Joseph Stiglitz – On Getting Carbon Pricing Right

What price on carbon would, together with regulations and public investment, enable the world to achieve the goals set out in Paris and Copenhagen at one and a half to two degrees? Most economists agree that we need to put a price on carbon if we are to tackle climate change. But how is that done? No doubt it's a complicated matter. Today I talk to Nobel Prize Laureate and economist Joseph Stiglitz. Welcome to Planet A, a podcast on climate change. My name is Dan Jonsson. I am Minister of Climate, Energy and Utilities in Denmark. In a series of conversations I ask some of the world's leading experts, policymakers and activists how to stem climate change. We, the human species, are confronting a planetary emergency. For more than 30 years the science has been crystal clear. The reason I believe we need to act now is because the facts are staring us in the face. The time to answer humankind's greatest challenge is now. So this gives us the best possible shot to save the one planet we've got. There is no Plan B because we do not have Plan B. You're listening to Planet A, a podcast on climate change and what to do about it. Today I'm speaking with economist Joseph Stiglitz. Stiglitz is an academic superstar. He won the Nobel Prize in Economics in 2001 and is currently working as professor at Columbia University. From 1995 to 97 Stiglitz served as President Bill Clinton's Chairman of the Council of Economic Advices in the White House. He then became the Chief Economist of the World Bank from 97 to 2000 before he returned to academia. Hello, sir. Hi, how are you? Good to see you again. Yeah, so thank you so much for joining me in this podcast. Sure. So you once said that the climate crisis is to be compared to World War III. Can you elaborate a little on that? What I meant by that was that we have to marshal all the resources that we have. It's an existential issue. And one of the points I was trying to make is when we fought World War II, we didn't ask could we afford it. We said we will afford it. We have to afford it. We cannot not afford it. In many ways, climate change is the same way that the threat to our planet is the risk is just too great to ignore it. So we've established that we need to fight climate change because it's a moral imperative. But asking you as an economist, does it also make economic sense to spend huge amounts of resources to fight climate change? One of the things I emphasized in the context of the pandemic is we're spending an enormous amount in responding to the pandemic. And to the extent possible, we should make that money do double triple duty because we have other crisis. We have an inequality crisis at the same time. And the good news is that we can do that. Not every dollar spent is going to do the same effect on all three of these crises. But there are a very large number of projects that can do double or triple duty. And so as we think about the recovery in the United States is spending an enormous amount of money, 25% of GDP. As we think about that, to the extent possible, we have to make sure that that money helps in the green transition. Yeah, well, if we look at what happened after the financial crisis in 2008, 2009. Unfortunately, the opposite was the result of the many stimulus packages adopted around the planet, not everywhere, but many places what happened was that the investment went into old fashioned infrastructure, into fossils. And of course, we have a big opportunity now to do it differently. Also, we have to admit there's a big danger that if we don't, if too many countries around the planet spend the money in the way that they've done previously, then we risk investing in some infrastructure that will in many decades ahead bring us in a wrong direction. You're making a really important point here, which is when you're spending money on infrastructure or buildings that last 20, 30, 40, 50, 60 years. And we know from the science that we have to be carbon neutral, roughly by 2050. So we are making decisions today that will determine whether we will be carbon neutral in 2050. We're not usually in the position of having to say what would the world be like in 2050. That's sort of a fantasy. But in the case of climate change, you have no choice. And that's why this moment where the United States and Europe are really beginning to take seriously climate change is the right moment. We can't, you know, we waited, we recognized the problem back in 1990, before 1990. It's now been 30 years and we've done much too little. We are now at a very critical point. I agree with you totally, but I would also say that there's reasons for optimism. Both the EU with its green deal, the growth strategy that's been deployed now, trying to help us out of the corona crisis. But certainly also, of course, in the US with the new administration and President Biden setting very ambitious targets and also investing a lot of money. Did you agree that there really is reasons for optimism? Oh, very much so. But it's a cautious optimism because, as you know, in the United States, under President Trump, we went the other way. It wasn't just we were not doing as much as we should. There was a real retreat from what had been done under President Obama, which had not itself been enough. So unfortunately, in the United States and a few other countries, climate change has been brought into the realm of the culture wars with those on the right attacking expertise. Science is why the