Journal Articles

Aldy, J. E., Hafstead, M., Metcalf, G. E., Murray, B. C., Pizer, W. A., Reichert, C., & III., R. C. W. (2017). Resolving the Inherent Uncertainty of Carbon Taxes: Introduction. Harvard Environmental Law Review Forum , 41, 1-13. Full_Paper.pdf
Aldy, J. E. (2017). Designing and Updating a US Carbon Tax in an Uncertain World. Harvard Environmental Law Review Forum , 41, 28-40.Abstract

A carbon tax provides certainty about the price of emissions, but it does so in a context characterized by uncertainty about its environmental benefits, economic costs, and international relations implications. Given current knowledge, suppose that the government sets a carbon tax schedule. In the future, a higher (lower) carbon tax could be justified by the resolution of uncertainty along the following ways: climate change turns out to be worse (better) than current projections; the economic costs of a carbon tax are lower (higher) than expected; other major economies implement more (less) ambitious carbon mitigation programs. This paper describes the design of a predictable process for updating the carbon tax in light of new information. Under this “structured discretion” approach, every five years the president would recommend an adjustment to the carbon tax based on analyses by the Environmental Protection Agency, the Department of the Treasury, and the Department of State on the environmental, economic, and diplomatic dimensions of climate policy. Similar to the expedited, streamlined consideration of regulations under the Congressional Review Act and trade deals under trade promotion authority, Congress would vote up or down on the presidential recommendation for a carbon tax adjustment, without the prospect of filibuster or amendment. This process could be synchronized with the timing of updating of nationally determined contributions under the Paris Agreement in a manner to leverage greater emissions mitigation ambition by other countries in future pledging rounds. The communication of guiding information and the latest data and analysis could serve as “forward guidance” for carbon tax adjustments, akin to the Federal Reserve Board’s communication strategy.

Houde, S., & Aldy, J. E. (2017). Consumers' Response to State Energy Efficient Appliance Rebate Programs. American Economic Journal - Economic Policy , 9 (4), 227-255.Abstract

Through an evaluation of the 2009 Recovery Act’s State Energy Efficient Appliance Rebate Program, this paper examines consumers’ response to energy efficiency rebates. The analysis shows that 70 percent of consumers claiming a rebate were inframarginal and an additional 15 percent–20 percent of consumers simply delayed their purchases by a few weeks. Consumers responded to rebates by upgrading to higher quality, but less energy-efficient models. Overall the impact of the program on long-term energy demand is likely to be small. Measures of government expenditure per unit of energy saved are an order of magnitude higher than estimates for other energy efficiency programs.

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Aldy, J. E. (2017). Frameworks for Evaluating Policy Approaches to Address the Competitiveness Concerns of Mitigating Greenhouse Gas Emissions. National Tax Journal , 70 (2), 395-420.Abstract

Domestic carbon pricing policies may impose adverse competitiveness risks on energy-intensive firms competing with foreign firms that may bear a lower carbon price. The risks of competitiveness effects include adverse economic and environmental outcomes, which can undermine political support for carbon pricing. Competitiveness policies, such as border tax adjustments, output-based tax credits, and related policies, also carry potential risks: unfavorable distributional outcomes, less cost-effective, and harming international trade and climate negotiations. This paper reviews the theoretical and empirical research on competitiveness risks and the risks posed by competitiveness policies, and presents two alternative frameworks for evaluating competitiveness policy options.

Aldy, J. E. (2016). Political Economy of Clinton's Ambitious Energy Program. Nature Energy , 1 (10). Full Paper.pdf
Aldy, J. E., Pizer, W., Tavoni, M., Reis, L. A., Akimoto, K., Blanford, G., Carraro, C., et al. (2016). Economic Tools to Promote Transparency and Comparability in the Paris Agreement. Nature Climate Change.Abstract

The Paris Agreement culminates a six-year transition toward an international climate policy architecture based on parties submitting national pledges every five years. An important policy task will be to assess and compare these contributions. We use four integrated assessment models to produce metrics of Paris Agreement pledges, and show differentiated effort across countries: wealthier countries pledge to undertake greater emission reductions with higher costs. The pledges fall in the lower end of the distributions of the social cost of carbon (SCC) and the cost-minimizing path to limiting warming to 2⁰C, suggesting insufficient global ambition in light of leaders’ climate goals. Countries’ marginal abatement costs vary by two orders of magnitude, illustrating that large efficiency gains are available through joint mitigation efforts and/or carbon price coordination.  Marginal costs rise almost proportionally with income, but full policy costs reveal more complex regional patterns due to terms of trade effects.

