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The latest Obama-Xi announcement sends a strong message: the two nations are acting fast to enable a global low carbon transition. Friday’s joint announcement is an unprecedented step by the world’s #1 and #2 emitters to commit, at the highest levels, to a strong set of domestic policies and to reinforce global mechanisms that will help to engage peers ahead of the upcoming landmark climate change negotiations in Paris. 

Pricing Carbon

Xi has committed China to launching a national emissions trading system for CO2 in 2017. An emissions trading system will directly constrain a large share of China’s CO2 emissions and, by putting a price on emissions, encourage reductions where they cost least. This is impressive in that China is pledging to reduce emissions at a time when its per-capita income is less than one-fifth of the U.S. and its economy faces headwinds. It recognizes the long-term benefits of action now—for local air quality, global climate, and its own long-term leadership in delivering innovative solutions that all nations will eventually need.

While China is not the first to establish an emissions trading system, China’s is likely to be the largest when it comes online in 2017. While the European Union has built an emissions trading system over the past two decades, the U.S. has so far not been successful in adopting a national system for greenhouse gases. In 2009 the Waxman-Markey Bill, which would have established an emissions trading system in the U.S., failed to pass Congress, leaving the U.S. to rely on a piecemeal approach that largely repurposed existing regulations, such as vehicle fuel economy standards and power plant emissions limits established under the Clean Air Act, to mandate CO2 emissions reduction. Indeed, these measures formed the cornerstone of the U.S. domestic action pledged on Friday, and they will have impact. However, an emissions trading system that could deliver the same reductions at lower aggregate cost has so far proven politically unpalatable. China’s latest move could prompt a rethink on emissions trading in the U.S.

Linking Global and Local Action

Along with a strong portfolio of coordinated domestic actions, Xi and Obama made progress on defining the architecture of a global climate agreement. The two leaders have agreed on the need for an enhanced system that monitors domestic action through reporting and review of progress, recognizing that some developing nations will still need time to put these capacities into place. Both sides also recognized the need to increase ambition over time. This is essential because even with all present contributions, the global emissions trajectory is not expected to bend down anytime soon. Recognizing that this will likely not be fully resolved in Paris, setting in place a timeline for assessing and revisiting commitments going forward will go a long way towards ensuring that the goal Xi and Obama reaffirmed at the outset of their remarks—deep reductions in GHG emissions that will markedly limit global temperature rise—does not slip off the radar.

Beyond generating momentum ahead of Paris, U.S.-China joint action will have far-reaching consequences at home when it comes to enabling a low carbon transition. Although many insiders anticipated that an emissions trading system in China would be established, efforts to codify this effort in a new Climate Change Law were moving more slowly—this high-level pledge will redouble the pressure. Beyond emissions trading, China has also pledged to promote “green dispatch” in the electricity sector, which will prioritize lower emitting plants. In China, generators are powerful interests entitled to supply a “fair share” of annual generation—now, their “fair share” will need to reflect environmental impact more strongly and directly.

Leading on Climate and Development

Perhaps the greatest promise of the latest announcement by China and the U.S. lies in its invitation to all parties to increase ambition, if not before Paris then as soon as possible as part of ongoing negotiations. On the eve of Paris, the world is poised to miss the 2 degree target—by a large margin. Stronger action will be needed by developed and developing countries alike. By committing to limit CO2 emissions, China has shown that domestic action on climate change does not need to undermine long-term development goals. In recent years, it has developed the domestic capability to assess—through research, modeling, and real-world experimentation—the advantages and disadvantages of various instruments for limiting fossil energy use and CO2 emissions. The results suggest that some opportunities, such as industrial energy efficiency and new energy development, can support cleaner air, better operational performance, and—in the case of, say, solar energy—open opportunities as a leading global provider of clean technology. Every developing country will have its unique set of opportunities. The architecture emerging on the road to Paris is shaping up in a way that will accommodate these differences, allowing the countries that are poised to grow the fastest over the next several decades to find ways to power this growth with clean, affordable, low carbon energy sources. Greater action from the developed world will also be essential. Ideally, the steps Xi and Obama have taken last week will inspire a broad-based, cooperative effort to deliver more than promised that carries both local and global benefits.