pandemic has killed over a half a million people in the United States. And it is a nativism associated with all kinds of, you know, going back in time. So we have to recognize this particular political moment is a very difficult one. But hopefully, even the political forces that has been opposed to taking real action on climate change, hopefully they will also see now that even if they don't feel so strongly for actually preventing climate change, maybe they might not even believe that it's real, they still might be able to see the economic incentive to do something. Because I think you would agree with me that we are looking into a decarbonized world in which the companies, the countries that are avant-garde, the ones that are moving forward the fastest in this development will also be most competitive. Absolutely. And one important instrument for making that happen are the cross-border taxes, the border adjustments that have been proposed in Europe. I've advocated for 15 years, argued that in fact they are not only consistent with WTO, but actually are at the core because at the core of WTO are unfair subsidies. And for a country not to bear company, not to bear the social cost of its actions, is a subsidy. And part of the social cost of your actions is what you are doing to the destruction of the environment. And this is something that the European Union is now looking into. The Commission will put forward a proposal, a border adjustment taxation, meaning that we will see whether or not we can set up a system in which high regulation of our own industry, putting a price on carbon in Europe, does not just mean that jobs and production will move to other countries, for instance China. And the idea is that if you then put a tax on things that you can import of the sort that is very energy-intensive, then maybe we can remedy that problem. There are also some dangers there, though, because some people argue that well, first of all, isn't this just protectionism from certain European countries? Others argue, well, you're just then now going into a war with certain countries, especially in Asia, among them a very big one, and that will actually hurt the cause. So what do you argument towards them? These are issues that have been long discussed in my book Making Globalization Work. I cite a famous case where the United States argued that we had the right to impose a cross-border action. In that case, it was on shrimp that were caught in turtle and unfriendly nets that were killing an endangered species. And there was a global agreement about not killing endangered species, and the WTO said in that context, where there's a recognized global issue, as long as the United States or any other country imposes that globally. You don't pick out this country. You can kill turtles. In that country, you can't kill turtles. That's not part of the rules-based system, but if you do it everywhere, that's totally consistent with the WTO. And as I say, it's more than consistent. The point of the WTO is creating a level playing field, and if you are not paying for the cost of labor, that's a subsidy. Well, if you're not paying for the cost you impose in society, in environmental destruction, that's a subsidy. And so I view that as absolutely core to the WTO. Well, that's an extremely interesting point, and I also agree with you. I do see some debate before us, and definitely it's going to be a struggle. But it will be put forward now as a proposal from the Commission within a few months, I guess. What is the situation in the U.S. on this question? Is that something that's feasible in the near future? Well, the irony is that there's actually a lot of support in the United States, even among the conservatives, because they think the United States behaves better than other countries. Now, there's a little bit of misperception here, but the United States, under the Trump administration, submitted a proposal to the WTO in the last few weeks of the Trump administration that a provision like this be viewed under the -- be able to view it in the anti-subsidy provisions of the WTO. So the Trump administration actually supported something that was very close to this idea. So I don't know if they knew what they were doing, but the fact is that on both the left and the right there is an understanding that it is a form of state aid, not to make companies pay for their environmental costs. Okay, so now what we've talked about now is a border adjustment mechanism. Then, of course, another interesting topic is how do we put a price on carbon, for instance, within the European Union or even within a country like my own, and of course in the future on a global level. Can you talk to us a little bit about that you've written extensively on that topic? Well, you know, the core issue here is something that are very valuable to us are not correctly priced. We don't price carbon emissions. They have a social cost. We don't price water pollution. That has a social cost. So the question is, how do you go about putting a price, assess the social cost of carbon? And there are a couple of different approaches. An approach, you know, I'll describe it fairly roughly, but an approach that Nick Stern and I have been engaged in is to ask the following simple question. What price on carbon would, together with regulations and public investment, enable the world to achieve the goals set out in Paris and Copenhagen at one and a half to two degrees? And it's important for firms to see that price. So