2022 Year in Review: Energy and Environmental Policy, with Catherine Wolfram and John Larsen

In this week’s episode, host Daniel Raimi recaps 2022 with Catherine Wolfram, a visiting professor at Harvard Kennedy School and member of the board of directors at Resources for the Future, and John Larsen, a partner at Rhodium Group. Wolfram and Larsen offer insights on the year’s biggest stories in energy and environmental policy at the state, national, and international levels, including US climate legislation and how Russia’s invasion of Ukraine has affected energy markets. They also look ahead to the developments in energy and environmental policy that are likely to become important in 2023.

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast for Resources for the Future. I’m your host, Daniel Raimi.

Today it’s our annual end-of-the-year episode, where we look back at the year that was and look ahead to the year that will be. This time around, we are so lucky to be joined by two of the smartest minds in energy and environmental policy: Catherine Wolfram, a visiting professor at the Harvard Kennedy School, and John Larsen, a partner at the Rhodium Group.

Today’s episode is a little longer than our usual fare, but I promise it won’t disappoint. Catherine and John offer deep insights on the most important, interesting, and overlooked issues from this truly extraordinary year in energy and environmental policy, markets, and geopolitics. Stay with us.

Catherine Wolfram and John Larsen, it is a pleasure to have you on Resources Radio. Welcome to you both.

Catherine Wolfram: Thanks so much. Nice to be with you.

John Larsen: Thanks for having me.

Daniel Raimi: Both of you are new to the show, and we’re thrilled to have you on. We always ask our guests to help us understand how they became interested in energy or environmental issues, either at a young age or later in life. Let’s start with Catherine—how did you get inspired to work on these topics?

Catherine Wolfram: Thinking back on my childhood, I realized that I probably should have become an environmentalist at a very young age. I grew up in Minnesota, the land of 10,000 lakes, and there was a lake nearby, where we’d go swimming. But every week or so, there would be this disgusting, green, three-inch-thick layer of algae, so sometimes we’d show up and couldn’t go swimming.

I had some vague sense that it was related to agricultural runoff, so we’d be annoyed. Looking back on it, I wonder if I should have been more concerned when the runoff went away about what they were doing to make it go away. Thinking back to my childhood in the ’70s, there were a lot of environmental risks that I was exposed to.

In general, I got to environmental issues from the energy side of things. I’ve always been interested in the basic way things work and infrastructure. I started working on the electricity sector and got interested in how that powers the economy, powers our houses—all those things. I worked in the electricity sector right out of college. I eventually worked for the Department of Public Utilities as a regulator and realized that you couldn’t understand the energy industries without thinking about the environment. Vice versa, the energy industries are so important to all of our environmental issues. The two go hand in hand. So, I have been interested in environmental issues for the past 15–20 years.

Daniel Raimi: I didn’t realize you were from Minnesota; you’re the second Catherine-who-is-an-energy-economist-from-Minnesota we’ve had on the show, the other being Catie Hausman.

Catherine Wolfram: That’s right. She’s from northern Minnesota.

Daniel Raimi: John, how did you end up working in this field?

John Larsen: I grew up on an island. The finite-resource questions, conservation, and protection of special places were big things that were right in front of me at an early age and growing up. I didn’t immediately become a fervent environmentalist or anything, but it was all around me—both how important the environment is to what makes a place a place, but also the limits and resources available and the development pressures and other factors that can affect that.

Later on, I went to college for music and quickly realized there was no way I was going to do that professionally and have a job. I dropped out of college. In the course of that year, I learned something about myself: I wanted to do work that I felt good about doing. I went back to school for environmental science and went from there towards the biggest environmental problem I could find, which was climate change. That’s been my path.

Daniel Raimi: We’re going to have to talk more after the show, because I was a music major in undergrad, then decided to do something else with my life, and now work on energy and environmental topics. I’d love to hear more about your path as well.

John Larsen: It’s a popular path. We have another person on the team at Rhodium with a similar story.

Daniel Raimi: We should start a band.

John Larsen: There you go.

Daniel Raimi: Let’s talk now about the year that we’ve all just been through: 2022. It’s been an extraordinary year for energy and environmental policy, geopolitics, and all sorts of other stuff. I’d love for each of you to get us started by highlighting what you see as the most significant domestic policy development for this year. The answer may be obvious—it’s the Inflation Reduction Act (IRA). If you think that is the case, why? If not, why not?

John, why don’t we start with you. What would you point to as the highlight of the year domestically?

