Nature Podcast

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David Goldston: Welcome to the first in our series of special podcasts on the US presidential campaign. I am David Goldston. Today, we will be talking about energy and climate policy. Both Senators Barack Obama and John McCain have said they want to reduce US greenhouse gas emissions, but are their proposals up to the task. We will be talking about climate policy, energy policy, and energy research and development today with Joe Aldy of Resources for the Future, a think-tank in town. Good morning Joe.

Joseph Aldy: Good Morning David.

David Goldston: And Steve Cochran with the Environmental Defense Fund. Hi Steve!

Steve Cochran: Hi David!

David Goldston: And from North Carolina by phone Richard Newell, professor of Economics at Duke University. Good Morning Richard.

Richard Newell: Good morning.

David Goldston: And I wanted to start by asking each of the guests, what are the most important few steps that the next president can take in energy and climate? Joe Aldy, why don't we start with you?

Joseph Aldy: Thank you David. It's a pleasure to be here. I would like to focus on three issues, two in the context of climate change policy and one on energy policy. First I think it is important for the next president to focus on what we can do in terms of our domestic mitigation program. So specifically, how do we go forward and actually create policies that will lower our emissions of carbon dioxide and other greenhouse gases. I think when we've seen the action in congress over the past year and a half as well as from the campaigns, it looks like we'll move forward with a cap-and-trade program and I think that's actually a very important way to set the right signals for firms in the private sector and for households to start changing the behaviour in a way that can deliver benefits for the climate. So I think, it is important to move forward and come into an agreement on what the quantitative targets would be over time and how you would go about implementing the emissions trading program and we can discuss a little bit later some of the details there, but I think that's important to really lead to the second point which I think is important which is re-establishing leadership in the international arena. The United States historically had been a strong bi-partisan supporter of climate change policy when we go back to the early 1990s and unfortunately the world has moved past the United States as it sat on the sidelines for much the last seven years. So I think it is very important for the United States to take a leadership position, especially as we are working towards developing the successor to the Kyoto protocol. The next agreement to govern the global effort to address climate change and I think having a domestic program will provide the opportunities for the next president to be a leader to engage China, to engage other developing countries to work with the Europeans and the Japanese to craft that next agreement. I think the third area where the next president can demonstrate a lot of leadership is on energy policy and specifically without a heavy mind there is the opportunities for the president to push for more energy research and development on both new technologies to power the economy and new technologies that allow us to use less energy for generating economic output. When we look back over the last 25 years, you've seen a dramatic decline in energy R&D.

David Goldston: Great! Thanks, we will come back to each of those issues. Steve Cochran.

Steve Cochran: I think broadly the most important thing for a new president to do on this issue is to lead and there has been a clear failure of leadership for a long-time. The globe isn't able to take its obligations to deal with climate seriously if the United States doesn't and there is an opportunity now with a new president coming into will be able to do that. The form that takes is important, but what's critical is for the president to identify taking on these issues as a significant priority. Any new president who will come in and be faced with what we know today will be problems dealing with the economy, energy problems directly in terms of our sources of energy and our dependence on those and then range of issues which we may not even be able to identify yet. A leadership focus on this issue is going to be critical when it can't fall down to the third and fourth and fifth tier. The second relative to domestic policy, we would like to see an aggressive movement forward both legislatively a new presidentship propose a framework for dealing with the climate change and energy. At the same time, the president also needs to drive for the administrative process and then finally as Joe said I think it's critical for the new president to immediately re-engage with the international process. The process has to begin right away, so that our positioning, our engagement, re-establishing of our own role in the international process can be established. So those three things to lead, to push domestically and re-engage internationally I think are critical for a new president.

David Goldston: Richard Newell.

Richard Newell: There is three major concerns that are motivating the current focus on energy policy in the United States. One is concerns of a global climate change. The second is concerns of our energy or national security and the third is short run pain that has all sorts feeling due to much higher gasoline prices and in this coming winter, home heating prices. So, I think that the next president is going to have to engage in policy and negotiations with congress to move forward on all three of these issues. On the climate front I think the other panellists have pointed out the importance of both the domestic policy which establishes an economy wide market-based solution that provides a widespread encouragement of new low greenhouse gas technologies across the entire US economy and at the same time engaging at an international level because the United States can't do this alone, this needs to be something that's done on a very broad-based basis across the globe. Second our national security, it's going to be important for the president to both focus on energy efficiency to be ready to use the strategic petroleum reserve, if that's warranted under emergency conditions and to be careful not to circumvent market forces where those market forces are sending the right signals as they currently are with gasoline prices and so the president is going to also have to resist bad policy. Finally on the short run pain again there is going to be a need for the president to resist policies that circumvent energy markets and instead if there is a need to address short run concerns with high energy prices for low income consumers, the best way to do that would be some type of a targeted tax credit or rebate.

