Joe Aldy on the Complex Economics of the Clean Energy Transition

POLICYCAST

Overview

The most optimistic outlooks on climate change often involve utopian visions of petrostates slowly fading away and locks on the gates of shuttered coal-fired power plants made obsolete by the decentralized growth of solar and wind power and a new generation of electrified vehicles and infrastructure. But utopian visions are just that—utopian. They're best-case scenarios that invariably fail because they fail to account for the complexities of the real world. And one of possibly the most complex—and one of the most existentially important—problems facing humanity is how to pull out the roots of fossil fuel infrastructure that are so deeply embedded in the global economy, a task that's been taken on by our guest today, economist and Harvard Kennedy School Professor of the Practice of Public Policy Joe Aldy. The scale of the work is immense; some experts estimate that transitioning the global economy from fossil fuels to sustainable sources will require the largest reallocation of capital in human history. Plus Russia's invasion of Ukraine and its willingness to weaponize oil and natural gas production was a sign to many that the green transition will be bumpy and buffeted by geopolitical crises and the domestic politics of countries around the world. Joe Aldy is here to help us swap our rose-colored glasses for a clear-eyed vision of what the future holds for climate economics.

TRANSCRIPT

Joe Aldy (Intro): Now, the upside of this is if we have the foresight and if we have the policies that give us the incentive to look far enough ahead, we can plan for this in a reasonable manner. We can do so in a way that can reduce the cost. We can think about what is the natural turnover of our capital stock, whether it's retiring power generation plants, or manufacturing facilities, or our cars and trucks, and do so in a more methodical way so that we're bringing in lower carbon or eventually zero carbon sources of energy for all those services that we value, then the costs can be significantly lower. The challenge is, we're not actually looking that far ahead.

Ralph Ranalli (Intro): Welcome to the Winter-Spring 2023 season of PolicyCast. I’m your host, Ralph Ranalli. We’re starting off this season with a three part series looking at efforts to confront the climate crisis from different perspectives. In the coming weeks we’ll have episodes on new research on methane and on the coming waves of climate migration that are destined to come with planetary warming. But today we turn our focus to economics. The most optimistic outlooks on climate change often involve utopian visions of petrostates slowly fading away and locks on the gates of shuttered coal-fired power plants made obsolete by the decentralized growth of solar and wind power and a new generation of electrified vehicles and infrastructure. But utopian visions are just that—utopian. They’re best-case scenarios that invariably fail because they fail to account for the complexities of the real world. And one of possibly the most complex—and one of the most existentially important—problems facing humanity is how to pull out the roots of fossil fuels that are so deeply embedded in the global economy, a task that’s been taken on by our guest today, Harvard Kennedy School Professor Joe Aldy. The scale of the work is immense; in fact it’s been said that transitioning the global economy from fossil fuels to sustainable sources will require the largest reallocation of capital in human history. Meanwhile Russia's invasion of Ukraine and its willingness to weaponize oil and natural gas distribution was a sign to many that the green energy transition will be bumpy and buffeted by geopolitical crises and the domestic politics of countries around the world. Joe Aldy is here to help us swap our rose-colored glasses for a clear-eyed vision of what the future holds for the economics of climate.

Ralph Ranalli: Joe, welcome to PolicyCast.

Joe Aldy: It's a pleasure to be here. Thanks for having me.

Ralph Ranalli: Well, when I was getting ready to talk to you about this subject, I felt a little bit like Alice going down the rabbit hole, because it was so complex and deep and broad, and everything seemed to lead to something else and everything seems to interconnect with everything else. But before we dive in, if you don't mind, I wanted to start with you. You have a degree in environmental management from Duke and a PhD in economics from Harvard. You've worked in academia, you've worked in government, you’ve working in the nonprofit sector. What drew you toward wanting to work on this issue of the economics of climate and energy?

Joe Aldy: So I think it's a couple things. One, I've long been drawn to environmental issues. I grew up on a small farm. As a family, we loved going out on hikes on weekends. It was just something that I sort of grew up with. And growing up in the 1980s, and then starting to learn about some of the challenging problems we were dealing with, we were just then learning about climate change. We were really concerned about acid rain. We were concerned about deforestation in the tropics and the Amazon, and it was interesting then trying to understand the economics of those problems. They were more than just environmental problems. They're really a reflection of economic incentives and at times the failure of public policy to deliver the appropriate changes in those incentives. And where we've seen success, the United States has been incredibly successful in cutting the emissions of sulfur dioxide that contributed to acid rain driven by a market-oriented environmental policy.

