Michael Livermore 0:11
Welcome to the free range podcast. I’m your host, Mike Livermore. This episode is sponsored by the program on law communities and the environment at the University of Virginia School of Law. With me today is Michael Greenstone, who is the Milton Friedman Distinguished Service Professor in Economics, and the Director of the Energy Policy Institute at the University of Chicago. He served as the chief economist for President Obama’s Council of Economic Advisers. And he’s been working for decades engaged in research and policy development on environmental issues. Michael, thanks for joining me today.
Michael Greenstone 0:44
My pleasure. Thank you for having me.
Michael Livermore 0:46
So I thought we might begin by talking about, you know, a really important recent climate development development in the world of climate policy, has been just over a month as of the time of this recording that we’re making, which is the inflation reduction act, a really major piece of legislation. So there’s a lot to it, but just to the really small thumbnail is the bills. Basically, the climate provisions of the bill are a big pot of money, a lot of funding mostly in the form of tax subsidies for a various kind of suite of decarbonization efforts, roughly to the tune of $400 billion. We’ve got tax credits for certain types of energy projects, there’s the electricity, electric vehicle tax credit, there’s money for homeowners who are going to make improvements, like installing heating pumps, there’s a provision establishing a Green Bank to provide funds for clean energy projects. This is a really complex piece of legislation. There’s requirements around many of these subsidies, including labor standards, US content standards, and so on. There are provisions to promote fossil fuel leasing on top of that, and as we record, we’re in the middle of a debate about what’s being referred to as the side deal, which is an effort to reform the process of environmental review, to make it more developer friendly. So I guess just the big picture question. I know, there’s a lot of moving parts, obviously, as you know, as well. But what’s your general impression of, of the legislation? Is it a good thing? Are we in a better place now than we were six months ago on climate policy in the US?
Michael Greenstone 2:18
So I think the short answer to that question is the period of American exceptionalism around climate policy, and that was not to have a policy has finally come to an end. And so I think, we in terms of confronting the climate crisis, we’re in a totally different place than we were six months ago. And that’s a great achievement. I, you know, as you list it, there’s many, many details about the IRA. And probably it’s too hard to sum them all up into one, you know, grade, but there are certainly some elements of it that are look quite terrific. Some of the tax themselves look like they’re gonna get reductions in co2, at relatively inexpensive costs.
Michael Livermore 3:10
Yeah, it seemed that the report that you were part of, on that, and, and which, so which of the which of those provisions have you have you taken a look at that you think you’re kind of most promising in that regard?
Michael Greenstone 3:21
Yeah, it’s primarily, you know, it’s permanently the tax incentives for generation of low carbon electricity. And those look like compared to their benefits, where their benefits are the reduction in climate damages, that they’re going to unlock their benefits, look, you know, maybe three times larger than the cost.
Michael Livermore 3:45
Pretty good. As these things go.
Michael Greenstone 3:47
Yeah. And I mean, I’ll just add, like, for those of, you know, your listeners who aren’t like in the depths of like, cost benefit land, like, normally, economists get pretty excited when a policy, you know, is like, you know, 1.2 times the benefits or 1.2 times a cost, like, we don’t get policies that are where the benefits are three times the cost, and it’s really remarkable. I think it is also a reflection of important outside event, and that has been the reduction in the costs of low carbon energy sources. And so these teams, same tax incentives would not have produced such large carbon reductions, you know, three years ago, five years ago, or 10 years ago, it’s these guys, these energy sources are much closer to being in the money and these tax incentives are now pushing them across the line.
Michael Livermore 4:43
Yeah, and that’s an interesting story itself on how the technology has come along, but maybe just one in general questions that kind of an almost an interpretive question that’s kind of come up in the wake of the of this bill and in the political success it it realizes, right? I mean, we’ve been working at the United States in general has been, as you said, the kind of exception to the rule here, in terms of its lack of climate policy, especially legislative climate policy. And, and there’s been efforts, you know, for decades to get something like, get something done. And now we finally have something. But one of the one of the interpretations that I’ve seen, I’d be curious your take on is that the fact that this is what got over the finish line, summer reading is kind of a rebuke to economists and the role of economists and debates over climate policy, the thinking of the argument goes, something along the lines of economists had been urging carbon pricing things like a carbon tax or a cap and trade for decades. And, you know, that’s not the policy that we ultimately got, we got something that was subsidy based, it’s much less technologically neutral than other approaches is there’s a lot of provisions in the bill that are targeted to specific technologies. And, you know, there’s been a kind of consistent concern amongst some economists that that’s a bad idea, because you’re picking the government’s not very good at picking winners and losers as the saying goes. And so that’s been an interpretation that I’ve seen, there was a piece in The Times by Lydia de Pilis, kind of recording some of this and some chatter on Twitter. Yeah, I was curious, if you read if you read the politics this way, if you read the legislation this way, or if you had a different take on that?
