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Robert Stavins on Environmental Economics and Public Policy

With growing awareness of the challenges related to global climate change, there is a heightened premium on innovative solutions designed to mitigate the impacts. Robert Stavins is Albert Pratt professor of business and government at Harvard Kennedy School and serves as director of the Harvard Environmental Economics Program (HEEP) and co-director of the Harvard Project on International Climate Agreements. His research has examined diverse areas of environmental economics and public policy.

Q: You have articulated the need to consider climate policy issues in a “post-Kyoto world,” referring to the Kyoto Protocol. Please tell us how this can and should occur.

Stavins: Countries of the world have different views with regards to the effectiveness and promise of the Kyoto Protocol in addressing global climate change. Some countries view it as a highly flawed first step; other countries think it was a good first step. But something on which all participants agree is that a second step is required. That’s because the Kyoto Protocol sunsets. It comes to an end essentially in the year 2012, and therefore it is necessary to come up with a successor international agreement.

That is the premise underlying the work of the Harvard Project on International Climate Agreements, a multi-year, multi-disciplinary, and multi-national initiative to help the countries of the world identify the key design elements of a post-Kyoto international agreement that is scientifically sound, economically rational, and politically pragmatic. We have 26 research teams working in the United States, Europe, China, India, Japan, and Australia, and we are collaborating with Danish Prime Minister Rasmussen in his capacity as incoming President in December, 2009, in Copenhagen, of the 15th Conference of the Parties of the Framework Convention on Climate Change, where most people anticipate or at least hope the post-Kyoto international climate agreement will be struck.

Q:  The effectiveness of the Kyoto Protocol was undermined by the fact that it was not ratified by the United States, and does not include developing nations. Can you speak to initiatives that may improve or encourage participation, especially among large, growing countries like China and India, as well as the United States, the second largest greenhouse gas contributor after China?

Stavins:  Many critics fault the Kyoto Protocol for the fact that many major emitting countries, including the United States and China, are not participating. And that means that even if the Kyoto Protocol were to be fully complied with by those countries that ratified it – and it actually won’t be – there would be virtually no effect in terms of the concentration of greenhouse gases in the atmosphere. It does very little. Unfortunately, what it does, it tries to do very abruptly. I sometimes think of the Kyoto Protocol as being too little, too fast.

So what’s needed is an agreement going forward after the Kyoto Protocol, something that is scientifically sound, economically rational, and politically pragmatic in the sense that it involves these key countries. And it will have to have a longer time horizon than the Kyoto Protocol because these greenhouse gases, importantly, are a stock, not a flow environmental problem. That is we’re concerned with the total amount that’s accumulated in the atmosphere, not with the emissions at any point in time.

So I think of this as if you’re looking at a super tanker in the ocean that is moving forward and you want to turn it around. That’s what we want to do with our world economy in terms of its reliance on carbon based fuels; you want to turn that super tanker around. Well, you don’t suddenly stop it. What you do is you slow down, you gradually come about and then you begin to accelerate in the opposite direction. If you try to suddenly stop that super tanker what you would do is crack the hull. Or else you would give lip service to stopping it and really wouldn’t do it. That’s the problem with flawed approaches to climate change. So going forward, better approaches will probably include a trajectory which ultimately will be scientifically sound, but will not render large parts of the capital stock – the economy –prematurely obsolete.

Then, in terms of including the right set of countries going forward, the sorts of architectures that are now being considered, such as in the project that we’re running here at Harvard, the Harvard Project on International Climate Agreements, will be policy architectures for the world which will include developing countries in meaningful ways.

What we’re now looking at, in the Harvard Project for International Climate Agreements, are international arrangements, policy architectures, that will include developing countries while also reducing their economic burden, in order to separate out participation from cost burden. The way I think about this is that developing countries need to get on board the climate policy train, but they don’t have to pay for their tickets.

Q:  You speak about a “top down” approach versus a “bottom up” approach to either amending the Kyoto Protocol or forming new policies on climate change. Can you briefly explain the difference?

Stavins:  There are a variety of approaches that could be utilized in a post-Kyoto Treaty. In a book which Joe Aldy and I co-edited for Cambridge University Press, “Architectures for Agreement,” we laid out three different categories of post-Kyoto climate policy architectures.