And so I think, as I transitioned from learning about this as a kid in middle school and high school and then going on to college, that's where I had the first opportunities to really try to integrate this passion for the environment with the insights that tools from economics can actually bring to tackling those problems. And it's something that I've been fortunate in my career—whether it's been in academia, whether it's been in government, whether it's working at a non-profit think tank—to continue to be able to tackle what I think is the intellectually most fascinating and perhaps existentially most challenging problem we've faced environmentally. To be able to do that through those various jobs with that sort of economics lens and to be able to think about ways in which you can advance the tools we use in economics to bring better insights to help inform public policy. It is both intellectually stimulating and also something that I've been passionate about since I was a little kid.

Ralph Ranalli: And there's just a real urgency to it going forward every time a page falls off the calendar.

Joe Aldy: Every time I have a conversation with my 10-year-old over breakfast, the kids, they're on top of it. They get it. And whether it's talking about what electric vehicles can do, or why do we have this pollution? What can we do about it? My kids are a constant reminder of the importance of tackling this challenge.

Ralph Ranalli: Mine too. And I think another positive thing is that we're finally tackling the green energy transition in a multidisciplinary way. And there are lots of disciplines that touch on climate, natural sciences, political science, economics, psychology, sociology. Where do you place economics in that structure? Is it the thing everything else revolves around? How do you put economics into that context?

Joe Aldy: I guess I think about it two ways. One is, it depends on the nature of the question. Some of the questions are better answered by economics because at their heart they are economics questions. Some questions are less amenable to that. Part of it depends on how we can use economics to help us understand. So I think there's more and more interest in understanding the distributional consequences of both climate change impacts, but also the transformation of our economies as we decarbonize. Those we can think of as being sociological questions, they're political science questions, but I think they're also economics questions. We can bring our economic tools to really better understand the economic incidents, who are the winners and the losers, which actually is I think a really critical input to sociological research or political science research.

And that gets to the second point, which is I think one thing that's great about a lot of the social sciences is there's more and more comfort stealing from each other. There's more and more comfort actually taking on questions that used to be the domain of another social science because you have a different perspective and you're not actually trying to steal and take it over, but you think you've got some ideas that come in there. And I think where you've seen some of the most exciting research in social sciences are where we really are at the intersection of disciplines. And I think that's one thing that's great about being at the Kennedy School and at Harvard. I participated in a workshop, I co-organized it with my colleague Rob Stevens, but we had colleagues there from political science and sociology and the law school and the business school all thinking about the future of climate change policy. And so at the end of the day, you realize if you're really going to be effective driving better public policy, you're going to need to be able to draw on the insights from an array of disciplines.

Ralph Ranalli: So in terms of the scope of the issue, I read somewhere that a net elimination of carbon emissions by 2050 will require the largest reallocation of capital in human history. That’s a lot to wrap your head around. For the average PolicyCast listener, who I view as someone who is not necessarily a subject matter expert in what we're talking about, but is intelligent, educated, understands the importance of policy in shaping the kind of world they want to live in. What do they need to know to start grappling with this issue of the economics of the energy transition?

Joe Aldy: I think it starts with the fact that basically everything we do relies on energy, and even despite our efforts to reduce the emissions of carbon dioxide and fossil fuel use in the US, the majority of our energy comes from the combustion of fossil fuels. So it's that kind of foundation of everything that we make to every time we flip a switch to turn on the lights to every time we go somewhere, we're still relying disproportionately on fossil fuels. And so that means that as we think about decarbonizing the economy, it's shifting out the technologies, many of which have been around in one form or another for a century or more, to a new technology in order to make something or to bring light to a room or to move. And so I think that's where the challenge comes in.
    
Now, the upside of this is if we have the foresight and if we have the policies that give us the incentive to look far enough ahead, we can plan for this in a reasonable manner. We can do so in a way that can reduce the cost. We can think about what is the natural turnover of our capital stock, whether it's retiring power generation plants, or manufacturing facilities, or our cars and trucks, and do so in a more methodical way so that we're bringing in lower carbon or eventually zero carbon sources of energy for all those services that we value, then the costs can be significantly lower. The challenge is, we're not actually looking that far ahead. We don't have policies that actually are creating the incentive for us to look that far ahead. If there's one thing that has been the constant characteristic of US climate policy for three decades, it's that it's a yo-yo. And that has created, I think, a challenge for those, whether it's in the business community who need to make investments or even just households when they think about planning ahead, it's not clear where the policy landscape is going. That's going to help inform those kinds of decisions they need to make.

