Excerpt from transcript:

Climate change is the most important issue of our lives. But time and again it seems to take a back seat to more immediate problems. The evidence is clear – wildfires, drought, heatwaves, extreme weather and flooding have moved from scientific models to daily headlines. And yet there are still so many powerful interests that want to deny the problem, or delay dealing with it. 

But in the face of reluctance, one surefire way to get someone’s attention, is to take aim at their wallet. Money talks, and that remains true even when it comes to saving the planet. So we were curious, how do markets, investments, and climate change intersect? 

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Many economists think the only answer is regulation. Governments can pass laws that make it expensive to produce carbon. Once you do that, the math changes. And markets have a new set of problems to solve. Transitioning your company to become carbon neutral is no longer a long-term adaptation, but an immediate business necessity. 

Host Gabrielle Sierra: So what do you see as the most effective types of regulations when it comes to emissions?

Michael Greenstone: You know, the economics of it, the blackboard economics are kind of boring. It’s very simple. You just put a price or tax on the thing that you don’t like. And in that case, it’s co2. And then you let the market sort out as to where the cheapest reductions are going to come from.

And you know, there are very successful markets on that right now. The European Union has a very successful cap and trade program for co2. There’s 9 or 10, maybe it’s now 10 or 11 states along the east coast that are in the regional greenhouse gas emissions cap and trade. And California has one. And so those have been very successful.

For those who need it, here’s what you need to know about carbon regulations. The two big options are carbon taxes and what’s known as “cap and trade”.

A carbon tax is a tax placed on the amount of greenhouse gases produced by a company. The more carbon produced, the more the company has to pay the government. This establishes a direct cost for releasing emissions into the air. With cap and trade, the government defines the maximum amount of carbon that can be produced by companies in a given state, region, or country. Within this system, companies that produce more carbon emissions than their cap allows can buy the right to do so from companies that produce less. The goal is to allow the market to set the price of carbon, which in turn can drive investment and innovation towards green solutions. The pros and cons of each are hotly debated, but most agree that a well designed set of policies are the only sure way to reduce overall greenhouse gas emissions. 

As advocates sought to promote these ideas, they came up with another term worth knowing – the “social cost of carbon”.

GREENSTONE: I like to call it the most important number you’ve never heard of. So the social cost of carbon is really pretty simple, once you cut through all the words. If I put a ton of co2 in the atmosphere today, what are the damages it’s going to cost to the economy, as long as that ton of co2 in the atmosphere? And I, under the President’s direction, Cass Sunstein and I had the idea that the United States government should have a social cost of carbon. And in 2009 and 2010, we led a process and set it, and if you were to follow through that number is about $51 a ton. And so, a way to say that in English is that every ton of co2, carbon dioxide, that we abate produces $51 of global benefits. So those benefits are reductions in climate damages.

You know, markets are constructions of people’s beliefs and government. And the governments really set the rules of the road and it’s hard to point to what markets would systematically have to react to if there isn’t government policy.

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I think it’s very natural, as we sit here in the United States to be focused on US policy and what US corporations are doing, but I have a concern that sometimes we become excessively focused on that. And that concern is grounded in the fact that climate change, really it is global climate change. And, if one looks at the projections for the United States share of emissions going forward, I think it’s about 15% for the rest of the century. So, unless the rest of the world finds it advantageous to engage in reducing emissions, it’s going to be hard to make a lot of progress. And I think what can help is if we don’t think of it as the climate change crisis, but rather we think of it as the global energy challenge. And in particular, I see the global energy challenge as this challenge that all societies have to confront in their own way. And I think there’s three main goals that underpin this challenge. The first is how do you make sure that your society has access to inexpensive and reliable sources of energy, that power economic growth and allow people to improve their living standards and lead much more comfortable lives and they are currently. The second is, how do you do that without suffering the health effects of air pollution? And the reason they’re interlinked is because the very fossil fuels that often provide the least expensive sources of energy, also often involved the release of particulate matter. And that causes all kinds of health problems, as we’re seeing in India and China. And we saw previously, you know, several decades ago in the United States.

And then the third leg of the stool, I think is that the same fossil fuels that are inexpensive and it can lead to very pernicious air pollution also, are increasing the odds of disruptive climate change. And what societies, this is the United States, this is India, this is China, this is countries in Sub Saharan Africa, it’s Bangladesh, Pakistan, all have to figure out is a way to balance and navigate between those three goals. And if the climate, if the global energy challenge looks like it’s going to involve massively more expensive energy, it’s going to be very difficult to bring people in other countries along and I think one example that’s very instructive. I do a lot of work in the state of Bihar. In India, their per capita, electric annual per capita electricity consumes about 200 kilowatt hours per year. In the United States, it’s 13,000. So trying to get people in Bihar, focused on climate risk, when they’re at about 200 kilowatt hours per year, is very, very challenging. And so all of that points to it’s not enough for the United States to find a way to reduce carbon emissions. But it’s critical for the United States and the world to identify innovations that, kind of, can soften some of the trade offs associated with that global energy challenge and a lot of that’s going to turn on innovation and reducing the costs of clean energy and/or reducing the costs of carbon removal technologies.  

Two dinosaurs looking up at a meteor, and one says “Oh, no, the economy.” We get it. Once the world ends, there’s no more economy to worry about. But, that doesn’t mean that it’s not worth talking about climate change in economic terms. Doing so gives us a common language for addressing the facts and clarifies the idea that nobody is going to turn a profit unless we get our act together. Money talks, and while climate change can only be mitigated by global solutions, the richest country on earth does still have the world’s ear. If the US can make the right changes at home, and regain its global leadership, it could do some very loud talking indeed. 

SIERRA: Do you think that a climate skeptic might be more convinced of the problem when banks and insurance companies and not just climate scientists are telling them ‘No, we can’t insure that house’, ‘No, you can’t have a loan to build on the coast, because from our analysis, those places won’t exist in 20 years’? I mean, do you think that that will and does bring new people into the conversation?

GREENSTONE: There is little more powerful than price signals reverberating through the economy. What do I mean by ‘price signals’? Exactly what you said. ‘Hey, I’d like to get insurance on my house on the New Jersey coast’ and the insurance companies’ rates have just gone up by five times’, that’s going to get people’s attention. And so to the degree that there are physical impacts that start to get priced, that is gonna matter a lot. And to the degree that there’s policy that starts to get priced into assets, that’s going to matter a lot. And I think there’s no amount of asking for people’s charity that is comparable to people facing very clear and very strong price signals.

Want to learn more about the role of markets and the economy in climate change? Head to CFR.org/WhyItMatters for the show notes from this episode.