John Larsen: I agree—it’s the Inflation Reduction Act. There have been (one could argue) multiple decades of effort to try and get major clean energy and climate legislation through Congress, and that happened in 2022. That overcomes any other contenders for the biggest development, and not just because of its historical significance. On top of that, what the IRA does for clean energy in the United States for the next decade is make all of the technologies that we need to decarbonize the energy system cheap.

I think that people are going to look back and say, “There was the way the energy markets worked before 2022, and there’s the way they worked afterwards.” One of the major barriers to decarbonization—clean energy deployment cost—now is not a factor, at least for the foreseeable future. That’s going to mean meaningful progress on greenhouse gas emissions in the United States.

Our work at Rhodium Group finds that by 2030 US emissions could be down 32–42 percent below 2005 levels, which is a major departure from what would’ve happened without the IRA and a major departure from historical decarbonization trends. It’s exciting moving forward, and it’s all because of Congress this year.

Daniel Raimi: Catherine, how about you? Would you point to the Inflation Reduction Act, as well? What do you think is interesting about it? What do you want to highlight?

Catherine Wolfram: I would point to the Inflation Reduction Act, as well. I have gotten a lot of use out of Rhodium and other modelers like Rhodium for thinking about what the potential impacts could be for US emissions. I defer to John on that and give huge props for all the work that they’ve done.

The only thing I would add is that this has changed the tenor of the international conversations around climate change. A lot of our allies—a lot of the rest of the world, frankly—were wary of us; they didn’t know whether they could trust the US legislative system to deliver. The Senate didn’t ratify Kyoto. Trump pulled us out of the Paris climate agreement. Understandably, they had questions about what we could do. The fact that the US Congress passed this major climate legislation signals that we’re ready to tackle this existential problem.

Going forward, it’s such a big deal that it’s going to have impacts on the macroeconomy and potentially on our fiscal situation, but it’s a massive task, and we should expect those impacts. There are impacts beyond just the climate impacts.

Daniel Raimi: Your point reminds me of an interesting element of the IRA. Please correct me if I’m wrong, but the way the IRA uses tax credits cements things in place for the next 10 years or so. It can’t easily be rolled back. Is that correct?

Catherine Wolfram: It does cement things in place. If there were a 57-Senate-seat majority in a Republican-controlled house, they could probably change the tax code and undo it. But I think—and I’m not the only one who’s made these prognostications— that that’s very unlikely to happen, especially because a lot of the development that John was describing is likely to happen in red states; a lot of the wind and solar potential is in the middle of the country. That’s unlikely to be rolled back, and, for the developers that I’ve talked to, having certainty that the tax credits are there for the next 10 years is important to their planning horizons and their investment decisions.

Daniel Raimi: IRA clearly tops the list here. Let’s look now outside the United States. Catherine, you’ve already spoken to the significance of the IRA outside of the United States, but I’m hoping that each of you can highlight something else that’s happened this year outside of the United States that you think is particularly important or interesting. Maybe the answer here is obvious again—it’s Russia’s invasion of Ukraine and the effects that the war has had on geopolitics and energy markets. Could you share your reflection on that topic or another one of your choosing?

Let’s start with Catherine this time. Catherine, what would you point to outside the United States?

Catherine Wolfram: I certainly agree that Russia’s invasion of Ukraine has been the major energy topic internationally this year. I would highlight a couple of dimensions of the invasion that I think are worth noting. First of all, there are definitely the short-run impacts that the invasion is having on energy markets. The European Union has experienced natural-gas prices that are several multiples of where they have been. That’s remarkable; people’s utility bills went up by a lot. Companies’ utility bills went up by a lot.

The good news story to come out of this has been that the European Union has stuck together and figured out how to import more liquefied natural gas and get some liquefaction plants up and running in record time. They haven’t disintegrated or caved under the pressure from Putin.

In addition to natural-gas issues, there’s the price cap on Russian oil. I was part of this at the US Department of the Treasury, and it’s a novel approach to rapid sanctioning. It’s designed to reduce Russia’s revenue from oil without using a full-scale embargo.

Russia is such a big oil producer that some of the measures we’ve used in the past against Iran and Venezuela to sanction them won’t work. There was the need for something like the price cap. In 2023, there’ll be more to watch on the price cap, such as when it starts applying to petroleum products and not just crude, but so far it’s working as planned, which is great. Those are the things that happened in 2022.

In the long run, the natural gas markets in the European Union and the price bodes well for our ability to get a bunch of countries together to think about how they want to consume energy and how they want to solve energy problems. In the short term, you might not think there’s that big a link between the invasion and climate change, but on an international diplomatic level, there’s a good path that’s being set here.