Michael Greenstone 6:30
You know, I find this kind of navel gazing, and the conclusions that have emerged from it really bizarre. So like, Yep, the bill got across, it got across the 50 50 Senate, the Vice President cast the first vote. And it is true that the period of American exceptionalism with respect to having no climate policy has come to an end. But we still are the standout in the in the sense that you know, of the seven G7 countries, we’re the only one that is not using carbon pricing in a systematic way. And I think it’s really kind of a strange, like getting the microscope all the way against the piece of paper to reach the kind of conclusions that you listed. And, again, I you celebrate at least some of the features of the IRA that I understand. But it doesn’t change the fact that we are picking some winners’ losers, and probably we’re gonna miss out on some innovation that would have happened if they’ve been more neutral, though this is more neutral than other policies had been in the path of proposals in the past. And, you know, this isn’t doing anything really about the economy wide problem. There’s emissions all over the place. So like, what an economist was like, what common sense would say is like, getting the entire economy incentivized on carbon is the way to go. So I find it kind of a very strange possibly self serving interpretation. And one that does also does not account for really the rest of the world. You know, the US is, I guess we’re about 5 billion tons of co2 metric tons of co2 now, the world is 40 billion tons. And the world seems to be most of the rest of the world seems capable of buying less expensive abatement than we do. Or the sorry, I want to be clear most of the rest of the g7 or the rest of the g7. Yeah.
Michael Livermore 8:42
Right. And which, which accounts for a good chunk of global emissions, of course. Yeah, I think this raises an interesting question is one that kind of is coming up. I think now, even just with respect to what we’ve seen with gasoline prices over the last, I guess, a year or six months, and how that relates to the kind of political fortunes of folks in Congress with a have a midterm election kind of on the horizon, it really does seem that gas prices are a huge input into an energy prices are a huge input into the political process. And that’s globally true, I think, to some extent, but it does seem really salient in the US. And I was wondering, and that obviously, that relates to carbon pricing. And so whenever proposals to price carbon have gotten serious, at the national level, there’s always an easy kind of opportunity for political opponents to shoot it down as something that’s going to affect energy prices. And that really does seem like something that motivates voters. I’m wondering if you have you know, you’ve been in this debate for a long time. If you have theories about why energy prices seem to have such an impact on elections? I mean, one possibility is that you know, that’s that’s just an impression or that’s wrong, I guess, right? It’s just perceived to have a big effect. And it doesn’t actually. But there seems to be alternative pathways through which concern about energy prices could kind of feed into into politics. Yeah. Just wondering if you had any, any thoughts on this as an observer over the years?
Michael Greenstone 10:19
Yeah. So I’d say a couple things. What we take away from the swift increase in gas prices around the initiation of the Ukrainian war, and now the decline as of late, but what we take away from that, I think, is not relevant. It’s not the same thing as what a methodical and forceful carbon pricing would look like. There you would have the price appear, you know, not overnight, when people are stuck driving a particular kind of car. But rather, people would have a chance to adjust in expectation of what was coming, and maybe you would phase it in over time. And the other thing, the reason, I think it’s kind of a false comparison is, it is a design feature of carbon pricing as to how you distribute the pain I guess of the higher costs, it’s like, and, you know, you could take the money, you could burn it, you could dump it in the ocean, you could put into general revenues of the Treasury, or, you know, it does not take like superpowers to come up with a plan to redistribute it, you know, in a very progressive way. And so there’s plenty of proposals out there that have at their core, the idea of introducing carbon pricing, which, as you said, would lead to higher gas prices and higher other prices, but then having some rebate as part of it, which is, you know, heavily tilted towards people who are gonna face the highest costs. But I want to add, like, if the idea is, can you name a carbon pricing policy, where there’s not a single American out of the 330 million Americans who’s who’s not hurt, then of course, of course, there’s there’s going to be people who will be hurt. But this is, you know, you have to add up the people be harmed versus the larger benefits. And I think it’s not hard to devise policies where especially lower income Americans are protected. And unleashing, all kinds of climate benefits. There’s one other point I want to make here. Which is, sometimes I think it’s not fully appreciated. You know, we want to why does the US want to cut its emissions? It wants to cut its emissions, I’m going to try and take a pretty narrow view of the US interests here. And suppose that, you know, all we cared about was the United States and we may, that may or may not be right. For some people, that’s gonna be true. For some people, it’s not. But even for the people who All you cared about was the United States, there is plenty of reason to look for carbon policies or climate policies, particularly those that will unlock reductions in other countries. Because when a ton gets reduced, in Detroit, it produces benefits for all Americans, but it also produces benefits for this world. Similarly, when a time gets reduced in Mumbai, or it doesn’t get emitted, or in London, or even in Moscow, it’s going to produce benefits for Americans. And so to the degree so like the benefit of having clear carbon policy, carbon pricing is a really good example of it not the only one is that that can be leveraged in international negotiations for reductions elsewhere. And that’s those aren’t abstract things, those are things are going to produce benefits for Americans. And I just want to get that out because sometimes, I worry, we get so focused on US emissions, kind of as an end in and of itself, and kind of, there’s this larger playing field out there.
Michael Livermore 14:09
Yeah, it’s a really interesting point. Because I think in a way, there’s a, there’s maybe an irony to this. So I take one of your an element of the point, you’re just making that one of the advantages of of a carbon tax, or even maybe even more specifically a cap, you know, that would involve a cap and trade program is that you can then go to international negotiations and say, Look, we have a mandatory cap, it’s very clear, like what our emissions profile is gonna look like. But you know, same thing with the carbon price, we were putting a carbon price of X dollars per unit of emissions. And what we want to see is you guys do something like that. And it’s very clear, as opposed to what you know, maybe something like the IRA looks like is we’re putting a bunch of money into clean energy development. We project is going to reduce our emissions by a certain amount but that’s it that lacks that clarity when you’re on the international stage.