David Goldston: So, let me follow-up on something you just said. When you talk about not circumventing market forces, what specific concerns you are reflecting there?

Richard Newell: I'm reflecting concerns that there is a huge amount of political pressure that builds at a time like this, where people, you know, on a weekly basis go to fill up their cars and pay over $4 per gallon of gasoline for policy makers to feel like they need to do something. Particularly if you do something that short-circuits high-energy prices, those high-energy prices exist because demand has been growing at a faster rate than supply. So those prices are sending the right signal to people, which is to cut back on gasoline use to find alternatives. If you dampen those price signals either through repealing gasoline taxes or by using other means that, you know, try to directly change energy prices, then you're reducing the incentive that people have to conserve and invest in more energy-efficient technologies. This is not going to be any kind of a long-run solution to the problem, and this is in fact a long-run problem of supply and demand of basic energy sources.

David Goldston: So, Richard points out that these concerns about energy don't all push in the same direction. To put it mildly, the pain one goes in the opposite direction of what's needed for climate and energy security. So far did the campaigns look able to face this head-on and talk about the fact that there is going to be some discomfort to get the long-range energy policy we need. Joe, can I come to you on this?

Joseph Aldy: Well, I think, we don't hear them talk too much about pain that's probably not in their interest as politicians right now, but when we do at look at their proposals what both campaigns are advocating on cap-and-trade will raise energy prices. Both candidates have called for reducing our greenhouse gas emissions to 1990 levels by the year 2020 and then they have ambitious goals to the year 2050, McCain's is 60% below 1990 where Obama's is 80% below 1990 by 2050. I think what is important is actually looking at and where there is actually difference between the two campaigns is what you do with those allowances that when we create this scarcity by putting on this cap, the right to admit greenhouse gases has value and there's a question of whether or not you decide to give those allowances away to the firms that emit carbon dioxide or do you auction them away and the Obama Campaign has actually called for a 100% auction. That actually gives the government a lot of revenues to work with. It actually helps deal with those who may be most adversely effected from the policy, whether it's low-income households who spend a greater share of their budgets on energy or workers in energy-intensive industries. Those revenues free up opportunities for the government to try to address those needs. It also provides revenues I think to help do some of the other objectives in the energy policy such as the investment in R&D that I think is really necessary. So, I think that's one area where they are trying to help try to deal with this pain, but I think it is important to recognize however you want to cut it, if we're going to get serious about climate change policy, we're going to have to change the prices of fossil fuels.

David Goldston: And at what point does somebody have to say that directly to the public?

Joseph Aldy: Well, I mean, for one thing it certainly came up in June during some of the debate in congress over the Lieberman-Warner bill there, are countless economic analyses out there generating estimates of what the increase in gasoline and electricity prices and natural gas and heating level will be under various proposals. So the estimates are out there. I think in one sense why we don't see it getting played up by the campaigns in addition to the fact that neither one of the campaigns want to say, we're going to raise energy prices when gasoline is already $4 a gallon. I don't think there's a difference between the two campaigns and the impacts on energy prices in the near term. They have identical 2020 targets, very little difference, I think, from an economic standpoint of what their 2050 targets are. I think that's one reason why we're not seeing a lot of this debate. There's not much of an appeal, I think for a politician to say, I'm going to raise your energy prices, but just as much as the other guy and that's why I don't think we're getting that part of the debate.

David Goldston: Steve, your thoughts on the campaign rhetoric and also on allowances, whether they should all be auctioned and what the revenues might be used for.