In the long run, too, the invasion is another reminder of how dependent our economies are on energy. Putin is targeting the electricity grid in Ukraine and trying to terrorize people by freezing them and turning the lights off. It reminds us how important things like energy reliability are.

Finally, the invasion has emphasized an additional reason that we don’t like fossil fuels: they’re controlled by autocrats like Putin. That’s another incentive to move away from fossil fuels.

Daniel Raimi: John, how about you? What would you point to outside of the United States?

John Larsen: I agree that the Russian invasion of Ukraine is the biggest energy story outside of the United States. Catherine gave an important rundown of a lot of the factors that make it so.

To add a couple, the elevated prices in Europe that Catherine was describing effectively get energy markets in Europe to the same place as the IRA does in the United States, just through a different path. What I mean by that is that the IRA in the United States makes all the clean energy way cheaper than fossil fuels through subsidies. In Europe, all the fossil fuels are now way more expensive because of the war and resource constraints, which makes clean energy a no-brainer.

As long as that dynamic hangs, even in a more moderated sense, you’re going to see a big acceleration of clean-energy investment in Europe as a response to the war, both for energy-security reasons and by virtue of the market signals. In a way, what we need for the United States, the European Union, and the world to decarbonize is more favorable market environments for clean energy. Between the dynamic in the United States and in Europe, those are happening together. Coincidentally, it’s going to be a big accelerator for clean-energy deployment.

I want to add one other small point, which is that the European market dynamics that Catherine described have reverberations for the United States. We had elevated oil and natural gas prices here this year because of the war. If that hangs around for a while, it’s going to amplify the IRA impacts by creating a bigger differential between clean energy and fossil. Even if it’s orders of magnitudes smaller than the European situation, it is still meaningful to the economics of clean energy in the United States.

Daniel Raimi: I can’t help but offer a couple of other complementary thoughts that are related to the points you both make.

People have been pointing to coal plants coming back online in Europe as a sign that the opposite of what John is saying is happening. But my sense is that that’s a short-term thing to get out of the immediate crisis. In the long term, the economics of moving to clean energy are clearer than ever.

The other thought that I had as you were talking about the interplay between European and domestic US markets is the boon to exporters of liquefied natural gas in the United States. The rents that they’ve been extracting from the cargo heading over to Europe have been enormous and are incentivizing new drilling and production, especially near the Gulf Coast.

John, did you want to say anything about that coal point I made?

John Larsen: I agree that it’s probably a short-term response for reliability reasons and keeping the lights on. You’ve also seen some other interesting choices and turnarounds on the nuclear front in some countries for the exact same reasons. The emissions implications in the near term might be a wash between the nuclear and the coal. It’s a little hard to say yet, but I think Europe as a whole has been clear that any near-term actions are strictly on an energy-security basis and that their climate targets are still top of mind.

Catherine Wolfram: I would chime in on the natural gas point, as well. I think that’s right, and we’re going to see that more and more. The United States is going to become more and more integrated with the rest of the world as we build more export capabilities for liquefied natural gas.

I have to make the economist’s point, though. I agree completely that higher natural gas and coal prices are helping with the clean energy transition. Unfortunately, the beneficiaries of those higher natural gas and coal prices are Russia, Qatar, and the owners of the fossil fuel, whereas with carbon pricing we get to raise prices and benefit from some of the tax on the fuel. The revenues flow to the government rather than flowing to the fossil fuel companies.

Daniel Raimi: We’ve been talking about these earthshaking events for the last 10 or 15 minutes, and we’ve been talking about the things that have been in the news over the last year. Now, could each of you point to a topic that you think is important but hasn’t gotten as much attention as it should over the last year or so? Catherine, why don’t we start with you?

Catherine Wolfram: This is related to the Inflation Reduction Act. We’re seeing a lot more attention being paid to trade and environment issues. The European Union, South Korea, and others are not happy about some of the domestic-content components of the IRA.

To be specific, the tax credits have adders that companies can only qualify for if they use domestically produced steel or batteries, for instance. The electric-vehicle subsidies are only available for US-manufactured cars; companies like Hyundai and Volkswagen are upset about that because they make electric vehicles, and the Korean and German governments are upset.

At the same time, the European Union is pursuing a carbon border adjustment mechanism to level the playing field. Their companies are paying carbon prices through the European Union’s emissions-trading system. There are going to be some fundamental issues with the US approach of subsidizing clean energy. A lot of other countries are taking the approach of taxing brown energy. Companies would understandably rather be in a country where they’re being subsidized, but not every country can afford to take the subsidy path.