Michael Greenstone 15:05
So yeah. And we sure hopefully like, by the way that there’s a jacent permitting law that would unlock all of those production and clean energy, which–
Michael Livermore 15:13
Right, exactly, which is very different than it can vary. So then, but I wonder if that’s also it’s kind of a feature, but it’s also a bug in the sense that part of what is attractive about something like the IRA, from a political perspective, or part of the liability of a pricing mechanism is that a pricing mechanism is very clear. And that’s part of what makes it politically difficult is we can say, look, look, this is what we’re doing, we know what the consequences are going to be, energy prices are going to go up, the mix of energy is going to change. You know, conservation efficiency efforts are going to make sense. So people are going to invest in those. And it’s actually, in a sense, that clarity, that makes it more politically difficult. I wonder, I’m not sure about that. But I wonder, I wonder if that might be partially–
Michael Greenstone 15:57
I think the transparency is both a feature and a bug. You know, there’s another thread that cuts through all of this, and I think it’s just worth touching upon for a second. And I think, you know, the United States is viewed as a kind of a free marketplace, at least internationally. What is strange in the environmental and climate and energy space, is, I kind of feel like our instinct is to be engineers. And not to be free market people. And what do I mean by engineers? You know, people want to put their hands on the machine, that’s going to stop the emissions, and really feel, or I think, quite uncomfortable with letting market forces sort that out. And so and I don’t know why that’s more true here than in some other places, or, or why that’s even true at all. But I think the tangibility of yes, I am subsidizing water heaters, right, or I’m subsidizing windmills. And then so I’m going to get more of those things that people feel comfortable about them. But what is lost in that is the goal is not more windmills, the goal is not more efficient water heaters, or whatever it is, the goal is less carbon. And, you know, time and time again, we have found that when you go for these bank shot policies, and the bank shot is, you know, not directly targeting the enemy. The enemy here is carbon, it’s not the enemy is not enough windmills, it’s too much carbon. You know, not always, but often we can end up in places we didn’t expect with outcomes that we don’t like so much. And, you know, I have made myself no friends in the kind of energy environment land with, one thing I’ve done is written a couple of papers on what are the returns to energy efficiency investments in the residential sector. And those who have not the in, you know, it’s, it’s hard to, when you name them, it’s hard to dislike them. You know, I want more insulation, in my end, or better windows or whatever it is, it turns out just because the world is a complicated and messy place, when you test this with, like real randomized control trials, that yeah you can get less energy consumption when you do that. But it turns out that on a cost per ton basis, there are a lot more attractive options out there. And so I view that as kind of the fault line on the engineering approach, which is, if you’re going to insist on putting your hands on it, then you may if you’re on the technology rather than on the co2, then you might end up with something that is not doing so great on bang for the buck.
Michael Livermore 19:08
Yeah. And as I actually want to dig into this, I think it’s a really interesting faultline. But just a little anecdote, kind of along these lines, is that reporter was asking me the other day, you know, it’s kind of up this bill, like, what do you think about hydrogen or carbon capture and storage and different technologies? And I said, like, I don’t know. And I don’t want to ever have to try to know like, this is what the tricky thing is, is like, I’m not you know, nobody knows the answer to these questions. And if you get the incentive straight, then the people will make bets. It’s not like the market. I mean, that’s the thing people not to go on a tangent too much. But you know, people think when folks talk about like the market, knowing that doesn’t mean that anybody knows in the markets, just that people are going to make bets and then eventually, the right people or the correct people, their bets are going to be borne out and other folks their bets are not.
Michael Greenstone 20:00
Yeah, you should define what do you mean by the right people in the graphic? Because it’s a really important point.
Michael Livermore 20:04
Yes. The ones with the ones who make better bets, you make good predictions about what technologies that are going to be the lowest cost technologies and most viable ones. Right. Yeah, not the right people in the right thinking people. That’s, yeah, that’s true. That’s a good point. But, you know, I guess the question that I wanted to just delve into a little bit is, you know, I think there is this fault line that you described, I totally agree with that. I like the idea that we can adjust, you know, the market approach, the free market approach versus kind of an engineering, more centrally directed approach. And there certainly has always been that within the environmental energy community. But on climate, really, I do think there was a period of time where a lot of folks were bought into more of a free market approach more of a price mechanism, cap and trade type system. And there was always going to be some elements of central directives kind of laid on top of the pricing mechanism, subsidies for this, or clean energies, energy efficiency standards, or whatever. And, you know, kind of putting those aside the centerpiece of, you know, just going back to the Waxman Markey Bill was always the cap and trade.
Michael Greenstone 21:13
But so let’s just stipulate you’re talking about the halcyon days of let’s call them a two year window 2007 and 2009. That’s right. That’s fantastic. So there was a presidential election, both people were saying, yeah, and then there was an effort to get to Congress made it to the house and died in the Senate.
