American Enterprise Institute

December 11, 2006

[Edited transcript from audio tapes]

2:45 p.m.	Registration
3:00	Presenter:	Lee Lane, Climate Policy Center
	Discussants:	Joseph Aldy, Resources for the Future
		Thomas Schelling, University of Maryland
	Moderator:	Samuel Thernstrom, AEI
5:00	Wine and Cheese Reception

Proceedings:

Samuel Thernstrom:  Good afternoon.  If folks could take their seats, I think we can get started now.  Welcome to AEI, everyone.  I’m Sam Thernstrom, and I’m the managing editor of the AEI Press, and thank you for coming to this forum to discuss an important new book by Lee Lane, “Strategic Options for Bush Administration Climate Policy”, which is available this month from the AEI Press, and copies were on the desk out front as you came in, and I hope anyone who wanted one took advantage of the opportunity to pick one up.  If you didn’t, you’re welcome to do so as you leave. 

AEI has hosted many events over the years examining different aspects of the scientific, economic, and policymaking questions related to global climate change.  This afternoon our focus will be primarily on the latter two areas, the economic and policymaking questions, and the related issue of how to structure federal policy to advance scientific research necessary to develop effective, long term solutions to global climate change.

The one important part of the climate change debate that falls outside the scope of our conversation today is the question of how much warming is a manmade phenomenon.  AEI has hosted events in the past on that question, and will certainly do so again in the future, but we set it aside today for two practical reasons.  First, our panelists are not scientists, and I’m quite confident that simply having conversation within the scope of their considerable expertise will be sufficiently interesting. 

But, secondly, I think it’s fair to say that as a practical matter, the scientific debate over the causes of global warming, while important in its own terms, is something of a moot point for policymakers today, although it is still fair to say that the timing, magnitude, and precise effects of climate change remain somewhat uncertain.  Nevertheless, the current debate in Congress and the executive branch is not about whether we should reduce greenhouse gas emissions, but, rather, how that might be accomplished in a cost effective manner.  It’s far from clear that it is possible to do that, but I expect that our panelists today will offer valuable insights into that question.

This is a particularly timely topic because I think we are now entering a decisive period for American and international climate policy.  There is widespread rumors that the Whitehouse is contemplating an ambitious new climate initiative that may be announced in the President’s State of the Union address in January.  Whether or not that is the case, I believe it is virtually inevitable that new federal climate policies will be enacted in the next few years, if not by President Bush, then certainly by his successor. 

The importance of this juncture cannot be overstated.  The policies that are adopted in the next few years are likely to fundamentally influence the shape of American and global climate policy for many years to come.  For the last six years, President Bush has attempted to set out an alternative to the Kyoto path.  The question now is whether that approach can be strengthened enough, both substantively and politically, that it will remain viable after President Bush leaves office, or whether the Bush administration will simply be an eight-year interruption in the Kyoto process. 

Personally, I still have hopes for the former scenario, and some fears for the latter.  Global climate change is a problem of nearly unparalleled complexity and potential significance.  Much of the world is already committed to pursuing a single approach to this issue, the Kyoto system of omissions trading, a path that offers, at best, very uncertain prospects for ultimate success.  I believe the effort to construct a viable American alternative to Kyoto is vitally important and I hope that today’s conversation will help illustrate the ways that might be accomplished.

Without further ado, a few words of introduction about our speakers, in the order in which they will speak. 

Lee Lane, to my immediate right here, is the Executive Director of the Climate Policy Center, a research organization dedicated to promoting economically efficient policy responses to climate change.  In addition to authoring the book we are discussing today, Lee has contributed chapters to three other books on global warming, as well as several white papers on climate policy that are available on the CPC’s Website.  Lee has also written extensively on issues of transportation, international trade, energy policy, and the environment, and I’m personally very proud to have Lee as an AEI Press author.

To Lee’s right is Joe Aldy, a fellow at Resources for the Future, where he researches and writes on the economics of climate change, among other topics.  He served on the Whitehouse Council of Economic Advisors from 1997 to 2000, where he worked on various environmental and natural resource issues, including climate change, air quality regulations, energy issues, and sustainable development.  Within the field of climate change policy, Joe’s expertise lies in the design of international climate change policy structures, the cost, effectiveness, and principles of emissions trading programs, and other mitigation policies, and the relationship between economic development and greenhouse gas emissions.  I look forward to hearing his critique of Lee’s work.

To Joe’s right is Tom Schelling, a distinguished university professor at the University of Maryland, School of Public Affairs, which he came to after twenty years at the John F. Kennedy School of Government at Harvard University.  He has been a recipient of many honors during the course of his distinguished career, but none more prestigious than the 2005 Nobel Prize in Economics, which he was awarding for his use of game theory analysis to shed light on the dynamic of international conflicts and cooperation.  The breadth of his expertise is truly remarkable, ranging from foreign affairs, national security, nuclear strategy, and arms control to terrorism, organized crime, racial segregation, various health policy questions, and, of course, the subject of our event today, global climate change. 

Professor Schelling has been kind enough to come to AEI several times over the years to talk about this and other topics.  The last time he spoke here on global warming, as I recall, his remarks were interrupted by an errant fire alarm.  I hope that we will be able to complete this afternoon’s conversation without any such glitches. 

Thank you all very much for coming.  I’ll turn things over to Lee.

Lee Lane:  Thank you, Sam.  I’m really delighted to be here, and I’m delighted that AEI was interested in publishing my book on strategic options for the Bush administration’s climate policy. 

I spent a good deal of time thinking about how to begin talking about the book, and I decided that a quote by Robert Kaplan, a journalist whose work I like, was probably a reasonable starting place.  Kaplan wrote recently, “It takes a shallow grasp of history to believe that most international problems have solutions.  For most problems, there’s only confusion and unappealing choices.”

Climate change, it seems to me – the debate about climate change has been dominated by assertions that quick, deep, greenhouse gas emissions cuts are a logical solution to the problem of global climate change.  I think that one of the main themes in my book, probably the main theme, is that there are, in fact, only unattractive choices available to us in dealing with climate change, and that the best ones we have require taking both a broader view and a longer-term view of the problem than would be suggested by proposals for very fast, short-term emission reductions. 

I selected as a focal point for the book the Bush administration’s policies, not because I hold any [indiscernible] either for the administration or against it, but because I think that the criticism, the pattern of criticism of the administration’s policies is very revealing about what’s been wrong with the debate on climate policies so far. 

Let me give you three examples, covered in the book, that I think are suggestive of what I believe has been misdirected in the climate policy debate.  The first of those, of course, is Kyoto.  The Bush administration drew a tremendous amount of criticism, both in the United States and internationally, for its rejection of the Kyoto protocol, and yet, the Kyoto protocol, even in its original version, with the United States in the agreement, and with the more stringent targets, before they were watered down by Marrakesh, would have produced almost no change in global mean temperatures over time.  It had very, very little impact on emissions levels, and the costs of the protocol were very disproportionately concentrated on the United States. 

Nordhouse has done an interesting example that kind of highlights that.  He points out that, whereas the United States was a net loser, by his analysis, from Kyoto, the whole rest of the world taken together was a large net winner.  And then you get into the details of the analysis, and it turns out the rest of the world was a net winner not because of the environmental benefits.  Those were relatively small.  It was principally a net winner because of the large transfer payments from the United States that were imposed by the Kyoto agreement.  So [there have been] relatively small environmental benefits, disproportionate costs for the United States, and at a deeper level still, Kyoto, of course, did nothing and does nothing to restrict greenhouse gas emissions in China and India.  At least those countries are not subject to emissions caps. 

I think it’s pretty generally accepted that it’s quite impossible to reduce greenhouse gas emissions significantly without somehow including China and India in the emissions control regime.  And yet, as many scholars – Tom Schelling is one of them – have argued for a long time now, there are reasons for suspecting that China – it may not be in the national interest of China and India to participate in greenhouse gas emissions caps.  Some of the work by David Montgomery and some by David Victor that’s been done in the last year or two, I think underscores and emphasizes the likelihood that it’s just not prudent for China and India, given their interests, to engage in a Kyoto-type system. 

So if a system can’t work without their participation, but it’s not in their interest to participate, it seems to me that we have a pretty profound impasse, and my conclusion would be that systems like Kyoto are very unlikely to work.  Therefore, it looks to me as though the Bush administration’s withdrawal from Kyoto had a good deal of justification from the standpoint of national interest, and it’s hard to argue that it did much harm to the cause of restraining climate change, given how little Kyoto would have done to restrain climate change, even if it succeeded. 

The second area where I think there’s been a great deal of criticism of the Bush administration, is on the administration’s emphasis on research and development, particularly developing new technologies to reduce greenhouse gas emissions in the long run.  I find it hard to understand the reasons for that criticism.  Most of the world is unwilling to impose the kind of emissions controls and incur the kinds of costs that would be required with current technology, to significantly restrain greenhouse gas emissions.  There are countries that will make changes around the edges.  That’s fine, but really deep cuts, it seems to me, are just politically unacceptable in most of the globe. 

The logical way, or a logical way out of their problem is for government to fund R&D that draws down the eventual costs of greenhouse gas abatement, hence making it possible to forge an international agreement for controls, for effective controls.  That’s precisely what the Bush administration’s strategy, announced strategy, is.  And it seems like a perfectly logical one to me.  Of course, what’s really going on is the critics are upset that, not that the administration is doing R&D, but that it hasn’t introduced short-run emissions controls. 