Steve Cochran: One of the interesting things that's to me to be interesting to watch during this campaign is that there's an irony here and that the short-term concern about gas prices, which is very real and very strong. It has been interesting to watch the campaigns, how they responded. They both have a series of advertisements that they run both on the web and on television, which have not shied away from the need to transition from our current energy mix both because of climate and because of security issues and they really both begun to talk significantly about the economic opportunity associated with that shift and I think part of the way politically to help manage the transition from where we are today to where we need to go is to identify in very concrete terms, not just in a sort of warm and fuzzy way what new investments in energy sector means, where those dollars would go, where those jobs would be created, where an auto worker who was current making an SUV will now be making a hybrid transmission. As those concrete examples of what a new economy can look like as those examples come forward that help that worker see where she or he fits in the future that we're talking about that makes it easier for a political decision to be made and what's going to be critical for a new president is to be able to articulate that, identify that, make that very clear to the public, so that they can ease some of the concerns, that's one thing which is qualitative, not quantitative, but critical I think to help do that. The second piece of it is that there's been a significant new entrant into the discussion about dealing with climate and that's the auction. Even 2 years ago at the national level there was no discussion about auctioning revenue. It would have been done the way previous, in this particular case in America, the acid rain program was constructed, which was a pure allocation of the allowances to the emitters. With the introduction of an auction that fight is not finished yet, there are a lot of people who are counting on getting distribution of allowances for free who are now going to have to pay or have to pay some degree and that'll get sorted out in a congressional process, but I think my own crystal ball suggests that there is going to be some money that comes along with this and in fact in Washington it may be as big a problem is this is, it may be the only problem that actually comes with money, which we can use along the ways that Joe was talking about which is to help manage the transition. So, no candidate can seriously talk about this as a free transition. It's not going to cost anybody anything, but there are resources to be able to use to help manage that transition, the challenge from a policy perspective is going to be doing that in a way that doesn't interrupt the market signals that we so desperately need to send to develop the technologies to have the investments in the private sector that we need to move in this direction.

David Goldston: The transition period will still be tough obviously and it will be interesting to see, I mean the auction may be something that the candidates actually do debate, since McCain has been less interested in auctioning, but I want to get back to this point about having the economy make a transition, Richard, that's in your bailiwick. Two questions, I guess. One is how much money should we be spending in the next presidential demonstration on R&D and how can we make sure that that's properly focussed and two, how do we make sure that this doesn't end up just being R&D without getting whatever comes out of the laboratory into the market place.

Richard Newell: As I get to that let me make one point on this question of allocation and it relates to this question of R&D and technology funding, even as current climate proposals have moved toward greater incorporation of auctioning into the system and therefore greater potential raising of revenue. The expenditure of that revenue is being earmarked to a lot of different programs and it is not being rebated in the form of tax reductions which is what most economists would recommend to do with the vast majority of that revenue. So, I think there is a large opportunity here to rebate some of those revenues back to households and therefore address a degree of the concern about rising energy prices. Now a lot of the revenue is being earmarked towards technology, it's actually being earmarked toward technology deployment largely, which is subsidies to specific different technologies rather than a primarily research and development which is where I believe the focus should be. The establishment of a cap‒and-trade system puts in place an emission price for greenhouse gases which is going to stimulate firms and households to buy more energy-efficient technologies. It's going to provide the incentive for firms in the private sector to invest in innovation and research and development so that they can make profits by selling these green technologies to consumers. In terms of what types of technology it doesn't make sense for the government, the part of the puzzle that is least likely to be undertaken by the private sector in response to a cap‒and-trade system is basic research, basic long term research that addresses climate and energy security concerns but focuses on the type of research that gets done at universities and other research institutions. So that's where I think the focus should be. As I have studied the problem, it's very difficult to pin a particular number on how much additional money makes sense to spend on climate mitigation and energy R&D. many people who have looked at this problem think that roughly a doubling from current levels of energy R&D from about 4 billion dollars to perhaps 8 billion dollars over a sufficient period of time so that this money can be absorbed in a reasonable way. If we put too much money into energy R&D over too shorter period of time, there is going to be waste. People will become disenchanted, we will potentially drive up salaries as oppose to increasing research effort and so I think this needs to be done in a careful way over the next, you know, 5 to 10 years.

David Goldston: Before we move on from R&D, are there any particular research areas that seem especially ripe for government effort, the Bush administration, for example put a lot of money into hydrogen, Richard.

Richard Newell: There is a need for a broad portfolio of research to be done. I think one of the mistakes that we have made in the past over many decades is, you know, picking the technology winner of the, you know, the next four years, you know, be it hydrogen or synthetic fuels or nuclear or something else. I think that there is a number of key underpinning technologies that are going to be necessary to solve some of our problems. One is the basic scientific underpinnings for better energy storage. In order to have increased use of renewable energy, in order to potentially allow electrification of the transportation system, we are going to need better energy storage capability such as in batteries. So, some of the basic research that's necessary to move forward in chemical engineering and electrical engineering to advance the potential for energy storage is very important. There is basic research that needs to be done in materials research to support things like, you know, LED lighting and solar photo-voltaics. There is work that's going to be need to be done in, you know, less expensive hydrogen production if indeed we are going to be able to use hydrogen over the longer run as a clean fuel source for transportation and for electricity production. There's some research that needs to be done on so called smart appliances, so in the information technology sector that are enabling technologies in real time to respond to energy price signals is an important area for research. So, there's a number of different areas but it's widespread, I think it's a mistake to focus on the technology of the day.