they say we better not pollute because there's a social cost and we need to take that into account in our actions. It's also important for governments because governments are always evaluating is should we put a tighter regulation here? There's going to be a cost and well, there's a benefit and the benefit is related to the social cost of carbon. So in everything governments and firms and actually households do, you need to assess the cost of the action versus the social cost of carbon. And so you have to get it right. And if it's too low, there'll be too much pollution. If it's too high, people will say we're encountering excess costs. And that's where the debate has been. Now, I've come out and said one of the first actions that President Biden did in the United States said we need to revisit the social cost of carbon that Trump had assigned, which was very, very low. And making sure that we would not meet the Paris goals. And I wrote some papers with Nick Stern where we said the social cost of carbon should be upwards of $100 a ton. And the Biden administration in their interim report, they had only a short time and they didn't want to go through all the legal issues and all updated the Obama number and they came up with the number like $60, which was much lower than I think is necessary. And at that $60, there is a real risk that we will have climate change, you know, three and a half, four degrees centigrade, and that should be viewed as intolerable. So that's really where I've come down on that issue. One thing that's being discussed in my own country right now, and I know also in many other countries is how do you make a carbon price that goes, that can be applied broadly in the society. Now, we do actually have a carbon tax in Denmark we've had it since 1991, but it's only on certain fossil fuels. If we want one that covers also industry, agriculture, transport sector, that's extremely difficult to design in a way where we don't risk then carbon leakage because jobs will just move to other countries and production will move or negative social consequences in terms of higher inequality. How would you advise policymakers like myself, when we are to construct such a system? Well, one of the reasons that in our earlier report, Nick Stern and I emphasized, you want to use a multiplicity of instruments, not just the carbon price. So you want to use regulations. Regulations are often criticized as cumbersome, very easy to write a regulation, no coal burning, electric generating plants. You know, I could write it myself, you can see, you can enforce it easily, you can see, is it using coal? You don't need a PhD administrator to administer, anybody can see whether it's using coal. So we often make this big deal about regulations being cumbersome and difficult to implement, not true. There's a very important regulation, very easy to implement. So carbon price regulations and public investment, you know, for instance, one of the worries is if you have a gasoline tax, which discourages people to use gasoline, that has an adverse effect on those who have to travel far distances, who are poor. True, but that's why you should have better public transportation. We should connect everybody with, you know, their homes with jobs through systems of good public transportation, which are carbon efficient and also help ordinary individuals, low and middle income individuals. So to me, I see a real congruence between those different objectives if we can use a whole portfolio of instruments. In terms of the issue about giving advantage to foreign companies, that's where the border adjustment that we talked about a minute ago comes in. That is an absolutely essential part of the framework. As you know, in Europe, we don't have a common taxation, so we would have to do it in individual countries. Now, we have a common internal market, as you know very well and have studied closely. So this means that if we were to make a high price on carbon in Denmark, I wouldn't be able to make also a carbon adjustment tax towards Germany, for instance, or Poland. So how do I make a system in which we have the high price on carbon, but I don't risk Danish farmers or having to close down in production just moving to Poland, or big production sites just moving to other countries where they might. And that would be a paradox, even pollute even more than Denmark because we have for higher regulation. Well, I think you're beginning to recognize some of the flaws in the design of the eurozone and the EU. The fact is that you have to work towards greater coherence in the tax system. And you've seen it with tax avoidance through Ireland and Luxembourg, real problem. Ireland and Luxembourg can rob the rest of the EU of all their tax revenue under current arrangements. So that's one flaw that people have begun to recognize and Margaret Vestiger tried some ways to patch it up. I don't think it's a real patch. But this is another one. So it would be good for Europe to create some mechanisms for common taxation across the whole EU. And particularly important, now that in response to the pandemic, you've issued Euro bonds. When you issue those Euro bonds, you should have thought, how are we going to finance the repayment of those Euro bonds? Natural answer, let's create Euro taxes. And a natural Euro tax is environmental taxes. So it may not fit in with an easy politics and you're in the area of politics, but it seems to me that this is an area where it would be both good for the