Well, I understand that criticism, and I’m actually even going to propose some ways that we might reconcile the critics in the administration in a relatively low-cost way, but let’s keep perspective on what controls can do.  I did a little back-of-the-envelope exercise, back a month or so ago, in which I looked at the impacts on projected global emissions as a result from – the would have resulted from the enactment of S-139, which was the original version of the McCain-Leiberman cap and trade proposal.  And, effectively, that proposal would have reduced global greenhouse gas emissions in the year 2025 by about 2.5%.  It’s not even enough to have significantly deflected the growth rate in greenhouse gas emissions.  And that was a piece of legislation that was then withdrawn and revised by the sponsors because they judged it, I think correctly, to be politically unacceptably expensive.  So, I mean that just shows us that trying to impose deep emissions cuts with existing technology is very unlikely to generate the necessary political support. 

The critics of the Bush administration, it seems to me, have focused so much on the issue of either international or national short-term emissions reductions, that they haven’t criticized what I think is some fairly serious potential problems with the administration’s efforts directed toward R&D. 

Let me talk a little bit about, first of all, why I think R&D efforts are so critical and so important, and then I want to focus a little bit on some of the specifics where, I hope, that the administration can, in the future, do a better job. 

There’s been a lot of discussion – I certainly encounter this on Capital Hill when I talk to people – about the idea that emissions limits themselves are going to generate the new technologies that are needed to restrain greenhouse gas emissions in the future at more affordable or more politically acceptable costs.  When I read the economic literature on this subject, whether one looks at David Popp’s work, or Bill Nordhouse, or Montgomery and Smith, it seems to me that there is a rejection of that principle. 

All of those people are saying that we’re not going to get the kind of emissions reductions – the kind of technological progress from emissions limits that many people are hoping for.  And yet, there’s a conventional wisdom that Title IV did produce significant technological progress.  Seems to me that this apparent conflict really comes down to a confusion about what we’re talking about under the rubric of R&D. 

Jay Edmonds, of the University of Maryland, I think, has put it best when he said that emissions limits are very good at drawing technology off the shelf.  That is to say if we have technologies that are almost ready to be commercialized, you put a price on emissions, and that will do a very good job of drawing those technologies into the marketplace. 

Emissions limits, Edmunds argues, are very bad at putting technologies on the shelf, and particularly in the case of greenhouse gas controls, where we need very large technological advances, many of which require progress in basic science.  We can’t expect the simple imposition of a price on greenhouse gas emissions to produce, out of the private sector, the kind of R&D, especially with this emphasis on basic science, and the more advanced, the earlier phases of development, we can’t expect that kind of R&D out of a price on emissions.  Only government can provide that kind of R&D effort.  That’s why it’s so important that government R&D efforts are efficient. 

I think that, with all the good work that is currently being done within the federal government’s climate change technology program, and there is a lot, there are four things that I would point to as areas that could really be strengthened, and where it’s important to strengthen the program.  The first of those things is that the expert workshops, that DOE, to its credit, commissioned to evaluate its strategic plan, made, I think, a valid point when they argued that the existing portfolio of research projects is too risk averse and too focused on incremental improvements, and not focused enough on more aggressive breakthrough technologies that have a prospect of affecting a technological challenge as large as that of decarbonizing the global energy system.

Second, the administration’s technology strategic planning process, which has done yeoman work, with very, very severe limitations on resources, is, in fact, just starved for resources.  And its ability to actually affect the shape of the R&D portfolio is, I think, questionable. 

Third, the research portfolio excludes what I think is a very important area of R&D.  And that is, it excludes work on geo-engineering, and it has, if any work on adaptation, only a very, very small amount.  Now, this is a big, and, I think, imprudent gap.  If we get into a situation in which rapid, dangerous climate change emerges, only some kind of geo-engineering will represent a solution, and at that point, abatement is just too slow to work.  We don’t want to deploy geo-engineering strategies at this point, but we certainly want to explore them.  We want to learn their pros and cons, their side effects, what ones might work best. 

And fourth, and finally, the program is probably just under funded, in terms of the scale of the challenge posed by this daunting task of technology development. 

So, all right.  I think the administration is being criticized for a lot of things that it’s doing right, and maybe, offsetting that, it’s not being criticized for some of the things that could be done better.  But that isn’t really the most important thing.  The important thing is what could be done now, in the remaining two years of the administration, to do a better job?  And I’m sure that’s what the people in the administration think about.  I’ve got – and the book talks about – three suggestions, for things that might be worth doing. 

The first of those I’ve already suggested, really, by my remarks so far.  The R&D program really needs to be strengthened in several regards, and I, personally, am convinced that it can’t be strengthened without some considerable degree of reorganization.  Several – actually, a majority of senators, and a number of House members, have proposed legislation that would create the energy, or the climate change equivalent of the Defense Advanced Research Projects Agency, that is to say, an entity that would engage and specialize in high risk, but high payoff R&D. 

This, it seems to me, is not a panacea, and we have Richard VanAtta in the audience, who has studied the actual DARPA a lot, and can tell you all of the reasons why it is not a perfect solution to this particular problem, and I agree, it’s not, but I think it would make things – the odds are it would make things better.  The administration, if it wanted to pursue this option, clearly could find a lot of congressional support for it.  Up to now, the administration has resisted that idea.  I think that’s a mistake.  I think we would do well to follow through and create such an entity, and charge it, incidentally, with doing R&D, to learn the pros and cons of geo-engineering as one of its important missions. 

The second thing is, I think, that there are obvious changes that need to be made to insure that the strategic planning process of the existing climate change technology program is strengthened. 

So, my first what-to-do-better is strengthen the R&D program in those two ways.  The second, I think, is that we should at least consider launching a new international negotiation on the subject of climate change.  But I’m thinking of a quite different kind of negotiation than Kyoto.  Tom Schelling has talked about the principles very eloquently.  We want something that is action-based.  We want something where countries can make proposals, see what others offer in exchange for them, check to make sure that the proposals are actually lived up to and implemented, and probably – I guess I would also say – probably, we want a negotiation that’s limited to the countries that really are likely to make a significant difference. 

I, personally, would suggest that a major focus of that kind of negotiation would be to try to increase overall international commitments to climate-related R&D spending.  There’s no reason why the world should be spending less today than it was in 1990, before the Kyoto protocol was agreed to, on energy-related R&D.  And, yet, that is precisely the case.  There really could be a solution to that, I think, in the right kind of international negotiations.  So that would be my second recommendation. 

My third proposal would be that the Bush administration should at least consider proposing mandatory greenhouse gas limits, ideally in the form of a carbon tax, or in the form of some other price-based controls on emissions.  I think there’s a pretty broad consensus among economists that if we’re going to have mandatory controls, a carbon tax would be the very best outcome that we could have.  A lot of economists of all different ideological stripes, have proposed, in particular, it would be very desirable if we could have a carbon tax and use part of the revenues from the carbon tax to reduce marginal rates of other taxes in the economy.  Indeed, Kevin Hassett, of AEI, has proposed exactly that kind of proposal, and I think it’s absolutely ideal. 

A lot of people tell me, including my own organization’s lobbyist, that that can’t happen, or that the Bush administration will never propose it.  And that may be right.  I think it’s worth – the option is so much better than everything else that’s worth a further look.  But let’s say it’s not right, that we can’t get that done, which, I have to admit, is a possibility.  It is possible to design a cap and trade system that, in many respects, although not all, but in many respects replicates the advantages of a tax, and some of Joe Aldy’s colleagues at Resources for the Future have been proponents of this idea.  Our own organization supports it, and it supported legislation that would implement such a program.  There is legislation in both Houses, or at least has been introduced in both Houses of Congress, supporting proposals of that kind.

The great advantage to this kind of legislation is that it would avoid wasteful expenditures on achieving short-run emissions cuts, over-hasty emissions cuts, that are very expensive but don’t actually confer that much environmental benefit.  The great disadvantage of using a cap and trade vs. a tax is that you run the risk that rent-seeking corporations end up capturing much of the revenue instead of its being used for public purposes.  But if a tax is not politically viable, that decision has already been made, and the great advantage of a Bush administration proposal for a moderate well-structured cap and trade program or tax would be that you might lower the cost of emission control policies for the next decade or two by putting the country on a more moderate path to emission controls than might otherwise be the case if the administration leaves office without dealing with this problem. 

So, in conclusion, I think the administration might have an option through a well-structured emissions control proposal to reduce the cost of greenhouse gas controls for a long period of time into the future.  But its chances to really improve our prospects of dealing successfully with climate change, I think, hinge, primarily, on what it does in the area of research and development, and what it does in the area of technology and producing a stronger R&D policy. 

So, those are the two thoughts that I would leave you with as my suggestions for how the administration should go forward.  Let me close by thanking, again, AEI for its efforts in publishing my book, and also offer a special thanks to Sam Thernstrom, who, as an individual, I think, really went above and beyond the call of duty to make this project work.  So I look forward very much to hearing from my colleagues and to hearing from all of you. 

Samuel Thernstrom:  I should just explain that we’ll follow our usual format here, where we’ll have each of our speakers comment before we open up the floor to all of your questions.  So please hold onto those for now.  Joe?

Joseph Aldy:  Thank you, Sam.  Thank you for hosting us here at AEI.  I’d also like to thank Lee for inviting me to participate in the session.  It’s a real pleasure to be here.  Actually, I recall it was a little over nine years ago the first time I came to an AEI climate change event, and that was to see Dr. Schelling speak on climate change policy in the fall of 1997.  So it’s an honor to be able to participate in this discussion here today, because, obviously, in the last nine years, we haven’t solved the problem.  We probably won’t over the course of the next hour and a half, but I think Lee’s book is actually a good starting point to think about where we can go from here. 