Michael Livermore 21:30
Right. And I guess the what’s what’s interesting here is, you know, comparing that that moment, with the moment that we just had, in a sense, where the IRA does, is able to get over the finish line. And in principle, it’s hard to explain this, I think, because if market mechanisms are the lowest cost approach, which I think is a really good recent thing, that’s true. What is it about the political coalition? And I think there’s so I guess that’s a question for you, if you have any insight into this is what what makes, because, you know, the cap and dividend that you were describing earlier, just seems like a superior policy. But it does seem to be very hard to get off the ground in the United States, where we’re, you know, as you said, supposedly culturally predisposed to market mechanisms. I guess the question, the question I have is, do you think it’s more of an inside game story, where, you know, there are just certain factions in the Democratic Party that prefer the engineering approach? And so if the prospect of bipartisanism, you know, a bipartisan approach is off the table than the engineering people kind of just have more sway within their own within their own party? Or is it something about kind of broad perceptions about these bills, and the opportunity to kind of go out and demagogue a little bit is less obvious with the subsidies approach, even though you might think it would be easier if folks in the US had a very pro market orientation? And, you know, opponents of this kind of policy could go out and say, Look, this is like a government takeover of the energy sector. Look at this, this seems bad.
Michael Greenstone 23:09
Yeah. So okay, there’s a lot to unpack there. Let me just make a couple of points. First. I said this before, I want to say it again, the delta, that is a difference between the clean energy short, costly, cleaner sources, and the fossils has shrunk a lot. And so, now, something is possible with these kinds of policies to achieve meaningful carbon reduction. That was not true as I said, three years, five, certainly 10 years ago. The second thing is, I, you know, I can’t fully I can’t fully I can’t fully articulate why this happened. But there is now my read is an increasing awareness of that climate change is having impacts today, you know, maybe it’s the wildfires, whatever it is. And so I think there’s a much greater sense of urgency. And so I think all that both of those things push towards doing something. And then now you’re asking in a way that wasn’t true. A couple of years ago. Now, you’re asking why did it tilt more towards the technology policies or widen and tilt towards carbon pricing? I don’t know. I think people will be writing books about this for a long time. I will say though, that one thing that I was really struck by is the green New Deal, and Greta, and it’s really galvanized people’s interest, I think helped to galvanize people’s interest in climate change in ways that I was surprised by and they were very successful at that. And I think they deserve a lot of credit for that. It is also true that that faction of the environmental movement, part of the environmental movement is I think, has historically not been very comfortable with markets. And so maybe because they were the ones who got the ball rolling their ideas took more, you know, the center piece, I’m not quite sure, yeah, yeah. But it’s a great question. I think we’ll be writing dissertations and books about it for a long time, and I’m not sure there will ever be a definitive answer.
Michael Livermore 25:30
Yeah. Yeah, I mean, it that seems totally right ending. And maybe we can shift shift gears a little bit, just because we probably aren’t gonna get this fully settled. It’s a it’s a fascinating set of questions. But but thinking, you know, gets kind of shifting, shifting gears, maybe one of the points that you raised a couple of times is the fact that technology has gotten so much cheaper in the last few years. And that really does change kind of everything, it changes how far subsidies go, it actually changes you know, how how much of a price you would have to put on, changes the effects of a price, let’s say whatever the price you put on, you’re going to get more emissions reductions if substitute technologies are cheaper. So what are your thoughts on, you know, kind of how that came about? Is it, because again, it was in anticipation of of a change in policy? Or is it just normal technological development, and, and we all just kind of get the benefit of waiting a few years and now, and now that technology is in a in a better place?
Michael Greenstone 26:34
Yeah, it’s that is another great question that I don’t think we have definitive answers to, I think some, there are some facts that seem directionally to have contributed to it. You know, Germany, and Spain, and some other parts of the EU’s focus on building out these technologies to get them down their cost curves. I think that certainly played a role. China’s massive investment in these technologies and subsidizing them, their development has surely played a role. I think, importantly, and I was in the Obama administration. But some of the things Obama administration did to help quicken the pace of understanding about these technologies probably also helped. I think state renewable portfolio standards probably also helped the United States. I think there were a mix of things that caused some, what economists like to think of as non appropriable learning that is, I learned something about how to build better windmills and the Michael Livermore competing company, some of that spills over on them, and they benefit from that as well. And so I think there was a lot of that going on, and there were probably a mix of factors that reducing it. But, you know, I think we should stand back in awe, the reduction in solar prices and the reduction in batteries. I think, really only a tiny minority of people could have would have predicted or were predicting them, you know, a decade ago, we got lucky.
Michael Livermore 28:13
It turns out, you know, there’s a variety of different environmental experiences that we had in the environmental space where, with some pushing from policy, whether it’s a pricing mechanism, or it’s a regulatory approach, or it’s a subsidies approach, you get, you do get these really important profound effects, in part because technology just kind of leaps loose forward in unexpected ways. So of course, I’m thinking of the sulfur dioxide program in the United States, where we just get these incredible reductions that were kind of at low costs that were just not anticipated at the time of the 1990, Clean Air Act amendments.