economy and give the EU a better foundation, revenue foundation, in which you can undertake a lot of the other activities. If EU and had more, a stronger fiscal support, it might have been able to do better in acquisition of vaccines and the management of the vaccine distribution. Well, there's a lot of discussions we could start there. I'm a strong proponent of the European Union. I used to serve almost 10 years in the European Parliament. And I definitely also think that we should align more of our policies with regards to putting a price on pollution. But one of the problems taxation wise and the reason why I'm not that much in favor of aligning that is that we're so different in the way that we've set up our political systems. We, some of us are universal welfare states, Denmark, Sweden, some are more insurance based systems like Germany. You're not going to move into the American federal model where two-thirds of all spending is at the federal level. The question is right now, the EU spending is range of one-two percent of EU GDP. That's just too small. And what I'm saying is that you could have a, these environmental taxes, maybe a few other taxes, it's still going to be small. So that's not going to be inconsistent with the different countries in Europe going their own way in the broader social, economic policy. So I understand that there is a desire, a need, you might say, different circumstances in the different countries to have different economic frameworks. But if you're going to have a common market, you'd need some basic other aspects of commonality. And you've recognized that. For instance, you have the European Investment Bank, a very important institution. So you've recognized that, and I'm saying there's still a need for a little bit more common taxation. Time is of an essence, of course. We need to fundamentally change the way we produce and consume energy, but also food, the way our industry produces goods within the next 10 years. So we need a price on carbon more or less tomorrow. Now, we're trying to do as fast as we can in Denmark, but we've experts working on different models now, and it was probably going to take us a few years. But if we were to wait for, let's say that there could be a support for more European common policies on taxation, first of all, I find that it's probably not going to be very feasible. But if it was, it would take too long time. So the question, I don't know if you have any advice for us, but do you see any ideas of how can you manage it as a nation state in the European Union? If you want to move forward, like Denmark does, I think the Netherlands wants to do it also. Germany is also looking at different schemes. Are there any tools in the toolbox of an economist that you can use to avoid carbon leakage if you don't have a common European system? As you said, it's really difficult because you have this free movement of goods across borders. One thing that many countries do in their value added taxes give rebates on exports. So one of the ideas I've talked about is something like a value added carbon tax. So that when you export, you get a rebate, keeps your competitiveness, but in terms of production, firms will be very sensitive to carbon. And part of this is just making people think about carbon. To me, that's 80% of the battle to make, and particularly in most of the countries I know, I talk a lot to CEOs, they want to be part of the solution. And they're worthers want, and their children want them to. You put all this together. I think there's going to be a lot of people working hard to get to the climate change. Especially in Europe where it's been elevated to such importance in America with Biden, it's been elevated, the young people. So with that massive movement, I think we may be able to make it. And the only thing, as you say, is you don't want to have this carbon leakage. You don't want to encourage the production to occur in bad places. And the ATX style rebate may be one way of maintaining good production without losing competitiveness. And we're also looking at different ways of having concrete subsidies for the companies affected. So as we expand the tax base for the carbon tax, we try and preempt some of the negative consequences by helping the companies to transform their production before the tax sets in. Now, this is of course a pretty expensive solution, but right now where we also have money to spend in economic restart stimulus packages, that might be a good way of directing those money. Well, yes, one has to be careful within the European framework of being charged with state aid. You're not about, but where this could be particularly effective is in R&D, in training of individuals. And one of the main ways that we're going to achieve, protect the environment, achieve carbon neutrality, is going to be through R&D. And this then plays into your long-term growth strategy. If you're doing R&D, you're making your firms more competitive, and I've talked to some Danish energy companies, they're already ahead of the game. And they just said, it was so clear that fossil fuels were a thing of the past, and they recognized this early and began the transition, very brave, courageous, but it turned out to be very right. Yeah, well, the Danish energy company is sometimes placed as number one of the list of sustainable companies in the world, and they had another name before. They were called DONG, which is short for Danish Oil and Natural Gas Exploration. So, you know, that