Sustainability Videos & Lecture Series

Gernot Wagner: Thank you Josh. It’s a pleasure to be here and I can tell you it’s been a fun, I guess, day so far. I’ll be here until tomorrow to talk to–look at the amazing breadth of work going on here at ASU in sustainability, right, from sociologists to psychologists–economists of course.

What I would like to do today is take a fairly narrow sliver of that–economics–which I would argue is probably the key one to look at as encompassing a framework of thinking about this problem that goes much, much beyond what we typically think of when we think economics.

It’s questions like these that we economists sort of look at and with sort of a very structured view, and frankly, often come up with answers very different from what is expected. Right, so what is expected of us as economists, sort of the stereotypical economist working to basically make money?

Now, looking at a question like this: which car should you buy, right? The hybrid, the more fuel-efficient version or the standard less–fuel-efficient version. Well, there’s one answer to this, which says neither. Right? I don’t have a license.

[Audience laughter 02:12]

Wagner: I also live in Manhattan so it makes sense not to have a license. Well, I did spend a year at Stanford. I was glad my wife had a license when we lived at Stanford but still, right, it was okay not to have one there; not to have a car there.

Bike everywhere, ya know, I walk 45 minutes to the next mailbox and so on but still, maybe that is one answer. Maybe one answer to this question to be sustainable is to say, “Maybe we should all be living in high–density, mixed–use urban developments, i.e., a city.

“Not be driving around and simply move beyond the choice, sort of the obvious choice given to many of us and try to live even better; do even more.” Yes right, I am vegetarian. I carry around my recycled water bottle everywhere. Thank you.

[Audience murmuring 3:12]

Wagner: I’ve reused plastic bags. Sort of I try to do all the right things but it simply doesn’t add up to enough. That is one question and frankly it’s simply not the question faced by most people. Right? Most people are in fact faced with this choice.

Which car should you buy, not whether you should buy a car and it is really easy to make fun of economists trying to analyze this question. Right? Here is the standard view of how economists view this problem.

You walk into the car dealership and you do a whole lot of things that no rational human being ought to be doing but economists assume that this is in fact what we do in order to make a decision of which car to buy.

Audience: Can you wait a second?

Wagner: Right?

Audience: – ’til they scrape this [inaudible and faint in background 04:12]?

Wagner: It’s easy to make fun of this, right? It is very easy to make fun this because no rational human being ought to walk into the car dealership and try to solve second–order conditions trying to figure out which car to buy. Now, it turns out of course, economists don’t look at this and say, “This is how humans actually do behave.”

We model human behavior and say, “People behave as if this was the case.” It is like looking at an expert billiard player who clearly has Newtonian physics figured out but it’s not like he’s solving these Newtonian equations every time he plays. It’s just as if he was very, very good at trigonometry and all these other topics that look like he is this expert physicist; that make him look like he is this expert physicist.

Humans don’t behave this way, right, so what does economics say? What can economics say to this and given that it is so easy to make fun of this model, we have come up with all sorts of other things. Fuel economy labels, as an example. Right?

It is not rational for you do this calculation yourself so let have someone else do it for you. This is EPA stepping in and redesigning fuel economy labels to look much closer to something that allows people to make the right choice. Right? The irrational zombie economic model would lead us to believe that what we have on the top left here is perfectly sufficient to make the right choice.

Well, it turns out that having information on how much you save, having information on much it costs–fairly redundant but still–comparing yourself to your neighbor makes a huge difference and we should be designed labels this way. I’m not making fun of this.

I have a couple colleagues at EDF who work damn hard trying to make sure that labels like this are being put in place. We clearly need this. The only question is, is that enough?

Here’s how economists view this and this is the moment where everyone sort of starts squinting and trying to figure out what the table says. Just focus on one number here.

Two economists, Hunt Alcott and Nathan Wozny–who I’m happy to say are about my age–they’ve probably the most comprehensive study of car–buying behavior, looking at how much are people willing to spend today for fuel savings later. And the best way of looking at this is essentially for every dollar you spend today, how many cents if fuel savings do you get later or conversely, how many cents are you willing to spend today to get a dollar in fuel savings later?

All right, this is basically–this is the question when you try to decide which car to buy. It turns out, making these asinine assumptions about human behavior gets you to a place where that model tells us that we are willing to spend 72 cents today for every dollar in fuel savings later. Or in other words, using slightly loose language here, humans are 70 percent rational.

[Audience chuckling 08:14]

Wagner: Right? In the standard economic sense, and you could look at this now and come up with two conclusions, right? One is to say, “Ha,” or “I’ve told you so.” It’s not a buck for a buck. It should be a dollar today for a dollar in fuel savings later. It is not.

