Host Daniel Raimi talks with Robert Stavins, the A.J. Meyer Professor of Energy and Economic Development at Harvard’s John F. Kennedy School of Government and Resources for the Future Board member. Daniel and Rob discuss the role that economics has played in shaping environmental policy, both in the past and today. As major proposals like the Green New Deal seem to be turning away from market based approaches—long-advocated—by most economists, Rob shares how he sees the role of environmental economics in today’s environmental policy landscape.
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The Full Transcript
Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week, we talk with Robert Stavins, the A.J. Meyer Professor of Energy and Economic Development at Harvard’s John F. Kennedy School of Government. I’ll ask Rob about the role that economics has played in shaping environmental policy, both in the past and today. As major proposals like the Green New Deal seem to be turning away from market based approaches, long-advocated by most economists, I’ll ask Rob how he sees the role of environmental economics in today’s environmental policy landscape. Plus, we’ll get Rob’s recommendations on biographies, blogs, podcasts, and more. Stay with us.
Daniel Raimi: Okay. Rob Stavins from Harvard University and a member of our board of directors here at Resources for the Future, thank you so much for joining us today on Resources Radio.
Rob Stavins: I'm pleased to be with you.
Daniel Raimi: So Rob, we're going to talk about economics and the environment and the role that economics has played over environmental policymaking in the last several decades. But before we do that, we always like to ask our guests how they got interested in environmental topics in the first place. So what drew you into this world?
Rob Stavins: Well, in some sense it was rather circuitous. My undergraduate training was in physics and philosophy, but quite fortunately what happened was that I went into the Peace Corps only days after I graduated from college, got involved in working in agriculture in the west African country of Sierra Leone. And to make a long story short, that was where I experienced for the first time the significant and dramatic trade offs between economic development on the one hand and environmental quality on the other hand. So that led me to the study of agricultural economics. I came back to the US after about almost five years in the Peace Corps, went to Cornell and did a master's degree in agricultural economics.
But somehow I didn't see that quite as my future. And then something happened. The three mile island meltdown at the nuclear power plant in Pennsylvania took place. I came to be sort of fascinated just by following on that in the New York Times every day. And that brought up in my mind for the first time that rather than pursuing work in agricultural economics and development, that environmental economics might be something that I could pursue instead. And then subsequent to that, I then eventually went on to Harvard to do a PhD in economics where I focused on environmental economics.
Daniel Raimi: Yeah. Great. So we had Gib Metcalf on the show a couple of months ago now, and three mile island was a motivator for him as well, getting into this field. So that's, yeah, it's fascinating to learn about that commonality.
Rob Stavins: And in fact, he and I were classmates at Harvard in economics program.
Daniel Raimi: All right, so we're bringing it full circle on Resources Radio. So we're going to talk today about sort of the influence of economics in the world of environmental policy making over time, sort of how it's ebbed and flowed over the years. But first, I don't think many of our listeners will need this little preamble, but for those of us who haven't thought much about the intersection of economics and the environment, can you give us a quick overview about what economics can even say about the environment, why it might be a useful frame for thinking about environmental topics?
Rob Stavins: Well, I think there are two principle reasons why it's helpful and indeed I would say almost essential. One is that the causes of environmental problems in a market economy such as we have in the United States and all but a handful of countries around the world, the causes of environmental problems in market economies are essentially the unintended consequences of what are fundamentally meritorious activities by producers producing the products that you and I want to buy and use, and sometimes by consumers themselves. They're of course external to those decisions by producers and consumers, which is why economists referred to environmental problems as a type of externality.
The other side of the ledger is that the consequences of environmental problems have very important economic dimensions. So if the causes are economic and the consequences have important economic dimensions, then surely economics, at least from my perspective, is essential for a full understanding of environmental problems and therefore for the development of public policies that are going to be effective, by which I mean they don't just demonize the bad guys, but they actually reduce pollution, that are economically sensible, by which I mean there are cost effective or cost minimizing, and that if possible, they're politically pragmatic.
Daniel Raimi: Right, and so that makes a ton of sense, especially if you're coming from an economics background, but economics hasn't always played a large role in environmental policy making. Are there early examples or is there a first example that comes to mind when you think back in history about one particular policy or any important policy that comes to mind where economics played an important role sort of in an early way?