Michael Greenstone 28:53
Yep. So, you know, I think that’s a validation of hanging prices and letting people sort it out. I do and I want to step back for one second, you know, there are two basic market failures with respect to climate change. The first is just that you get to pollute, and largely don’t have to pay for it. And the second is, on basic r&d, or in I would even say basic r&d and demonstration, really considered part of basic learning. And that is this idea that there’s a whole bunch of learning that has to take place. No company has it in their interest to do it all because some of it they’ll do less of it than a social album, because some of it will spill over as I described a minute ago. And there’s just such a strong case for the for government support of that. And so, you know, if I were king of the world, I would be shooting tons of money at the wall on all kinds of things that might reduce, might develop new technologies that are in the early stages or demonstrate kind of maturing technologies about how we can build them at scale and things like that. And you know, when you turn over those cards, a couple of them are going to, you know, I think we have a long history, a couple of them will turn out to be great. Many will turn out crappy, but that’s totally fine.
Michael Livermore 30:21
That’s that’s expected at some ways. Yeah. You know, as we’re kind of, you know, thinking about the role of role of economics in in, in his policy debate, one of the things that was also kind of struck me in this domain, is the importance of economic forecasting here, and actually, the predicting technology kind of relates to this, because that’s part of one of the most, that’s probably the most difficult, or it’s certainly one of the most difficult pieces of say, predicting what the effects of this bill are going to be. The rhodium group, which, which you’re familiar with, of course, is did a lot of very influential, I think, predictions on what the what the emissions consequences are going to be. And technology is just is an inherent or making guesses about technology is an inherent part of that enterprise. So I wonder, kind of two things I think are interesting about about this one is just your thoughts on the role of economic forecasting, and the the difficulty of that, as it relates to to, you know, emissions and so on, in the in the policy domain. And, and it’s influence, the fact that it seems to be really, really influential, even if the tools that economists might recommend, like carbon pricing or not, you know, weren’t carrying the day that economic forecasts were certainly used as an input into the policymaking process, a really important input.
Michael Greenstone 31:48
Yes, I think it’s awesome to choose policy when you’re not blindfolded. And I think there was a lot of good work done to kind of assess what these policies could produce in terms of carbon reductions. And the rhodium group has been the absolute forefront and providing thoughtful, clear, fair, totally level analysis. And, you know, they deserve a lot of credit in my book, you know, another area where there’s like forecasting going on, is probably trying to understand what the impacts of climate change are going to be, like the damages from climate change. And that’s, I think, that I know that space much better than the economic forecasting, of which technologies are going to win. And in that space, you know, I think we’re totally at the dawn of a new era. And very, very exciting time. And, you know, I think they’re the intellectual lineage is that Bill Nordhaus, who won the Nobel Prize at Yale, kind of laid out this foundation for how to think about the problem, but he was stuck in a period where there’s like, crappy computers, and there wasn’t a lot of access to data. And so he played, he did like totally reasonable things like he made, took what data was available, and it made some assumptions and extrapolated them and kind of went within laid this foundation for how to think about everything. Now, you could think of that as like, laying out, you know, like a body. And now we’re, like, have all this data and these great big computers can do all kinds of amazing things. And it’s like, we’re taking that body and we’re putting muscles in it and bones and, like, you know, turning it into like a much more nuanced and rich understanding of what the impacts of climate change will be. And that a lot of that work is, you know, I have to admit, like, is like being done by this group that I helped set up with Trevor Houser, and Saul, Shawn, in Epcot called the climate impact lab, where we’re really trying to take what was kind of mathematical best guesses and flesh it out with data and evidence.
Michael Livermore 34:17
Yeah, well Yeah, let’s talk about the next generation of of, maybe broadly, we could talk about it because you know, social cost of carbon and, and climate forecasting. Maybe one thing to kind of get on the table I think folks are sometimes unclear about is the difference between say what folks associate with the climate impact center and even Nordhaus, and more broadly, the way that economists go about the business of doing this modeling versus what you see at the the Intergovernmental Panel on Climate Change, the IPCC models, those types of forecasts, you know, I see those as being like really too, fundamentally different enterprises. And maybe maybe you could kind of explain how the work that you does kind of fits into or differs from the climate models that I think a lot of people who are outside of the really the really the inside game of policy analysis, might might see these as all being kind of similar to each other. And the IPCC, of course, gets a lot of general attention.
Michael Greenstone 35:25
Yeah, so I kind of, I’ve never been on IPCC panel, I guess you’d say by choice. But there are very large groups of people who I don’t, I don’t think they’re based largely on my understanding, or not doing original analysis or kind of trying to summarize a bunch of articles that are out there. And, you know, with very large teams, and people with very different opinions, and kind of really excellent review pieces. What the climate impact lab is trying to do is actually say, you know what, we can do better than what has been done in the past and understanding what the impacts of climate change will be. And kind of build up from scratch in empirically founded, estimates of what climate damages will be, and then with a special focus on the social cost of carbon, which is which are the damages associated with the release of an additional tonne of co2?
Michael Livermore 36:33
So, so one question I have for so so the, when you say from the ground up this is this is, in a sense, the distinctiveness of a lot of this project, right? Because in the as you were describing the Nordhaus methodology, and a lot of the kind of the premier models, peer reviewed, very useful, first generation models are taking a lot are really kind of building their the estimate of climate damages from a top from a top down, right. And so when you talk about building it from the ground up, like what a what does that mean, in practice, if you’re not making like just a general assumption about a relationship between temperature change and global GDP damages?