And I think, actually, while he’s trying to address the next two years of the Bush administration, I think what’s important when thinking about his book and the lessons he draws from our experience and suggestions on ways to move forward, is that if, by chance, the Bush administration doesn’t do anything over the next two years, his ideas should still resonate over the course of the next administration and the Congresses to come in the future as they discuss this issue. 

My comments here today – I like to organize my thoughts around four major topics that Lee addresses in his book.  First, I’d like to talk a little bit about domestic policy.  Then I’ll discuss some about issues regarding international engagement.  Then I’ll touch on one thing which, as an economist, I really focused in on, even though it’s probably only something that my fellow lemon-suckers would really be attracted to, and, in fact, Lee didn’t even mention it much in his comments, but it’s the need for analysis, and really thoughtful, rigorous analysis to inform how we move forward on this issue.  And then, finally, to conclude with some comments about the politics, and the political realities of what we’re facing with in terms of both domestic and international climate change policy. 

In my comments, I’m going to be viewing this sort of through the lens that an economist would bring to this, about, sort of, what’s the optimal portfolio policies, even though that I know, in part, the reason that I was invited to be here is because I worked in the Clinton administration, and had played some role involved in our policies leading up to Kyoto, trying to figure out how to implement Kyoto after the 1997 conference and the subsequent international negotiations, and also thinking about domestic design of policies that would implement Kyoto, were it to be ratified in the U.S. 

But having said that, I think more of my comments are going to reflect my views as an economist, so when I hear someone say, hey, a tax sounds great, my initial reaction is I agree with you, but I would have had some caveats with that through the course of my comments here.  So first, let me talk a little bit about domestic policy. 

I don’t want to spend too much time talking about the Kyoto protocol, because it’s been talked about for a long time.  It’s dead in the United States.  There’s no reason to continue to beat that horse, but I would like to make one comment regarding the Kyoto protocol in cap and trade.  Then I’d like to make brief comments about the Bush administration’s policies, and then discuss what I find the most attractive parts of Lee’s proposal for domestic policies. 

Regarding Kyoto, and there’s several of this, especially in the first half of the book, where Lee comments on draconian emissions cuts required under the Kyoto protocol, and, certainly, without any of the flexibility available through international emissions trading through the use of carbon sinks, the emissions commitments under Kyoto for the United States would have been very harsh.  But having said that, I don’t want to immediately say we should dismiss cap and trade, because it’s associated with draconian emissions cuts.  One can envision a cap and trade system with much more modest emissions cuts. 

And so, I think when we are discussing what are the different ways of implementing goals, we should think that, well, it may be possible to design a quantitative target that is sufficiently modest, that one isn’t too concerned about what the cost can be, the initial step towards what may be a longer path in the future more significant emissions cuts, but in the near term, you can take modest cuts and have an effective cap and trade program. 

So, to conclude on that, when I think about cap and trade, the real question, then, is can you design a cap and trade system that allows for efficient trading, can you do something that doesn’t involve really substantial transfers?  And that’s one of the real problems of the Kyoto approach is that in order to achieve modest cost for the U.S., it would have required really substantial income transfers across countries.  Can you do so in a way which can really equate marginal benefit and marginal cost?  And one of the major criticisms of Kyoto from economists is not that cap and trade is a bad idea, it’s that cap and trade was such a stringent early target, involves much higher cost than what the environmental benefits would justify. 

So I’d just like to put that out there as cap and trade, we shouldn’t just throw it out just because we didn’t like the Kyoto targets.  There could be ways to design a more reasonable cap and trade program, and I’ll get to that in a little bit, as well.

Male voice:  Pardon me for interrupting, but could you say a word – what is the instant transfer dimension of [indiscernible]?

Joseph Aldy:  So what’s envisioned there is that you have some countries like the U.S. with really ambitious targets, you have other countries with very modest and non-binding targets, and so they can enjoy substantial revenues of selling their emission permits to the United States, to Japan, to the E.U. that have more stringent targets.  And so they would then be sending all these – in this case, primarily to Russia and the Ukraine, a lot of resources for them to undertake really nothing substantial because their emissions commitment is so high above where there emissions would be under business as usual. 

So let me move on a little bit then to talk about the Bush policy, which I may be less sympathetic than Lee is, regarding the Bush policy.  I have several problems with how they’ve designed their intensity target.  In some sense, some economists like this.  In fact, my colleague, Billy Pizer has written some on this.  He actually was working at the Counsel of Economic Advisors when the Bush administrating announced its intensity target. 

My concerns with this have to do with how one designs it, and this case is simply a function of economic output.  The way it’s designed, the economy grows faster than expected, the commitment may not even require any emissions abatement, because most of our economic growth would grow faster than expected, tends to be in low carbon sectors of the economy.  And so, just by growing faster than normal, you might comply with the commitment.  If you go slower than normal, that means you’re probably seeing less economic growth in these carbon-lean sectors of the economy, and may actually make it more difficult to meet your goals. 

So as sort of a model for how other countries should think about goals, setting their climate change goals, it’s actually a poor model.  If you think about a developing country, it says, well, if you grow slow, the target gets harder.  If you grow fast, the target gets easier.  And that’s the opposite way you’d really want to design a target if you’re going to try to index a target economic growth.  

I also find that the [indiscernible] Review of Policies in 2012 seems somewhat non-credible considering that the President, when he announces this knew that he wouldn’t be in office any later than January 20, 2009, there’s also a concern I have in which the policies that were announced didn’t really show any connectional correlation with the policy goals, and there wasn’t any analysis to try to show how the suite of policies that were proposed in 2002, and they announced the domestic policy, how it would help achieve the goal that they had set forth. 

And finally, it’s hard to find any economist out there who would suggest that the optimal price of carbon should still be zero, and that’s the thing that’s really missing.  And while they may be making some improvements on the R&D side, there really needs to be the companion policy which puts the price on carbon to help move some of the technologies that are being developed in the R&D program, into the use in the private sector. 

A couple of other things, and this is a bi-partisan critique, the voluntary actions that the Bush administration continued – a lot of these were from voluntary programs that were used during the Clinton administration, some of which built on climate change programs initially announced in 1992 by Bush I, these really don’t do a lot. 

I think that what we’re talking about here is sort of modest cost programs that cost on the order of tens to hundreds of millions of dollars.  They’re good for PR, they don’t really do a lot for the environment, and my colleagues, Billy Pizer and Dick Morganstern actually have a book coming out next month where they’ve evaluated a number of different kinds of voluntary programs, and find the environmental outcomes from these programs to be quite modest. 

The other point I’d like to make regarding the Bush policies is that they have been able to push, and some of these were enacted in the Energy Policy Act, as Lee notes in his book, for tax credits.  These are actually, in many cases, very expensive ways to reduce carbon dioxide.  If you have other goals, they may be worthwhile to pursue, but if you’re thinking about it just from the climate context, you’re talking about spending hundreds of dollars to reduce a ton of carbon, and there are a lot of other ways to reduce carbon in the economy at much lower cost. 

The final thing I’d like to say is that uncertainty was used some by this administration for not taking action on climate changes, certainly not for taking any mandatory action.  I think if you look at economics literature, there’s a lot of research that suggests that in the face of uncertainty, especially when we’re looking at irreversible outcomes such as the impact of climate change, as well as the impacts of regulations on large scale capital investments in the regulated sector that we have to make, that you actually what to do some things to reduce your uncertainty over time. 

And that can involve taking some policy actions, doing more research under science, which should be applauded.  Although I think more can be done, more research on R&D, and, I think, more funding for that would be advisable, but also implementing some policies and learning from that.  And I think that’s the frustration with the fact that there haven’t been many policies implemented in which we can try to learn and move forward from that experience.

So let me talk briefly about Lee’s proposal.  One idea I like is that he’s trying to strive for a diverse balanced portfolio.  He recognizes the need to put a price on carbon, whether it’s through a carbon tax on the order of, say, fifteen dollars on a ton of carbon, or a cap and trade program with a safety valve which I like, and I like, really relative to a carbon tax, in a domestic context, for political reasons, and I’ll get to those in a minute.  I like the fact that he brings up the G word, which in some circles is still a dirty word, but recognizing the need to address geo-engineering, and a number of environmentalists still dislike the concept of geo-engineering.  They think it means really abdicating this – trying to address this issue in a serious way.  They’re concerned about side effects associated with it. 

My view on this is if twenty years from now we realize we were completely wrong about the science of climate change, it’s much, much worse than we thought it was going to be, we will regret not having undertaken some serious R&D on geo-engineering over those twenty years.  So I think it’s something that can complement a policy that involves mitigation, that involves R&D, and also involves adaptation, as Lee mentioned.  It could be seeding rain clouds, it could mean putting particles in the upper atmosphere to deflect some of the incoming sunlight, various ideas like that.  There are some people here who are certainly more expert on that than I am.  And we can discuss that during the Q&A. 

Let me turn some to international engagement.  First, it’s not easy to defend a process that involves 190 countries and requires consensus.  I don’t think anyone would necessarily want to start a process up like that.  And there are certainly concerns about how Kyoto was set up.  As opposed to most international agreements, it focused on outcomes and outputs, as opposed to inputs, and it’s difficult to really think about how you design, in this case, a top down cap and trade program that involves large transfers, as we’ve already discussed. 

