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Alli Gold Roberts
MIT Joint Program on the Science and Policy of Global Change

Earlier this year, China took a major step in combating climate change by launching a pilot CO₂ emissions trading system within some of its provinces. This is the first step in a series of planned reforms and part of a larger effort to reduce CO₂ intensity by 17% in 2015, relative to 2010 levels.

In a study coming out tomorrow in the November issue of Energy Economics, a group of researchers from MIT and Tsinghua University test the efficiency and equity of the provincial approach by comparing it to a national carbon-trading program. They find that while China can achieve its reduction goal with either a provincial or national level trading system, the national system encourages reductions where they cost the least—resulting in less welfare loss.

“Leaders in China want environmental protection measures to be fair to all regions and households. They also want to choose policies that will be the most cost effective,” says Da Zhang, the lead author of the study and a PhD student with Tsinghua University.  “We hope that our research will help policymakers understand the distribution of the burden of alternative policy options, and help them to determine the most cost effective method of reducing CO₂.”

Zhang and his coauthors are part of the Tsinghua-MIT China Energy and Climate Project, a collaborative effort between the MIT Joint Program on the Science and Policy of Global Change and the Institute for Energy, Environment and Economy at Tsinghua University in Beijing, China.

The international team finds that imposing CO₂ targets at the provincial level results in a consumption loss that is about 20 percent greater than if targets are achieved through a national system.  Zhang explains that this is because in a provincial level system, industries may miss out on low-cost opportunities in other provinces and be forced to invest in more expensive abatement measures.

“In contrast, a national target creates incentives to make reductions where they are the cheapest,” says Zhang. “Though we realize there are challenges in implementing a national system, especially when provincial governments are currently accountable for CO₂ reductions in their communities.”

To investigate the impacts of this policy, the researchers built a model they call the China Regional Energy Model, or C-REM.  The C-REM disaggregates China’s 30 provinces and details the entire energy system. The model also includes global trade data to measure the interactions between China and the global economy.

“This work and the model our team developed are the first steps in our analysis of a broad range of energy and climate policy proposals in China,” says Valerie Karplus, co-author of the study and the director of the Tsinghua-MIT China Energy and Climate Project. “The analysis we produced reflects intensive exchange and learning within our integrated research team.”

She notes future analysis will also include comparing different designs of emissions trading programs and measuring the additional or unintended impacts of air pollution polices.

Anthropogenic emissions that lead to air pollution (particulate matter and ozone) are also large contributors to climate change. Unlike the well-mixed greenhouse gases, the spatial distribution of these emissions affects their climate impact. A better understanding of the role of aerosols and ozone in contributing to historical and projected future climate change provides insight into the relative importance of air pollutants versus well-mixed greenhouse gases, the role of uncertainties in forcing in creating uncertainties in regional climate projections, and the balance between efforts to improve air quality and mitigate climate change. 

In his presentation "How Air Pollution Affects Climate and What We Can Do About It", this year's Kendall Lecturer Drew Shindell, a senior scientist at the NASA Goddard Institute for Space Studies in New York City, discussed recent progress in understanding the role of aerosols and ozone and the implications for our understanding of climate sensitivity, of the recent slowdown in global warming, and of the benefits to both climate and human health that can be obtained by taking action to reduce air pollutant emissions.

Dr. Shindell who taught atmospheric chemistry at Columbia University for more than a decade, earned his Bachelor's degree at UC Berkeley and his PhD at Stony Brook University, both in Physics. His research concerns natural and human drivers of climate change, linkages between air quality and climate change, and the interface between climate change science and policy. He has been an author on more than 100 peer-reviewed publications and received awards from Scientific American, NASA, and the NSF. He has testified on climate issues before both houses of the US Congress, the UNFCCC and the World Bank, developed a climate change course with the American Museum of Natural History, and made numerous appearances in newspapers, on radio, and on TV as part of his public outreach efforts. He chaired the 2011 Integrated Assessment of Black Carbon and Tropospheric Ozone produced by the United Nations Environment Programme and World Meteorological Organization. Most recently he was a Coordinating Lead Author on the 2013 Fifth Assessment Report of the Intergovernmental Panel on Climate Change, and chairs the Scientific Advisory Panel to the Climate and Clean Air Coalition of nations.

