The Economics of Climate Change

Professor Robert StavinsAs part of the 2018 Deep Dive, Professor Robert Stavins of the Harvard Kennedy School further explained the economic implications of climate change. Stavins explained the rationale behind viewing the climate change crisis from an economic perspective, presented several economic solutions, and described the political realities of driving change internationally and in the United States. 

Stavins started by explaining that people often think of the economy and the environment as opposites when, in reality, they are deeply connected. He argued that the causes of environmental problems are economic and the consequences of environmental problems have economic dimensions. Therefore, “an economic perspective is essential to understand environmental problems and develop pragmatic solutions.” Only with an economic perspective can societies around the world create policies that meaningfully address climate change. 

In part, the economic perspective to environmental problems is essential because of the very nature of greenhouse gases. As Stavins explained, greenhouse gases mix in the atmosphere, and societies feel the effects of CO2 emissions independent of the location of the emissions. This leads to what economists call a “global commons problem” where the costs of changing emissions behavior are local, while the benefits are spread globally. 

Further complicating matters, greenhouse gases accumulate in the atmosphere, so the consequences are long-term but the costs of abatement are typically incurred up front. In sum, the nature of greenhouse gases creates a “tragedy of the future commons” – a significant problem that requires international cooperation. 

To combat this “tragedy of the future commons,” Stavins and other economists suggest carbon pricing. Carbon pricing – policies that put a cost on emitting CO2 – takes two forms: a carbon tax and a cap-and-trade system. The carbon tax would tax people who produce emissions, while the cap-and-trade would set a limit on CO2 emissions and allow firms to buy and sell their allocated contributions toward that limit. Economists like these options because they create a cost-effective solution to meaningfully reduce emissions. 

Undeniably, Stavins continued, carbon pricing would have consequences for the fossil-fuel industry and consumers. Namely, carbon pricing would amount to a tax on the coal industry because of its relatively high carbon content. This would lead to overall lower energy output, increased investment costs in new energy, and increased costs to retire existing plants. It would also likely lead to an increase in demand for natural gas but would have less impact on the oil industry. Stavins explained, “Carbon pricing is bad news for coal, mixed for natural gas, muted for oil, and good for renewables.” 

2018 ALI Fellows during the Climate Change Deep Dive

Stavins said that the international community was already taking steps to address global environmental problems. In addition to a number of countries instituting carbon pricing, nearly 200 countries around the world signed the Paris Climate Agreement, a plan for greenhouse gas emissions mitigation, adaptation, and finance. This agreement covers 97% of the world’s carbon emitters, but it is unclear whether the policies are sufficiently ambitious to reduce global carbon emissions. Stavins said that individual national policies were critical in this work because “internationally, the policies are fundamentally voluntary.” 

Despite the recent international agreement around climate change, US domestic climate policy saw a major shift under the Trump administration. President Trump, who describes global warming as “a total and very expensive hoax,” began to roll back environmental regulations in the US, including the Clean Power Plan and the CAFE Standards, and withdrew the nation from the Paris Climate Agreement. With the absence of the US, Stavins said that China had emerged as the global leader on climate change. 

In his closing remarks, Stavins expressed some optimism around “sub-national” action around climate change in the US. He noted that EPA Administrator Scott Pruitt would likely make cuts, “with a scalpel rather than an axe,” and that many states and regions were adopting stringent regulations around carbon emissions. Stavins also explained, with some hope for existing laws protecting the environment, “it is non-trivial to change federal laws and regulations.”