Ralph Ranalli: That yo-yo analogy is particularly apt when you look at politics and geopolitics. We're in the Paris Accord. We're out of the Paris Accord. We're back in the Paris Accord. You look at cars, first we're having high CAFE standards, and everybody's driving a Toyota, and then we’re back to cheap gas and everybody's driving a Chevy Suburban. And now we're swinging back to electric cars. Actually the last time I saw you talk about this subject in person, it was a forum where you were hosting Jim Stock, the Vice Provost for Climate here at Harvard and the head of the new Salata Institute, and Meghan O’Sullivan, the professor and economist. And they both said something, that kind of struck me and stuck with me, which was that this popular conception of this happy slow period of petrostates just kind of fading into oblivion is just sort of a fantasy. And what is more likely to happen is that we’ll have this kind of cascading series of geo-crises, one after another. And Megan went further to say that she sees a kind of downward spiral relationship between the energy transition and geopolitics, that they're reinforcing each other in a negative way. What's your thinking on how current geopolitics is driving climate economics and how those two things are going to influence each other going forward?

Joe Aldy: So I think there’s sort of a near-term phenomenon, and a long-term phenomenon. The near-term phenomenon is that it's pretty challenging. We know that decarbonizing our economies will incur some cost. If you look at our friends in Western Europe, what they're having to do to manage the huge run up in heating costs and electricity cost because of the war in Ukraine, it strains their budgets, but it also strains the politics and about what's the willingness among the public, or for that matter, key constituencies in the business community who now look at how much more expensive it is to make something in the face of the run up of energy costs. It makes it difficult to really say, let's be ambitious on climate right now. Now, longer term, I think it's a little bit different. Longer term, it's creating this signal of we need to get off Russian gas, we need to get off Russian gas as soon as possible. And if you're going to go ahead and get off Russian gas, you might as well just get off gas. And so I think you're going to see this is what it will create in the longer term—once you're out of this initial crisis period where you're looking at hundreds of billions of euros outlaid to just shield people from the run up in energy prices—I think you'll see a transition towards what do we do to advance, say, heat pump technology that makes it easier for us to get off of natural gas because we're not relying on it for heating so much anymore. What do we do to actually help try to accelerate changes in the industrial sector so they're not as reliant on natural gas for high heat sources, high heat needs in manufacturing processes. So I think you'll see that as a way to further spur this movement.

And I think one thing that's important when we think about this sort of challenge of decarbonization is that when we do see these periods of positive movement on climate policy that help drive out more technologies, they often help contribute where we've seen success in dramatically cutting the cost of those technologies. And once you've made, for example, solar panels cheap, because you had really generous subsidies for solar in the past, they're not going to get expensive again. You've enabled that kind of learning and the manufacturing process, when those firms look and say, hey, here's an opportunity for us to invest big in manufacturing capacity because we have these subsidies that are going to help create the market for us. So I think one thing that helps is as you see some of the initial efforts to make the push, whether it's in Europe in response to this crisis, whether it's in the United States in response to the Inflation Reduction Act, which is now putting out a lot of subsidies in new clean energy technologies, to the extent they drive down those costs, they make it that much easier to think about how you're going to see wider adoption of those technologies in the longer term.

Ralph Ranalli: And you even have some political pushback you're fighting against because now you've got people running into their kitchens and hugging their gas stoves because that's apparently become a thing.

Joe Aldy: I will admit, I'm a bit fascinated by all of a sudden this concern about whether induction stove tops will take over from natural gas stove tops based off of one comment by one commissioner when there wasn't even a policy process on this. I think it says something about communications in our current political environment more than the future of US energy and climate policy.

Ralph Ranalli: Yep. Well, I'm glad you brought up Russia because I wanted to ask you about that, but also, I was reading a bit lately about the predictions of an impending economic slowdown in China. If we do see a significant downturn over a number of years in the Chinese economy, how do you think that plays out for energy economics and climate economics?

Joe Aldy: Well, China is by far the largest emitter of greenhouse gases. It's a large economy. I think it has a couple of immediate impacts in terms of what does the emissions profile look like in China? What does that then mean in terms of the global impact on the environment? It also raises questions though about what's the future of the, if you will, sort of foreign economic diplomacy that the Chinese have been undertaking. They've been more and more invested through the Belt and Road Initiative, through their development aims to push out investment into countries, in some cases, with fairly carbon intensive infrastructure. And the question is, if they start to see their economy growing more slowly, what does that mean in terms of the magnitude of that foreign investment as well as the carbon characteristics of that foreign investment. That could have sort of longer term impacts if they continue to push, and say, building out coal-fired power plants in developing countries.
    