But having said that, I think ignoring the process, the international process, or at least playing a non-interference role, which I think is a fair way to describe the current approach to international negotiations, is not sufficient.  And Lee recognizes this, and I think this is actually very valuable, that you need to further engage the international arena on this topic.  [Indiscernible] Pacific partnership is a start, but, to be honest, fifty million dollars for the partnership coming out of the fiscal year budget is pretty inconsequential. 

When I was in government, I was told if something costs less than a billion dollars, don’t worry about it.  There are just so many bigger fish to fry.  And so we were talking about fifty million dollars like, you know, sure, I mean that’s a rounding error in a lot of agencies’ budgets, so let’s sort of think about more important things to really try to address the issue.  So if you’re going to be serious about promoting R&D and cooperation and technology transfer among these six countries, or think about expanding it in the future, I think a more substantial contribution is necessary. 

I think the idea of trying to engage a smaller group, whether it’s the G8 plus 5 idea that came out of Gleneagles, or the former Canadian prime minister proposed leaders of the twenty biggest countries coalition to address this issue is worthwhile, and because we can really get a lot done, by focusing on the smaller group of countries, then trying to engage 190 countries.  And I think actually what we have now and this idea of pledge and review that Lee supports, and Dr. Schelling has talked about this some in the past as well, is sort of useful right now because this is a long-term issue.  It serves as an opportunity for us to sort of learn about the impacts and effectiveness of various policy approaches. 

In some sense this is similar to the approach that Bob Hahn advocated in an AEI press book in 1998, sort of a case study approach.  We really don’t know the best way to go – whether it’s cap and trade, or taxes, or other ways, so let’s just let [indiscernible] regions of the world do what they want to do, have everyone come together and talk about what they’re going to do, and see what we can learn from that process.  And I think that would be a valuable way to move forward. 

The one concern I have about this is whether or not you’re going to get any policy action that’s more than what you would get without any coordination at all.  We know that we have this huge coordination problem, given the global public nature problem associated with climate change.  We need to get more that just what you would do otherwise.  And so the question is whether or not pledge and review is really going to get – through whether it’s just publicizing it, and the potential for shame for those who don’t do much is enough to get more action or not, is a big question.  But clearly cap and trade has serious problems when it comes to promoting participation as well, as you learn by both the U.S. and Australian actions with respect to Kyoto. 

The other thing I would say about international engagement is that –- and I’m sure Dr. Schilling will talk about this more, is that the big problem with climate change is that, in the long term, it hurts developing countries a lot more than the developed countries.  And so this is why we need to think more about how we can affectively engage developing countries, whether it’s through adaptation measures that are specific to climate change, or we think about it more in ways to facilitate their economic development.  Because the more these countries grow, the easier it is – they’ll have more resources, they’ll have more technologies to adapt to the threats posed by climate change in the distant future.

Let me spend a minute or two to talk about the need for analysis, which, as I said, is near and dear to my heart as an economist, and seeing that I have a couple of  fellow economists in the room, they’ll like this, and the rest of you may fall asleep during this comment, but there’s certainly been a dearth of analysis, certainly by governments on climate change.  And I think that it’d be really valuable as we moved forward to think about how can we inform the policy process? 

And the IPCC is not necessarily the best venue for doing this.  There are some problems with the IPCC.  I think a lot of economists have lamented that the reports being generated by the IPCC on socio-economic impacts don’t have an impact on the policy process.  Volume I on the science has an impact, Volume III on socio-economic impacts does not.  And so I don’t think that’s necessarily the best way to go forward.  I mean, one could look at the Stern Review as a model for how you want to think about this, and a model simply in the context of a bit of a cost analysis is a great way to frame this question. 

I would stop there with my applause of the Stern Review.  I found a number of problems with the analysis.  I’m certainly not alone in that, but I think it’s fascinating, actually, to find a European government saying the way to frame this issue is to benefit cost analysis.  And I think we can learn form that.  And it may be useful to think in the context of, say, a commission as Lee proposed, is that you may have a commission.  One of their things would be to bring together some of the U.S.’s best scientists and economists and say, if you could do the Stern Review the way you think is right, go at it, and give you the resources to do that, and bring that back to this committee or this commission and use that as a way to inform the policy process.

Let me conclude with some comments about politics.  First, when I was in the government in 1997, we weren’t allowed to use the T word, which is tax.  The fact that people are actually willing to talk about it now is refreshing.  When I read Lee’s book it reminded me of a New York Times poll from February this year, about support for a gasoline tax, and so in this poll in February, they asked a series of questions.  Would you favor or oppose an increased federal tax on gasoline?  Twelve percent said yes, we favor.

 Now, if you said what if payroll taxes or income taxes were reduced as a result of an increase gasoline tax, would you support?  Only 28% favored that, which, as an economist, that bothered me, because there should be a better way we can design our tax system by reducing our taxes on good things, such as labor and capital, and put more taxes on things that we know how to associate as bad or externalities, such as gasoline. 

What if the increased tax on gasoline would reduce U.S. dependence on foreign oil?  Fifty-five percent now favor this.  Not that you would design a gasoline tax – it’s not that you can design it one way that would influence your oil consumption from foreign countries, and another way that wouldn’t.  That’s not really a policy choice.  If the increased tax on gasoline would cut down on energy consumption and reduce global warming, would you support?  And 59% favored the increase in the gasoline tax. 

Now, none of these say how much, and, of course, it’s really easy to say yes, I like this, when it’s someone over the telephone, not the guy at the gasoline pump in your Phillips station.  But there does appear to [indiscernible] more support if you’re able to say, this is good for the environment, or this is good to help us on our energy demand, and this has good energy security components to it. 

Now, energy security to me as an economist is a rather vague notion.  I have some problems with how it gets discussed in the media and in politics.  But there does seem to be this potential right now from a political standpoint of saying, we have concerns on energy policy, we have concerns on climate policy.  There may be ways to tailor how we address both to reach some common good. 

A couple of other comments I’ll make about taxes is that we need the revenue for gasoline taxes, and especially if we look at some of the alternatives that address climate change, we’re going to see our gasoline tax revenue going down as we substitute more and more for bio-fuels, especially given the current subsidies for bio-fuels.  If you think there’s a future that has plug-in hybrids, or a world in which we’re looking at hydrogen that’s generated from electricity, there may be reduced tax revenues that way. 

Let me talk a little bit about some of the political advantages of cap and trade and of taxes, and then some of the disadvantages.  One, and this is one of the problems that Lee identifies in the book, and part of me says it is a problem, but part of me also says, if you want to deal, this is how you get a deal, and that is when you do cap and trade, you create a lot of winners, and a lot of losers.  You’re creating a lot of rents when you create these permits, and you give some of them away, you’re going to have a big impact on the bottom line for some of these companies. 

That may be a way to actually get a coalition to support a climate change policy.  You can also use these rents if you auction off some of the permits to help those who are going to be adversely affected by climate change policy.  And I think what’s important when thinking about this is once you build in a constituency, whether it’s the affected industry or, as someone proposed, auction off the permits and fund Medicare and social security. 

Now, all of a sudden, you have the elderly groups.  I mean, if you had AARP advocating for a carbon tax or a carbon permit auction that changes the political dynamics significantly.  But having said that, I think it’s important to recognize that as you do this, you’re reducing some of the efficiencies because you’re reducing some of the proceeds that could be used to reduce existing taxes.  But in the long term, we know that if you’re going to get a climate change policy, you need to have at least some industry support. 

Having said that you also need some environmental support, and that’s one of the problems of the carbon tax, is that environmentalists love the idea of a hard quantitative target.  Even if, at the end of the day, it kills the bill, they prefer that over a carbon tax because they don’t like the uncertainty of the environmental outcome associated with just a carbon tax.  But having said that, it’s hard for me to imagine a bill coming out of Congress without support of at least some environmental groups.  So I’m thinking about what’s sort of politically viable in Congress, you need to have the support of at least some of industry, and some enviros. 

The last thing I’d like to say about a tax.  It’s clear this issue that Lee mentioned in his book about committee jurisdictions – people fighting in Congress on who designs it.  If it’s a cap and trade program it’s different committees than if you’re writing changes to the tax code. 

The other problem is that it – well, it’s called a tax, and, you know, in this era it’s very easy to just criticize the tax by using the word tax to describe it, but it’s difficult to imagine you can really get a lot of action there.  But in some sense, maybe President Bush is the right person to do this.  As someone who’s adamantly opposed raising taxes and championed reducing taxes, maybe he actually has the credibility of being, like, I’m really serious about taxes, but we need to increase taxes on carbon, and reduce taxes elsewhere in the economy, to generate environmental benefit and promote growth.

The other thing [indiscernible] politics it’s not clear to me why now, that certainly if you say Senator McCain, you’re not really going to be pushing for, I think, a Bush administration implemented a new policy because that’s something you want to run on in the 2008 election.  If you’re a democrat, and really want to do something about climate, why do you want to support Bush now when you think you can get something more ambitious two years in the future, whether it’s a democratic president, or President McCain, or, perhaps, another moderate Republican who wants to do something on climate.  So it’s not clear to me whether or not the politics are right right now for President Bush to really push for something that would involve a mandatory price on carbon in the economy. 

So let me close with just a couple of final comments.  One is that I’m certainly less sympathetic with what the Bush administration has done in our climate policy than Lee’s been.  I feel like more could have been done in response to Kyoto.  I think a year was lost by ditching Kyoto and waiting for eleven months before announcing a new policy, and that, in the end, I think had very little teeth in it. 