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Aldy, J. E., & Pizer, W. A. (2016). Alternative Metrics for Comparing Domestic Climate Change Mitigation Efforts and the Emerging International Climate Policy Architecture. Review of Environmental Economics and Policy , 10 (1), 3-24.Abstract

The availability of practical mechansims for comparing domestic efforts aimed at mitigating global climate change are important for the stability, equity, and efficiency of international climate agreements. We examine a variety of metrics that could be used to compare countries’ climate change mitigation efforts and illustrate their potential application to large developed and developing countries. Because there is no single comprehensive, measurable metric that could be applied to all countries, we suggest using a set of indicators to characterize and compare mitigation effort, akin to using a set of economic statistics to indicate the health of the macroeconomy. Given the iterative pledge and review approach that is emerging in the current climate change negotiations, participation, commitment, and compliance could be enhanced if this set of indicators is able to show that all parties are doing their “fair share,” both prospectively and retrospectively. The latter, in particular, highlights the need for a well-functioning policy surveillance regime.

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Aldy, J. E., Pizer, W. A., & Akimoto, K. (2016). Comparing Emissions Mitigation Efforts across Countries. Climate Policy.Abstract

A natural outcome of the emerging pledge and review approach to international climate change policy is the interest in comparing mitigation efforts among countries. Domestic publics and stakeholders will have an interest in knowing if peer countries are undertaking (or planning to undertake) comparable efforts in mitigating their greenhouse gas emissions. Moreover, if the aggregate efforts are considered inadequate in addressing the risks posed by climate change, then this will likely prompt a broader interest in identifying those countries where greater efforts are arguably warranted based on comparison with their peers. Both assessments require metrics of efforts and comparisons among countries. We propose a framework for such an exercise, drawing from a set of principles for designing and implementing informative metrics. We present a template for organizing metrics on mitigation efforts, for both ex ante and ex post review. We also provide preliminary assessments of efforts along emissions, price, and cost metrics for post-2020 climate policy contributions by China, the European Union, Russia, and the United States. We close with a discussion of the role of academics and civil society in promoting transparency and facilitating the evaluation and comparison of efforts.

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Aldy, J. E. (2016). Mobilizing Political Action on Behalf of Future Generations: The Case of Climate Change Policy. The Future of Children, Issue on Climate Change , 26 (1).Abstract

By nearly any perspective, insufficient effort has been undertaken to address the risks posed by global climate change. This failure to mobilize sufficient effort to combat climate change reflects the difficult political economy that characterizes the problem. To grossly simplify the problem, the challenge is that future, unborn generations will enjoy the benefits of climate policy while the current generation, and in particular those reaping substantial returns from a status quo that fails to address climate change, will bear the costs. In this paper, I describe the returns to narrowlydefined business capital and a broad concept of capital – physical capital, human capital, environmental capital, social capital, etc. – to illustrate differences in investment incentives and hence political economy considerations for those engaged in climate policy debates. While the standard economist’s prescription to price the externality could align private and societal investment incentives and ensure that future generations have the opportunities to enjoy a standard of living at least as good as the current generation, it must confront the political economy that the costs of changing prices are borne primarily by the current generation and concentrated among incumbent firms and the benefits are enjoyed disproportionately by future generations and emerging insurgent firms that aim to bring new technologies to market and capture the incumbents’ market share. Tailoring the design of climate policy to mollify the incumbents in opposition and to leverage the potential of the insurgents to build broad political support will be necessary to mobilize successful political action to combat climate change.

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Aldy, J. E., & Pizer, W. A. (2015). The Competitiveness Impacts of Climate Mitigation Policies. Journal of the Association of Environmental and Resource Economists.Abstract

The pollution haven hypothesis suggests that unilateral domestic climate change mitigation policy would impose significant economic costs on carbon-intensive industries, resulting in declining output and increasing net imports. In order to evaluate this hypothesis, we undertake a two-step empirical analysis. First, we use historic energy prices as a proxy for climate change mitigation policy. We estimate how production and net imports change in response to energy prices using a 35-year panel of approximately 450 U.S. manufacturing industries. Second, we take these estimated relationships and use them to simulate the impacts of changes in energy prices resulting from a domestic climate change mitigation policy that effectively imposes a $15 per ton carbon price. We find that energy-intensive manufacturing industries are more likely to experience decreases in production and increases in net imports than less-intensive industries. Our best estimate is that competitiveness effects – measured by the increase in net imports – are as large as 0.8 percent for the most energy-intensive industries and represent no more than about one-sixth of the estimated decrease in production under a $15 per ton carbon price.

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Aldy, J. E. (2015). Policy Surveillance in the G-20 Fossil Fuel Subsidies Agreement: Lessons for Climate Policy. Climatic Change.Abstract

Inadequate policy surveillance has undermined the effectiveness of multilateral climate agreements. To illustrate an alternative approach to transparency, I evaluate policy surveillance under the 2009 G-20 fossil fuel subsidies agreement. The Leaders of the Group of 20 nations tasked their energy and finance ministers to identify and phase-out fossil fuel subsidies. The G-20 leaders agreed to submit their subsidy reform strategies to peer review and to independent expert review conducted by international organizations. This process of developed and developing countries pledging to pursue the same policy objective, designing and publicizing implementation plans, and subjecting plans and performance to review by international organizations differs considerably from the historic approach under the UN Framework Convention on Climate Change. This paper draws lessons from the fossil fuel subsidies agreement for climate policy surveillance.