So I think if you look back over the last 20 years of where energy forecasters have gotten emissions wrong, it's often been with respect to China. We used to think that their emissions were going to grow slowly even as their economy boomed because their emissions grew fairly slowly during the 1990s as their economy boomed. We were wrong, we were really wrong. What turned out is they actually went big into energy intensive manufacturing in the yachts, huge manufacturing in steel and cement and chemicals. And so part of it is also going to be a question is, if their economy starts to slow down, is it going to be in the sectors that are more energy intensive or is it going to be in less energy intensive retail or IT services? The composition of the economic slowdown will matter a lot for their emissions profile as well.

Ralph Ranalli: As we’ve talked about before on this podcast, China also controls a lot of the world market in the rare earth metals that are necessary to make a lot of the technology that is crucial to the climate transition. If there is a slowdown in the overall Chinese economy, does that have any ripple effects on their control of those metals?

Joe Aldy: I think a key question there is going to be where do we see investment in some of the mining necessary to bring those rare earths? They're rare in the sense of overall composition of the earth, but it's not like they're just in a couple of countries. We know that there's rare earths in many other countries. And the question is whether or not we'll see the investment in mining to bring those into the market. And one thing I think will be interesting to look for is not just what's the state of the Chinese economy and how does that influence that kind of activity there, but what are the incentives we see now in US policy under the Inflation Reduction Act, which makes it very clear, we want our say batteries and electric vehicles to be manufactured with rare earths that come either from the United States or from countries we like. Fringe shoring is the term that gets you some … it depends on which provision of the Inflation Reduction Act you're looking at. But basically these are countries with which we have free trade agreements that would be able to take advantage of the most generous subsidies for electric vehicles. And so I think there's a question about whether or not those subsidies are enough to sort of drive some of the changes in the supply chain so that we see rare earths being produced in other countries or perhaps in parts of the United States as well.

Ralph Ranalli: That was actually my next question, which is, does globalization survive the energy transition? Biden's saying we got to make things here. The nature of a lot of clean energy is decentralized and based on local production. I have solar panels on my house that charge my electric car. So to what extent going forward is globalization the way we know it now going to be compatible with a future where we do have net zero emissions and the requisite level of clean energy that we need to stave off the worst effects of climate change?

Joe Aldy: I think we'll see differences in trade patterns and differences in the kinds of things we trade. And as much as this administration wants to advance a buy American ethos in clean energy, I think there's limits to how much we can do that. If we're going to able to ramp up our solar capacity investment that we need, we're not going to do that by manufacturing all those panels here at home. Maybe one out of five panels that we install in the US is actually manufactured in the US. And so the idea that we're going to ramp that up really fast and make up that huge within product category, if you will, trade deficit, I just don't think it makes a lot of sense. And then where it makes more sense is not in manufacturing something that has effectively become a commodity like that, but think about where you can specialize in higher value technologies. Maybe it's next generation of batteries, maybe it's in making more and more electric vehicles here. That's where it makes more sense. 

I think from a standpoint of economic policy, we won't be shipping fuels around as much, although some people think there's going to be a lot of shipping of hydrogen fuels. There will be some uses ... We can electrify a lot of things, there's some things we won't be able to electrify. There's some forms of transportation that will be just really difficult to electrify. There's some industrial, like-

Ralph Ranalli: Ocean shipping.

Joe Aldy: Ocean shipping, aviation, it'll be tough, especially when you think about long distance and heavy loads. You think about some of the industrial processes that require really high heats, that's very difficult for electricity to deliver that. So there's been a lot of enthusiasm over the last couple of years for what role hydrogen could play as a substitute for fossil fuels and especially if you made that hydrogen, say, from using a renewable electricity as a source of your energy for producing the hydrogen gas. Now having said that, there's some challenges. Hydrogen blows up, this scares people. So there's that issue. There's an issue as well at the end of the day on just the economics and whether it makes sense to try to do something really aggressive on the hydrogen front or whether you still find that for some uses where you're going to burn, say, natural gas, you make the opportunity of capturing the carbon at the smoke stack and then sticking it in the ground, something that becomes commercially viable and that so-called carbon capture and storage or some people call it carbon capture utilization and storage because there are some uses for the CO2 that you would capture. That might enable you to still do some fossil fuels, in which case you would still have some, I think, transnational shipping of natural gas.

But what you'll see a lot more of is trade and manufactured goods because our sources of energy will be much more manufactured and taking advantage of than the sun and the wind, and I think you'll still see that. I don't think it's in our interest as a country to become self-sufficient in all this. Some countries are going to be able to make it relatively cheaper than we would, and that would be to our benefit to engage in that trade. We just characterized most of our approach to trade policy since World War II. Having said that, trade policy's changed a little bit in the last six years, and we'll see whether that continues as a trend or whether there'll be an effort to try to rebuild some of the ties, economic ties we have among countries.