Rob Stavins: I think a key moment was actually during the administration of Ronald Reagan when his EPA put forward a policy to reduce the lead in gasoline or the quantity of leaded gasoline in the blended product. It turned out that economics was important in two fundamental ways. One was that under what was Reagan's new executive order that eventually led to what we now call regulatory impact analysis, that they carried out a benefit cost comparison on eliminating leaded gasoline for the marketplace and found a very favorable positive net benefits benefits minus cost.
The other is that the Reagan administration developed . . . It wasn't a statutory product, but they developed through regulation what is essentially an emissions trading system, or to be specific, what's called a tradable performance standard among refineries to get the leaded gasoline out of the market. The result was, as I recall, a $250 million per year savings. Now that's to refineries, but given the nature of that competitive market, it was all essentially passed on to consumers through the price of gasoline, and it was accomplishing much faster than anyone thought was possible. The whole phase down took about five years from beginning to end.
Daniel Raimi: Yeah, that's really rapid. I know very little about that program or its origins but sort of two random thoughts come to mind. One is, does the phrase, "Get the lead out," have anything to do with that particular environmental policy? That's my first question, and the other one is, I've read recently that leaded gasoline and is actually still used in private aviation in small airplanes. Do other of those things ring a bell for you?
Rob Stavins: So the phrase, the slogan does not ring a bell, but I can tell you that leaded gasoline is still present in a sense because unleaded gasoline is allowed to contain 10% of what was originally the lead content of gasoline, and in certain uses for which it would be extremely high cost to remove the leaded gasoline and keep up a given octane level of the product, it still exists. For a long time, it did in agriculture, but that's been phased out.
Daniel Raimi: So when I think about early examples of market mechanisms and economics playing a role in environmental policymaking, the first example that came to my mind was a relatively contemporaneous effort on sulfur dioxide, the sulfur dioxide trading program implemented under the Clean Air Act Amendments of 1990. can you tell us a little bit about that program and how it has sort of fared over time?
Rob Stavins: So the purpose of the program, which is well-known around the world, the purpose of the program was to cut sulfur dioxide emissions by half, which it did. So it was successful. Quite ironically, the purpose at the time was in order to reduce ecological impacts of so-called acid rain, that is, acidification of aquatic ecosystems, that was the sole intended purpose of it. It's turned out from subsequent analysis that the benefits in that regard were not very great compared to the costs.
However, there was at the time unanticipated positive benefit of cutting sulfur dioxide emissions and that was reducing sulfate particulates. And when subsequently it was then examined in terms of its benefits and costs, it was found that if you want to look at it in terms of ratio, that this was among the highest ratios of benefits to costs of any environmental policy that we've put in place going back to the first Earth Day in 1970, so it worked very well.
It was implemented through, as you said, what's nowadays called a cap-and-trade system, then just called emissions trading. It worked very, very well for the period of time, which was most crucial, which the act was established in 1990, it was implemented in '95 with about the most polluting power plants. Year 2000, all the others came online and then over the subsequent period of years it worked extremely well, so that sulfur dioxide emissions were cut by more than 50 percent, which was the target.
However, subsequent to that, what's happened is that other regulations, including the mercury rule, other regulations and then some regulatory constraints that have come onboard, have essentially rendered the program nonbinding. And so the market has more or less closed down. However, before it closed down, I'd say that it had done its job.
Daniel Raimi: When I was reading about the sort of political process by which the Clean Air Act amendments passed in 1990 and the sulfur dioxide trading program was implemented, one of the things that came up was that a number of environmental advocates at the time were sort of uncomfortable with the idea that companies would have essentially the right to pollute, to buy and sell the right to pollute. Can you talk a little bit about those concerns that were raised at the time and whether in your mind those who were concerned about that issue, maybe we could call it a moral objection or something, whether those who were concerned about that issue have been converted to believing that the market based approach might be worthwhile or if they continue to have reservations.
Rob Stavins: Well, first of all, Daniel, I think that the premise that you voiced is absolutely correct. It's perhaps hard to believe now, but back at the time of the Clean Air Act amendments in 1990, there was tremendous resistance from the environmental advocacy world. There were two voiced objections that I recall. One of them is the moral or ethical objection, namely, that it's inappropriate to allow companies to buy the right to pollute. At the time, what I pointed out in response to them was that conventional command and control regulations give that right to companies for free.