Economics fails us. Another version is to look at this and to say, “Well, actually we get 70 percent to where we want to be.” Right, you ignore economics at your peril if you want to nudge people in the direction of buying the more fuel–efficient car.

The most fundamental answer is to look at the price, at getting the price of gasoline up–I realize right around now this is not the most politically sensitive statement to make–but still, that is the answer. That is two–thirds of the answer.

We need psychology, sociologies–economic sociology–everything else to get us to 100 and we need those disciplines to put the price in place in the first place but the policy answer is clear.

It is not about telling people not to drive. It’s not about shaming people into buying the right vehicle. It’s about getting the incentives right.

Let’s look at a slightly more personal example. This is my now one–year–old when he was three weeks old on his way to Vienna–not Vienna, Virginia–this is Austrian Airlines, so his small carbon footprint hat–

[Audience chuckling 09:59]

Wagner: – is cute but certainly doesn’t apply to him anymore. He saw my parents in Austria now I think three times so far in his first year of life. Here’s me flying to a climate meeting, a UN–sponsored climate meeting in Bangkok, bumped up to first class. Thank you British Airways. It’s a fruit basket here and that’s my laptop writing about climate safety.

[Audience chuckling 10:28]

Wagner: Now, I don’t always travel–this was me coming here, so I don’t always travel first class but still–all right, so I fly. I fly a lot so yes I do all the right things. I try to do all the right things and then I do this.

Right, the average New Yorker does not have a car but the average New Yorker of course, every vacation hops on a plane and flies, right? We all know the numbers here so the average American emits about 20 tons of CO2. The average European emits about 10 tons so as a double citizen I get 30–

[Audience laughing 11:09]

Wagner: – but still, right? You look at this and there’s something wrong with this picture–people like us essentially, ones who understand this issue and know that every ton of CO2 emissions causes about $20.00 worth of damage, at least. I’m motivated to do something about this.

Right, and you can in fact go to terrapass.com, spend $20.00 and have someone plant a tree or cover a methane pit on your behalf to offset the emissions that your flight has caused. Of course working for an environmental NGO, EDF does that for all my flights. There are lots of trees being planted and I’m not saying that’s a bad thing, right?

We should be planting trees. We should be covering methane pits. We should be doing much, much, much, much more of that but that’s exactly the point. Right? Voluntarily spending the extra $20.00 simply doesn’t get us there essentially for three reasons. Right?

One is it doesn’t add up to enough. Right, it’s maybe many of us here in this room who would consider spending $20.00 extra voluntarily to offset our emissions but it is clearly a niche market. Terrapass, the biggest site out there, or one of the biggest sites out there for offsetting your emissions, has a customer database of about 10,000 people. Right?

It is a tiny, tiny niche market. It simply doesn’t add up to enough. Now, a second point here is it may actually be kind of productive. There’s not just Terrapass; you can actually go to some airline’s websites. First you pay for your ticket; they make sure that happens and then you get the option to spend another 20 bucks to offset the emissions that your flight will have caused.

Now, they don’t do that to make you feel bad about flying. You can be pretty sure about that. Right? They do that to make you feel good about flying and to do much, much more of it of course. In fact people do, right, so you can feel about going on your eco–vacation in Costa Rica.

Well, you may well fly more as a result. It’s anecdotal evidence but pretty solid evidence if the airline puts it on their website. There is a reason for that.

Actually, I was pretty sure that airlines discriminate by zip code when they do that so if you purchase your plane ticket and you check out with an address that has you located in Berkeley, Boulder, Brooklyn or Boston, or Tempe for that matter, you get the choice.

If you check out from certain other locations–I don’t know that for a fact–but you probably don’t for a very, very good reason as well. Right? That’s the second problem.

Now, still nothing actually compared to the third problem with this, which is this does nothing for the incentives of the airline. Right? They don’t fly more fuel–efficient planes. They don’t optimize their routes; nothing like it.

They put a tree in their annual report. They paint the tail wing green. They have the CEO come out with an amazing Q & A in the inflight magazine talking about their amazing achievements in putting solar panels on their office buildings, for example, but nothing to the scale that actually makes the planet notice.

This voluntary system simply doesn’t add up to enough and in this case, it may actually be counterproductive. Now, airlines of course do react to prices. As the price of fuel goes up and the actual time between takeoff and landing–not what’s printed on your ticket, but the actual time goes up a few minutes, but still.

On average, airlines fly their planes more slowly as the price of fuel goes up because you save on fuel costs. Clearly airlines react to incentives, just not based on sort of the typical green answer of saying, “Let’s voluntarily do something about it.” It is through the price system.

Now there is in fact an answer out there. If the European Union, starting January 1st of this year, is incorporating aviation–all flights into Europe, within Europe and out of Europe–as part of it’s overall Emissions Trading System. It’s not perfect. It translates to about $2.00 extra per transatlantic flight as opposed to the $20.00 worth of damage.

