Q&A: Don Fullerton

Jul 1, 2014

Don Fullerton
Credit WUIS/Illinois Issues
 Don Fullerton, a finance professor at the University of Illinois and a former deputy assistant secretary of the U.S. Treasury Department, served as co-author of a chapter of the United Nation’s Intergovernmental Panel on Climate Change's fifth assessment report, which was released this spring.

The environmental economist, who is also an expert in the University’s Institute of Government and Public Affairs, co-wrote the chapter on the social, ethical and economic concepts of climate change after several trips abroad. That report can be found here. In May, he spoke with Illinois Issues’ Managing Editor Maureen Foertsch McKinney. This is an excerpted and edited version of that conversation. 

Q. Can you summarize the thesis of the chapter for a lay audience?

Bear in mind first of all that the charge … was not to make some dramatic point in particular, but simply to review the theories and the evidence, and to talk about what’s been said in the peer-reviewed literature about the pros and cons of the various points that have been made. The point is to provide information to policy makers to help inform policy decisions from each country about what each country is going to do in the global effort to try to mitigate climate change. 

The chapter was about economic effects, and some are very bothersome. The poor spend a higher proportion of their incomes on commodities that are carbon intensive, such as electricity and gasoline, in the United States at least … and people who have to use a car to get to work are going to spend a fairly high portion of their income on gasoline. One bad thing about a carbon tax or any environmental policy to reduce emissions is that it impacts relatively low-income people in the United States. The difference in other countries is very interesting, though. In other poor countries, it’s only rich people who have electricity and only rich people who have cars, and so within a very poor country, it’s the relatively well-to-do who would be impacted by climate policy.

And then there’s distributional effects between different age groups and urban vs. rural distinctions. You know rural people who live in farmlands have to drive longer, so whether they are rich or poor, they are going to use more gasoline. Almost any energy policy to reduce greenhouse gas emissions is going to do something to make gas more expensive. Doing almost anything to reduce climate change is going to raise costs of driving. In the United States that’s going to affect poor people, and it’s going to affect rural people and working people as opposed to retired people. There’s a lot of evidence on that.

So then, the next point is that with a carbon tax, the government would have some revenue to use to try to help out those people — an income tax break or tax credit or something — that would counteract the nature of the carbon tax so that the overall package is not too regressive.

So one of the issues is the ethical question of how much of this burden should be on rich and poor countries, or within the United States, how much of the burden should be on rich or poor people. Atmospheric concentrations of carbon dioxide are much higher than they were 200 years ago, basically because of countries in Europe and then the United States that were industrialized first, which made them richer through industrial growth. So the poor countries say, “You caused the problem, you fix it.” That is an important ethical concept, historical responsibility, which says that other industrialized countries should bear the burden of cleaning up emissions and reducing greenhouse gas emissions in the future, and that they should not be denying the poor countries the opportunities to experience that growth. A different view from the United States is, “Yeah maybe our ancestors had something to do with that, but nobody knew that it was going be a problem. We all live in the world, we’ve all got this problem, never mind what people did decades or centuries ago.” Well, anything that reduces greenhouse gasses now will … provide benefits to everyone around the world. Some would say especially in the developing world because there are poor low-lying countries that are damaged by sea-level rise and global warming. 

Then there is yet-another fairness principle that the costs of this mitigation should probably be proportional to the benefit. The countries that are poor are the ones that stand the most to gain from mitigation, so they should help pay for it.

Q. Talking about the report overall, what do you know about whether there’s time to employ a mitigation strategy that would avert global damage from climate change?

The short answer is, there is probably still time to avert most of that damage if we act very soon, within the next decade. … If we wait even 10 years to get started, then that probably means we will not be able to avert some severe damages. I would also point out there’s huge uncertainties; we really don’t know what the damages are going to be. But because of those uncertainties the politicians have decided in previous international negotiations — like when President [Barack] Obama flew to Copenhagen — that we should not let the world average temperature rise by more than 2 degrees Centigrade. That is almost 4 degrees Fahrenheit. So that’s a good size increase, and some scientists have pointed out that likely damages will still occur from heat stroke, crop damage, sea-level rise and lost biodiversity. 

So the politicians decided that the goal is to keep the increase down to only 2 degrees centigrade. But scientists are now saying that it would be extremely hard to keep the increase down to only 2 degrees. 

If we go on the current path, we’re likely to see increases in the mean global temperature that are not only 2 degrees centigrade but closer to 4 and maybe 6. Call it a 4-to-6 degree increase in the average worldwide temperature, which is going to be a lot more damaging. 