Michael Greenstone 37:16
Yeah. So what does it mean in practice, first of all, it means spend a couple of years collecting data. And so that’s not the most glamorous part of this. But we spent a couple of years gathering data on electricity and energy consumption, for 95% of the ended up being available for about 95% of world collecting data on mortality, from about 60% of datasets occur about 60% of the world, and doing similar things for agriculture and all the other sectors we looked at. And I think one way to really highlight why it’s so important to do that is a finding that comes out of our results is before we started working on this, the assumption was that the relationship between temperature and human mortality was–sorry, that climate change impact on temperature would basically have a zero impact on human mortality. Now, why was that? That was effectively saying reductions in very cold days would be almost equally balanced by increases in the number of hot days. And that was the right conclusion from the available data. It turned out though, that most of that data came from like rich places with temperate climates. Maybe like Chicago, or London, or places or Northern European cities. And so like, yeah, getting rid of coldest Chicago is really good. It’s going to cause less deaths. And it’s not a hot enough place that you get to really high temperatures that cause really large increase in mortality. So when you actually have data from the whole world, it turns out that that relation, that that kind of balancing that applies in these rich northern places, is not true globally. And there are locations in the world that are very poorly positioned for climate change both because they’re poor to begin with, and they’re hot to begin with. And they’re you’re not getting the counterbalancing reduction, cold days, you’re just getting an increase in hot days. And when you add it all up, it turns out we were understating the climate change impact on mortality due to temperature change, probably by a factor of 20. And so I think that is like an illustration of why I kind of think we’re at the dawn of a new era. And you know, another thing that’s really, really important about it is we, climate, you know the way we have largely up until recently been talking about climate changes. Well global GDP will change by two or three percent. And, and you know, global temperatures will go up by two degrees C, on average. The problem is nobody lives at the average. And what we’re finding is just massive inequality in the impacts of climate change. And what is true is that if you know, of 2% loss in GDP, just to be very extreme, is like, we would feel very differently about a 2% loss of GDP if it was generated by everyone on the planet losing 2%, then if, you know, 90% of the people had some massive loss, or sorry, 10% of the people, that’s a massive loss and 90% of people had no loss. And that’s what we’re uncovering is like the losses are very unequally distributed.
Michael Livermore 40:55
Yeah. And so so I think, and that’s a really interesting point, right, there is I think there’s kind of two two things I wanted to touch on, as you know, in this question of next generation, social cost of carbon issues. So one is adaptation. I’m curious how, what you think the best approach to dealing with adaptation because it, it raises some of the same difficult questions around forecasting, generally, we’re talking about the difficulty of predicting technological change. Adaptation is something that at least in principle, could involve a substantial amount of technological change in agriculture, agricultural practices, new, you know, new varieties of agricultural crops, genetic even potentially, you know, genetic engineering here. So yeah, building materials or building practices, there’s a lot of potential things that would affect how temperature change actually translates to effects on human well being. So I’m curious, is that something that you just have to make the best assumptions you have? Or are there ways to try to validate the predictions that the that you kind of have in these models, and just generally, your thoughts on the best way to deal with the question of adaptation? In the social cost of carbon?
Michael Greenstone 42:10
Yeah, so the first thing is, I think you have to have the social cost carbon or any estimate of climate damages. So of course, social cost of carbon is just one particular calculation about climate damages, you have to include both the benefits and the costs of adaptation. And the kind of granular local projections that we’re able to make in the climate impact lab, kind of unlock that. And so there’s a really good example, I think, that comes out of this, which is, you take the cities of Houston and Seattle, they are both very, very rich by global standards. And they’re, were obviously, both belong the United States and have a lots of similarities. Maybe there’s some differences in state government. But by and large, most different, you know, a lot of differences are, like, they’re way more similar than Houston and Mumbai, when we say, and what is so what we got out of the data, is that when a very hot day arrives, so like, you know, where the average temperature that is the average of the highs and the lows, maybe 95, or something in Houston, basically, nobody dies. But when that arrives in Seattle, there’s very, you know, there’s quite elevated rates of mortality. And why is that? That reflects adaptations, those kinds of days arrive in Houston all the time, or maybe not all the time, with some frequency. And so people in Houston have adapted their lives, adapted their buildings, you know, purchased air conditioning, a whole series of things, to protect themselves, when those things come. In Seattle, it’s not worth it, because those things don’t currently don’t come very often. And in some sense there, you know, it’s a nasty way that economists talk, choosing to spend their money on something else, which is when those days arrive leads to elevated mortality there. And what we put at the center of our efforts at the Climate Impact lab, is to measure both the benefits, that is the reduction in mortality when a hot day arrives from adaptation, as well as accounting for the costs. And it’s absolutely critical. The cost of those adaptations, it’s absolutely critical to do that, to get in order to get an accurate estimate of what climate damages will be. So that’s one point I want to make it just wanna make a second point, which I think is related to your question, which is, if you are going to unleash companies, Monsanto to figure out what seeds are needed and things like that. It is not okay to just know what’s going to happen, either globally or at the country level. In response to climate change, you have to have local efforts so In the corn counties, you know what’s going to happen to crop yields. And so to get the adaptation we need, we have to have visibility at a much more granular level than has been the case with the climate index literature today.