The Henry W. Kendall Memorial Lecture Series honors the memory of Professor Henry Kendall (1926-1999), a 1990 Nobel Laureate, a longtime member of MIT’s physics faculty, and an ardent environmentalist. A founding member and chair of the Union of Concerned Scientists, he played a leading role in organizing scientific community statements on global problems, including the World Scientists’ Warning to Humanity in 1992 and the Call for Action at the Kyoto Climate Summit in 1997. 

Following the lecture there was a reception in the Green Building.

As the U.S. and other large nations experience the benefits of a natural gas boom, smaller countries – from Tanzania to Cyprus – are hoping to reap the rewards too and use the resource to spur their economies. But in a new study, MIT researchers warn them to proceed with caution.

“While natural gas is often cheaper than oil and gives off fewer emissions, developing the resource comes with risks, especially for smaller nations,” says Sergey Paltsev, an author of the study and a principal research scientist at the MIT Energy Initiative. “The cost for these smaller nations makes up a larger portion of their economies, so before spending the money, they need to have the proper expectations.”

In collaboration with the Cyprus Institute, the MIT researchers take an independent look at the economics around developing the resource using Cyprus as an example.  They find that it will take the country about five years to put their natural gas resource to use, and the required investments will make up to a quarter of the country’s Gross Domestic Product (GDP).

“That’s a substantial amount of a country’s economy dependent on a resource that has proven to be unpredictable in the past,” says Paltsev, who is also the assistant director for economic research at the MIT Joint Program on the Science and Policy of Global Change. “Natural gas development is so new to such regions, and the global gas market is changing so rapidly, that there’s a large amount of uncertainty.”

This is the message the researchers will bring to a November meeting with Cyprus decision-makers, meant to help the leaders plan a path forward with realistic expectations in mind.

The Case of Cyprus

What’s happening in Cyprus is a good model for other countries like it that are exploring natural gas, according to Paltsev. 

The small nation has been teetering back from a near collapse of its banking industry and searching for revenue. When a major natural gas reserve was discovered off its coast two years ago, Cyprus leaders saw it as a golden opportunity.

The latest estimate of the resource at that site, given earlier this month, shows about 5 trillion cubic feet of gas. To put that into context, the researchers cite a 2013 BP report showing the global supply of natural gas to be about 6,600 trillion cubic feet, with Russia’s reserves alone being 1,160 trillion cubic feet.

“These numbers tell us that, while this is a significant find for a country the size of Cyprus, it’s only a small fraction of the global resources,” says Francis O’Sullivan, the director of research for the MIT Energy Initiative. “Most likely, Cyprus will never be a major player in the global gas markets, but that doesn’t mean natural gas can’t benefit the country’s economy if developed properly.”

One trillion cubic feet of natural gas is enough to meet the needs of 5 million households for 15 years, according to the American Gas Association. With the population of Cyprus being just around a million, the study shows that Cyprus has enough natural gas to power the country for nearly a century – while significantly reducing its use of foreign oil.

LNG versus a Pipeline

An ample resource for domestic use, the Cyprus government has made plans to build a Liquefied Natural Gas (LNG) plant and export the resource to such place as Europe and Israel.

LNG has been the preferred option over building a pipeline because of political tensions in the area. The island has been divided since the mid-1970s, with Turkey occupying the northern half. 

While a clear political maneuver, building an LNG terminal would also create jobs and raise revenue. Depending on the tax scheme, it may raise $1.5 billion in taxes. Still, it would cost about $6 billion to build, for a country that has a GDP of about $25 billion. The cost of building an LNG terminal is far more than the cost of building a pipeline, though LNG offers greater flexibility to adjust production to changing natural gas prices and market supplies – perhaps outweighing the upfront costs. 