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Aldy, J. E. (2015). Pricing Climate Risk Mitigation. Nature Climate Change , 5 396-398. Full Paper.pdf
Aldy, J. E. (2014). The crucial role of policy surveillance in international climate policy. Climatic Change , 126 (3-4), 279-292.Abstract

An extensive literature shows that information-creating mechanisms enhance the transparency of and can support participation and compliance in international agreements. This paper draws from game theory, international relations, and legal scholarship to make the case for how transparency through policy surveillance can facilitate more effective international climate change policy architecture. I draw lessons from policy surveillance in multilateral economic, environmental, and national security contexts to inform a critical evaluation of the historic practice of monitoring and reporting under the global climate regime. This assessment focuses on how surveillance produces evidence to inform policy design, enables comparisons of mitigation effort, and illustrates the adequacy of the global effort in climate agreements. I also describe how the institution of policy surveillance can facilitate a variety of climate policy architectures. This evaluation of policy surveillance suggests that transparency is necessary for global climate policy architecture.

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Pizer, W., Adler, M., Aldy, J., Anthoff, D., Cropper, M., Gillingham, K., Greenstone, M., et al. (2014). Using and Improving the Social Cost of Carbon. Science , 346, 1181-1182. Full Paper.pdf
Aldy, J. E. (2013). The Case for a U.S. Carbon Tax. Oxford Energy Forum , 91, 13-16.Abstract

Every aspect of economic activity a%ects greenhouse gas emissions and, hence, the global climate. Since individuals and businesses bear virtually no cost for emitting greenhouse gases in the absence of public policy, and thus have no incentive to reduce these emissions, the government has a strong case for climate change policy. US policymakers may choose among three general approaches to drive more climate-friendly economic activity: (1) subsidise businesses and individuals to invest in and use lower-emitting goods and services; (2) mandate businesses and individuals to change their behaviour regarding technology choice and emissions; or (3) price the greenhouse gas externality, so that decisions take account of this external cost. Let’s consider these options in turn.

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Aldy, J. E. (2013). A Preliminary Review of the American Recovery and Reinvestment Act’s Clean Energy Package. Review of Environmental Economics and Policy , 1-20. Full Paper.pdf
Aldy, J. E., & Viscusi, W. K. (2013). Risk Regulation Lessons from Mad Cows. Foundations and Trends in Microeconomics , 8 (4).Abstract

The mad cow disease crisis in the United Kingdom (U.K.) was a major policy disaster. The government and public health officials failed to identify the risk to humans, created tremendous uncertainty regarding the human risks once they were identified, and undertook a series of policies that undermined public trust. In contrast, the mad cow disease risk never became a major problem in the United States (U.S.). The lead time that the U.S. had in responding to the disease that was first identified in the U.K. assisted in planning the policy response to avert a crisis. The absence of a comparable U.S. crisis, however, does not imply that the U.S. risk management approach was a success. Until recently, there was no systematic assessment of the domestic risks of mad cow disease. Moreover, U.S. government agencies have never undertaken a comprehensive assessment of the benefits and costs of any U.S. regulation dealing with mad cow disease. The absence of a sound economic basis for policy is reflected in the United States Department of Agriculture’s (USDA) ill-considered decision to prohibit the private testing of beef for mad cow disease. This decision disadvantaged companies that sought such testing in order to comply with foreign testing regulations. In the absence of such testing, U.S. beef exports plummeted. One company that attempted to implement a testing program launched a legal challenge to the USDA prohibition and was unsuccessful. The policy failures in both the U.K. and the U.S. provide several lessons for regulating invasive species risks and dealing with emerging risks more generally. We conclude with a series of ten public policy lessons for dealing with similar emerging risks.

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Aldy, J. E., & Stavins, R. N. (2012). Climate Negotiators Create an Opportunity for Scholars. Science , 337, 1043-1044. Full Paper.pdf
Aldy, J. E., & Stavins, R. (2012). The Promise and Problems of Pricing Carbon: Theory and Experience. Journal of Environment and Development , 21 (2), 152-180.Abstract

Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.

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Aldy, J. E., & Stavins, R. N. (2012). Using the Market to Address Climate Change: Insights from Theory and Experience. Daedalus , 141 (2), 45-60.Abstract

Emissions of greenhouse gases linked with global climate change are affected by diverse aspects of economic activity, including individual consumption, business investment, and government spending. An effective climate policy will have to modify the decision calculus for these activities in the direction of more efficient generation and use of energy, lower carbon intensity of energy, and – more broadly – a more carbon-lean economy. The only approach to doing this on a meaningful scale that would be technically feasible and cost-effective is carbon pricing, that is, market-based climate policies that place a shadow-price on carbon dioxide emissions. We examine alternative designs of three such instruments – carbon taxes, cap-and-trade, and clean energy standards. We note that the U.S. political response to possible market-based approaches to climate policy has been and will continue to be largely a function of issues and structural factors that transcend the scope of environmental and climate policy.

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