Michael Livermore 45:14
Yes, certainly, in terms of informing it’s an important point, informing adaptations. Is that kind of what you’re talking about, like there’s someone out there and thinking like, what should I be doing to adapt to climate change? And if all you get is, Well, climate change is going to result in a 2% decrease in global GDP, that doesn’t really tell you what you’re supposed to do in response.
Michael Greenstone 45:31
It doesn’t tell. So to you know, be snarky, like, knowing what’s going to happen on average in the US is not going to help Miami prepare for higher, you know, for higher sea levels.
Michael Livermore 45:43
Right. Right. So on that distribution, so there’s a couple of points that that, you know, you’re kind of making about distribution. So one is just that one that you made, that the impacts are going to be different in different places. And planning and adapting is, you know, has to account for those differences. It sounds like you’re relatively optimistic. I mean, one of the points I make is the difficulty of making fine grain analysis, there’s a reason why it’s easier to make a prediction about global effects than there is local effects in Miami, because in some sense, you’ve just got the benefit of aggregation and your errors, you know, can point it as long as they’re uncorrelated, you know, you can kind of take advantage of that. And so it’s really tricky, but it does sound like you are optimistic that we can make sensible predictions that are at least useful enough for policy making at a more fine grained level.
Michael Greenstone 46:39
Absolutely, I really believe and I said this at the outset that we’re at the dawn of a new era on understanding what the consequences of climate change are going to be. And that has as its foundation, the use of data, and accounting for adaptations, costs and benefits, and doing this at a very hesitant, but almost hyper local level.
Michael Livermore 47:05
So So then, you know, another feature of distribution. So there’s what we’re talking about right now, which is just differences, it’s essentially on the ground. There’s also kind of how we should be thinking generally about the unfairness of distribution, as you said earlier, 2%, if we all take a 2% haircut, that’s not that big of a deal, if, you know–
Michael Greenstone
To be extreme if 2% of people died.
Michael Livermore
Right, take 100%. Exactly. So how do you think that should inform something like the social cost of carbon or policy? So, you know, obviously, there’s a long debate that you’re familiar with about, you know, a practice, like equity weighting, and the social cost of carbon were effects on people who are less well off were counted more, because of the diminishing marginal utility consumption or just unfairness in general. We’ve largely not gone that way in the US with respect to the social cost of carbon. I’m curious, just, you know, is it something that you think should just kind of be in the background of our deliberations as we think about climate change? And that’s that or, you know, something, we should incorporate formally into the social cost of carbon through something like equity weighting or, or something in the middle? Yeah, just, you know, without taking up to take a stand on any of that stuff. How do you think about those kinds of questions when thinking about distribution and, and this type of analysis?
Michael Greenstone 48:27
Yeah, it’s a terrific question. So let’s start with first principles. First Principles is, it appears to me that the world cares much more about a poor person losing $1 than Jeff Bezos losing $1. And that’s because the dollar doesn’t mean so much to him. The marginal utility of consumption, as you said, is very low for Jeff Bezos than it is for a poor person. And so if you set aside politics, and he said that governing like that basic insight should inform how we think about climate damages. And I don’t think that’s a controversial view. I think what is more complicated is how you bring that into the federal policymaking apparatus. And if you were to do that, you know, is climate special? Or should you be doing that more broadly? Does it spill over to all kinds of other policies? And you know, those are difficult and thorny questions. And I think political, you know, those are probably those are much more political judgments than kind of what would a benign social planner, not that there is one in the world, but were there benign, so what would a benign social planner want to do? And so they’re just, I think, how you think about it is depends very much on which hat do you have on like, am I Joe Biden, President Joe Biden, who is running the American government, or am I you know, kind of a social planner for the world?
Michael Livermore 50:00
So ultimately, then it sounds like for the economist, then what is what do you think the role of the economist then is there?
Michael Greenstone 50:07
I think the role to Congress is to articulate very clearly what the impacts of climate change look like, from these different perspectives. And I think, you know, that ultimately the, you’re going to turn on, you know, very complicated and dirty things like values. And do we really care as a society about poor people more, or, you know, losses to poor people more than the rich people? You know, I personally do. But, you know, it’s a democracy. And that kind of has to be sorted out through all the messiness of democracy. I should also add, by the way, the, you know, if you were to do a full accounting, you got to do it on the other side of the ledger too, you know, suppose it was carbon pricing that was unlocking carbon reductions, you would then want to track very carefully, who was bearing the costs of that carbon pricing and how you felt about that?
Michael Livermore 51:15
Right. Okay. Good. So then another, you know, since we’re in the weeds a little bit on the social cost of carbon–
Michael Greenstone 51:21
I mean you’ve done that, you know, you managed to avoid saying, The verboten circular a4, which will drive your listenership to zero. So.
