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On Friday, July 17, 2020 Richard Zeckhauser joined the Princeton Bendheim Center for Finance to discuss recent research on prudent climate policy. Zeckhauser is a Professor of Political Economy at the Harvard Kennedy School. The event began with a brief discussion by Markus Brunnermeier, Director of the Princeton Bendheim Center for Finance. Zeckhauser then presented and took questions from the audience.

Watch the full presentation below and download the slides here.  You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

The COVID crisis lowers expected growth and heightens growth uncertainty, and this has implications for climate policy. The effects of the crisis on growth lower the discount rate, which is an argument to ramp up abatement measures faster. However, having long-lasting assets and machines that depreciate slowly is an argument to flatten the ramp.

The COVID crisis might help coordinate and synchronize environmental strategy moving forward. Since the start, environmental strategy has been plagued with coordination issues across firms and industries. But a restructuring of the economy across industries, spurred by the COVID crisis, might change things.

C02 taxes or pollution permits should be designed to give a clear path forward and reduce uncertainty. Unless permits are issued short-term with either a clear price-dependent supply schedule or a C02 permit central bank arrangement, pollution permits lead to price uncertainty. Moving forward, policy should address this uncertainty.

Some highlights from Zeckhauser’s presentation:

Climate debates are characterized by two groups: Climate-skeptics (ostriches) and concerned environmentalists (Pollyannas). Skeptics consider variation in temperatures to be a normal phenomenon and see irrelevance in human behavior. They have their head in the ground and aren’t paying attention to what’s happening around them. Concerned environmentalists have hope for the future and believe mitigation efforts alone are sufficient to deal with our climate problems.

Mitigation alone will not be sufficient, and we’re on track for a “very unpleasant future” if we don’t pursue a more comprehensive approach. Oceans have already warmed and greenhouse gases have accumulated in the atmosphere. International efforts on mitigation, for example cutting greenhouse gas emissions, so far have been futile and have a low probability of delivering on long-term climate goals.

From a political-economy perspective, strong “cheap-riding” incentives have resulted in policies that strongly oppose raising energy prices. Over the last 30 years, humans have engaged in activities despite the fact that these activities don’t earn them enough benefits to account for the costs. As a result, carbon pricing often has generous exemptions while fossil fuel subsidies abound.

A three-pronged approach to prudent climate policy would combine mitigation with adaptation and amelioration and consider economic growth and technological innovation. However, mitigation, adaption, and amelioration (for example geo-engineering) are substitutes for each other, creating moral hazard problems because investing in one diminishes the value of another. For example, pursuit of more geo-engineering might lower carbon reduction efforts. This explains why mitigation is the main focus of many environmentalists, who think pursuing an “awful action” might prompt people into awareness of the problem. Learn more about the ideal three-pronged approach in this paper.