Credit WUIS/Illinois Issues

The cost-benefit analysis is very difficult. We don’t know what all the costs would be of mitigation, and we don’t really know what all the costs would be of that kind of climate change. But the 2-degree-centigrade limit the politicians have declared in their goal statement, well, first it’s going to be very hard to meet, and second it’s not clear that it passes the cost-benefit test. At this point it, would be extremely costly to keep the temperature increase down to 2 degrees centigrade. I mean, we’d have to get emissions down to almost zero. In other words, we’d have to convert almost entirely to wind power, solar power and electric cars within just a couple decades … in order to keep the temperature down to 2 degrees centigrade. You can imagine how expensive it would be to switch all generation. We’d have to throw away major investments in coal-fired power plants made over the last few decades. And it takes $3 billion dollars to build a coal-fired plant. We’d have to shut those down and spend many billions to build more solar power and windmills, build all-electric cars just to keep the emissions down enough to limit the accumulation of carbon dioxide in the atmosphere so that the temperature increased only 2 degrees. Frankly, that’s probably not worth it. In other words, the politicians have decided on this target without doing a cost-benefit analysis, and it’s kind of “pie in the sky.” Thus, we’re really looking at 3 degrees centigrade, or 5 or 6, and that could mean 2 or 3 meters of average sea-level rise. We will lose the Everglades in Florida, and we will have huge costs if we try to build up the levies even higher in New Orleans. Coastal cities like New York would be dramatically affected.

There’s going to be major droughts, so Illinois will be dramatically affected as well. There will be both floods and droughts, neither of which is very good for corn farmers. And that’s kind of a scary thing we’re looking at in Illinois, but it’s even worse in other poor low-lying countries.

Bangladesh, for example, is a very poor and very low-lying country. Under the current trajectory, if not enough is done to reduce emissions, the prediction is that sea-level rise will submerge a third to a half of Bangladesh. Of course, it’s a very populous country. …. The probable number of refugees could be as high as 100 million people. They’re displaced because their homes become submerged. They’re very poor, and they have nowhere to go. They’re going to be pushed beyond the borders into Thailand, India or anywhere that’s above the new water level. The problem is that nobody will know what to do with them. It’s not like they can buy a different farm and start faming again. It happens slowly, so they won’t drown; all they have to do is walk uphill. But they will end up in a refugee camp where they are going to starve. In other words, it’s going to cost the richer nations to support them. The cost is not going to be just on Bangladesh with that many homeless and that many starving. There will be major costs to the United States, including Illinois citizens. Some of our own money will have to be used to try and avert the damages of having 100 million people starve to death. I don’t think the U.S. would sit around and do nothing, so it will be costly to us as well.

Q. Are there particular strategies that can be employed to mitigate potential damage?

The report has three volumes. The first volume came out in the fall, with thousands of pages about the science of climate change, and the authors are all researchers in hydrology, climatology and oceanography. The second volume came out a few months ago in 2014, and that was all about adaptation: dealing with the climate change we are going to get. 

Adaptation includes ways to avert some of the damages for any given amount of climate change. We could do something to protect our crops, to protect our shores, to move people to higher ground, to preserve some of the biodiversity, whatever it might be. 

I was an author of the third volume, which is all about mitigation. We were looking at ways to reduce greenhouse gas emissions and therefore to reduce climate change. A country could choose from several categories or types of policy, but what’s most common is what I would call direct regulation. In the United States, for example, we have direct regulations like CAFE (corporate average on fuel economy) standards for automobiles Manufacturers such as Ford, GM and Chrysler are told … “You must increase fuel efficiency so that the average of the cars you sell reaches at least 28 miles per gallon.” Then they can still make bigger cars that are gas guzzlers, but only if they sell smaller cars that are fuel efficient. But that is not necessarily the most cost-efficient way to reduce use of gasoline.

Often problems arise with these kinds of mandates because they are all “one-size-fits-all,” where everybody has to meet the same target regardless of cost. For example, energy efficiency standards apply to all refrigerators, washing machines and home appliances, while insulation requirements are built into building codes in various cities and states around the U.S. The point of these rules is to reduce our use of our fossil fuels, which would include not just coal and gasoline or petroleum but also natural gas, anything that would cause carbon dioxide and other greenhouse gas emissions. I sometimes refer to these regulations as Soviet-style command and control regulations because they involve a planned economy where the government tells people what they have to do.

In contrast, other environmental policies could be called incentive policies. They don’t exactly tell people what to do. Consumers have options, and they can do what they want, but they face certain incentives. With the recent special energy tax credit, you could get up to $1,000 if you made certain kinds of energy efficiency increases in your home like wall insulation, double-pane insulated glass windows and doors, or an energy efficient furnace. The problem with all those policies is what’s called the “rebound effect.” Once you have a mandate or incentive to increase energy efficiency, like to increase miles per gallon, then it becomes cheaper to drive, per mile. So people might actually drive more miles in a way that might offset energy savings. In other words, the rebound effect will undo some of the reduction in energy use. So that’s a disadvantage of some of those policies that are not really so effective. 