One is structured around top-down targets and time tables. An example of that would be the Kyoto Protocol itself. The second category is harmonized domestic policies, whereby the emphasis is less on the agreement and more on the countries themselves; an example might be harmonized carbon taxes adopted in individual countries. The third category is bottom-up – unilateral, loosely coordinated policies. That category, which is quite interesting and at first might seem strange for an international agreement, is exemplified best by what’s already happening in the world.

In many countries, including the United States, Australia, Japan, New Zealand, Canada, and the European Union, there is an emerging preference for domestic or regional cap and trade systems, tradable permit systems to address global climate change. As a result of that, there are now significant pressures from private industry on those same governments to establish linkages amongst those programs. If those programs, which are fundamentally established within nation states, are linked together internationally that’s an example of a bottom-up policy architecture internationally.

Q:  How important is the inclusion of and continued development of technologies to combat climate change in conjunction with multi-lateral policy making? What would these sorts of technologies be like?

Stavins:  The costs of addressing global climate change are going to be very significant. In order to achieve the targets that natural scientists talk, something in the order of a 50% reduction of greenhouse gas emissions relative to the year 1990 would be required by the year 2050. Meeting that goal will require massive amounts of technological change – increases in energy efficiency, moving away from coal and petroleum to natural gas and eventually to renewables, and increased reliance on carbon capture and storage technologies. These are technologies, yet untested on a commercial scale, which would enable electricity generation facilities to remove carbon dioxide from stack gases, sequester it, and then send it underground for deep storage for prolonged periods of time on the order of centuries. There is tremendous geological capacity for such underground storage both in the United States and in China, two very important coal-consuming countries.

But new incentives to spur this kind of technological change are needed, and among those incentives would be placing a price on carbon itself – through a carbon tax, or through a cap and trade program. The best estimates indicate that we will need to set prices on carbon dioxide at approximately thirty-five to fifty dollars per ton in order to achieve that kind of technological change. Without technological change it will simply not be possible to address climate change, because it would be too costly, and hence the political will would not be there.

Q:  In addition to working on the architecture of a future international climate policy agreement, you've also been involved in the development of domestic U.S. climate policy. What sort of policies do you see as best for the United States to adopt, and – given political forces – what do you anticipate will actually happen?

Stavins:  The best approach for the United States to achieve meaningful reductions in carbon dioxide and other greenhouse gases would be a domestic, upstream economy-wide, comprehensive cap and trade program. By upstream I mean a program which would not be emission trading per se, because the sources of CO2 are much too plentiful in a modern economy to expect trading to take place. We would be talking about hundreds of millions of sources – not just large manufacturing and electricity generation, but every automobile, every furnace, every lawnmower; the list goes on and on.

So instead, the right way to design such a program is upstream. The point of regulation could be the mine mouth, the well head, and the point of import, and the three fossil fuels – coal, petroleum and natural gas would be completely covered. So it would be carbon right trading among those. That means that instead of talking about hundreds of millions of points of regulations we would have approximately two to three thousand companies in the United States that would be subject to the regulation.

That cap and trade program of carbon rights among the fossil fuel producers and importers would then reflect itself in the price of fossil fuels moving downstream into electricity generation, into the price of gasoline, into the prices of manufactured goods and services. That’s the best way to design the program.

A proposal that I authored for the Hamilton Project at the Brookings Institution last year laid out the details, the specifics of that kind of program. I’m pleased to say that we now see the Congress moving in that direction, in particular the U.S. Senate. The Lieberman-Warner Bill, a major vehicle going forward in the Senate, calls for a comprehensive, essentially upstream cap and trade system. We still have to see what will happen in the House of Representatives, but the initial signals are favorable.

And I would say it’s highly likely that in the new Congress in 2009, we’ll see a cap and trade program from both the House and the Senate go through a conference committee, be sent to the White House, possibly in response to a bill that will be developed in the new White House. That legislation would be signed into law by the new president. Whether that turns out to be President McCain or President Obama, the signals are very strong that the new president will sign such legislation.

However, let me state two important caveats on that prediction of what will happen. First of all, if we find ourselves in a deep and prolonged recession which is continuing into the year 2009, then all bets are off, because clearly the political will to increase the price of fuels domestically is not going to be present in the Congress. Secondly, if another unforeseen domestic terror incident on the scale of 9-11 should occur, that would also divert political attention away from this issue, and we would see a delay in the response to climate change. Putting aside those two unforeseen, certainly unwelcome events, I think it’s likely we’re going to see the United States begin the process of putting in place a meaningful cap and trade program in the year 2009.

Interviewed by Doug Gavel on June 30, 2008.