Ralph Ranalli: Can you talk a little bit about the relationship between public investment and private investment? You co-wrote an article not long ago that argued that overall climate investment needed to grow by a factor of six. And you also wrote about pervasive policy myths that surround public investment and clean energy. I think they where that: Policy makers shouldn't be in the business of picking winners; that a lot of firms would seek excessive government support and would become dependent on it; and that failed investments in a particular kind of technology or an avenue of pursuing the energy transition were tantamount to a failure in policy. Can you talk a bit about the role of public investment?

Joe Aldy: Sure. So I think one thing that's critically important is—whether it's the public sector providing a subsidy for a project or a private equity firm investing in a startup—everyone's picking a winner. They think this is going to work. And if we only picked, as in the public sector, surefire winners, we're not actually helping the problem. If it's a surefire winner, the private sector should be investing in it anyway, so you don't actually need the public sector to jump in there. The thing is, there are uncertainties in the world. We're talking about new technologies, we're talking about new ways we might use existing technologies. Some of those may be viewed as risky by the private sector. There may be opportunities for the public sector to say, we're willing to take on some of this risk. 

If we were to push out and subsidize a number of different projects and one out of five of them succeeds, but it's a game changer in the energy economy, that could be huge. That 20% success rate would look great. Some of the really wealthy people in Silicon Valley have success rates worse than that, but they were an original investor in Google or Facebook, and so they're doing fine. So part of this is you want, I think, the public sector to take on that risk. I think it's important that they're not going to fund stuff that would've been funded anyway. That's the challenge. And that's where the rent seeking comes into play, because if you're someone who's going to make money with a project and it looks great, then all of a sudden you're like, wait, I can also qualify for this subsidy. That just increased the rate of your return on your project if you can get that government subsidy. And so there can be a challenge or that rent seeking, but rent seeking is normal. Rent seeking, we see in the private sector as well. You're just always trying to raise the return on your project. 

And so I think the challenge is to know that if you're thinking about the standpoint of public policies, you want to be able to take risk and doing that, you're going to occasionally pick firms or pick projects that you think are going to be a winner. Now, the challenge is making sure that you don't stay with a loser too long. This is what a former colleague of mine at the Treasury Department said, "Everybody picks winners. The difference is the private sector is better at dropping losers than we are in the public sector." That's the challenge, is that you want to say, okay, this didn't work out and let's not put more money into something that's not going to pan out. Let's find something else that's worth taking a chance on. And I think if we have that as kind of our ethos for where public policy can help drive change in especially emerging technologies that are just becoming commercial, that's where I think we can have bigger bang for the buck. And that's where you see the public sector money then, I think, compliments private sector money as opposed to crowding it out. And that's what you'd want to avoid.

Ralph Ranalli: Is there a role for nationalization of any aspect of our energy infrastructure? I say this because I used to work in public TV as a news producer, and one of the stories I did was on power poles and this phenomenon that you would see of double poles—one pole attached to another. And many times the reason for the double power pole was that it was just too onerous to figure out who owned or had responsibility for the power pole and there were multiple stakeholders for the wires attached to it and nobody was allowed to touch anybody else's wires. So when you had to change or repair anything it was easier to just strap a new pole onto the older one. And it seems like that's almost like a metaphor for how we need to simplify and standardize certain aspects of our energy infrastructure. Do you think there is a role—even though it might be unpopular—for selective nationalization of any parts of the energy infrastructure?

Joe Aldy: I think it's hard to say that, although your example of transmission is one where people are looking to solve the authority problem. I think right now we have our energy system, we have some parts of the country where you still have economic regulators like public utility commissions, setting the rates for the electricity people consume. Those are still sort of localized, regulated monopolies. And I think that actually for a long time it's worked fairly well. We have reliable electricity. A lot of these people for a long time enjoyed relatively low rates for their electricity. I think the challenge when we think about transmission is that in order to really get to the best zero carbon resources, the best wind resource, the best solar resource, we can't just always put up a new wind farm or new solar facility just outside of town. The old model of electric utilities is that you had a little service area and you have a power plant sort of nearby and you didn't have to build lines that far.