Dr. Valerie Karplus is a ChinaFAQs Expert at the Massachusetts Institute of Technology (MIT). She is an Assistant Professor in the Global Economics and Management Group at the MIT Sloan School of Management and Director of the China Energy and Climate Project (CECP) at MIT.

ChinaFAQs is a project facilitated by the World Resources Institute that provides insight into critical questions about Chinese policy and action on energy and climate change. The ChinaFAQs network is comprised of U.S.-based experts, including researchers at U.S. universities and government laboratories, independent scholars, and other professionals.

Photo Credit: U.S. Embassy the Hague via Flickr Creative Commons License

On the eve of President Xi's visit to the US and summit with President Obama, Professor Karplus participated in the panel discussion on Meeting China’s Climate Goals at Columbia University today, September 21, 2015, at 12:30-2:00 p.m. David Sandalow, Inaugural Fellow, Center on Global Energy Policy, and former senior official at the White House, State Department, and U.S. Department of Energy moderated the discussion among the expert speakers who include Valerie Karplus, Assistant Professor of Global Economics and Management, MIT Sloan School, and Director of the Tsinghua-MIT China Energy and Climate Project; Zhu Liu, Fellow, Resnick Sustainability Institute, California Institute of Technology and Associate, Kennedy School, Harvard University; and Kelly Sims Gallagher, Professor of Energy and Environmental Policy, the Fletcher School, Tufts University, and former Senior Policy Advisor, Office of Science and Technology Policy, the White House.
 
A podcast of this event will be available three-five days after the date of the event through iTunes or via the Center on Columbia Global Energy Policy’s website.

Mark Dwortzan | MIT Joint Program on the Science and Policy of Global Change

Climate CoLab, an MIT-based crowdsourcing platform to advance climate change solutions through the power of collective intelligence, has named Langley DeWitt, a research scientist with the Center for Global Change Science, as a Judges’ Choice winner in one of 15 contests for 2015. DeWitt, who is also chief scientist of the Rwanda Climate Observatory, was recognized in the Transportation contest for her proposal to set up an inexpensive air quality sensor network in Kigali, Rwanda as part of an effort to reduce vehicular emissions and improve air quality.

DeWitt and other contest winners will present their ideas at MIT's Solve and Crowds & Climate conferences, October 5 and 6 on the MIT campus, where the $10,000 Grand Prize will be awarded.

Read more about DeWitt's proposal here.

Peter Dizikes | MIT News Office

The politics of climate change are often depicted as a simple battle, between environmentalists and particular industries, over government policy. That’s not wrong, but it’s only a rough sketch of the matter. Now a paper co-authored by MIT economist Christopher Knittel fills in some important details of the picture, revealing an essential mechanism that underlies the politics of the climate battle.

Specifically, as Knittel and his colleagues demonstrate, at least one climate policy enacted by Congress — on transportation fuels — contains a crucial asymmetry: It imposes modest costs on most people, but yields significant benefits for a smaller group. Thus, most people are politically indifferent to the legislation, even though it hurts them marginally, but a few fight hard to maintain it. The same principle may also apply to other types of climate legislation.

In 2005, Congress introduced the Renewable Fuel Standard (RFS), which mandates a minimum level of ethanol that must be used in gasoline every year, as a way of reducing greenhouse gas emissions. Ethanol can indeed reduce emissions, but as Knittel and other economists have argued, it is not the most efficient way of doing so: He estimates that mandating ethanol use is at least 2.5 times as costly, per ton of greenhouse gas reduction, as a cap-and-trade (CAT) policy, which would price the carbon emitted by all transportation fuels.