David Goldston: Joe what's your thinking on technology areas?

Joseph Aldy: I agree with Richard that we need to have a diversified portfolio of R&D that we shouldn't pick just one winner. Having said that let me pick a winner right now and I don't know if it's going to be a winner, but I think it illustrates an opportunity for cooperation actually internationally and that's in the area of carbon caption and storage. I think one appeal for government intervention on this is the fact that carbon caption and storage technology, the idea that you would actually grab the carbon dioxide as being emitted say from a coal-fired power plant smoke stack and then putting it underground, so it never enters the atmosphere. There is no reason for utility ever to invest in that technology unless you have a very serious domestic program that regulates carbon dioxide emissions. When we look at other countries in the world that have fast growing emissions like China, whose emissions have grown incredibly fast this decade and they've actually passed the United States as the number one emitter on an annual basis of carbon dioxide emissions. It's because they burn so much coal. We burn a lot of coal. We can also look at a several other important countries around the world. India burns a fair amount of coal. South Africa has a lot of coal. It actually creates an opportunity that if we can collaborate with these countries in developing carbon caption and storage technology and may be a way to bring them in and slow the growth of their emissions over time and really help play a role in trying to re-establish our leadership internationally. So I think it's important when we think about R&D, not just what do we do domestically, but recognize that whatever technologies we develop can be used around the world and find the opportunities to coordinate and cooperate with other countries.

David Goldston: Before we go to Steve on that point indeed half of US electric generation is from coal. Richard talked about basic research, usually the projects that have been at least talked about on carbon capture and storage are more on the demo projects. US had an aboard of projects FutureGen, Australia has a ZeroGen project that looks like it's got some promise that's a lot more expensive than what FutureGen was looking at. What kind of government involvement should there be in looking at CCS, Joe.

Joseph Aldy: Well, I think one way to think about this that's different then say the FutureGen approach which actually when the Bush administration revised their position on that. They recognized that instead of having one big project may be a number of projects make sense. In some sense, there is a sort of this general class of technology that woke our carbon caption storage. There's a variety of ways in which you can capture the gas and actually how you go about storing it. You could just pump it deep under ground, you can actually mineralize it, you could pump it deep under the oceans. So, there is different ways in which you can approach and I think it makes sense to actually fund projects where you try to understand the different ways of doing this.

David Goldston: Steve, environmental groups have sometimes had mixed feelings about CCS, because it keeps coal in the future. Others say coal is unavoidable and we are doomed without CCS. What's your sense on government investment in that as part of an overall climate program?

Steve Cochran: Just a couple of points here. One is the point that both Richard and Joe have made about the need to have policy, which doesn't pick winners and losers, I think is a critical one. Having said that we are in a situation now based on the science, where if you read history you know that the world has made transitions from one type of energy source to another. We've done that several times throughout history and if you look at the timeframes involved they are in the 75 to 125-year kind of timeframe, we don't have that luxury here and that's the principal problem. We have to hurry history. We have to move more rapidly through this transition than we've ever done before. There is no reason for China to have to develop the same way we did, yet they are because we are not helping them not do that and so trying to focus resources in a way that can help short circuit that decision making which is so damaging long term, if we just allow it to play out is a critical piece of this I think and that means money for deployment as opposed to just pure R&D.

David Goldston: Are there particular mechanisms that people think would work on that that make economic sense to both donor and the donee country in the technology area, Joe why don't we start with you on that?

Joseph Aldy: This is an issue that has got now a lot of interest in the international policy debate since the Bali negotiations last December laid out the 2-year road map. I think one thing to keep in mind when we talked about developed countries financing technology transfer in developing countries, even if the governments in the United States and Europe and Japan step forward and put several billion or even 10 billion dollars a year in a fund, this is a really smaller drop in the bucket of how much investment we expect in the energy infrastructure around the world. If you look at the International Energy Agency in Paris they have estimated that they will spend roughly a trillion dollars a year over the next 20 years investing in the energy system around the world and so it's important to think then what impact can really 5 or 10 billion dollars a year from governments have. What's important too is to say well, if we are going to provide this assistance to you what additional policies are you going to do and so I think we need to think about this not as just what do we get like just how many tons of carbon dioxide or other greenhouse gases are we going to mitigate. What can we leverage out of additional policies and measures out of these developing countries to really modify their development path. So it's a more climate friendly, a less carbon intensive development path than what we have.

David Goldston: Steve, you also talked about international leadership.