In addition to that, there was also concern, perhaps legitimate concern to whether or not it would work. After all, it hadn't had been observed previously with the exception of the leaded gasoline phase down. I should point out that there was one environmental advocacy group which really stood out from among all the others though, and really did support the program, and that's the Environmental Defense Fund, the New York based environmental advocacy group, and they work very close with the White House, the Bush 41 White House, as did I at the time with Senator Tim Wirth, Democratic Colorado, and Senator John Heinz, Republican of Pennsylvania on what we called Project 88.
Since that time, gradually, all of the mainstream environmental advocacy groups have come to support cap and trade. I wouldn't say that they would support pollution taxes, which are the symmetric instrument with cap and trade, but they do support cap and trade. Whether that will continue going forward, I have some question about, because of what has now arisen. I'll call it the new left of green coalitions putting forth the Green New Deal and other policy proposals, and these are coming from groups which are much less enthused about market-based approaches to environmental protection.
Daniel Raimi: Right. And I wanted to ask you about that. So I had a question in mind before this topic, but now that you've raised it, let's just skip ahead to it, which is raising the topic of the Green New Deal, which I think it's safe to say, does not put market-based approaches at the core of its policy approach. Obviously there's a lot of details yet to be worked out. It's not quite clear what the Green New Deal is and what it isn't. But my understanding of it, listening to some of its proponents and some of the people who are working on the legislation is that carbon pricing in one form or another does not look like it's going to be at the center. So do you have any sense or intuition as to why market-based approaches that economists might favor are perhaps falling out of favor with advocates of the Green New Deal or what you might call the new left?
Rob Stavins: Well, I would say first of all the Green New Deal is fundamentally a combination of aspirational goals for addressing climate change and another set of goals and achieving what the proponents believe would be greater economic justice with our capitalist system. I mean, there are aspects of it about minimum wages, about universal guaranteed employment, universal healthcare, single payer system, on and on. So approaches that fundamentally embrace the market for some of the Green New Deal proponents, and I would include the Sunrise Movement and the Green Party, are actually anathema to their overall ideology, which is very objectionable to the market itself.
Now, some economists have critiqued the Green New Deal as being superficial or even vacuous in terms of specific policy proposals. I've come to the conclusion that the Green New Deal is really not intended to be a policy proposal. The Green New Deal is what I would label a movement, a deeply political movement, which may or may not spur meaningful and useful real policy proposals at some point in time. It's simply, in my view, too early to say.
Daniel Raimi: And do you think my characterization of the sort of skepticism of market-based approaches, do you think it's too early to say whether the movement has weighed in on that or not? Because maybe you and I just sort of have different interpretations of what we've been hearing from the advocates.
Rob Stavins: Well, there are two things about that. One is to say that in the preliminary version of the Green New Deal, before the final resolution, the House/Senate resolution was introduced, the preliminary version, which was sort of posted on the website and then withdrawn, was actually very, very hostile to market-based approaches, explicitly hostile to them. Probably, I assume as a result of pushback, the final version that came out simply doesn't talk about the one way or the other. Having had discussions with some of the people that are involved in it, I would say that there is a substantial amount of hostility that remains and certainly the grassroots organizations that are behind it, and that's why I mentioned the Sunrise Movement and the Green Party, have been quite hostile towards market-based approaches. Their major discussion is about carbon taxes, but cap and trade and using the market in that way would also be, I think, objectionable to them.
Daniel Raimi: Right. And do you think that's sort of tied into the larger concerns that they voice over sort of the distribution of benefits in our existing capitalist system related to things like healthcare and job guarantees that you mentioned earlier?
Rob Stavins: I think that's exactly right. I don't think it's a policy objection to a carbon tax or cap and trade, per se. It's just the notion of using the market and apparently giving freedom to companies to make decisions within some kind of constraint, either a pricing constraint or a quantity constraint. It just rubs them, I think, the wrong way.
Daniel Raimi: Right. So, yeah, somewhat analogous to what we were talking about earlier with the Clean Air Act amendments.
Rob Stavins: Oh, I think that's right.
Daniel Raimi: So let's step back from this specific topic for a moment and look broadly across the United States at the suite of environmental policies that are out there today. And I'm kind of thinking primarily about climate change related policies. So when we look broadly across the country, we see a variety of federal proposals that have not been implemented related to carbon pricing, either cap and trade or carbon taxes, but are still on the table under discussion. We see a variety of subsidies related to energy, particularly renewable energy development, but also fossil fuels. And people argue about the role that subsidies play for nuclear power. When you look at state governments, we see a lot of standard-based approaches, so renewable portfolio standards being deployed very widely. When you look across the broad landscape of climate policy in the US and abroad, if you'd like to extend it abroad, how would you sort of characterize the influence of economics in today's environmental policy landscape?