As an economist, I’m actually very supported of a lot of the elements in what Lee is pushing – more thoughtful R&D, targeting more basic R&D, thinking about how they can affect the portfolios of technology available to us in the long term, putting a price on carbon in the near term, but at a modest level to get the technologies out there, and thinking about more of a bottom up approach to engage the international community to get action going.  But as a realist, I’m less optimistic about whether or not we can achieve any of this in the next two years. 

I’m a little bit more optimistic that some of what Lee’s talking about can certainly be incorporated in policies in 2009 and thereafter, and I look forward to our conversation during the rest of this session.  Thank you.

Samuel Thernstrom:  Just before Professor Schelling gets started, I thank you all for your forbearance with our technical difficulties here.  Our conference’s staff suspects it is possible that we had some feedback going on from cell phones or Blackberries in the room, so if anyone, the panel, or anywhere in the room, has anything you can turn off, please do so now.  And it may help us.

Thomas Schilling:  I think Lee Lane made a strategic decision.  He didn’t know how the election would come out.  He could choose to write a book about what Bush might do during his lame duck two years, or he could write a book about what, with a little advance preparation, a new administration might do after a couple of years.  He chose the former.  Whether he regrets it because of the outcome of the election I don’t know, because he didn’t discuss at all the politics of a Bush administration dealing with a Democratic Senate and a democratic House of Representatives. 

What he did examine -- he says it in the first page of his introduction – he examined how well the administration’s climate policies served the President’s stated goals, not how well it serves the nation, how well it serves the President’s stated goals.  As far as I could tell, the President’s stated goals were pretty hollow from the beginning.  They never involved much.  In fact, they’ve recorded some disbelief in whether climate change was a real danger of any kind.  He asked for a study from the National Academy of Sciences about three years ago, and he got a gentle answer that essentially said, yes, it is serious.  And he took that to mean, well, with all the uncertainties, we don’t want to burden the economy now. 

I objected to the way he turned down Kyoto upon his election.  I didn’t believe in Kyoto at all, and I think the Clinton administration, having done nothing in three years to identify what would have to be done if the Kyoto treaty were ratified by the U.S. Senate?  We’d lost at least three years, and I thought by then, it was unlikely that the United States could possibly meet the nominal Kyoto commitments.  I didn’t worry much about burdening the economy with the heavy commitments the U.S. undertook because I didn’t expect the U.S. to meet those commitments, and when it failed to meet those commitments, I didn’t expect it to hand out large amounts of money to Russia and Ukraine just to buy what has popularly been called the hot air, that is, the unused emissions quotas of those two countries. 

There was nothing in the Kyoto Treaty that was self-enforcing.  I was struck with the fact that two years ago, when both France and Germany were on the verge of completing three years in which their budget deficits exceeded three percent of GDP, and they were supposed to be severely penalized by the European Union, nobody expected anything to happen, and when, at the end of the year, they had exceeded those limits of three percent of GDP in budget deficits, nothing was done.  They didn’t anticipate anything being done. 

I can’t imagine that a Kyoto regime would have had more enforcement teeth than the basic Constitution of the European Union, and therefore I don’t think anybody took very seriously the need to purchase hot air from Russia and Ukraine or anybody else who comes out under quota.  There are always a few small northern European democracies that are willing to pay a price to demonstrate their moral superiority to the rest of us, so maybe Finland or Denmark will spend a little money but only at bargain prices.  Anyway, I looked at this statement, which I think our chairman endorsed.

Currently, post-Bush climate policy threatens to become an exercise in needlessly expensive symbolic politics.  Leaving an institutional vacuum in the U.S. climate policy is an invitation to policy mischief in the coming years.  I think this implies that what might be done in the next two years could have a very substantial impact on what happens in the future.  I had the impression of what the Clinton administration did for three years had no particular effect on anything, and I think what Bush has done has had a permanent effect, but at least a long term effect, the long term effect, is to lose any standing we had in the international community toward leadership on the subject of greenhouse gas emissions and climate change. 

I rather agreed with Bush that we shouldn’t ratify the Kyoto Treaty.  I did think it was incumbent on him to think of something better that he could not only propose domestically for the United States, but propose internationally, but as far as I could tell, it didn’t occur to him that U.S. leadership is important internationally on this subject – I don’t think it occurred to him that this is a serious problem.  He had so many more serious problems to worry about that maybe we shouldn’t blame him for not taking this one terribly seriously. 

Professor Schilling [??] -- make a few comments.  Most of what I think about Lee’s book is that within the constraints he put upon himself, namely, deal with the next two years, and don’t antagonize the administration when you’re trying to influence.  I think he came up with probably the best I could have done, or the best anybody could have done.  Research and development is always bound to be popular.  It’s one way the government can spend money that profits a lot of people.  It’s much more exciting than regulations and taxes, so that I think focusing on research and development is important. 

I also like the fact that he did mention geo-engineering.  You’re wondering what geo-engineering was.  Essentially, it has a broader context, but here it means, essentially, changing the earth’s albedo, changing the reflectivity of the sunlight that falls on the earth.  It’s worth knowing – Lee and I were at a conference together just a month ago in California on geo-engineering where we had twenty people who had been making a career out of this, or, if not quite a career, at least they’d been studying it, many of them for a dozen years or so. 

One of the things I learned that I’ve been trying to get answers to was that how much of the incoming sunlight would you have to deflect, reflect away in order to offset the warming effect, or the doubling of greenhouse gases in the atmosphere?  And somebody gave an answer that nobody contested.  I think it was 1.7%.  One point seven percent would take care of the entire warming due to a doubling of CO2, if you were willing to take care of little – less than a doubling of CO2, allowing for some of the inevitable warming to take place, it would be less than 1.7%. 

I asked, for example, would the Palomar telescope know the difference if you put things in the atmosphere that would block out 1.7% of incoming light, whether it’s sunlight or starlight or whatsoever.  And 1.7% seemed to be something that nobody could notice by looking at the sky, either through a telescope or just walking outdoors on a beautiful day like this, and looking up at the blue sky and wondering whether the blues of the sky would be lowered.  So I think that that gives some notion of how much sunlight you have to deflect. 

I also learned that one of the best deflectors of sunlight is sulfur aerosols and everybody knows that sulfur aerosols are not nice things for children and old folks and wildlife and fish and so forth, but the amount of sulfur you have to put up there, since you put it way up high in the stratosphere, the amount is a very small percentage of the amount we’ve already been putting up there year after year after year, from all of the coal we burn and all of the gasoline we burn, and so forth.  So the amount you have to put in the stratosphere is very small by comparison with what’s already up there, so that if you worry about acid rain and such things, worry about the low level aerosols that we’re breathing and are falling out of the oceans.  You don’t have to worry so much about what somebody might want to put into the atmosphere. 

There was an interesting –- it’s the first time I heard of it – a proposal that would not cost terribly much that looks like it might work, to put into the atmosphere ocean water in the form of a spray, in the form of very tiny droplets, and these, it is expected, could substantially change the reflectivity of clouds.  You do it over the ocean, so if anybody doesn’t like more clouds, nobody lives underneath, where they would be doing it anyhow.  And it looked as if when the stuff you put up there comes down, it’s nothing but ocean water, which is what it started out as.  So there are a few, what I would call benign possibilities, and I think the interesting thing is that this is a subject that has been in the closet for a long, long time. 

There was a meeting at the Scripp’s Institute of Oceanography at the University of California, La Jolla, about twelve years ago, that discussed this.  It was a meeting of the American Association for the Advancement of Science about eight years ago, in which, I think, seven or eight of us contributed papers, but on the whole, whenever I mention this to an audience, half the audience thought I was crazy, and the other half thought I was dangerous, and maybe I’m crazy or dangerous, but at least I – I decided at this meeting that Lee and I attended that I’m not all that dangerous, I’m not all that crazy. 

But I think it’s good to have it out in the open.  And Lee is about the first person who, in a book intended for a popular audience, has mentioned geo-engineering as something that, if things get bad, far worse than we expect, and it proves politically impossible to do anything about global warming, then this may be the kind of thing that minimizes the need to change lifestyles all over the globe, minimizes the need for dozens of countries to impose regulations and taxes, probably it would be, if it works, cheap.  The only danger is that there may be disagreement over whether or not to do it, but then I don’t think we’ve examined that enough yet. 

Lee, quoting my colleague Jay Edmonds, said that putting on a tax tends merely to bring off the shelf things that are already available on the shelf.  I think Lee dismissed that as not being worth doing.  In 1992, the National Academy of Sciences came out with a thick book on this subject, and it discussed the marginal costs of reducing emissions by different percentages, and they concluded that somewhere between 10 and 30% of current U.S. emissions – this is just for the United States – between 10 and 30% of U.S. emissions could be abated at either zero or negative costs or very small cost. 

And the question is, wouldn’t it have been wise to embark in 1992 on a project that, at very little cost, could have begun to reduce by somewhere between 10 and 30%, U.S. emissions?  How much would it cost?  Well, they didn’t give an estimate of what the tax would have to be on electricity, or gasoline, or diesel, or kerosene, or taxes on anything else in dealing with carbon emissions, but they implied that either the cost to consumers would be very, very small, or the cost could be easily offset by other tax reductions, which is something Joe mentioned which, I think, makes a lot of sense. 

