Climate & Sustainability

Climate Policy Instruments for the Real World

Summit brings together academics, business, regulatory, and policymaking experts to talk about how state-of-the-art research on key aspects of climate policy design can be put into action.

April 01, 2011

| by Marguerite Rigoglioso

With the U.S. Senate unwilling to put a mandatory cap on carbon emissions, many companies are continuing to spew global warming pollution into the atmosphere unabated — and for free. Critics rail that if we are to avoid a catastrophic climate crisis, a price should be placed on emissions, thereby providing incentives for the development of more environmentally sound energy alternatives.

At the heart of this acrimonious national and international issue are fierce private and political interests. Taking a pragmatic approach, economics professor Frank A. Wolak, director of Stanford’s Program on Energy and Sustainable Development (PESD), opened a September 7 Stanford University conference by asserting “climate policy must respond to technological, economic, and political constraints.” Toward that end, the summit brought together leading academics and business, regulatory, and policymaking experts to talk about how state-of-the-art research on key aspects of climate policy design and analysis can be put into action. 

Presenters and respondents at the day-long event, “Climate Policy Instruments in the Real World,” discussed controversial and contentious issues such as the tricky politics of setting carbon price controls, challenges associated with engaging the developing world in climate change mitigation, the role of renewable energy sources in climate policy, and ways to reduce greenhouse gases in the transportation sector.


Robert Stavins, professor at Harvard’s Kennedy School Government, argued firmly for carbon pricing, stating “no other approach can provide meaningful carbon reductions.” He laid out two instruments for carbon pricing: taxing CO2 emissions and issuing tradable carbon permits that major league polluters must buy for each ton of CO2 they send into the atmosphere. While the latter, also known as “cap and trade,” creates a trading market in which permit costs can become volatile and unpredictable, Stavins noted, it incentivizes companies to improve environmental performance and provides a mechanism for building political constituencies around the issue. Taxing emissions, on the other hand, provides no cap on greenhouse gases and therefore does not address the environmental problem adequately, but has the advantage of reducing cost uncertainty for companies that are penalized for polluting. 

Looking globally, PESD research associate Richard Morse observed that with 2 billion new people expected on the planet by 2050, mostly in the developing world, fast growing nations now drive the planet’s greenhouse gas emissions. He discussed carbon offsets — the reduction in emissions of greenhouse gases made to compensate for or offset an emission made elsewhere — as a way to engage the developing world in climate change improvement. Morse demonstrated how difficult offsets are to implement in a way that unequivocally generates real additional emission reductions. He drew, in particular, on lessons from the largest worldwide carbon offset experiment, the Clean Development Mechanism (CDM), a market-based mechanism established under the Kyoto Protocol as a means of allowing the industrialized countries to meet their national targets by investing in carbon reduction projects in developing countries. He also reviewed two new innovative emerging models and markets strategies that could serve as an inspiration for the United States. 

Haas School professor Severin Borenstein turned the audience’s attention to renewable energy, arguing that to have a significant impact in the energy market, any alternative must be scalable. This not only creates a serious challenge for a new technology, he pointed out, but will actually drive down the price of fossil fuels, thereby creating a bigger problem than policy makers have realized. Policy interventions, he argued, should take a hard look at market failures and must initially be focused on reducing greenhouse gases so as to pave the way for the greater appeal of renewable technologies. He called for more support of basic research that focuses on making low-emission sources the least expensive form of energy.

Among the biggest fossil fuel guzzlers and polluters is the transportation industry, yet the government has done little to incentivize reductions in oil use or carbon emissions from this sector, noted Christopher Knittel, an associate economics professor at UC Davis. Increases in fuel efficiency, lower-carbon fuels, and reductions in vehicle miles traveled are all ways in which pollution could be reduced in this arena, he said. Knittel pushed for subsidies and performance standards in the transportation industry as a means of reaching emissions goals. 

The electricity industry is another significant area in which policy changes could have an impact. Stanford’s Frank Wolak considered how different utility rate structures might accelerate or delay the vision of an intelligent energy supply/demand nexus in the home. He discussed the inevitability of — and political barriers to — dynamic pricing, outlining the role of hourly and critical peak plans in motivating customers to reduce their consumption. He also talked about how renewable energy should be priced to encourage investments in energy storage technologies. View podcast

UCLA professor Matt Kahn rounded up the day by reminding participants of the scope of the problem. A world with 7 billion people, each of whom seeks to live the American Dream, he observed, will translate into increasing greenhouse gas emissions that will cause hotter temperatures, rising sea levels, and natural disasters. Drawing on his new book, Climatopolis: How Our Cities Will Thrive in the Hotter World (Basic Books 2010), Kahn focused on how urbanites will cope with such anticipated but uncertain changes. Specifically, he noted that heat waves and increased natural disaster risk may cause households to migrate either within cities or to new ones offering higher quality of life. Landowners in the areas deeply affected by climate change will thus suffer an asset value loss.

What will help protect us against climate change, concluded Kahn, is capitalistic innovation. Forward-looking entrepreneurs have strong incentives to design products such as energy-efficient appliances and homes that can withstand flooding risk. He argued that it will be easier to adapt to climate change if we mitigate now — but the reality is that we have made little collective progress to cap our global carbon emissions.

The conference was sponsored by Stanford’s Program on Energy and Sustainable Development in the Freeman Spogli Institute for International Studies, in collaboration with Stanford GSB and Stanford Law School, as well as the Stanford Institute for Economic Policy Research, CMEA Capital, and Pillsbury Law.

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