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Mehling, Michael A., Gilbert E. Metcalf, and Robert N. Stavins. 2019. “Linking Heterogeneous Climate Policies (Consistent with the Paris Agreement).” Environmental Law 48. Publisher's Version Abstract
The Paris Agreement to the United Nations Framework Convention on Climate Change has achieved one of two key necessary conditions for ultimate success—a broad base of participation among the countries of the world. But another key necessary condition has yet to be achieved—adequate collective ambition of the individual nationally determined contributions. How can the climate negotiators provide a structure that will include incentives to increase ambition over time? An important part of the answer can be international linkage of regional, national, and sub-national policies, that is, formal recognition of emission reductions undertaken in another jurisdiction for the purpose of meeting a Party’s own mitigation objectives. A central challenge is how to facilitate such linkage in the context of the very great heterogeneity that characterizes climate policies along five dimensions: type of policy instrument, level of government jurisdiction, status of that jurisdiction under the Paris Agreement, nature of the policy instrument’s target, and the nature along several dimensions of each Party’s Nationally Determined Contribution. We consider such heterogeneity among policies, and identify which linkages of various combinations of characteristics are feasible; of these, which are most promising; and what accounting mechanisms would make the operation of respective linkages consistent with the Paris Agreement. 
Gillingham, K., and J.H. Stock. 2018. “The Cost of Reducing Greenhouse Gas Emissions .” Journal of Economic Perspectives 32 (4): 53-72. Abstract

This paper reviews the cost of various interventions that reduce greenhouse gas emissions. As much as possible we focus on actual abatement costs (dollars per ton of carbon dioxide avoided), as measured by 50 economic studies of programs over the past decade, supplemented by our own calculations. We distinguish between static costs, which occur over the lifetime of the project, and dynamic costs, which incorporate spillovers. Interventions or policies that are expensive in a static sense can be inexpensive in a dynamic sense if they induce innovation and learning-by-doing.

Last updated on 11/08/2018
Schatzki, Todd, and Robert Stavins. 2018. Discussion Paper: GHG Cap-and-Trade: Implications for Effective and Efficient Climate Policy in Oregon. Harvard Project on Climate Agreements. Abstract
Like many other states, Oregon has begun to pursue climate policies to attempt to fill the gap created by the lack of effective climate policy at the Federal level. After adopting a variety of policies to address climate change and other environmental impacts from energy use, Oregon is now contemplating the adoption of a greenhouse gas (GHG) cap-and-trade system. However, interactions between policies can have important consequences for environmental and economic outcomes. Thus, as Oregon considers taking this step, reconsidering the efficacy of its other current climate policies may better position the state to achieve long-run emission reductions at sustainable economic costs.
Narayanamurti, Venkatesh, and Jeff Y. Tsao. 2018. “Nurturing Transformative U.S. Energy Research: Two Guiding Principles.” MRS Energy & Sustainability 5 (Fall). Publisher's Version Abstract

We raise for debate and discussion what in our opinion is a growing mis-control and mis-protection of U.S. energy research. We outline the origin of this mis-control and mis-protection, and propose two guiding principles to mitigate them and instead nurture research: (1) focus on people, not projects; and (2) culturally insulate research from development, but not science from technology.

Energy research is critical to continuing advances in human productivity and welfare. In this Commentary, we raise for debate and discussion what in our view is a growing mis-control and mis-protection of U.S. energy research. This flawed approach originates in natural human tendencies exacerbated by an historical misunderstanding of research and development, science and technology, and the relationships between them. We outline the origin of the mis-control and mis-protection, and propose two guiding principles to mitigate them and instead nurture research: (i) focus on people, not projects; and (ii) culturally insulate research from development, but not science from technology. Our hope is to introduce these principles into the discourse now, so they can help guide policy changes in U.S. energy research and development that are currently being driven by powerful geopolitical winds.