But corn-based ethanol production has strong political support in the Midwest, where much of the corn industry is based. In the new paper, Knittel and his colleagues quantify that effect in unique detail. They model what U.S. fuel consumption would likely look like through 2022 under both RFS and CAT scenarios, among others. Compared with a cap-and-trade system, the average American would lose $34 annually due to the RFS policy. But 5 percent of U.S. counties would gain more than $1,250 per capita, and one county gains $6,000 per capita.

Thus, most people are indifferent to the shortcomings of the RFS policy, but those who care tend to support it vigorously.

“Because of the skew in the distribution, you have the typical voter who doesn’t find it in their interest to fight against the inefficient policy, but the big winners are really going to fight for the inefficient policy,” says Knittel, adding: “If the typical voter is losing $30 a year, that’s not enough for me to write to my congressman. Whereas if you have someone on the upper end who is going to gain $6,000 — that’s enough for me to write my congressman.”

The political economy of energy

As the study shows, some folks do more than write to their representatives. Knittel and his colleagues found that members of the House of Representatives in districts that gain greatly from the RFS policy received an average of $33,000 more from organizations that opposed one particular piece of legislation — the 2009 Waxman-Markey bill, which would have created a CAT system, and likely would have reduced ethanol use. That bill passed in the House in July 2009, but was never taken up by the U.S. Senate.   

That difference in campaign contributions holds up strongly even when the researchers controlled for factors such as ideology, state, and overall emissions. That is, other things being equal, representatives of the specific areas benefitting most from RFS were given far more in donations from opponents of the Waxman-Markey bill than other congressmen. Representatives were also 39 percentage points more likely to oppose Waxman-Markey, other things being equal, if they were in districts that benefit strongly from the RFS policy.

“It’s a very robust finding,” Knittel says. “One interpretation is that these people or corporations who were donating money have a model very similar to ours, and are able to predict winners and losers under different policies. This is a very sophisticated group.”

On one level, the results confirmed something that was broadly understood: Areas with corn-based economies support ethanol. On another level, the study reveals the deep asymmetry that structures the politics of the issue: on one side, widespread indifference; on the other, narrow but deep support.

“It wasn’t until we got the results that we were able to think through the political economy of it,” Knittel says.

Tax the externality

The paper, “Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies,” is forthcoming in the Review of Economics and Statistics.  

The paper’s co-authors are Knittel; Stephen P. Holland of the University of North Carolina at Greensboro; Jonathan E. Hughes of the University of Colorado; and Nathan C. Parker of the Institute of Transportation Studies at the University of California at Davis.

To conduct the study, the researchers used modeling by Parker that estimates where ethanol production will be located in coming years, as well as projecting the overall costs of various potential transportation fuel policies, were they to be implemented. The work also drew extensively on methods the other co-authors have used in evaluating both the potential impact of biofuels as a gasoline replacement and the relationship between policy options and politics.

On the general question of picking the optimal emissions–reduction policy, Knittel says, “The efficient policy is to tax the externality.” That is, to tax the additional cost or problem imposed on people — in this case, greenhouse gas emissions. That forces consumers to account for the costs of their own decisions, such as buying fuel-efficient vehicles.

Other scholars in the field regard the paper as a significant contribution to the study of energy politics. Mark Jacobsen, an associate professor of economics at the University of California at San Diego who has read the paper, says the “voting and donations models are both quite convincing.”

Jacobsen adds: “A very important contribution of this paper is in pointing out that we need to be alert to distribution [of energy resources] across states, making sure that it does not stand in the way of otherwise good policy.”

Knittel suggests the same kind of political asymmetry is probably at work in other aspects of climate politics. When it comes to coal-burning power plants, most people are only marginally affected by policy changes — but people living in coal-mining areas are deeply affected, and so have a much larger impact on the policy debate.

“We hope this paper sparks a literature that can do the same thing for other fuels,” Knittel says.