“The discovery of natural gas has created exciting opportunities for Cyprus and could transform the country’s energy system and position in the region,” O’Sullivan says. “But the cost of developing the resource makes up about a quarter of the country’s economy. That’s not insignificant, and it’s a major risk if it fails.”

O’Sullivan and Paltsev warn that even projects that start out having clear economic gains can become less profitable because of poor technical planning and execution or bureaucratic and regulatory delays.

“Prices change, projects get delayed, overrun costs pile up. These are all unforeseen risks that can come up and must be properly mitigated,” Paltsev says.

The study, funded entirely by the Cyprus Research Promotion Foundation, is part of a larger report that will further take into account the changing dynamics of the regional and global gas markets – giving a comprehensive view of the implications for the long-term development of natural gas in Cyprus and other like nations. The researchers expect to finish that larger report in August 2014.

Photo Credit: ©iStock.com/MsLightBox

The Advanced Global Atmospheric Gases Experiment (AGAGE), meets this week in Boston for their biannual meeting and to celebrate their 35^th anniversary.

Peter Dizikes, MIT News Office

If you have stopped at a gas station recently, there is a good chance your auto has consumed fuel with ethanol blended into it. Yet the price of gasoline is not substantially affected by the volume of its ethanol content, according to a paper co-authored by an MIT economist. The study seeks to rebut the claim, broadly aired over the past couple of years, that widespread use of ethanol has reduced the wholesale cost of gasoline by $0.89 to $1.09 per gallon.

Whatever the benefits or drawbacks of ethanol, MIT’s Christopher Knittel says, price issues are not among them right now.

“The point of our paper is not to say that ethanol doesn’t have a place in the marketplace, but it’s more that the facts should drive this discussion,” says Knittel, the William Barton Rogers Professor of Energy and a professor of applied economics at the MIT Sloan School of Management.

The 10 percent solution?

The vast majority of ethanol sold in the United States is made from corn. It now constitutes 10 percent of U.S. gasoline, up from 3 percent in 2003.

It is another matter, however, whether that increase in ethanol content produces serious savings at the pump, as some claim. Knittel and his co-author, economist Aaron Smith of the University of California at Davis, contest such an assertion in their paper, which is forthcoming inThe Energy Journal, a peer-reviewed publication in the field.

The claim that ethanol lowers prices derives from a previous study on the issue, which Knittel and Smith believe is problematic. That prior work involves what energy economists call the “crack ratio,” which is effectively the price of gasoline divided by the price of oil.

The crack ratio is something energy analysts can use to understand the relative value of gasoline compared to oil: The higher the crack ratio, the more expensive gasoline is in relative terms. If ethanol were a notably cheap component of gasoline production, its increasing presence in the fuel mix might reveal itself in the form of a decreasing crack ratio.

So while gasoline is made primarily from oil, there are other elements that figure into the cost of refining gasoline. Thus if oil prices double, Knittel points out, gasoline prices do not necessarily double. But in general, when oil prices — as the denominator of this fraction — go up, the crack ratio itself falls.

The previous work evaluated time periods when oil prices rose, and the percentage of ethanol in gasoline also rose.

But Knittel and Smith assert that the increased proportion of ethanol in gasoline merely correlated with the declining crack ratio, and did not contribute to it in any causal sense. Instead, they think that changing oil prices drove the change in the crack ratio, and that when those prices are accounted for, the apparent effect of ethanol “simply goes away,” as Knittel says.

To further illustrate that the previous study was touting a correlation, not a causal relationship, Knittel and Smith conducted what are known in economics literature as “antitests” of that study’s model. By inserting unconnected dependent variables into the model, they found that the model also produced a strong correlation between ethanol content in gasoline and, for instance, U.S. employment figures — although the latter are clearly unrelated to the composition of gasoline.