Rob Stavins: Well, look, globally there are about 50 carbon pricing regimes, either at the national or the sub-national level. About half of those are carbon taxes and half of them are carbon trading systems of one kind or another. So that's substantial. But on the other hand, there are 176 countries with renewable energy policies or energy efficiency standards and there are another 110 with national and sub-national feed in tariff systems. So I think it's fair to say that in terms of policy instruments to address climate change, the use of economic incentive approaches is very significant, but it's by no means dominant. And in terms of setting the targets, that is what level of action should be required, whether it's say an explicit price, it's the severity of the standard, or it's the cap in a cap-and-trade system, what economists would call the efficiency question, there's considerably less attention to economic criteria and rather much more attention to some, I think rather not very well-defined criteria that link directly with science or politics.
So in terms of the overall influence of economics, I think I would observe that the influence of economics, at least in the United States on environmental policy, probably peaked during the administration of George HW Bush, the Bush 41 administration, which favored this approach of harnessing market forces to protect the environment in a way that shouldn't be surprising because a very phrase or that thought of harnessing market forces to protect the environment does sound like the quintessential moderate Republican policy approach. And that was fundamentally a moderate Republican administration, something that nowadays many people might observe as almost oxymoronic.
Daniel Raimi: When we think about the combination of pricing instruments and standards such as the ones you mentioned, efficiency standards or renewable energy standards, do you see, in an ideal world, do you see those two types of instruments being complements, or being substitutes going forward either in the US or in an international context? And I raise this because certainly with some conversations I've had with folks recently, there's been a skepticism that carbon pricing would be sufficient to achieve the deep decarbonization goals that we might be thinking about for limiting climate change to two degrees Celsius or below by 2100. So how do you think about the combination of pricing instruments and these other approaches?
Rob Stavins: So my view is that carbon pricing instruments will be necessary but not sufficient, necessary because it's only with a carbon pricing mechanism then you can possibly affect broadly across the economy all of the uses of fossil fuels, because in the case of, we're not just talking about regulating a thousand power plants or even 100,000 significant manufacturing facilities, but all commercial facilities, every home, every residence, every motor vehicle, every backyard barbecue grill and lawn mower. So it really takes more of an upstream carbon pricing approach in order to disseminate price signals throughout the economy. Secondly, because it's a cost-effective approach, it's important. And thirdly, I'd say it's necessary because in the long-term, in order to bring about massive technological change, changes in relative prices will be necessary.
On the other hand, there are some other market failures that get in the way of price signals, and that's why I say that carbon pricing will be necessary but not sufficient. There are several examples of that. One is in terms of decisions that individuals make in renter-occupied properties where neither the landlord nor the tenant has an incentive, even when facing the right set of energy prices, to put in place what would be the efficient amount of thermal insulation in the walls. So that's just one, and therefore building codes are an appropriate mechanism as well. There are lots of other examples, so that's why I say that carbon pricing is necessary, but we really shouldn't think that it's sufficient.
Daniel Raimi: Right. That makes sense. So one question that I think economists have wrestled with substantially over the years and that they've sometimes been criticized for by folks from other disciplines is the role of thinking about so-called second best policies, where an optimal mix of policies is unlikely to be adopted in the political reality that we live in. So when you think about the world that we live, in the real world, how should economists continue to analyze the options available to policymakers and how hard should they push for so-called first best solutions and how much time should they spend carefully looking at options that might not be sort of economically optimal, but are perhaps more likely to be implemented in the real world?
Rob Stavins: Well, it's clearly the case that the body politic is not as enamored of carbon pricing mechanisms as the academic economic community is. So I think there are two levels of questions there. One is, are there ways, is there research that could be done to improve public acceptance, political acceptance of carbon pricing policies? And I think the answer to that would be through judicious policy design that may will depart from what we usually think of as the first best design.
Three examples there. One would be phasing in taxes or caps over time, as opposed to following what the economic models tell us are the dynamically efficient time paths of emissions reductions. We have examples from California and British Columbia of phasing in those policies over time that have been effective.