The utility business model and power generation industry are built upon a century-old legal regime. Federal and state laws are premised on power flowing from large-scale infrastructure to captive consumers paying regulated rates to a monopoly utility. Today, electric power and money can flow in the opposite directions. Services supplied through utility-owned distribution grids, including storage, energy production, and demand response, upend long-standing industry assumptions about infrastructure investments, consumer behavior, and rate setting. In doing so, distributed energy resource (DERs) threaten incumbent businesses and challenge entrenched regulatory regimes. Regulation of the electric industry is pervasive and will determine where DERs are deployed, the services they may provide, the prices they are paid, and who is allowed to own them. A threshold issue in addressing the future of DER regulation is the roles that federal and state regulators will play in making these decisions. This paper pieces together, from numerous FERC orders and federal court decisions, how the Federal Energy Regulatory Commission’s (FERC) jurisdiction over interstate wholesale energy sales and transmission service applies to DERs. It finds that FERC has disclaimed authority over DER sales that offset a ratepayer’s retail consumption but federal law applies to other sales. FERC’s current approach to these other energy transfers splits authority with state regulators based on various factors, including technology and location on the grid. This fragmented regulatory regime could doom DERs to segmented markets, preventing the creation of a coherent framework for DER development. This paper suggests that FERC should simplify the overlapping web of state and federal regulation by disclaiming jurisdiction over DER energy sales. Doing so would allow states to regulate sales by all types of DERs to local buyers, such as a utility or aggregator. States would then have clear authority to develop comprehensive DER development models. It would also free FERC from the potentially onerous task of directly regulating millions of small-scale resources, while allowing FERC to invite aggregations of DERs to sell directly into regional wholesale markets.
Ford, Michael J., and Daniel P. Schrag. 2018. “A tortoise approach for US nuclear research and development.” Nature Energy, 1. Publisher's Version Abstract
In Aesop’s fable, a swift hare races with a deliberate tortoise. In the end, the tortoise wins by taking a slow and steady approach. We argue that, given the economic constraints on US deployment of nuclear power, a ‘tortoise strategy’ is more prudent for US government nuclear R&D efforts.
On December 19, 2017, the government of China announced that it is commencing development of a nationwide CO2 trading system, that when launched will become the world’s largest carbon trading system, annually covering about 3.5 billion tons of CO2 emissions in China’s electric power sector. That approaches twice the size of what is currently the … Continue reading "What Should We Make of China’s Announcement of a National CO2 Trading System?"
Daniel, Kent D., Robert B. Litterman, and Gernot Wagner. 2017. “Applying Asset Pricing Theory to Calibrate the Price of Climate Risk.” NBER, 22795. Abstract
Pricing greenhouse gas emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. The optimal carbon dioxide (CO2) price, thus, is based on society’s willingness to substitute consumption across time and across uncertain states of nature. Standard constant relative risk aversion preference specifications conflate the two. Moreover, they are inconsistent with observed asset valuations, based on a large body of work in macroeconomics and finance. This literature has developed a richer set of preferences that are more consistent with asset price behavior and separate risk across time and across states of nature. In this paper, we explore the implications of these richer preference specifications for the optimal CO2 price. We develop the EZ-Climate model, a simple discrete-time optimization model in which the representative agent has an Epstein-Zin preference specification, and in which uncertainty about the effect of CO2 emissions on global temperature and on eventual damages is gradually resolved over time. We embed a number of features including potential tail risk, exogenous and endogenous technological change, and backstop technologies. The EZ-Climate model suggests a high optimal carbon price today that is expected to decline over time as uncertainty about the damages is resolved. It also points to the importance of backstop technologies and to very large deadweight costs of delay. We decompose the optimal carbon price into two components: expected discounted damages and the risk premium. JEL code: D81, G11, Q54.
Green, Jessica F., Thomas Sterner, and Gernot Wagner. 2014. “A balance of bottom-up and top-down in linking climate policies.” Nature Climate Change 4 (12): 1064–1067. Publisher's Version Abstract
Top-down climate negotiations embodied by the Kyoto Protocol have all but stalled, chiefly because of disagreements over targets and objections to financial transfers. To avoid those problems, many have shifted their focus to linkage of bottom-up climate policies such as regional carbon markets. This approach is appealing, but we identify four obstacles to successful linkage: different levels of ambition; competing domestic policy objectives; objections to financial transfers; and the difficulty of close regulatory coordination. Even with a more decentralized approach, overcoming the 'global warming gridlock' of the intergovernmental negotiations will require close international coordination. We demonstrate how a balance of bottom-up and top-down elements can create a path toward an effective global climate architecture.