Thinking about how these different approaches to climate mitigation interact with one another, the positive view is that trade and environment issues will force some important conversations between the big emitters, who could come to some agreement and harmonize on ambition and solve the trade issues. The negative view is that this is going to be the centrifugal force that undoes some of the international ambitions around climate change. It’s already coming up, but it’s something we’ll need to be paying close attention to going forward.

Daniel Raimi: It’ll be fascinating to watch it play out this year and for years to come, I’m sure.

John, how about you? What’s something that you think has been under the radar that you think is particularly important?

John Larsen: One thing that comes to mind—and this is a bit of logrolling, but it benefits Resources for the Future (RFF), too, so I’m going to mention it—is the updated social cost of carbon that came out alongside the proposal of the oil and gas methane rule last month.

There are a lot of things here that one could mention. First of all, the social cost of carbon is an approach to valuing the avoided damages of climate change. That gets folded into cost-benefit analyses of federal regulations and quantifies the benefits of taking on those new regulatory actions through the amount of emissions reductions. Those regulations catalyze. It’s been an area of debate for over a decade. It first got imposed during the Obama administration. When President Biden came in, he reinstated the number at around $51 per ton, which was much higher than what had been used during the Trump administration.

I bring it up now because the US Environmental Protection Agency (EPA) included this new revised set of numbers in their regulatory proposal. The numbers come in around $190 per ton, which is three times greater (and then some) more than the previous number. That reflects a lot of new science, new methods of quantifying damages, and new analytical tools and capabilities that have been pioneered by places like the Climate Impact Lab, which the Rhodium Group is a part of, and also your colleagues at RFF and others.

I just want to recognize all of the years of work and research that contributed to that and note that a more substantial and realistic social cost of carbon that reflects the damages of the next ton of emissions is going to be critical to any future rulemaking by the Biden administration or any future president. The fact that this new number is out there and being used and that the EPA is taking comment on it now could be very important for future actions going forward.

Daniel Raimi: It’s such a big development in the social cost of carbon over the last year. The Climate Impact Lab and RFF have been major players there. It’ll be interesting to watch as the science on the social cost of carbon continues to evolve. There are several important climate damages that we know are real that aren’t even included in the current social cost of carbon, so it’ll be important to see how that evolves over time.

Let’s turn to the future. We already talked about it a bit, but we’ve mostly been focused on things that have happened in 2022. I’d like to ask you now to highlight something that you’ll be watching closely in 2023. It might be something that connects to things we’ve already talked about, or it might be something brand new. John, why don’t we start with you?

John Larsen: I have a couple of quick thoughts. The first is that I think 2023 is going to be a consequential year for the United States and climate change—as consequential or even more consequential than 2022. The United States has a climate target of getting emissions at least 50 percent below 2005 levels by 2030. In the best-case scenario, the IRA gets you to 42 percent. There’s a big gap. The kinds of actions necessary to close that gap take time to put together, put in place, and enforce, which means there’s only seven years left. It’s going to be important for the federal government and for state action to be quick and robust on multiple fronts, including regulations, IRA implementation, and a lot of other things. Next year is going to be critical.

A longer-term sleeper issue that I’m going to start paying attention to in 2023 is the fact that the IRA in the United States takes cost off the table as a barrier to clean energy deployment. But we’ve known for a long time that there are other barriers that have nothing to do with costs, like permitting, siting, market structures, lack of information or rational frameworks for decisionmaking by consumers, and principal-agent problems. You can go down the list of all these different non-cost barriers.

They have always been there and annoying, but they’ve never been in our face from a decarbonization perspective, because cost was a bigger deal with clean energy. We had to get over that first. But now that the IRA removes cost as a factor, these other non-cost barriers are going to become much more real and more of a substantial constraint. There will be a bigger need for policy responses to deal with them if the United States is going to meet its targets and make the most of the transformational aspects of the IRA.

Daniel Raimi: On the podcast, we’ve been homing in on some of those non-cost barriers— things like local concern about renewable siting. We talked to Emily Grubert a couple of weeks ago about workforce challenges in the energy transition. Those are going to be such important issues to watch. Catherine, what would you point to on this topic?

Catherine Wolfram: I agree with John that where the rubber meets the road is in implementing the IRA, and we have to pay attention to permitting and siting. I’m going to be paying a lot of attention to the trade and climate issues that I mentioned.

To bring up one other topic that we haven’t touched on yet—if the IRA hadn’t passed, I would’ve said that the most important thing is the voluntary carbon markets, climate finance, or whatever name you give it. There’s been a lot of activity in terms of corporate commitments and a lot of private cash that’s potentially going into climate. Figuring out how that will be used is going to be a key question going forward.