Now, the question is, how much, if you want what Lee calls – I think his word is a modest – is that right?  A modest gasoline tax.  You know how modest his gasoline tax is?  A nickel a gallon of gasoline.  A little less than the difference between the price of gasoline on the left-hand side of Connecticut Avenue, and the right-hand side of Connecticut Avenue, when I drive out to the Beltway.  Gasoline prices were boosted by more than a dollar very recently.  What’s a nickel a gallon?  Actually, Lee refers to a hundred dollars a ton of carbon as a gross burden.  A hundred dollars a ton is thirty cents a gallon of gasoline, and correspondingly for kilowatt hours and kerosene and diesel and so forth.  Thirty cents a gallon, a modest fraction of the increase that we got used to in the past couple of years. 

Let me say a word about getting used to gasoline taxes.  Right after World War II, I was in Europe with what they call the Marshall Plan, and we were providing, among other things, dollars to the countries that had to buy a lot of imports, that had to be paid for in dollars, and petroleum was one of the main products that had to be paid for in dollars.  Wherever you bought it, Middle East, Venezuela, from the United States, or whoever, you had to pay for it in gold or dollars.  And the Marshall Plan didn’t give them enough money to have all the petroleum imports they wanted, so they had to ration motor fuel. 

Every European Marshall Plan recipient country, from Iceland to Turkey, rationed gasoline.  And, you know, gasoline rationing is an exceedingly cumbersome, awkward thing.  It’s very hard to make allowance for how many children you have in school, and whether they go to the same school or different schools, whether you’re a farmer, how far away from market you are when you need to drive your produce to market, it’s hard to make allowance for how far from work people are and whether people worked two jobs and deserved twice as much gasoline. 

And all of these things are awkward, they’re inequitable, but they were tolerated because everybody knew that it was after the war, and petroleum was hard to come by.  Eventually, the gasoline rationing in all of these sixteen countries, became such a burden, administratively and otherwise, that they all decided to try to see whether they could persuade their public to accept heavy gasoline taxes, taxes roughly of about 200 to 250 percent [indiscernible], in order to damp down demand to match what they could afford by way of imports, in order to get rid of rationing.  Rationing had become such an inequitable burden that almost everybody agreed let’s get rid of the damn rationing system, even if we have to pay high taxes. 

Well, what happened was that people got used to the then equivalent of five or six dollars a gallon for gasoline.  It was so much better than rationing.  And if you need in an emergency more gasoline, you didn’t have to go someplace and borrow a siphon hose and get a friend to lend you some gasoline out of his gas tank.  You simply went to the gasoline station and paid the price and got the gasoline you needed.  Well, what happened was, after a few years, people got so used to the high price of gasoline they forgot what it used to cost, and governments realized that this is a wonderful source of revenue. 

And gasoline prices have stayed that way for half a century, all because, in order to get rid of rationing, people were willing to incur, at least in the short run, very high gasoline prices.  And they probably didn’t notice that they got more and more used to it as time went by, and there was never a movement to go to the government and say now that we can afford the import, because we’ve got enough exports, let’s get rid of the gasoline tax.  So I tend to think it’s an enormous problem in the United States to get people to accept gasoline taxes, but if we ever once get them accepted, people will get used to them.

I completely agree with Lee when he says – he uses the term bottom up.  I never know the difference between top down and bottom up, but I think what he means what I’ve been arguing for a long time.  I think if we ever do have a system in which nations incur serious commitments to what they will do about greenhouse gas emissions, the commitments should be to what they do, not to the consequences. 

I don’t think, in 1997, when the Kyoto protocol was signed in Kyoto, I don’t think any government has the slightest idea what would be required in order to meet the commitments they were undertaking.  Certainly, the U.S. didn’t.  I don’t think the British did.  You know, five nations will probably meet, or come close to meeting, their Kyoto commitments.  Britain will probably meet them, because the baseline for the emissions to which your commitments are to reduce toward or below – the baseline was 1990, and just about 1990, North Sea gas became available to Britain to replace coal in a large part of the electric power industry.  And to the extent that Britain meets its Kyoto commitments, it’ll largely be because, just by happy coincidence, North Sea oil was discovered, and Britain had a claim to it. 

Similarly, just about 1990, the baseline, East Germany ceased to be East Germany, became part of the Federal Republic of Germany, and it had an exceedingly antiquated electric power industry, burning soft coal very inefficiently, and they had now had sixteen years to modernize their electric power industry, and, as a result their emissions are probably down to where they will come close to meeting their commitments.  And Russia, just by coincidence in 1990, was about the year that Russia became an independent sovereign nation, and slumped into a depression from which it hasn’t recovered.  And it can’t yet employ enough energy to emit as much as it was doing in 1990, so the three successful major countries will do it largely not through any efforts of their own.  I think Ukraine is also going to come out like Russia, ahead of the game. 

So Kyoto hasn’t really induced any significant burdens, and my guess is that if the United States had undertaken any commitments, the United States government would notice that nobody else is incurring severe burdens.  Why should we?  And, of course, there’s no procedure in the Kyoto protocol for any kind of sanctions on any nation that doesn’t meet its commitments.

Lee does say that there has never been anything like an international regime of the magnitude that would be required forever, over the whole century, to reduce greenhouse gas emissions.  Nothing like it.  There’s no precedent for it.  I think the truth is there’s no precedent for any enforceable system, any system that embedded incentives with sanctions for failing to meet the commitments.  The one example I have used of something at least as important as the greenhouse issue was the North Atlantic Treaty, under which sixteen European nations and the United States and Canada undertook commitments to raise troops, to train troops, to equip troops, to buy ammunition, to provide in many cases real estate for housing, for maneuvers, for pipelines for petroleum, allowing the stationing, the foreign troops on nations’ soils, and, in effect, the commitments were unenforceable, except through what you might call diplomatic administration of shame. 

None of the nations wanted to fail to meet its commitments, given the common danger, and I think NATO was a huge success with no enforcement, and where the commitments were not to results, but to what they would do.  The Dutch never had to say how much they would retard a Soviet invasion.  All they had to do was say how many troops they would recruit and train and where they would station them, and therefore, I tend to think that the important thing, if we ever get into a new regime of making commitments, commitments should be to what will be done, and not to what, fifteen or twenty years down the road, will be the result in terms of emissions, because I don’t think anybody can guess emissions that far ahead.  The energy crisis of the 1970s didn’t last long enough for us to learn about the long run elasticity, price elasticity of demand, for automobiles, and electricity, and storm windows and things of that sort.

Let me just look here – I like what Lee says about R&D.  I wish he had castigated the Bush administration a little more for being so stingy.  It just doesn’t look as if the Bush administration took this seriously, and I think – I believe if I had been writing something that I wanted the Bush administration to be sympathetic toward, at least sympathetic enough to read the first part of the book, I think I would have gone easy on them also, but –

On what the U.S. should do.  I think this.  I think it’s going to be very important for the U.S. to persuade the G8 or the OECD, or some appropriate combination of developed countries – it’s going to be hard for the U.S. to persuade them that the U.S. takes this subject seriously.  It’s going to be hard no matter who wins the next election.  I think it’ll be even harder to persuade China, India, Indonesia, Brazil, and others that we take it seriously.  We haven’t done anything to suggest to the Chinese that there’s anything in it for them to do anything about greenhouse gas emissions.  They have very strong motivation to reduce air pollution from the burning of coal.  In fact I think they’re scared that when the 2008 Olympics arrive in Beijing, not just the athletes, but most of the spectators are going to find it a little hard to breathe. 

So I think the Chinese have plenty of motivation to try to reduce air pollution, but I think to reduce greenhouse gas emissions, to them, greenhouse gases are not pollution, they’re a part of the essential atmosphere.  They’re no more pollution than oxygen is.  Think what would happen if we doubled the concentration of oxygen in the atmosphere.  Nobody could smoke here without the whole building going up. 

Anyway, I think eventually we’re going to have to have a demonstration of U.S. leadership, and I think any demonstration is going to require the U.S. doing something that imposes burdens on consumers to demonstrate that we’re not trying to get a free ride, and that we should be respected whenever we go to a gathering of other governments to talk about what to do, now that the Kyoto timeframe has finished.  And I just have to say I’m not optimistic.  I sort of admire Lee for thinking that it’s possible to induce the Bush administration in its last two years to take some initiative.  And maybe, as he says, maybe because Bush’s record is good on not liking taxes, and maybe because he has nothing to lose in the next election, at least not his own position, maybe he can do some things. 

So I want to congratulate Lee on writing something that I trust people in the Whitehouse, and the Department of Energy, and other places will be willing to look at. 

Samuel Thernstrom:  Thank you all for bearing with us while we sorted out our technical problems, which seem to have disappeared.  We’re going to move along to questions and answers now.  I’m sure there are many people here who have burning questions in their mind for our panelists.  I’m going to exercise the moderator’s privilege and start things off with one quick question of my own, but I promise it will be brief.  Please raise your hand if you have a question.  Katherine, who’s standing against the wall over there will come around with a microphone, and please identify yourself when you ask your question. 

Just my quick question for our panelists, in particular taking off on something that Lee said that I think is perhaps his most provocative part of his thesis is the idea that emissions reductions in the near term are expensive and inefficient, and the Jay Edmonds idea that emission reductions now bring technologies off the shelf but they don’t put them on the shelf, and I’m wondering, perhaps, if Joe, in particular, had any thoughts addressing that. 

Joseph Aldy:  Well, I stand here and say we should have $200 a ton of carbon, but having said that, I’m fairly confident zero is also incorrect.  And I think one can have a modest price in the near term that can get some small changes and decisions, and start sending the signal – I mean, part of the need for this price isn’t just to [indiscernible] the price now.  It’s to establish the institution that people know will be there and expect will be there over the next ten, twenty years or more, that can then influence their kinds of investments that will affect their carbon impact now, and into the distant future. 