Well, now what we realize is that the best wind resources are in the northern Great Plains and there aren't a lot of people who live there. So what you want is to be able to build long distance transmission to bring that great low carbon resource to Minneapolis or Milwaukee or Chicago or St Louis. But that's a lot of transmission. And the challenge of that transmission is that that's a lot of people who are going to look at those lines and say, not in my backyard. You're going to be crossing a lot of local jurisdictions and state jurisdictions and they all have their own veto points and put up their roadblocks to this. They'll be arguing over who has to pay for the lines and how you allocate those costs can be thorny when it crosses multiple political jurisdictions. So that's the big challenge we face. It takes way too long to build new transmission in the US right now. 

The issue though isn't, I think, is it the public sector building those lines or the private sector is that we have already all these different processes that have established veto points. And it's not clear that nationalization solves that problem, but we do need to be more creative about how we're going to ... We want to do two things that may be at cross purposes. We want to make sure people have a voice in decision making, but we also want to get things done. And given that in the context of transmission, a lot of that voice, sometimes for good purposes, sometimes not, have been used to just maintain the status quo. And what we don't need, if we're going to be successful in dealing with the climate change problem, is defending any part of the status quo when it comes to our energy system.

Ralph Ranalli: There was another example I ran into just the other day. In the city where I live, a quarter of the people who live there are renters. The other three quarters have single family homes. I was talking to some of my neighbors about, if you want an electric car and a you own a single family home, you can buy a charger and you can plug in your car. But if you rent, most times you can't. But we have power delivery infrastructure right on the curbside in these utility poles, and you could potentially use those to have curbside chargers for people who are renters and park on the street. But the thought of trying to navigate that jungle of stakeholders and processes, I think, almost makes, like you said, it stifles creative thinking.

Joe Aldy: Yeah, and I think that example also highlights the challenge when we think about going from the early adopters of new technology who may be just sort of enthusiasts for new technology. They may be wealthier and willing to bear more costs, or it just may be kind of easier for them. The cost of the adoption just end up being lower. And then I think through, well, if we really need this penetration of this new technology though to become a hundred percent, how we deal with some of these where the cost are going to be a lot higher. There's some economic research showing that if you can't charge at home the cost of EVs, and there's not just the cost having to go to an external charging station, it's the cost of your time. If you can charge in your garage at home, you charge overnight, you don't think about it at all, as opposed to I now have to go to some third-party charging station somewhere else and sort of wait for the car to get charged. It may reduce my usage of this car because I can't always get it to a full charge. And you realize that the benefits are going to be a lot lower to some of these people who have just sort of higher cost of that new technology. And so the question is whether or not we can develop new institutions and new policy strategies to help lower those costs and make it easier for them to adopt these technologies.

Ralph Ranalli: I'm glad you said that because my next question was literally about cost-benefit analysis, because you wrote a paper in 2021 about cost benefit analysis and efforts to replace it with a different standard. The standard measure of benefits of a climate policy is the so-called social cost of carbon standard. Can you explain what social cost of carbon means and what you mean when you talk about why it's crucial to keep cost benefit analysis as a key part of figuring this whole thing out?

Joe Aldy: So the social cost of carbon, we can say—just what is the damage of emitting another ton of carbon dioxide into the atmosphere? So it allows us to say, when you drive a car, you may pay for the gasoline and you're paying for the vehicle and you pay for auto insurance, but there's this cost that you don't actually bear that's going to be borne by people around the world and literally for centuries to come, that's the carbon dioxide that came out of your tailpipe. And it's important that when we think about policies that reduce those emissions, those are the benefits. That's the damage we're going to be avoiding if we're effective in cutting our emissions of carbon dioxide. Now, it's been used in a lot of regulatory evaluations, in the federal government, in the US, but it has also been used in other countries around the world. It's being used more and more in state policy processes to really understand what are the benefits when we cut our emissions. And I think this is really important, not just so that we make informed policy decisions, but that we can then also communicate to the public and the stakeholders why this is good for them. Why is this actually good for the American people that we're pursuing these policies to cut our emissions? And I think there've been these proposals for alternatives to benefit cost analysis.

I think one reason why benefit cost analysis I think is kind of salient to people is that we see businesses and we see families do something that looks like benefit cost analysis all the time. But I think it also makes sense when you want to sort of hold accountable policy makers, you want them to do things that are actually going to yield greater benefits than cost. There's just something that I think resonates, certainly with me as an economist, but I think with a lot of people like, yeah, actually that's probably a good thing for the government to do. They can do something where the benefits are great and the cost, that's great. The problem was, in the past, we didn't have a way to estimate the benefits of reducing the emissions of carbon dioxide. It was implicitly a zero in our analysis, which meant that we wouldn't be doing things as aggressively as we should if we really understood the harms and could characterize those harms in a metric that allows us to compare it to the cost of the actions to reduce those harms. And so I think that's why it's really important to inform public policy. I think it's really important when we think about the way some of our laws are written now, because to be honest, Congress especially this Congress, isn't going to be writing many new laws that will actually move through both chambers and get signed by the president, at least in the climate context.