Steve Cochran: I think it makes sense, there are a couple of other things I would raise. One is that a critical peace from our perspective and the effort to try to manage this transition is to focus on forest as well. These are the lungs that we depend on. They are being destroyed at unsustainable rates. The destruction of them itself is adding about 20% of the emissions to our greenhouse gas concentrations around the world.

David Goldston: So let's get back to domestic policy. Well, we have been talking as if cap-and-trade is going to happen or at least that's been the underpinning of everything we've been talking about. Let's say it doesn't or at least that it takes sometime. What are some of the other tools, the policy tools that the government should be looking at and are some of those things that we need to do even within cap-and-trade. Richard you want to start on that. What kinds of policies other than cap-and-trade should we be looking at?

Richard Newell: It's interesting. This is actually an area where the two presidential candidates are different quite a bit when you go beyond cap-and-trade and look at the other energy policies. The Obama platform tends to be quite a bit more Activist on that front than I think the McCain policy is, I mean, so you raised a good question. I think the key things there again cap-and-trade is absolutely fundamental to addressing both greenhouse gas and energy security problems coupled with research and development effort. Beyond that I think the next most important thing honestly is energy efficiency. There are some additional market based reasons to think that due to, you know, poor information or due to other incentive problems, some government policy in the area of energy efficiency standards is warranted both with respect to building technologies and transportation. Both of the candidates have supported those kinds of standards I think relatively speaking Obama has been more Activist and would be so in the future. When you get to a particular technology subsidies it's interesting. McCain has historically been more opposed to energy subsidies across the board including renewable energy subsidies and tends to be in favour of repealing ethanol mandates and subsidies and standards. One exception to that actually is nuclear power, because he is proposed to build 45 new plants by 2030 and eventually a 100 plants. On the other hand, Obama tends to be supportive of policies which are subsidies more in the direction of renewable energies such as our renewable portfolio standard and increasing the bio-fuel standard to 60 billion gallons by 2030. I tend to think that most of what we are hoping to achieve through these policies is best accomplished through a broad-based climate change policy. I think it's to be honest, putting the cart before the horse, to focus on specific technology subsidies.

David Goldston: Joe what are you thoughts on that both on the supply subsidies and the demand policies that Richard talked about both in terms of timing and their value and in and out themselves.

Joseph Aldy: Well I think it's important to recall why there is such policy interest in cap-and-trade to begin with. Why is it they were pursuing this approach? Why is it we pursue that approach to deal with acid rain as Steve mentioned earlier, in contrast to how we started undertaking environmental policy in the 1970s and it's because you recognize that by setting an overall aggregate goal on your pollution and then effectively establishing a market for firms to trade this opportunity to admit the prudent they can figure out what the low cost way is at meeting that goal. They can find ways which a government regulator can ever even imagine to lower their emissions at low cost and exploit all the potential opportunities available and that's why I think it's important to really focus on trying to get as broad a possible coverage in a cap-and-trade program that these other policies these other, for the most part either performance standards or subsidies are inferior in the sense they will cost more to deliver the environmental benefit the more that we would expect out of cap-and-trade

David Goldston: Steve you've certainly been involved over the years in trying to get congress to move an interest hasn't always translated into actual action yet, although the interest is certainly growing. What I mean getting back to some of the things we talked about at the beginning, the mixed public reaction on this and so forth. I know that the environmental committee has been very reluctant to see a piecemeal approach. What do you think will help move things forward other than obviously a president pushing?

Steve Cochran: I was talking about this the other day and described climate policy as the younger brother that your mother makes you take to the movie when you are about to go with your friends when you are a teenager and have a good time and you're really not happy about it and you're irritated about it and if you can drop him off somewhere along the way you will and pick him up may be later. This is going to be hard for the congress, because.

David Goldston: This is actually asking to take your little brother and you are him paying him for out of your own pocket.

Steve Cochran: That's right. And sorting through the interests that are potentially affected here is going to be very difficult and we've seen frankly a great deal of reluctance on the part of members to really engage in this. John McCain gets credit for forcing members back when nobody wanted to talk about this to have to deal with it. My own judgment at this point is that given the economic situation we're likely to be facing given their continued concern about our both dependence and the volatility of energy prices that the next president is going to have to pack each climate with significant economic stimulus, so that these two things can go together and be seen as an opportunity rather than just the really bad medicine that you have to take.

David Goldston: One thing that has happened in the debate is that it's shifted somewhat from a debate about whether climate changes are real although you still hear voices on that too, the cause which is actually a sign of people are getting more serious, but I am not sure people are as familiar with the range of opinions on the cost side of the debate and it may not be the same kind of consensus, so I wonder if first Joe and then Richard can talk a little bit about what kind of range of estimates there are and where are we since that's likely to be the real sticking point in the climate debate.

