Person:

Aldy, Joseph

Despite bipartisan interest in advancing American energy policy, comprehensive energy and climate legislation fell short in the Senate last year after passing in the House of Representatives in 2009. The difficulty of coming to broad agreement highlights the need for a more targeted and incremental approach. One promising intermediate step would be a technology-neutral national clean energy standard that applies to the U.S. power sector. This paper proposes a standard that would lower carbon dioxide emissions by as much as 60 percent relative to 2005 levels over twenty years, streamline the fragmented regulatory system that is currently in place, generate fiscal benefits, and help fund energy innovation. Through a simple design and transparent implementation, the National Clean Energy Standard would provide certainty about the economic returns to clean energy that would facilitate investment in new energy projects and lower the emission intensity of the power sector. It would also serve as an ambitious bridge to economy-wide energy and climate policy.

Emissions of greenhouse gases linked with global climate change are affected by diverse aspects of economic activity, including individual consumption, business investment, and government spending. An effective climate policy will have to modify the decision calculus for these activities in the direction of more efficient generation and use of energy, lower carbon-intensity of energy, and a more carbon-lean economy. The only technically feasible and cost-effective approach to achieving this goal on a meaningful scale is carbon pricing: that is, market-based climate policies that place a shadow-price on carbon dioxide emissions. We examine alternative designs of three such instruments: carbon taxes, cap and trade, and clean energy standards. We note that the U.S. political response to possible market-based approaches to climate policy has been, and will continue to be, largely a function of issues and structural factors that transcend the scope of environmental and climate policy.

In 2010 and 2011, Republicans and Democrats proposed mandating clean power generation in the electricity sector. To evaluate public support for a national clean energy standard (NCES), we conducted a nationally representative survey that included randomized treatments on the sources of eligible power generation and program costs. We find that the average American is willing to pay $162 per year in higher electricity bills (95% confidence interval: $128-$260), representing a 13% increase [4], in support of a NCES that requires 80% clean energy by 2035. Support for a NCES is lower among non-whites, older individuals, and Republicans. We also employ our statistical model, along with census data for each state and Congressional district [5], to simulate voting behavior on a NCES by Members of Congress assuming they vote consistent with the preferences of their median voter. We estimate that Senate passage of a NCES would require an average household cost below $59 per year, while House passage would require costs below $48 per year. The results imply that an “80% by 2035” NCES could pass both chambers of Congress if it increases electricity rates less than 5% on average.

The information structure of the climate change policy collaboration problem necessitates the design of institutions to enhance public knowledge about nations’ commitments, policies, and outcomes. The international community has addressed this kind of problem in a wide array of other contexts from which lessons can be drawn and applied to international climate policy. Based on these experiences and the characteristics of a successful international climate policy architecture, this paper proposes the design of a “Bretton Woods Climate Institution” (BWCI). This BWCI should implement a serious system of national and global policy surveillance. This surveillance would include an evaluation by independent experts of the various policy commitments nations make in international negotiations to assess whether nations delivered on their commitments and to examine the impacts of these actions on various climate change risk reduction margins, such as emission abatement and adaptation. Such a surveillance scheme should be consultative in nature, to allow give and take among experts and among nations engaged in the international climate policy effort. Based on this surveillance, the institution should promote best policy practices. In addition, the BWCI should provide a means to channel some financing for investments in climate change risk mitigation activities in developing countries. By making funds conditional on agreeing to policy surveillance, such an approach would create an incentive for transparent evaluations of policies and actions. Moreover, access to market-based climate policy schemes, such as the Clean Development Mechanism and emission trading, could be predicated on countries agreeing to participate in policy surveillance.

Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.

The 2010 BP Deepwater Horizon oil spill posed near-term economic risks to the Gulf of Mexico region and raised questions about appropriate policies to mitigate catastrophic oil spill risks. This essay reviews the Obama Administration’s assessment of the economic vulnerabilities to the spill, the Administration’s May 12, 2010 legislative proposal focused on minimizing the adverse economic impacts to workers and small businesses in the Gulf of Mexico, and the effort to secure an agreement with BP to ensure that those harmed by the spill will receive full compensation. Then, the essay discusses several of the policy reforms advanced by the Administration to reduce the risks of future catastrophic oil spills, including the value of an industry consortium to provide deepwater well containment resources and the need to remove the arbitrary limit on liability for economic damages from offshore drilling. The essay closes with a few policy lessons learned from the spill.

Nations around the world are considering strategies to mitigate the severe impacts of climate change predicted to occur in the twenty-first century. Many countries, however, lack the wealth, technology, and government institutions to effectively cope with climate change. This study investigates the varying degrees to which developing and developed nations will be exposed to changes in three key variables: temperature, precipitation, and runoff. We use Geographic Information Systems (GIS) analysis to compare current and future climate model predictions on a country level. We then compare our calculations of climate change exposure for each nation to several metrics of political and economic well-being. Our results indicate that the impacts of changes in precipitation and runoff are distributed relatively equally between developed and developing nations. In contrast, we confirm research suggesting that developing nations will be affected far more severely by changes in temperature than developed nations. Our results also suggest that this unequal impact will persist throughout the twenty-first century. Our analysis further indicates that the most significant temperature changes will occur in politically unstable countries, creating an additional motivation for developed countries to actively engage with developing nations on climate mitigation strategies.

The pollution haven hypothesis suggests that unilateral domestic emission mitigation policies could cause adverse “competitiveness” impacts on domestic manufacturers as they lose market share to foreign competitors and relocate production activity – and emissions – to unregulated economies. We construct a precise definition of competitiveness impacts appropriate for climate change regulation that can be estimated exclusively with domestic production and net import data. We use this definition and a 20+ year panel of 400+ U.S. manufacturing industries to estimate the effects of energy prices, which is in turn used to simulate the impacts of carbon pricing policy. We find that a U.S.-only $15 per ton CO2 price will cause competitiveness effects on the order of a 1.0 to 1.3 percent decline in production among the most energy-intensive manufacturing industries. This amounts to roughly one-third of the total impact of a carbon pricing policy on these firms’ economic output.

The American Recovery and Reinvestment Act included more than $90 billion in strategic clean energy investments intended to promote job creation and promote deployment of low-carbon technologies. In terms of spending, the clean energy package has been described as the nation’s “biggest energy bill in history.” To provide a preliminary assessment of the Recovery Act’s clean energy package, this paper reviews the rationale, design, and implementation of the act. The paper surveys the policy principles for clean energy stimulus and describes the process of crafting the clean energy package during the 2008-2009 Presidential Transition. Then, the paper reviews the initial employment, economic activity, and energy outcomes associated with these energy investments and provides a more detailed case study on the Recovery Act’s support for renewable power through grants and loan guarantees. The paper concludes with lessons learned.

Flood protection infrastructure investments, such as Army Corps of Engineers levees, can enhance resilience to flood risks amplified by climate change. We estimate levees’ benefits by exploiting repeat residential property transactions. In areas protected by levees, home values increase 3-4 percent. Levees impose adverse spillover flood risks that reduce home values in nearby areas by 1-5 percent. Capitalized benefits in protected areas are progressive, but adverse spillover impacts are regressive. Capitalized benefits at levee construction do not vary by race, but racial sorting occurs post-construction. The local political economy of levee construction can explain the distribution of winners and losers.