The previous work also claimed that if ethanol production came to an immediate halt, gasoline prices would rise by 41 to 92 percent. But Knittel does not think that estimate would bear out in such a scenario.

“In the very short run, if ethanol vanished tomorrow, we would be scrambling to find fuel to cover that for a week, or less than a month,” Knittel says. “But certainly within a month, increases in imports would relax or reduce that price impact.”

Informing the debate

The differing assessments of ethanol’s impact have garnered notice among economists and energy policy analysts. Scott Irwin, an economist at the University of Illinois at Urbana-Champaign who has read the paper, calls it a “convincing and compelling” rebuttal to the idea that expanding ethanol content in gasoline drastically lowers prices.

“The paper dispensed once and for all with that conclusion,” Irwin says. Still, he adds, there remains an open debate about the marginal effects of ethanol content in gasoline, and more empirical work on the subject would be useful.

“A case can be made that it can be a positive few cents,” Irwin says, adding that “reasonable arguments can be made on either side of zero” regarding ethanol’s price impact. In either case, Irwin says, his view is that the effect is currently a small one.

Knittel has posted, on his MIT Sloan web page, a multipart exchange between himself and Dermot Hayes, an Iowa State University economist who is a co-author of the prior work. After an initial finding that ethanol reduced gasoline prices by $0.25 per gallon, Hayes and a co-author produced follow-up studies, examining about a decade after 2000, and arrived at the figures of $0.89 and $1.09 per gallon, which gained wider public traction. 

Knittel acknowledges that policy decisions about gasoline production are driven by a complex series of political factors, and says his study is not intended to directly convey any policy preferences on his part. Still, he suggests that even ethanol backers in policy debates have reason to keep examining its value.

“Making claims about the benefits of ethanol that are overblown is only going to set up policymakers for disappointment,” Knittel says.

Peter Dizikes, MIT News Office

The structure of the auditing business appears problematic: Typically, major companies pay auditors to examine their books under the so-called “third-party” audit system. But when an auditing firm’s revenues come directly from its clients, the auditors have an incentive not to deliver bad news to them.

So: Does this arrangement affect the actual performance of auditors?

In an eye-opening experiment involving roughly 500 industrial plants in the state of Gujarat, in western India, changing the auditing system has indeed produced dramatically different outcomes — reducing pollution, and more generally calling into question the whole practice of letting firms pay the auditors who scrutinize them.

“There is a fundamental conflict of interest in the way auditing markets are set up around the world,” says MIT economist Michael Greenstone, one of the co-authors of the study, whose findings are published today in the Quarterly Journal of Economics. “We suggested some reforms to remove the conflict of interest, officials in Gujarat implemented them, and it produced notable results.”

The two-year experiment was conducted by MIT and Harvard University researchers along with the Gujarat Pollution Control Board (GPCB). It found that randomly assigning auditors to plants, paying auditors from central funds, double-checking their work, and rewarding the auditors for accuracy had large effects. Among other things, the project revealed that 59 percent of the plants were actually violating India’s laws on particulate emissions, but only 7 percent of the plants were cited for this offense when standard audits were used.

Across all types of pollutants, 29 percent of audits, using the standard practice, wrongly reported that emissions were below legal levels. 

The study also produced real-world effects: The state used the information to enforce its pollution laws, and within six months, air and water pollution from the plants receiving the new form of audit were significantly lower than at plants assessed using the traditional method.

The co-authors of the paper are Greenstone, the 3M Professor of Environmental Economics at MIT; Esther Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at MIT; Rohini Pande, a professor of public policy at the Harvard Kennedy School; and Nicholas Ryan PhD ’12, now a visiting postdoc at Harvard.

The power of random assignment

The experiment involved 473 industrial plants in two parts of Gujarat, which has a large manufacturing industry. Since 1996 the GPCB has used the third-party audit system, in which auditors check air and water pollution levels three times annually, then submit a yearly report to the GPCB.