Joseph Aldy: In terms of the cause, the devil is really is in the details here and how you design a policy. So, you know, I could say both campaigns advocate for 1990 levels by the year of 2020, but there's a number of issues that how you implement that goal, that can have an impact on you know the price of gasoline and the price of electricity that the average American faces and it is an important part of the debate and in fact the, sort of, lingo here in town is that there is debate over cost containment. How do we make sure that the costs don't become unexpectedly high; and there is a variety of ways to do that. The estimates out there range, I wouldn't say all over the map, but they vary by probably a factor of 2 to 3. So you could see anything in the order of perhaps, you know, 20 cents a gallon increase on gasoline to may be 40 or 50 cents of gallon increase in gasoline by the year 2020. But some of the factors that can really influence this are how much flexibility you provide in meeting these targets. For example one thing that one can do is, is to allow firms to be able to not just trade among themselves in a given year but also trade across time. So there may be some years in which, in a sense to, actually mitigate your emissions more and save your emission allowances for use later. This is actually one of the successful elements in the acid rain program, how to have this initial banking effort. In a sense you can think of it is just a sort of, you know, a rainy day fund. At some point in future, may be it ends up being more expensive to reduce our emissions; well we will do some extra effort early on to make sure that will help smooth out the cost. When one looks at some of the recent debate in congress, there's also a discussion of effectively what has been referred to as a climate federal reserve. So that you have sort of a committee of experts who would be evaluating the emissions allowance market and if prices go unexpectedly high may be you would actually have the government effectively borrow from the distant future, if we are setting targets out to the year 2050, this would actually force borrowing some of those emissions that you would be allowed to made in the years 2030 or 2040 and bring them forward, but that would effectively make the target, you know that is in future much tighter, but the idea...

David Goldston: So we'll not only have federal climate reserve, we'll even have a federal climate debt.

Joseph Aldy: Well we could have that as well, yeah. So there is a variety of ways in which, when you really dig into the details, how you're going to impact what the bottom-line will be to the average American household.

David Goldston: Richard, any additional thoughts on that?

Richard Newell: Yes this question about the cost of domestic US climate policy, there is a significant degree of uncertainty and think Joe has pointed to some of the potential ways of designing policy to try and limit the upper bound cost to the economy, two other key features of uncertainty that I Joe didn't mention is that drive this, are that we don't know exactly what our greenhouse emissions are going to be in the absence of any policy. This is going to depend on how fast the economy grows in the future, which there is a significant degree of uncertainty about and also depends on what kinds of technologies are likely to develop in the future, even in the absence of climate policy so that drives some of the uncertainty. The other thing that drives differences in these cost estimates are which technology options are on the table for dealing with climate policy. In fact you see a very significant difference in the ultimate cost of achieving certain targets depending upon the degree to which you can use offsets or you know biological sequestration and other means of reducing greenhouse gas emissions, it is dramatically affected by the extent which you have nuclear power available as an option and carbon capture and storage available as an option. Studies that I have seen you can, you know, double the cost if you don't include these technologies as a part of the picture. There is a couple of different ways to look at the cost. On the one hand, you can look it and say, well, most of the cost estimates that come out is that you know to achieve some of the main targets that have been proposed in US legislation would, you know, cost may be around 1% of GDP on average and that seems like you know an affordable cost and I think it is. On the other hand, one could look at it differently, which is we have a huge economy and 1% of GDP is measured in the hundreds of billions of dollars per year, and so I think that it's appropriate to think about climate change as a problem which we can afford if we are to deal with, if we do it in a deliberate manner, in a flexible manner over a long period of time, but it is going to cost a large to give money in aggregate and I think it's important to try and moderate the cost as much as possible and we've talked about ways of coupling climate policy with other economic policies such as reducing other taxes in order to moderate this cost.

David Goldston: Couple of last questions: I don't think I've ever been at a conversation that's with a topic with a congress where someone hasn't said, 'we should really do a tax instead'. Joe, either you've shown great restraint or...

Joseph Aldy: I do like taxes actually.

David Goldston: So I just thought I would ask is this is just the sense that politically that's unrealistic or the advantages of cap-and-trade versus tax, the differences don't matter that much. Why has tax been off the table in this conversation so far? I am not advocating it myself; I'm just trying to bring it in there so that something usefully comes up in the debate.