And they cost money. Illinois just doesn’t have the budget to provide incentives. The state is short on cash, and the governor is talking about income tax increases that become permanent instead of phasing back out again. No money is left over to provide technology incentives or tax credits. Politicians love to give out money, by the way. They love to get their constituents on board by yelling, “There’s a tax credit for you and you, and if you vote for me, I will provide all this.” It gets expensive, and it’s not always wise policy even if it’s good for getting elected.

In contrast, what could work better is a different kind of incentive like a carbon tax or cap and trade, where a firm that burns coal or natural gas would pay a carbon tax or need to get a permit for the carbon content of fuel.

And a driver finds it to be more expensive to drive a gas-guzzler and more expensive to drive any car. So each driver has an incentive to drive fewer miles and to use less gasoline. People don’t like that kind of policy because they won’t be able to drive as much. I understand that. It’s not ideal. Wouldn’t it be better if we just didn’t have this climate change problem? But we do face climate change, and to deal with that problem, we may just have to burn less gasoline. And the best way to get people, not just in Illinois but all around the world, to burn less fossil fuel would be to raise the price of burning fossil fuel. And if you’re trying to reduce carbon emissions, then you want specifically to raise the price of carbon emissions. And that’s what a carbon tax would do, or cap and trade. Those policies place a price per ton of carbon emission. 

I’m realistic. I know Illinois is not going to leap to the idea of having a cap and trade on carbon emissions or a gasoline tax or something like that. That’s a political reality. I understand that. But it’s worth pointing out that that’s really the best way to reduce carbon emissions.

Q. How would you assess progress of communications between the nations on climate change?

I’m actually very discouraged. Watching these international negotiations is depressing because they’ve been talking about this problem for many years, and the closest they ever came to doing something substantial was in 1997 with the Kyoto Protocol, in which a large number of industrialized countries agreed to reduce their emissions. It was a complicated agreement, and it was not ideal, but it was more stringent than anything we’ve had before or afterwards. And the progress since 1997 has been backwards. That is, some countries have been backing out of the Kyoto Protocol and other countries have been failing to meet their promises. The Kyoto Protocol was an optimistic step taken in 1997, but it did not really work very well. It’s effectively void, and we have no replacement.

Q. Do you think that there is a particular role the United States should play?

Yes, that’s a very good question. And I do. It’s discouraging to watch the annual rounds of these international negotiations. You might remember hearing how President Obama went to Copenhagen in 2009, and the next year’s meeting was in Cancun, Mexico. In recent years, we have been hearing less about them because less is happening. The countries all point fingers at each other.

The U.S. says, “Yes climate change is a big problem, and we need to do something, and all the nations of the world need to agree. We need to commit ourselves to emission reductions, but the U.S. is not going to do it alone.” And the U.S. is not going to do it if China and India do not do anything. 

Those other countries don’t seem to be doing any emission abatement, so the U.S. is not going to do anything by ourselves. Then China says, “We’re not going to do anything if you don’t do anything,” and India says, “We’re not going to do anything if you don’t do anything.” And nobody’s willing to take the first step.

Well, obviously it’s not working, but it’s not necessarily even good policy for the United States. But we don’t have to wait for others before doing anything! The U.S. could take some action. I don’t mean we need to immediately leap to a carbon tax of $30 per ton, which would be a substantial carbon tax, but we could at least get started, which would have several sorts of benefits. If we have a $5 tax instead of $30, first of all, it would not be very costly. We might pay a little more for gasoline, about 5 cents a gallon. So the price of gasoline rises from $3.50 a gallon to $3.55, and the price of electricity might rise by a couple of percent, but the cost is relatively low. But the benefit would be that we start to learn about low-carbon technology. It would provide an incentive for research and development, so some companies would go to a little more trouble to develop new technologies to use less carbon.

We need to work on our electric vehicle technology. We need to work on our battery technology. We need to work on our solar panel technology, and we would have more incentive to do all that if the U.S. started on some sort of carbon tax. It would position the United States for being able to sell those technologies to the rest of the world later, when the rest of the world got onboard. Right now, China is saying, “We’re not going to do anything if you’re not doing anything.” Well, one way to break the cycle is to get started. If the U.S. did something, China would not be able to say, “We’re not going to do anything if you don’t.” That would provide a little moral high ground for the United States to look better in the eyes of the world and to take leadership. The U.S. is supposed to be a world leader, and leaders need to get out front.

Illinois Issues, July/August 2014