To conduct the study, 233 of the plants tried a new arrangement: Instead of auditors being hired by the companies running the power plants, the GPCB randomly assigned them to plants in this group. The auditors were paid fixed fees from a pool of money; 20 percent of their audits were randomly chosen for re-examination. Finally, the auditors received incentive payments for accurate reports.

In comparing the 233 plants using the new method with the 240 using the standard practice, the researchers uncovered that almost 75 percent of traditional audits reported particulate-matter emissions just below the legal limit; using the randomized method, only 19 percent of plants fell in that narrow band.

All told, across several different air- and water-pollution measures, inaccurate reports of plants complying with the law dropped by about 80 percent when the randomized method was employed.

The researchers emphasize that the experiment enabled the real-world follow-up to occur.

“The ultimate hope with the experiment was definitely to see pollution at the firm level drop,” Duflo says. The state’s enforcement was effective, as Pande explains, partly because “it becomes cheaper for some of the more egregious pollution violators to reduce pollution levels than to attempt to persuade auditors to falsify reports.”

According to Ryan, the Gujarat case also dispels myths about the difficulty of enforcing laws, since the experiment “shows the government has credibility and will.” 

But how general is the finding?

In the paper, the authors broaden their critique of the audit system, referring to standard corporate financial reports and the global debt-rating system as other areas where auditors have skewed auditing incentives. Still, it is an open question how broadly the current study’s findings can be generalized.

“It would be a mistake to assume that quarterly financial reports for public companies in the U.S. are exactly the same as pollution reports in Gujarat, India,” Greenstone acknowledges. “But one thing I do know is that these markets were all set up with an obvious fundamental flaw — they all have the feature that the auditors are paid by the firms who have a stake in the outcome of the audit.”

Some scholars of finance say the study deserves wide dissemination.

“This is a wonderful paper,” says Andrew Metrick, a professor and deputy dean at the Yale School of Management. “It is a very strong piece of evidence that, in the context they studied, random assignment produces unbiased results. And I think it’s broadly applicable.”

Indeed, Metrick says he may make the paper required reading in a new program Yale established this year that provides research and training for financial regulators from around the world.

To be sure, many large corporations have complicated operations that cannot be audited in the manner of emissions; in those cases, a counterargument goes, retaining the same auditor who knows the firm well may be a better practice. But Metrick suggests that in such cases, auditors could be randomly assigned to firms for, say, five-year periods. At a minimum, he notes, the Dodd-Frank law on financial regulation mandates further study of these issues.

Greenstone also says he hopes the current finding will spur related experiments, and gain notice among regulators and policymakers.

“No one has really had the political will to do something about this,” Greenstone says. “Now we have some evidence.”

The study was funded by the Center for Energy and Environmental Policy Research, the Harvard Environmental Economics Program, the International Growth Centre, the International Initiative for Impact Evaluation, the National Science Foundation and the Sustainability Science Program at Harvard.

International leaders have gathered this week in Kumamoto, Japan to sign a landmark treaty to curb the use of mercury. The treaty, named the Minamata Convention after a Japanese city where serious health damage occurred from mercury pollution in the mid-20th Century, is both wide-ranging and legally binding. MIT researcher Noelle Selin is attending the conference and presenting research on the impacts of mercury pollution and the importance of policies to control it.

Selin was part of an expert panel discussing the science of and policies regarding mercury pollution this weekend, hosted by the National Institute of Minamata Disease and the Society of Environmental Toxicology and Chemistry.

Learn more about the UNEP event: United Nations Convention Tackling Hazardous Mercury To Open for Signature

Learn more about Dr. Selin’s mercury research:

Will the New Global Mercury Treaty be Effective?

MIT researcher Noelle Selin assesses the challenges of implementing the first global mercury treaty.
 

Science Policy in Action

MIT students participate in the final mercury talks resulting in an international treaty.

Strategies to Reduce Mercury Revealed Ahead of International Talks

Harvard, MIT researchers map future trends of mercury and ways to reduce it on eve of international negotiations.