Joseph Aldy: Well I will start since I like taxes. I mean I think the important thing that recognizes whether you do a tax or a cap-and-trade, you are sending a price signal that changes people's behaviour and if anyone tries to make an argument that 'Oh, I like cap-and-trade because I don't like energy taxes'; they are either not understanding the issue, or they are not being straight with the American people. Both policies will raise energy prices. I think the reason why a lot of economists like tax is that it does provide some certainty to firms to make their investment decisions. I think the important thing to recognize though is that they are not as different as one may play them out to be there. There are ways in which you design cap-and-trade to mimic some of the positive attributes of a tax, positive in the sense, that I see is an economist in sending the right signals, to be bold to change the behaviour, to lower the carbon intensity of our economy. And so I think when you modify a cap-and-trade in such a way which is part of the debate, certainly in congress where they have addressed some of these issues under the, sort of, category of cost containment mechanisms. The differences between cap-and-trade and tax become much smaller and so I think you still see there are actually a couple of bills dropped in the house this year advocating for carbon tax. You certainly see that by a number of other prominent individuals are there. I mean former vice president Al Gore is actually to call for a carbon tax and to use the revenues to reduce payroll taxes and I think the important thing that recognizes that if you do cap-and-trade and you auction the revenues, you can then use those revenues to cut payroll taxes just as well. So I think a lot of it the benefits of what economists see in a tax, you can get in an appropriately designed cap-and-trade program and either one is I think much better, much superior to a lot of these, sort of, traditional command and control approaches we have to regulate inclusion.

David Goldston: Steve one of the things that I think environmentalists also preferred about cap-and-trade besides the fact that seems more politically feasible is that you actually know the level of carbon emissions or greenhouse gas emissions you're going to get, although the price is more variable as Joe referred to, what's your thinking on this?

Steve Cochran: Yeah, I mean uncertainty which is, this issue has been dominated by uncertainty both on the science and the economics. The certainty on the science is, there is still obviously uncertainty in lots of elements of the science here but the broad conclusions seem to be accepted, but one of the uncertainties that we would prefer government policies to manage is what are our emission levels going to be and a tax doesn't tell you that. A tax says we are going to estimate what the level would be in order to try to get the behaviour change that we want, but it is a guess. And so our comfort level goes up from an environmental perspective with certainty along the emission side. Having said that I had two other political commentaries about a tax which makes it very similar to a cap-and-trade system. All of the political pressure in the debate on the levels of reductions and their cap are to make them as little as possible and because as you raise the level for requirement you lower the cost of implementation and so from a economic perspective, there are going to be all other forces who don't want to have to pay are going to be pushing the same thing is true on a tax. Once you get a limit introduced which you get a price introduced all of the pressure, political pressure is downward, is to make that cost as well as possible and so both suffer the same political challenge there. The second is there has been concern raised about cap-and-trade system being too complicated, particularly with carbon. There are so many sources there are so many difficulties in measuring and monitoring and making sure that you have the kind of complete information you would like to have to have a market function; appropriately that is just too hard we can't understand it. So my political experience says that I have never seen a tax introduced to go through the process and come at the back end without a whole range of exemptions and modifications and changes, which create the complexity that is today our tax goal. So I think both of them suffer the same fate in the political process then we have to try to mange against as we go forward. Our perspective is that we got to make sure that we are measuring what it is that we want to manage here, that's emissions, that's where we have the start and go from there that's what cap makes sense to us.

David Goldston: Let me move finally to something we haven't talked about, which is adaptation, including some people throw in geo-engineering as a possibility. What kinds of things should we be doing, is that one of the things that adaptation generally, one of the kinds of things that should be possibly use of auction revenues should that be done on a separate policy track. What role should adaptation play in an overall climate policy? Steve why don't we start with you and then go on to Richard and Joe.

Steve Cochran: Well that the unfortunate news now is that we are already seeing changes in the country and around the world from concentration levels that we currently have and so under any scenario by which we return what our projected emissions would be to back to current levels or below suggest that we are going to have continuing challenges before we manage to make that happen over the next century or so. So adaptation, we are going to have to do some of these things and some of it is going to be wildlife oriented and habitat oriented really trying to look at how we can help manage and prevent the loss of habitat and therefore species and in the Warner-Lieberman bill there was money out of an auction set aside to try to do that and we think it does make sense to look in that way. Adaptations also going to be frankly more expensive and thanks having it with the infrastructure, roads, bridges, ports things which are going to be subjected to sea level rise and others, I grew up in South Louisiana and we are seeing that happen all the time. So it doesn't make sense to us to be thoughtful about what we are actually get the world, we are actually going to be living with even as we go forward trying to make the best world that we can.

David Goldston: And also presumably an area for international assistance as well.