And so some of our laws, like for fuel economy standards that are issued by the Department of Transportation or appliance efficiency standards of the Department of Energy, they're told by Congress, weigh the benefits and cost. So if you don't take into account the benefit of reducing that ton of CO2, that social cost of carbon, you're going to end up with lax standards. So they're motivating and they're playing a key role, and we're seeing new scholarships showing that social cost of carbon is actually much higher than we thought before. In fact, the Environmental Protection Agency is seeking public comment on their updated social cost of carbon that reflects this new scholarship. That, I think, is going to be able to drive more ambitious policies and serve as the basis for a much more effective communication strategy to the public and the stakeholders about why this is in our interests as a country and when we work with governments around the world, why it's in our collective interests to cut our missions so aggressively.

Ralph Ranalli: Right. Speaking of accountability, over the years, you've written favorably about the notion of a carbon tax. Where are you now on a carbon tax? We've been talking about it for years. There isn't one. Tax policy is a classic accountability measure. Where does that stand now?

Joe Aldy: Well, the challenge is you need the House and the Senate to pass and the President to sign into law a carbon tax. I think there were some discussions, in fact, in this past Congress about whether a carbon tax could be a part of budget reconciliation. Senator Whitehouse of Rhode Island has been one of the leading champions in the Senate on this. It felt like he had close to all the members of his caucus supporting it, but not 50 votes to get it into reconciliation. It's not clear whether or not all the Democrats in the House in the last Congress would've been supportive of a carbon tax. 

There's been a lot of opposition to a carbon tax from a number of grounds. I think some of it I understand politically, some of it I think has been a bit unfair. I think a lot of the conversation about a carbon tax being regressive is really not doing justice to how you use the revenues. If we think about taxes that are regressive without thinking about the revenue use, think about social security. The taxes we pay on payrolls, that tax part is regressive. The benefits that are paid out from Social Security though are quite progressive and so on net, social security is progressive, both the tax itself and the benefits. And so when we talk about a carbon tax being regressive because lower income households spend a larger fraction of their budgets on energy, that's true, but if you use the revenues raised by a carbon tax in a way to address those concerns, the net effect can be progressive. And there are proposals out there that illustrate that. 

I think the challenge though is, politically, we're in a world in which progressives don't want to rely on market oriented climate policy, and conservatives don't want to do anything on climate policy. So it's not clear where there's a sweet spot. There was a time when you can see some Republicans favoring, in fact, they had introduced carbon tax bills. I'll be surprised if the current Republican House of Representatives has any Republican proposed pieces of legislation that would implement a carbon tax. So I think it's one of these things where we're going to have to wait a while for what's the next opportunity. And the next opportunity might be in a few years’ time when we return to tax policy. Some of the 2017 Trump tax cuts will expire. They were part of a 10-year reconciliation window as well. And so the question is whether that renewed debate on tax policy creates a window of opportunity for a carbon tax or whether economists will continue to dream and see our dreams unfulfilled.

Ralph Ranalli: So speaking of policy, what would your, say, top three policy recommendations be for people listening to us that they could go and talk to their legislators about and advocate for right now. The kind of the things that you think would be both potentially feasible in terms of getting them implemented and that would also be impactful?

Joe Aldy: So part of it is, how do we take advantage of what we just got in the last Congress? They did a lot on climate policy. And so one challenge is that some legislators will kind of feel like, well, we just checked the box on a number of things. So part of it is, what can Congress do to make sure we're spending that money wisely? And this is an area, and it's not clear to me whether this is like Congress has to pass a piece of legislation or Congress does its role of oversight in saying, you should do this smarter. And one thing that I think is really important here is that there's this opportunity where we have 10 years of spending and tax credits estimated on the order of about $370 billion through the Inflation Reduction Act. We have some additional resources through the Infrastructure Investment and Jobs Act from the last Congress. We also have from a few years ago the Foundations and Evidence-Based Policymaking Act. All the federal government agencies are supposed to have learning agendas. They're supposed to use program evaluation to see what policies work and how they help deliver on the agency's mission. There are opportunities right now as the executive branch starts to implement the Inflation Reduction Act to do so in a way that enables them to collect the necessary information to analyze and evaluate the performance of their programs, see what works well, this is great. Some things may not work well.