I think it’s imperative to actually start to get that out there, because if – for example, Lee talks in his book about whether or not carbon captured in storage will ever work.  And there’s some technologies that have reimproved them [indiscernible] in fuel economy.  They’ll eventually get adopted.  There’re economic incentives to do that.  The only reason there would ever be an economic incentive to adopt carbon capture and storage is if there’s a positive carbon price. 

Now, with the current technology, it would require an expensive carbon price, but one can imagine if you have a continued R&D on carbon capture and storage, you have a modest government price that increases slowly over time.  And when I mean modest, I think $15 a ton of carbon is a reasonable place to start with, that may increase, say, 3 to 5% a year over time, or you increase in response to learning new information about both the effectiveness of your policies, and as you learn more about the science, you adjust it over time, but that sends a signal to get some of the technologies that we would never adopt unless there’s a positive price on carbon. 

So I think, in the near term, you need to have a package of both R&D, and a positive price on carbon, to really get the technology, development, and deployment to really get us off of the current path, and on to a lower carbon development path.

Male Voice:  Just if I could follow up on that one point very briefly.  Given that no congress can bind the actions of a future congress, how do we establish a price on carbon that the private sector knows is going to be there ten years from now, twenty years from now, and so forth, to send that sort of long term signal? 

Joseph Aldy:  Well, we managed to do that with the 1990 Clean Air Act amendments.  And part of that is the benefit of gridlock.  So it’s really hard to change policies.  I think, in the context of the Clean Air Act, it’s easy for the people who want to maintain the system to say that any attempt to try to roll back on the SO2 training program runs a risk of harming your kids, and your grandparents, and all that.  I think the other thing, too, is that, depending on how you design the program, whether there’s cap and trade or a carbon tax, you’re naturally constructing constituencies who will fight for that program. 

If we give away all these permits, there will be a lot in industry who will fight for this program.  You already have enviros who will fight for the program.  If you use it to reduce, say, taxes on Medicare, the payroll taxes that support Medicare and social security, you may be able to create a constituency among AARP and associated groups who would fight for it.  So part of it is, I think, [indiscernible] that we can’t bind future congresses and future presidents to policy decisions that we make today, but there’s a lot of inertia is the institutions we create that make it difficult to do substantial rollbacks of these policies.

Thomas Schelling:  Yes, back in the 1970s, we had what people thought was a real energy crisis.  People who drove station wagons apologized – said, well, I’ve got three kids, and a St. Bernard, skis, and bicycles, I need a big car.  I was on a couple of panels of the National Academy of Sciences looking to the question why don’t consumers make wise investments in energy-saving automobiles, storm windows, refrigerators, all kinds of things. 

We never found an answer, and I think it’s partly that consumers are subject to an enormous inertia, but I think it’s worthwhile recognizing most of what is to come off the shelf, it will be at the initiative of consumers, not businesses.  If consumers want to buy these things, they’ll be available, and the question is how do you get consumers to realize that the cost of storm windows is cheap compared with heating oil or heating gas or heating electricity over the coming years?  How do you get consumers to recognize that heavy automobiles are very expensive, and maybe they’d be wise to buy lighter automobiles? 

I don’t mean to embarrass them.  Back in those days, the Governor of Massachusetts, when he was on television, wore a sweater, because they had turned down the thermostat in Massachusetts government buildings, and everyone had to come a little more warmly dressed because of the energy crisis.  And I think there were stories that the Whitehouse was dimming its lights during that time in order to save energy.  And as a result, people got the idea that it’s patriotic to conserve energy.

I think it’s possible to get consumers in a mood to take this seriously, but if the government doesn’t take it seriously, there’s no reason to think consumers will.  So that I would say the whole purpose of trying to get things to come off the shelf is essentially to make it more obviously in the consumers’ interest to demand things that can come off the shelf and save energy. 

Samuel Thernstrom:  Fair enough.  Hands?  Why don’t we start on this side of the room here?

Brian Beery [sounds like]:  My name is Brian Beery, and I’m a reporter for an EU policy magazine called Europolitics.  Just wondering if the panel has any views on the EU’s mission trading program, and also the plans to include the international aviation sector in it, and what kind of impact that might have, given the Bush administration seems it’s going to strongly oppose such a move.

Joseph Aldy:  Well, I think the E.U. is still going through some growing pains with their trading program.  In May, when they had their first announcement of emissions, a market where a lot of people thought – and a market in which a lot of people thought countries and firms are going to be short, they wind up being quite long.  It was a pretty big jolt that day, not just in the permit market, which saw the price fall by nearly two thirds in one day, but actually in some of the stock markets, where you had, in some cases, some of these utilities that had permits – they actually saw their equity values fall.  I find this to be interesting, seeing how they’re learning and going through this. 

There had also been a fair bit of criticism over the first year about how electricity prices had gone up as permit prices were going up.  And this is one thing which I’m reminded by a friend of mine, who worked in the Council of Economic Advisors after me, where he was giving his briefing to other people, and this was early on in the Bush administration about a carbon cap and trade, and, you know, describing it, and it seems great, you’re creating a market, you’re using market forces to achieve a problem at low cost, and then he concluded by saying, of course, this has the exact same effect as a carbon tax.  And that sort of changed the tenor of the entire conversation, where now there’s a lot less enthusiasm for this.  And I think what’s going on in the E.U. is that there’s sort of this learning that yes, if the prices do go up, you will see this getting passed on.  And it’s certainly, in some industries, to the consumers, and potentially at risk of drawing some negative public opinion. 

The one thing I would say is that I think that so far, given how generous the allocations have been, we’ve seen fairly volatile permit prices, and that’s reflecting in large part that only a small number of the players are trading on a regular basis.  And, I think, as we move forward, and they move into the next phase where you see more stringent emissions targets, more stringent allocations to all the participants, you’ll see a lot more trading going on.  I expect then we’ll have a better sense of what the costs of reducing emissions are in the E.U., and we’ll also see, I think, a more liquid and better functioning market then we’re seen to date. 

Hit a couple of roadblocks, is how I’d characterize it thus far.

Clay Ogg [sounds like]:  I’m Clay Ogg, with EPA.  Another way to look at it is that the cap and trading is very, very complicated and difficult to administer and create and agree on, especially an international tax, and so it seems to me the more that we’re able, as economists, and everybody else, to convey, as you were talking about earlier, what’s really being accomplished here – Europe has had some experience with taxes that’s been very successful in terms of – you know, 40% of their car fleet is diesel-run, they’re usually small cars, I would think virtually all of that is as a result of tax policies, and I don’t know what role the fact that taxing is part of the burden may fall on the exporting countries.  In the U.S., we subsidize oil, so I think there’s a lot of things here that we could learn more about that all sort of related, and then might be helpful.

Finally, and I think it’s important that the focus here has been on this one issue, but the other part of global warming problem is due to not release of greenhouse gases directly, but deforestation, and it’s a huge part of the problem.  I think part of the complexity of what we’ve created here is that we now have energy policies that require an immense amount of land, and they’ve been justified, in part, as a – in the past – I don’t think people are pushing this idea now, as a way of reducing greenhouse gases.  In fact, we have energy policies now that contribute immensely to the deforestation problem, because so much land is demanded in order to produce the crops that – so I think the focus here is appropriate on the tax issue, but somewhere down the line, there’s a whole ‘nother aspect to this problem that we’re actually making worse.

Bruce Smith:  Bruce Smith, George Mason University.  Small question, then a large, crazy one.  How would this BTU or carbon tax work?  Is it sort of like a transfer tax up from one company to the next to the next?  Or do you lay it on consumers, do you lay it on refiners, or what?  I’m just wondering how the British thing works?  And then in the broad sort of probably ridiculous nature, we are not able to do anything with the Doha round. 

This is going to be a very unfortunate development for the world economy, but I wonder if somehow we could hook some commitment or something if we make a concession in agriculture, the Europeans with India and China maybe agree that they do something in the environment in the future that we somehow urge or make it even harder to do anything with the Doha round.  Could we think of some even grander global tradeoff than we’re already trying to cope with in the Doha round?

Lee Lane:  Let me take the first easy question and recommend my colleague, Joe Aldy, for the second, harder question.

The carbon tax could be, and I think should be, administered in a cap and trade program with a safety valve would work the same way, basically upstream, that is to say at the point of either production, or import, of fossil fuels.  Now, there’s some ambiguity associated, say, with natural gas.  So what you’re really looking for is the point in the stream of production with the fewest entities that you have to monitor, and collect a tax from.  There aren’t really a whole lot of producers and importers.  It actually comes down to monitoring a couple of thousand corporations to implement a carbon tax effectively, or carbon cap and trade system effectively.  And what you’re counting on, at that point, is that the cost of the tax would then be passed on to consumers and would affect the price of fossil fuels.  But Joe has actually written about connections with trade and climate policies, and maybe he would like to take the second.

Joseph Aldy:  On the second question that you described as potentially crazy, I don’t think it’s that crazy.  I think it’s a hard question.  Certainly if you talk to anyone who does trade negotiations, they do not even want to talk about climate change or any other issue.  They feel like there’s already too many issues that they have to wrestle with to get an agreement.  Now, having said that, if one looks at some of the literature about whether or not you can get agreement on some of these big international policies, then in some sense you need to think about the game, not as being a climate change negotiation or a trade negotiation, but you need to try and somehow enlarge the game. 