Steve Cochran: Absolutely.

David Goldston: Richard your thoughts in that and particularly are they aren't the areas related to adaptation that ought to be looked at as well.

Richard Newell: Yeah, I agree with the points about adaptation. The thing about adaptation is there is going to be natural forces that lead us to adapt and so in some sense the need for centralized policy to encourage adaptation is not going to be as necessary as it is for centralized policy that encourages mitigation. And that said, you know, there's a lot of government activity and planning that takes place in citing infrastructure and so and where climate considerations are going to need to start getting incorporated and I am sure this going to be need to be some increased level of funding and training to help folks understand how to plan at the local state and federal level. In terms of research and development, there aren't specific adaptation technologies that immediately come to mind. I mean there are ways that people talk about you know if we need to adjust our agricultural crop patterns in response to changing weather, I think that there's going to be a natural incentive on the part of the private sector to, you know, alter the types of biotechnology innovation they engage and so I think a lot of this in a sense it's going to take care of itself. I think the main thing is in terms of improving government planning and incorporating climate considerations into regulatory and help planning processes.

David Goldston: Thank, Joe you would like to have a last word on this.

Joseph Aldy: Yeah, when we want to think about this there is three ways to address the risk of climate change. Looking at how to stop it from happening, and we have talked a lot here today about mitigating your emissions. You can get used to some of the climate change that is already happening as Steve mentioned through adaptation and the other is that you can try to fix that problem and that's the geo-engineering solution that you described and something when I talk about geo-engineering they have in mind sort of replicating what we know from big volcanic eruptions that send sulphur particles into the upper stratosphere that blocks some of the incoming sunlight and effectively cools the temperature of the planet. And I actually think that this is something, when we looked at geo-engineering, initially you think it's like, sort of, a page one of a script of a Hollywood movie that ends in a disaster. But it's actually getting a little bit more serious discussion in the scientific community and getting a little bit more discussion actually in the policy community as well.

David Goldston: The question in fact just makes it a longer movie.

Joseph Aldy: Well, I think there are two reasons to think why it's important for us to do some of the basic research on geo-engineering. I think one is that you know, I have seen in the decade plus that I have worked on this issue that the concentrations of atmospheric greenhouse gases that we thought will be sort of safe or acceptable keeps coming down. As we learn more and more about the science, we realize we need to be aiming for a more ambitious target, which is disconcerting because, over that time that I had been working on this issue, we haven't really been making much progress towards any target, but what that suggests to me is that if we find out say three or four decades from now that say Hansen was wrong, 350 ppm is actually too high and at that point, we are already over 500 parts per million and that we start seeing really abrupt climate change or catastrophic events happening. I think we would actually regret not undertaking the research in the interim on a potential geo-engineering solution, if we find out, you know, it's too late that we need to actually by say ten or twenty years of time for all of our mitigation efforts to really pay off. So I think that's one reason to do it, as sort of your last insurance policy to deal with this problem. If you really realize the worst case scenarios in climate change. I think the other reason I think about this is from an international standpoint and that is that the incentives on geo-engineering are very different than from mitigation. No one country can solve the problem by cutting their CO2 emissions. We cut our emissions to 0 to mark keeping that way the rest of the century; we still are facing serious risks from climate change. But one country can launch a geo-engineering solution and so I think we need to think about well, even if we say we don't think its right, there is a concern that other countries may decide to pursue geo-engineering. I mean if China which is already very concerned about water and suppose water scarcity becomes a bigger problem for China in the future and they decide they want to pursue a geo-engineering solution then it solves their water problem, lets say, but the expense of precipitation in the Himalayas and then that creates problems for India, you see the potential for tension between two countries that traditionally don't like each other very much, through geo-engineering. So I think there is value in trying to think about how we try to manage this technology and manage the research internationally to make sure that we don't get countries either you know, because they have legitimate concerns about this or in some sort of rogue nature, going forward and launching a geo-engineering solution. So I think it needs to be part of the debate, but I think equally needs to be secondary to what we need to do in the near term in mitigating our emissions and adapting to the climate change that is already occurring.

David Goldston: Great well, we'll try to end on it a hopeful note by calling that technological optimism, but I think there is agreement among all our guests about the need for a cap-and-trade system, the need for presidential leadership and the need for much more open direct discussion about what the consequences of climate change and programs to mitigate climate change will be, if not during the campaign then certainly shortly after the next president takes office in January and with that I would like to thank Joe and Steve and Richard for joining me this morning. Thanks.

Joseph Aldy: Thank you.

Steve Cochran: Thanks Dave.

Richard Newell: Thank you.