Reinhart, Carmen M., and Vincent Reinhart. 2018. “Are Oil Prices Heading for Another Spike?”. Publisher's Version Abstract
The decline in the dollar’s exchange rate seems to have gathered momentum, in part because the person who has his signature on US currency, Treasury Secretary Steve Mnuchin, seems unperturbed by its weakness. If it continues, will energy costs spiral upward?
Goldstein, Anna P., and Venkatesh Narayanamurti. 2017. “Simultaneous Pursuit of Discovery and Invention in the US Department of Energy.” Harvard Kennedy School, RWP17-046. Abstract
The division of “basic” and “applied” research is embedded in federal R&D policy, exemplified by the separation of science and technology in the organizational structure of the US Department of Energy (DOE). In this work, we consider a branch of DOE that shows potential to operate across this boundary: the Advanced Research Projects Agency – Energy (ARPA-E). We construct a novel dataset of nearly 4,000 extramural financial awards given by DOE from 2010 to 2015, primarily to businesses and universities. We collect the early knowledge outputs of these awards from Web of Science and the United States Patent and Trademark Office. Compared to similar awards from other parts of DOE, ARPA-E awards are more likely to jointly produce both a publication and a patent, with at least 5 times higher odds. ARPA-E awards have been productive in creating new technology, without a detrimental effect on the production of new scientific knowledge. This observation suggests the unity of research activities which are often considered separate: that which produces discoveries and that which produces inventions.
Meckling, Jonas, Thomas Sterner, and Gernot Wagner. 2017. “Policy sequencing toward decarbonization.” Nature Energy 2. Abstract
Many economists have long held that carbon pricing—either through a carbon tax or cap-and-trade—is the most cost-effective way to decarbonize energy systems, along with subsidies for basic research and development. Meanwhile, green innovation and industrial policies aimed at fostering low-carbon energy technologies have proliferated widely. Most of these predate direct carbon pricing. Low-carbon leaders such as California and the European Union (EU) have followed a distinct policy sequence that helps overcome some of the political challenges facing low-carbon policy by building economic interest groups in support of decarbonization and reducing the cost of technologies required for emissions reductions. However, while politically effective, this policy pathway faces significant challenges to environmental and cost effectiveness, including excess rent capture and lock-in. Here we discuss options for addressing these challenges under political constraints. As countries move toward deeper emissions cuts, combining and sequencing policies will prove critical to avoid environmental, economic, and political dead-ends in decarbonizing energy systems.
Mehling, Michael A., Gilbert E. Metcalf, and Robert N. Stavins. 2017. “Linking Heterogeneous Climate Policies (Consistent with the Paris Agreement) .” Harvard Kennedy School. Publisher's Version Abstract
The Paris Agreement has achieved one of two key necessary conditions for ultimate success – a broad base of participation among the countries of the world.  But another key necessary condition has yet to be achieved – adequate collective ambition of the individual nationally determined contributions. How can the climate negotiators provide a structure that will include incentives to increase ambition over time?    An important part of the answer can be international linkage of regional, national, and sub‐ national policies, that is, formal recognition of emission reductions undertaken in another jurisdiction for the purpose of meeting a Party’s own mitigation objectives. A central challenge is how to facilitate such linkage in the context of the very great heterogeneity that characterizes climate policies along five dimensions – type of policy instrument; level of government jurisdiction; status of that jurisdiction under the Paris Agreement; nature of the policy instrument’s target; and the nature along several dimensions of each Party’s Nationally Determined Contribution.  We consider such heterogeneity among policies, and identify which linkages of various combinations of characteristics are feasible; of these, which are most promising; and what accounting mechanisms would make the operation of respective linkages consistent with the Paris Agreement.
The behavioral responses to taxes and subsidies are often subject to various behavioral biases and transaction costs—what we define as “microfrictions.” We develop a theoretical framework to show how these microfrictions—and their heterogeneity across the population and policy instruments— affect the design of Pigouvian policies. Standard Pigouvian pricing still holds with transaction costs, but requires adjustment with behavioral biases. We use transaction-level data from the US appliance market to estimate the heterogeneous behavioral responses to an array of energy fiscal policies and to quantify microfrictions. We then assess optimal fiscal policies and find that it is rarely optimal to couple a Pigouvian tax on energy with an investment subsidy in this context. We also find that energy labels—intended to increase the salience of energy information—can interact in perverse ways with both taxes and subsidies.

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