Michael Livermore 51:31
So some credit for that, right? But what one alternative that’s been getting at least a little bit of attention, both, I believe, within the Biden administration, but also, in the broader debate within the Economics and Policy community, is this notion that the project that you’re describing, actually, that you have a lot of optimism about is the wrong project, in a sense, when we’re talking about valuing greenhouse gas reductions and what we should be doing instead, usually the term that is used as a marginal abatement costs kind of analysis, where the idea is, you know, what we know enough to know that we need to decarbonize we’ve selected these dates and certain goals. That’s happened at the state level, that’s happened, you know, lots of countries have decarbonization goals. And we really don’t need to know too much about the, you know, the exact details of damages to set policy at this point, maybe for adaptation purposes. But, you know, we’ve already set our goals of decarbonisation by, you know, 2050 or 2030, or whatever it happens to be. And all we need to know is, how much is it going to cost so that we can on a marginal basis so that we can kind of decide which policies to pursue? Is it subsidies for that industry? Or this industry? Is it energy efficiency? Is it clean energy? Is it this is it that that’s the other thing? And all we need to do is have essentially a projection around what the marginal abatement, what marginal abatement cost do we need to impose in order to get to our goals and everything else is kind of besides the point are useful, but but not really shouldn’t be core to how we’re implementing policy. So, you know, Nick, Nicholas Stern, and Joe Stiglitz have written something to this effect. Yeah, I’m curious, curious what your thoughts are on this notion of this kind of alternative to the social cost of carbon?
Michael Greenstone 53:27
Yeah. So I think it depends what it was just with Nick Stern last week in London, and it depends on what you think the goal is, is climate change beyond cost benefit analysis? And then is, is there no amount that we should pay–that we should be unwilling to pay? Then I guess, I think that’s probably right, then their view is right. Which is that we should just line up the lowest cost options to get to zero by whatever year. My own view is that that’s not correct. And that climate change is a complicated version of economic problems. It’s, you know, the damages go out a couple centuries when you release a ton today. And but those just add, those don’t add conceptual problems. They just add complications and calculation. And so I think, knowing what the damages are, should give you a sense of how much you’re willing to spend. And, you know, if it costs $5,000, to get rid of a ton of co2, and getting rid of a ton of co2 only produces $200 of benefits. I don’t think that’s such a great idea. And so, I just, you know, I basically disagree with the assertion that climate change must be brought to its knees at any costs.
Michael Livermore 54:59
Right. Part of the, there is a flipside to this, of course, which is we might not have sufficiently ambitious goals and information about the social cost of carbon can tell us that because if we are, you know, if we’re not squeezing out enough carbon on a fast enough timeline, then, you know, just looking at marginal abatement cost isn’t going to tell us whether that’s the case.
Michael Greenstone 55:21
You know, there’s another thing that I find a little bizarre about that approach is like, there’s this there’s there’s “we” that is like lurking here. The we sometimes takes the form of start parochially, you know, some I think sometimes in the United States, we think, Well, if we could just decarbonize California, then everything would be fine, we can start worrying about the climate change problem. That’s not true. The emissions from anywhere in the world have the same impact. And then sometimes there’s like a we like, Well, if the United States would just do it, and that would be fine. But in truth, I think we can, it’s a mistake to even for one second, take our eyes off the ball, that is global emissions that matter. And, you know, a dare I want to come back to the fundamentals, what are the fundamentals, the fundamentals are the Delta and the delta is a difference between the cost of low carbon technologies and the and the fossils. And we need that delta to shrink not just in California, or not just in the United States with the IRA. But we need to make it so that the countries that are really going to be the big drivers of increases in emissions in the coming decades, it’s in their own interest as well, to reduce to reduce their carbon emissions. And so so there’s this kind of implicit, like, I don’t know, is Nick Stern and Joe Stiglitz, are they like in charge of global emissions? No, nobody is in charge of global emissions. And each country is going to decide on them on their own, what’s good for them? And ultimately, a lot of that’s going to turn on what that delta looks like.
Michael Livermore 57:12
Yeah, and it may be just the last question with with respect to that. And I’m not sure if you have thoughts on this, but it does seem like we’re in a weird place with respect to global negotiations on climate change. I mean, there’s there is the Paris accord and follow up to that, but there’s not really a clear, there was a clear picture of what the goal was, in terms of, you know, international treaty caps that would be allocated in some way. And and now it’s, it’s it’s a bit of a it’s a very unclear pathway forward. So I’m just curious if you had any, any broad thoughts on, you know, ideally, what would what would we be shooting for in terms of is it just kind of hope that everybody coordinates in some general way? Or is there do you have other thoughts on, on what we might hope for in terms of global cooperation on this issue going forward? Because as you know, it is fundamentally and will always be a global problem in it’s in its nature.
Michael Greenstone 58:07
Yeah. So I, you know, I’m not a religious person, but I do find the Serenity Prayer to super insightful on many things. I think, even on climate policy, which is, you know, the essence of it is grant me the wisdom to know the difference between the things, I can control and the things I can’t. And I think that’s where our focus should be. So where our focus should be, is driving down that delta, again, just repeating myself the difference between the cost of the low carbon energy sources and the fossils to as small or even negative as humanly possible, and we should be putting our policy through that test. Is this helpful for them? And then the second thing is, I think we should be looking for opportunities to leverage our policies for reductions elsewhere in the world, because those reductions elsewhere in the world are going to provide benefits for Americans. And of course, other people as well.
Michael Livermore 59:11
Right. Great. Well, well, thanks so much for taking the time to chat with me, Michael. It’s been a broad ranging conversation and super, super interesting.
Michael Greenstone 59:21
Thank you for the opportunity. Always fun to talk.
Free Range Podcast 