The Special Presidential Envoy for Climate Change announced at the 27th Conference of the Parties an idea of trying to channel some of the private cash to emerging market economies for their use in mitigating climate change. In principle, that’s a great idea. Where we want to pay attention is how that gets used. There’s a lot of appropriate skepticism about offsets and people getting paid to do something that they would’ve done anyway.

But we shouldn’t throw the baby out with the bathwater. There are some good applications of offsets, and there’s so much corporate money potentially going into that type of use that we should pay attention to it and do what we can to make sure that it gets used effectively.

Daniel Raimi: If there’s so much money flowing to those efforts, one can imagine it going very badly or, hopefully, not so badly.

I’ll ask each of you to try to answer this last one quickly. We’ve been talking mostly about federal and international issues, but I’m wondering if each of you have a particular issue at the state or local level that you are going to be watching closely this year?

Catherine Wolfram: I would come back to John’s point about permitting and siting. Those tend to be local and state issues.The optimistic view is that a lot of the permitting and siting that needs to be done will be in red states, and those states tend to have quicker processes. But all of the modeling that I’ve seen suggests that those are important issues to solve in order to get as much clean energy investment as we need to.

Daniel Raimi: John, how about you? What will you be watching at the state and local level?

John Larsen: I will be watching electrification policy. I mean that in a broad way—not just vehicles, but also buildings. Folks are still grasping for what the renewable portfolio standard equivalent is of an electrification policy for, say, buildings or vehicles. In other words, what is an easily understood policy that a lot of states can adopt? There’s been a lot of experimentation, but there’s no real front-runner yet.

Then, there’s a lot of inertia in the policy system at the state level that doesn’t necessarily lend itself to electrification of end users. For example, energy-efficiency spending at the state level is largely fuel neutral in incentivizing, say, a more efficient gas furnace instead of flipping over to heat pumps. If the United States is going to continue to accelerate its pace of decarbonization, these factors are going to need to get dealt with soon. States are the place where we’re going to see a lot of that action.

Daniel Raimi: It’s going to be so different across states, given politics and climate issues. It’s so much to watch.

This has been a fascinating conversation. We are only scratching the surface on all of these topics, and we could talk about them for hours, but we’ll call it a wrap and let everyone get back to their holiday celebrations.

Before we let you go, I’d love to ask you each to recommend something that’s at the top of your literal or metaphorical reading stack that you think our audience would enjoy. It could be related to the environment or just tangential to the environment. John, let’s start with you—what’s at the top of your stack?

John Larsen: Thanks. I’ll connect directly to climate change here with a podcast that I go to a lot called Catalyst with Shayle Kann from Canary Media. I bring it up here in this venue because there are a lot of new people coming into the climate space because of the IRA and other developments, and we get a lot of questions from external folks like, “What are the most important things, and how do I learn more about things?” I just recommend the Catalyst podcast.

Shayle does a great job of diving deep on each one of the key climate technologies or other factors related to decarbonization and comes at it from multiple different angles over time. It is as technical as it can get. It’s still very clear and understandable. I work on these issues every day, and I still learn something every time I listen, because there’s so much that they cover. I’d recommend it for folks who are looking for a slightly deeper dive, especially on the technology side of climate policy. Catalyst with Shayle Kann is a great resource.

Daniel Raimi: That’s a great recommendation. I’m a regular listener of that podcast, as well. Catherine, how about you?

Catherine Wolfram: I’m going to do the literal stack. Before I left for government, I did an annual energy book review as part of the Energy Institute at Haas blog, so I got the opportunity to dig into the years’ books. I didn’t do that this year, so I’m going to have to defer to my husband, who’s a much more voracious reader than I am. He liked the Katherine Blunt book about the Pacific Gas and Energy wildfire crisis, California Burning. That is at the top of my stack, and I look forward to reading it.

Daniel Raimi: I remember your end of the year book blog, Catherine. Are they going to come back next year?

Catherine Wolfram: It depends. It’s a fair amount of work, to do justice to a couple of books, but it’s a good incentive to dig into the energy literature.

Daniel Raimi: I always love them, so I hope you’re able to get back to it.

Catherine Wolfram: Thank you.

Daniel Raimi: In any case, Catherine Wolfram and John Larsen, you’re both really gracious for spending all this time with us and sharing your expertise. We appreciate it. We wish you both happy holidays and a happy New Year, and thanks again for coming on Resources Radio.

Catherine Wolfram: Thank you.

John Larsen: Thanks. This was fun.

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