was an oil and gas company that's totally changed, and is now a very, very sustainable company, even also building wind farms in the US. Now, I'd like to ask you about a different way of setting a price on carbon, because we always talk about tax, and no doubt that is going to be a part of the solution. In my view, looking at the European level, then the cap and trade system that we have now, the ETS, that we are now also looking at expanding to the non-ETS sector. So now it's heavy industry in the future, it'll probably also be transport sector, buildings, and maybe even the agricultural sector. In your opinion, is that a better working system or worse working system than a taxation? In general, I've been more supportive of the taxation system for a couple of reasons. One is that the allocation of the rights to pollute, if you want to put it that way, is a very contentious issue. And sometimes they do it on a historical basis, how much did you pollute? But that rewards the companies that were slow in reducing their pollution. You give more rights to those who were the bigger polluters, and that doesn't seem fair. If some company got ahead of the game and reduced its pollution 30 years ago, they don't get many pollution rights. And then you have a lot of lobbying going on about, should I get more pollution rights? And then you have the lobbying about the aggregate level of pollution rights. And that's one of the reasons why the price has been low in Europe, relative to what it should be in the European trading system. So one thing that's very clear, there's a lot of things that are not clear. And that means that we will have to adjust the price over time or we'll have to adjust the caps over time. And so both of these are going to require dynamic adjustment. But it seems to me that the framework of taxation with regulation and public investment is a simpler framework and an easier framework for making the adjustments that we're going to have to need. Really? Because I would argue the opposite. I would say that, okay, I agree with you if you just put a price on carbon and then that's it. But because you need all the other mechanisms to make sure that it doesn't lead to inequality, to make sure that jobs just doesn't move and all of that, that would constitute a very complex system. Whereas in the ETS, I agree with you with all the problems that you mentioned that's been with the system so far. But on the other hand, instead of having to calculate what you think might be the right level for tax, here you can actually calculate exactly how much you should decrease your emissions and then put a cap on it. And you know that you will live up to it because you'll just cut the numbers of allowances every year. And I agree with you that for companies that's been doing a green transformation for decades, it's probably a disadvantage. But for companies that are doing a good job now, it creates the positive incentive that if they do it faster than they have to, they can then auction their allowances and that can help them then finance the transformation. The effect of the two systems in terms of incentives is very, very similar. And as you say, there is this question of dynamic adjustment. And what I wanted to emphasize is on both of them, we're going to have to repeatedly adjust and adjust as we go. So the argument that was used by a lot of people in the beginning, we know the quantity. And let's fix that and let the market determine the price. Is it okay in a static world? I found that a strong argument in a static world. It is much less compelling in a dynamic world with lots of uncertainty where next year we're going to have to re-examine. Was that the right quantity? So we still have to re-examine it. In the case of the price, we set the price, we see the quantity, we say it wasn't working, but we have to raise it. And so you go through exactly the same calculation in both. So there's a little bit of a false precision that was given in the early discussions where people pretended that they knew exactly the level of emissions that was going to be required to get to the one and a half degree, two degrees. Let me say in terms of this uncertainty, we don't even know what our goal should be when we began back in Copenhagen, it was two degrees. But the evidence coming in now is revised our thinking a lot. And we're beginning to think that the risk is so great that we ought to curb it to our goal should be one and a half degrees. There was a very influential IPCC report saying how much the difference is between one and a half and two degrees. So that just gives you another example of how we are going to be in a dynamic framework where we are going to have to every few years revisit this issue. And I could add to that that, I mean, that's true, we thought it was two degrees where after which the self-enhancing effects would set in and we needed to stay below that. Now, I think most scientists would say it's probably 1.5 degrees, but adding to that, we're not even sure how much of a concentration of CO2 particles in an atmosphere that correlates to. I think we used to say 450 ppm for two degrees. Well, that might not be true. It might be 350 if that's the case, then, well, basically, we're already in a very bad place. So this is so complex, but nonetheless, as politicians, decision makers, we are trying to build systems to remedy this. And maybe, well, I'm beginning to think at least, that maybe instead of focusing too much on these market-based