Some things, where there's be some discretion in some of the spending programs, some discretion how EPA or the Department of Energy or the Department of Agriculture or the Department of Transportation design and implement these programs, if they have a performance evaluation integrated in that initial implementation, they can generate some lessons learned that can help inform how we make these policies better going forward. There may be also policy recommendations that you go back to Congress. Treasury has 270 billion, maybe more. That was the score. That was the score from the Joint Committee on Taxation of the Clean Energy Provisions in the Inflation Reduction Act. There's some things there where Treasury could quickly learn, what's working or what isn't. Share that information with Congress, share that information with stakeholders. Hopefully, you could get a kind of quick fix so that it could be more effective going forward. So I think one thing is just like how do we make sure that we get the biggest bang for the buck with what we've already decided we were going to spend in the last Congress?

I think the second thing is going to be a question about where there may be opportunities for tweaking some of the existing regulatory authorities so that an agency can implement that authority and not be concerned that the courts are going to throw it out. So we have, for example, in the context of financial disclosure among publicly traded companies, the Securities and Exchange Commission will soon finalize a regulation for climate related disclosures. So just as a publicly traded company has to produce an annual financial report and quarterly financial reports, they would have to do this related to their climate risk, climate opportunities, what they're doing to cut their emissions, et cetera. There's some concern that the SEC's going too far with their authorities. Congress could actually make a relatively minor tweak to the Securities and Exchange Act that would allow the SEC to do this and not be concerned that a future court would toss out this regulation. And I think this regulation is really important for enhancing the transparency about what businesses are doing to cut their emissions and to cut their exposure to climate change risk. So those are two sort of big categories of things that I think you could do. Whether you could get this through this Congress, I think is another question. But I think those are areas where, you could get more effective policy. And it's not like say we're going to completely reauthorize the Clean Air Act or produce a wholly new economy-wide climate change program like we've seen in past congresses.

Ralph Ranalli: So it’s time for us to wrap up. So in the interest of ending on a positive note, what's your best-case scenario going forward? And do you consider yourself an optimist or a pessimist? Is the solar-charged battery half full or is it half empty?

Joe Aldy: So I'm pretty optimistic, and one reason I'm pretty optimistic is that I see climate change as a kind of first tier issue, not just now in our politics, but I think among businesses, I think, more and more households. I think it's not this like, oh, this is something we have to deal with in the future. Unfortunately, because of the kinds of natural disasters we've experienced across the country and across the world, whether it's hurricanes or forest fires or droughts or heat waves, climate change feels more salient to people. But as a result, I think you have more and more really clever minds trying to tackle this problem. And even if we can look at Congress, or Washington, DC more generally, and be like, I'm not sure what they can get done, I think c-suite and business America is moving on this. And they recognize that it is now an imperative, whether it is to attract good workers, whether it is to address the concerns of some of their investors, whether it's to make their consumers happy, whether it's anticipating what will be future regulation, they're getting more and more ready, and in some cases, have started to move to tackle this problem. 

So I think that gives me some optimism that even if we see fits and starts with public policy, where I think our policy response to even now, even with some of the big bills in the last Congress, is still quite incomplete when we think about the scope of the challenge we're facing. I think more and more decision makers outside of the halls of Congress or outside of different executive branch agencies, but more and more decision makers who will make the investment decisions that, at the end of the day, really matter for cutting our emissions, what really matter for enhancing our resilience to a changing climate, they're moving forward. And that is what gives me optimism. 

And the last thing that gives me optimism is seeing kids. And by kids, I mean this generally, not just my kids who are getting more interested in this issue, but the students who we teach and seeing how they're getting more and more passionate about this issue and thinking about all the different ways they can make a difference on this issue. You realize we're going to be in better and better hands going forward as more and more of those kids are taking those roles, making those decisions, whether it's in government, whether it's in the private sector, whether it's in civil society, that gives me hope we're going to continue to make more and more progress on this problem.

Ralph Ranalli: Well, that's great. Joe, thank you so much for being here.

Joe Aldy: Yeah, I've enjoyed the conversation. 

Ralph Ranalli:  Me too. 

Ralph Ranalli (Outro):  Thanks for listening, and for being a valued member of our PolicyCast audience. Please join us for our next episode, when we'll talk to Harvard Kennedy School Professor Rob Stavins and Professor Daniel Jacob of Harvard's John A. Paulson School of Engineering and Applied Sciences about recent scientific breakthroughs that have given us a much better understanding about methane emissions and that will hopefully help shape policies to reduce this potent greenhouse gas. And until next time, please remember to speak bravely and listen generously.