A second one would be to earmark revenues, either from attacks or from the auctioning of allowances in a cap-and-trade system, to finance climate mitigation because clearly politicians have shown over and over again that they're very interested in doing that rather than what is the first best approach favored by economists typically of optimizing the overall system by proportionate cuts in distortionary taxes.
Third possibility is using the revenues for fairness purposes, which has also seen a lot of attention in Washington policy proposals, such as with lump sum rebates or rebates targeted to low income or other particularly burdened constituencies. And these have gone under the name of with taxes of carbon dividend programs or of cap-and-dividend programs.
But beyond that, if I can add, one can go even further and I think it's merited, and consider second best non-carbon pricing policies, essentially to catch up with the political world. An example would be to examine clean energy standards. I'm pleased to say that Resources for the Future has a research initiative doing just that. But at some point, the politics will change and it's important to be ready, and it's for that reason, for the longer term, ongoing research on carbon pricing is very much warranted, but only in my view of if it's carried out in the context of real world politics and focuses on policies that are at least likely at some point to prove feasible.
Daniel Raimi: Right. So trying to find that balance and to some extent, walking and chewing gum at the same time, it sounds like.
Rob Stavins: I think that's going to be essential.
Daniel Raimi: Yeah. Well, Rob, it's been really great talking to you about all of these questions here. Your views are so well-stated and so deeply researched. I've really enjoyed this conversation. I'm sure our audience has, as well. We're going to close it out by asking you the same question that we ask everyone who joins us on the show, which is what it is at the top of your literal or metaphorical reading stack? So what have you read or watched or heard related to energy and the environment that you've enjoyed and that you'd recommend to our listeners?
Daniel Raimi: And I'm going to briefly start us off with a recommendation of a documentary film that I stumbled across a couple of weeks ago when I was up late and clicking around on TV, and I stumbled across this documentary that I had never heard of. I was later embarrassed that I'd never heard of it because I realized that won the Academy Award for best documentary in 1976, a film called Harlan County USA, which is about a coal mining community in eastern Kentucky that goes through all sorts of strife related to coal mining activities in the region and the efforts of local coal miners to unionize and some of the violence that ensued as well as some of the disasters that happened at mines in the community.
And it's really just a fascinating, fascinating portrait of the community as well as a look at some of the sort of inside union politics of coal mining and unionization in that time period in Appalachia in 1976. So Harlan County USA. If you haven't heard of it, if you're of my generation, you may not have, so definitely check it out. And Rob, what's at the top of your stack?
Rob Stavins: So I should say I'm not of your generation and hence I had heard about it, and I agree. One of the things about that feeling that I should say is very healthful in ties in with thinking about public policies, it's a real reminder of the fact that Appalachia and these communities that are so reliant upon deep shaft coal mining and some surface gold mining in Appalachia, this is essentially a less developed country, which is right within the borders of the United States, areas of very low income, very low alternative job opportunities. And it's good to remember that when we talk about phasing out coal—which I'm supportive of and is happening as a result of natural gas prices—this is an issue which for the coal industry doesn't just mean increased costs. It's existential. And for those communities, it is the difference between squeaking out barely a reasonable livelihood and from an even bleaker future. And it's something that we have to be honest about and cognizant of when designing public policies.
Daniel Raimi: Yeah.
Rob Stavins: That said, in terms of my books, so the books that I most enjoyed reading most recently have not been on energy environment. They've been political biographies, Alexander Hamilton, Winston Churchill, George HW Bush, and now Lyndon Johnson, but I will mention some podcasts that I think are really excellent.
Daniel Raimi: Great.
Rob Stavins: One is, and I'm not including this current interview, but I would say Resources Radio from Resources for the Future, and the other is the Columbia Energy Exchange from Jason Bordoff Center at Columbia University, and I guess I should mention that the Harvard Environmental Economics program, we're going to be launching a podcast in the fall. For blogs, I would certainly recommend The Energy Institute Blog from the Haas School of Business at the University of California, Berkeley, and because I've received a great deal of positive feedback about my own blog, An Economic View of the Environment, I actually would encourage those who have not read it—it only comes out once a month—to take a look at that as well.
Daniel Raimi: Yeah. Those are a set of fantastic recommendations and I encourage everyone to subscribe to all of those outlets, particularly your blog, Rob, which I read immediately as soon as it comes across my screen. So thanks for doing that. And thanks again for joining us today to talk about environment and economics on Resources Radio.
Rob Stavins: Daniel, this was fun. Thanks a lot.