If I look at it with a narrow view of just trade, or the narrow view of just climate, I can’t see a deal forming, but if I bring the two together, I might be able to get a deal.  And certainly, one can say that was the case for why Russia ratified Kyoto.  It was because, as they were working through their WTO accession with the E.U., the E.U. decided to sort of back off on some of their issues regarding natural gas pricing with Russia.  And so that concession in Russia was sufficient for the Russians to decide to ratify Kyoto. 

Having said that, it’s not clear to me, given how I think we’ve made limited progress in both climate and trade in the last several years, whether or not bringing the two together in the near term for Doha is going to result in some grand solution.  There is some talk out there about whether or not some countries will use border adjustment taxes to deal with the fact that some countries are reducing their emissions under Kyoto, and some are not.  And so the idea is that you would actually impose an import tariff based on the carbon content of the goods coming from countries that do not implement any policies under Kyoto, or do not impose a comparable kind of carbon price in their economy. 

The question then is whether or not then is grounds for a WTO appeal, and then whether or not a country can impose countervailing duties if there are exports to countries that put on these border taxes, and I think that’s something that will continue to be worked out.  I’m not optimistic in the near term on advances in either of these negotiating arenas and whether or not you can bring them together.  I’m not very optimistic about that.  But this is something that I think is going to be ongoing.  So is ongoing research and political debate. 

Thomas Schelling:  The short answer to your question is no. 

Male Voice:  If I could actually just follow up briefly.  Joe, aren’t you at all concerned that the interjection of climate into trade talks could lead to an unraveling of the progress that we’ve made in free trade in this country, in the world, in the last couple of decades?  It seems the prospect for green trade wars is a very real one.

Joseph Aldy:  That is a concern, and some have brought that up.  I have to admit, I don’t think I’m sufficiently expert on WTO policies and the trade negotiations to say whether or not it would just stop the negotiations, which they’re not really moving anywhere right now anyway, or whether or not you’d actually see an unraveling of it, and we’d actually lose of the deals we had previously.  There have been some arguments have made about this – why is it trade always trumps environment?  So [indiscernible] has made this argument before.  He doesn’t understand why trade always has to trump environment, why they can’t be considered co-equals, and then try to treat them as co-equals.  Understand there way be some ways in which we want to use the trade regime to try to enforce the climate regime. 

I am not as enthusiastic about the idea as Joe has been in the past.  But I think that it’s something that’s worth at least considering.  And I think it’s worth studying, at the very least, you’re starting to get some European governments to start talking about doing that against the U.S. as one way to sort of retaliate for our non-action in Kyoto, or to take any domestic action.  So that may be – in a sense, it’s beyond just sort of – we want to take on more of a leadership role, as Dr. Schelling was talking earlier, and we abdicated that so far in order to be a leader again in the international community we need to do something domestically.  But it may also be necessary to preempt some of the reactions by the Europeans that would be very negative in other contexts that we care about, such as trade.

Bob Marley:  I’m Bob Marley.  I’m with the Department of Energy in the Climate Change Technology Program.  Speaking for myself, not officially, I’d like to direct a question to Professor Schilling, and I’m musing on your story of rationing after World War II, and how it ultimately, because it was so unpalatable, all of the overburden and inequities, inefficiencies, and presumably some black markets and other things that were distasteful, that it eventually led to something simpler, a tax, that was tolerable because it was better than the first remedy. 

And I’m wondering if we draw a lesson from that, because the issue here – we’re talking about it, at least – is tax or cap and trade, whether or not the idea of cap and trade was all of its allocations and some of the mistakes that were made in Europe, and the rent-seeking that happens from corporations if we – because the T word is so unpalatable politically if we – your lesson says we go through a cap and trade phase that might ultimately lead to something simpler in the end as a remedy, or whether or not we forego the simpler one by getting involved in cap and trade and then can’t get out of it because everybody is so vested in the benefits that it creates.  So it’s kind of a philosophical question, but I like your story, and it seemed to end up in a good place.  And I’m wondering if you have any hope for that transition here in this present discussion.

Thomas Schelling:  I like your question.  I don’t know what the answer is.  It could be that we deliberately impose a scheme that will prove unbearable in the long run, and people will accept the simpler tax.  It could be that we get something that is unbearable in the long run, and either we make it worse, or we drop it altogether, and whether it gets us to a tax, I don’t know.  But somebody would have to look at that in terms of the context of this century and this country, rather than the 1950s in Western Europe. 

Female Voice:  What about a tax cut if you put in better windows or more insulation?

Thomas Schilling:  That’s what Jimmy Carter proposed.  Do you remember?  No, you’re too young to remember, but during the Carter regime, he had an energy program that was often likened to a Christmas tree, it had so many ornaments on it, as they said.  And for all I know, there is still some federal tax relief for certain kinds of energy-saving construction somewhere.  Back then, you could get tax relief if you had your house audited for escaping heat.  I think you could get tax relief for insulating your house.  I think there were a number of things for which you could get tax relief, or at least the President’s program.  Whether they were enacted into law, I’m not sure. 

Female voice:  [indecipherable]

Thomas Schilling:  We’d have to go back and look and see what really did happen.  I don’t know.  It’s very hard to motivate consumers, and whether the people we’re trying to reach are the people who pay enough income tax to be aware of tax relief, I’m not sure.  I think consumer inertia, as I mentioned, is very strong, and I would hope that raising the prices would do the trick.  If it doesn’t, maybe going back to Jimmy Carter’s approach would have some merit.

Lee Lane:  Joe referred to a section in my book in which I talk a little bit about the various tax cuts and regulatory approaches that the administration has advocated, or at least accepted as sort of its patchwork of policy for short-run energy savings and emissions cuts.  And he also alluded to the fact that economic analysis tends to show that these programs are very expensive.  You do end up paying much more per ton of carbon abated through these programs than anyone would ever pay with an explicit visible carbon tax or cap and trade program. 

Maybe I can make Tom Schelling a little bit happier by criticizing the Bush administration explicitly for the fact that it seems to me that this kind of patchwork approach is what they are selecting to avoid having to confront the issue of an economy-wide carbon emissions reduction plan that would be more explicit and that would have more explicit costs, but this almost guaranteed to be a much less efficient, much less cost effective approach to dealing with the problem.  And one of the advantages of doing what I recommend, which would be to go to a carbon tax, or, if you can’t do that, a cap and trade with a safety valve, would be that it would diminish, I would hope, the incentive for this sort of patchwork of tax subsidies and sectoral regulations and so on and so forth. 

We see in Europe – Germany, where I had the most experience – good heavens!  They have just a huge complex of taxes and subsidies and regulations implying very, very different marginal costs of abatement across sectors.  It’s a very, very expensive way to do it.  We would be much better off if we could agree on a modest, uniform incentive across the economy.

Michael Nix:  Michael Nix, energy consultant here in town.  Just a follow up on the previous question.  Worked for a company in the early 90s that did an awful lot of energy efficiency work.  We supported the Clean Act in 1990 because we contracted low sulfur coal in ’87, and so then, by the time the Congress was doing clean air legislation, in 1990, we knew we were going to have credits.  We thought that we were going to be priced at about 1000, so we were off by probably a factor of 10, but early on there were probably like 300 bucks. 

To the question there, we used to give rebates to people if they put in energy efficient light bulbs, and if they put in insulation, and if they put in double or triple-paned windows.  We’d actually worked it out with the Public Service Commission.  Yes, we were paying people not to use our product, but we were also paying people to use energy more efficiently, so we didn’t have to build as many power plants, so we were an energy company and yet we were selling electrons, but there was another way to get around it, and to get to some of the points you folks are bringing up here, part of the reason we were able to support the 1990 Clean Air Act was you incentivized us. 

There was that Environmental Defense Fund concept of cap and trade, which, at that time, was a new concept for us.  But it let us, as corporations, to say, oh, you’re not just putting a tax on us, you’re letting us be innovative and creative.  And on acid rain and SO2 emissions, we took a no regrets strategy, and we were in a minority in the electric utility community, but it worked for us.  You folks are talking about a tax here and you’re talking more disparagingly about cap and trade than a lot of progressive corporations thought about in the past, because they don’t like the T word. 

And there’s also that issue of gee, if you put a tax on us, you’re using the T word.  If you do cap and trade, you’re allowing us to be innovative.  Can you comment on that, about the difference in perspective on cap and trade vs. tax and how it incents businesses to come along with that?

Joseph Aldy:  Well, I would say that initially a firm should respond the same way, whether it’s facing a tax or a permit price to emit carbon dioxide.  In both cases, there’s the opportunity caused for emitting, and so they should be responding the same way.  The difference lies in it.  In fact, if I were to do an auction of carbon permits vs. an emissions tax, the only reason how they differ is in terms of the uncertainty of the volatility and the price.  So with an emissions tax, I always know where the price is.  Under Lee’s proposal, it’s $15 a ton of carbon.  If I’m in a system like the SO2 program, I have some expectations about the price, but it could vary over time, depending on just other things that go on in the market.  So that may affect some of my decisions of what kind of investments I make, given that kind of uncertainty in one market that doesn’t affect me in the other. 

The other issue is, though, if I’m giving away most of the permits, so like in the SO2 program, [indiscernible] I don’t know what it is, a percent or two of the permits a year, and the rest are given away based on historic, basically historic emissions.  In that case, there’s this benefit that you’re getting the value of these permits. 

Now, in the CO2 context, when we’re looking well outside the electricity sector, that could mean a lot.  It may mean a lot in the electricity sector depending wh