instruments, they are a part of the solution. And I'm not neglecting them. But maybe we should start with the other more easy solutions that we know will help. We don't know exactly how much they will help, but they will help regulation, for instance. Why not say, let's have a phase-out date of new combustion engine vehicles on the market. From 2030, you're not allowed to produce a combustion engine car anymore. I agree absolutely. There's no coal-fire electric power plant, no all cars have to be electric by 2030. A simple regulations that are easy to implement, necessary if we're going to be carbon neutral, we know they're necessary. We know they're not sufficient, but these are big things that we can do quickly. And as I say, it's all part also of making people start thinking green. And there are many other components where you're not going to be quite so regulatory, but as people start thinking green, I don't know if... In the United States, there's a lot of people are moving towards vegetarian, vegan, there's a lot of interesting research going on and creating foods that are vegetarian-based, that are like meat in terms of the protein and AIDS. So we are succeeding in many ways of a very rapid transition. The pace at which the cost of renewable energy has come down has been phenomenal. This gives me some optimism, but one of the things that we know about markets is that they're often lethargic. They don't look very far ahead. They need a little push, and the regulations can be a very constructive way of pushing the markets. And of course, and this probably goes contrary to what many economists would say, but I don't know your opinion on it, but I would say we're in a situation where we really need to pick the winners. Now, you focused on R&D earlier, and there's a lot of good to be said about that the scientists decides where to do the research, and then we'll see what they come up with. Because we're so busy, because we need action now, we need to also focus on some technologies, carbon capture and storage, carbon capture and utilization, power to X, all of these things. And the reason why I believe so strongly in this is that it's been done before. If we look at all the technologies that are helping us now, you mentioned the low price on renewables. Well, when we made the first offshore wind farm in the world in Denmark in 1991, it really wasn't a very lucrative business, and we had to spend a lot of money subsidizing it. Thank God we did, because that was the beginning of what is now turned out to be very good, not only business, that's one part of it, but more importantly, it helps us in the green transformation globally. So what's your opinion on governments being quite aggressive in subsidizing new technologies? So first of all, let me say that a lot of what needs to be done can be done with old technologies. I mean, for instance, we know that we can make much better insulated buildings. Getting to the goals that we need is a societal transformation, and we just need to have regulations saying, if you want a mortgage, you have to have a green building. So we can get a lot better. Let me make that clear. And when you think of R&D, you often think about R&D in the big things, big technologies, big turbines. But a lot of the advances are little things, making buildings more energy efficient, architects working day and night to get a better building. So you shouldn't just focus on the big things. But on the particular issues, governments have always picked winners. They have to. All basic research is financed almost by governments, and governments have to decide where that money should go. Their citizens want them to. And I got to say, the US government has done a fantastic job. Good portfolios of research projects, you want a portfolio, are going to have some big winners and some things that are not going to pan out. And unfortunately, the critics always pointed to the things that didn't work. They don't talk about the things that did work. Among the things in the US that did work, the internet, how much have we benefit from the internet? Basically, in the middle of the pandemic, the browser, could we have used the internet without the browser? But even electricity, a lot of people focused on the one failure. Tesla, the car company, the most valuable car company in the world now, got a half a billion dollar loan from investment from the US government. That was a good winner. I did a research when I was chairman of the Council of Economic Advisers, and I looked at our average return on public investment in R&D. It was about 70% rate of return. No private sector comes anywhere near that rate of return. So basically, to finish this great conversation, more strict regulation, put a price on carbon, and invest heavily in research and development, and don't be afraid to pick winners. And that said, we'll save the planet. That's right. Okay, Mr. Stickles, thank you so much for joining me, and thank you so much for your insights in these issues over the years, both climate change globalization and not least the price of inequality and how to avoid that. It's been a pleasure reading your books and a great inspiration, so thank you so much for that. Thank you. You've listened to Planet A, a podcast on climate change and what to do about it. If you want to know more about the climate policies of Denmark, you can follow my ministry, the Danish Ministry of Climate Energy and Utilities, on social media platforms such as Twitter, Facebook and Instagram.