easier to put into place because you just look at the difference in the prices of carbon and then you adjust to the border. But when you look at the real world even the carbon tax systems are actually very complex because they vary sector by sector and there's gonna be an extra challenge if most of your work is done with industrial policy and not with kind of pure idealized market instruments then you're gonna need to find a way to convert industrial policy into border tariff adjustments which is hard problem but actually not unfamiliar to trade lawyers. It's identical to the tarification debate and so I think that's actually not when you start to really focus on it it's not a hard problem and the trade laws all lined up in this area so I don't see how we're gonna avoid trade measures in one form or another if we're gonna have a world where some jurisdictions are doing a lot like Europe and other places are not doing as much. So now I have a toss up for both of you and I'll put together about three or four different themes in a way that you've probably heard before. So if you're favoring industrial policies why not bring in other environmental pollutants and other social goals to justify them? So this could include everything from particle pollution other air pollutants, water pollution Danny helped me do a couple of workshops with the Schwarzenegger Institute they're really big on bringing in the environmental justice and social justice people on your side if you could do the analysis why not bring those into these kind of political public public debates where we're consumers in various interest groups weigh in is that a good thing, a bad thing? How would you do it? When would you do it? Who wants to take that first? I'll maybe start it I mean, I think it's a necessary thing I think that's one of the most important things trying to keep together but frankly a coalition is capable of maintaining majority support in this country needs to deal with is to think about equity issues front and center. There's some tensions in that I think there's opportunities where leading with equity helps you address really tough parts of the climate problem. My favorite example is if you think about pollution from the ports and warehouse districts so for example down in the Los Angeles port and warehouse area the Inland Warehouse District the freeways in between the ports and the warehouses and the communities that live next to the ports the freeways and the warehouses experience enormous local air pollution from the trucking associated with the largest port on the West Coast of North America. And if we can start to tackle that through zero emissions vehicles we're going to hit both climate and local air pollution at the same time in a way that leads on justice. That's an incredible opportunity to do both but you're not always going to find those win-win opportunities and I think that's all the more reason to bring those emphases in whenever it's possible because there's also going to be instances where doing the right and by the climate means not doing the number one priority of a justice focus constituent and it's going to be really important for the broader climate movement to develop relationships and trust that are serious and not superficial in that direction. I fear a lot of our approaches on climate policy have failed to do the sort of legwork to build that trust so far it's going to be really important going forward. Last thing to say on local air pollution is we have a hostile reactionary right wing Supreme Court in my view and the idea that you're going to get major climate policies under today's statutory laws through that court system is much riskier than it was five years ago. And that's all the more reason to focus on the regulation of local air pollutants where the precedents are more cleanly established and the legal risks of using the existing statutory authority that the federal government has are lower as a result of that. So another reason to really bring all those pieces together whenever possible. Perfect, David. I agree with that. I'll just say you have to deal with the politics as they are and there's a real blind spot around part of this group, centrist, carbon-focused folks who don't always recognize the extent to which the politics have shifted a lot and the questions of justice have been reframed in different ways and have become much more powerful. And that's true not only in this country the high watermark right now is European Green Deal. So we had a Green New Deal debate here and then the words moved across the Atlantic and they actually get it. And what they're doing is not gonna pass the kind of pure cost-effectiveness tests if you only think about carbon because it's got all this other stuff in it that's necessary to hold the politics together for the way these justice concerns are organized today. Terrific, we're almost out of time. I'd like to ask you both one last question as in part as a transition to the post seminar student session. And that is in my experience with both of you as I've introduced you to students and watch students react to you. There are a lot of students out there you probably see them in your own sphere that wanna grow up to be like Danny or be like David. So what advice would you give them if they wanna get into this interesting and important type of work that you two are involved in here and in the book and in everyday life? Maybe the first thing to say is I had that experience when I was an undergrad and David was at Stanford and I remember saying, David, how do I do this? And he said, don't and ignored him and that was wrong with me. It is actually really hard to get into this stuff and do it well. I think precisely because policy and policy research has been so politicized in my experience it's very difficult to do it openly and honestly and to learn to dialogue with the engineers and economists whose insights and expertise is necessary to navigate the toughest questions. So you are setting yourself out for a long journey if you wanna be somebody who works in policy but also dialogues with the research community it's rewarding but you basically can't be an academic these days and hope to do that unless you luck into it. And I think the other thing to mention is we wrote the book to try and provide some tools for how to think about political economy in the climate space which for as many decades as people have been working on this most people are not writing down how they think the politics work. We've tried to do that whether you agree or disagree it's really important to get specific about how you think the politics work and did not just invoke sort of cliches about political will or political effort and these amorphous black box barriers between the one perfect idea if somebody would just try it the way you're thinking of it and the barriers that exist on the ground to making those ideas reality. That's a lived experience. We tried to codify as much of it as we could but it's gonna be really important to be clear-eyed about that. I guess I'd say two things. One is I feel like I've had a completely reckless career and this is the source of my advice to Danny. So I have a PhD in political science I've never been appointed in the book science department most of what I do that is fun and interesting is working with engineers and oceanographers and other people and somehow I'm employed at a university but the incentive structure especially now compared to when I would have been a junior professor the incentive structure is totally different now and so it's much more focused on disciplinary contribution and so on and there are a few exceptions here and there but for the most part if you wanna be in the tribe you gotta follow the tribe's rules and so know what the rules are and the expectations are and then figure out how to succeed with the tribe and then do other stuff that's also works on real problems that in the real world don't sit neatly in their boxes. The other thing I would say is it's really important to search constantly for what's new. One of my mentors was an emotion, Nakachanovich and I remember Nakhi saying once joking but it was very insightful. He said, David, one of the reasons the meetings are so long is that even when everything's been said not everyone has said it. So really important to recognize there's just a lot of echo chambers out there and one of the joys in working on this book with Danny has been the opportunity to just go look at all the data with fresh eyes and think about the problem differently and just keep pushing yourself to do things that are new and different and periodically you're gonna blow up and do something that's wrong but it's a sign of taking risk. Terrific, well thank you both for a truly inspiring although somewhat frightening seminar. I hope the audience will take to heart all your advice including let's get serious about what's wrong with the current ways we're doing things and what do we need to do? Maybe experience some pain again. Experience some pain for the game that might follow and you two guys are two of my idols in that regard. So I once again would like to thank you for a truly inspiring seminar well put together and well orchestrated. Thanks a lot. And then we're on to the next part of the program. See you all in the general audience again next week. Thank you so much. Thank you.