It’s about a tenth of the way. Still it’s a start and it covers about 2 billion passengers a year–about a third of all global flights flown. You can bet that the planet notices this one. Right now this is Europe of course, right? The U.S. is suing them over instituting that system.

[Audience murmuring 16:53]

Wagner: A few other countries are too. Happy to say that today five Nobel Laureates in economics came out in favor of this approach, which is very good for the economics profession. I’m not sure that the average U.S. voter would change his or her mind based on this convincing letter.

Looking at sort of these overall incentives, they don’t just work but in fact there’s also a lot of momentum in that direction which actually is the surprising thing, especially looking at the U.S. situation. Right, so you have Europe with its fairly comprehensive cap and trade system.

Actually, globally you have–India has a coal tax–a price in coal. China, as part of it’s 12th, 5–year plan, is experimenting with 7 local cap and trade systems–regional cap and trade systems. Australia just passed a carbon price. New Zealand has one. Canadian provinces do and even here in the U.S., California just passed a few years ago, but this past November it was instituted.

The process was instituted to have the most comprehensive cap and trade system of anyone, covering about more than 85 percent of California’s emissions, decreasing them quite significantly more so than the European system does. There clearly is momentum. There clearly is hope in that direction.

In fact, that may well be the way to go, right? Is something like this, comprehensive carbon pricing, comprehensively looking at the right incentives going to happen in Washington any time soon? Well, not the next six months.

Not the next eight months, either of course, but when the climate bill fizzled in the Senate a couple years ago, environmentalists were outspent ten to one by fossil fuel interests. It was two years ago. Last year in California it was three to one the other way.

Clean tech interests outspent fossil fuel interests three to one, so yes, money speaks. In this case it spoke in the right direction. It’s easy to get disenchanted when looking at the national level. It’s equally easy, I’d like to think, to be at least a bit hopeful looking at the state level and of course, this wouldn’t be the first time that California provides an example for the nation when it comes to environmental policy.

It’s certainly not the first time that a state–pioneered system would serve as a template for the nation overall. It was a liberal governor in conservative Massachusetts who pioneered Romney Care and four years later it turned into Obama Care for the country. Maybe once again we have a conservative governor in liberal California–Arnie is this case–pioneering cap and trade which hopefully, sometime soon, will turn into a comprehensive answer for the nation.

It’s certainly the only answer that can work and that has been shown to work very, very well. Right, so every time we did manage to do something like this, it got lead out of gas in the 80s. It banned acid rain to the history books in the 90s.

We’ve been extremely successful replenishing fisheries through a system very similar to this, and the European example as well shows that emissions, even for carbon, do in fact respond to incentive systems like that. Here’s hoping and I look forward to your questions, push back, tomatoes, everything else along these lines.

[Audience laughing 21:15]

Wasgner: I think Josh is going to moderate. Thank you.

[Audience clapping 21:21]

Josh Abbott: Okay, so now we have some time for question and answer. Just a couple of reminders–questions end with a question mark.

[Audience chuckling 21:36]

Abbott: Just a general reminder and please keep them brief as well. Do we have a roaming mic or is this the only one we have? All right. I’ll walk around then. All right. I think I saw you first.

Audience: I can speak loud I think.

Abbott: You wanna speak loud? Okay.

Audience: I’m torn on cap and trade versus a carbon tax and with all the stuff that’s gone on in Wall Street in the last several years, it seems to me that a cap and trade program adds a middle man who’s gonna be taking a cut and it is subject to packaging and manipulation and weird derivatives that nobody understands except for a few people.

Would a carbon tax, even though it has the evil word tax in it, would that be from an economic standpoint, would that be a more efficient method to reduce carbon?

Wagner: The very short answer is no.

Audience: Right.

Wagner: Mainly because as an economist I could go to a white board and draw you a diagram that shows that they are exactly equivalent. Right, so now that’s the right answer in many ways. It’s also only a partial answer of course.

There is in fact a very real difference and there’s two differences–well, three differences. You mentioned one, which is politics.

Now there is a lot of reason to believe that given how cap and trade has failed and how you have now Democratic candidates for the Senate shooting at mockups of a cap and trade bill in order to get elected, this may not be the best policy push to try to advance here. There may well be a lot of reason to believe that as part of fundamental tax reform, for example, carbon taxes may actually have a shot.

Right, and any environmental economist will be the first one to say, “Yes. Absolutely. Let’s do that.” Now there are two more things to this which still do lead me to believe that cap and trade beats a tax if we can get it or since we could get it in places like California and there’s still, of course, hope for Washington as well.

One is that this is not about sticking it to the man, right? This is not about pricing carbon for the sake of pricing carbon. The ideal long–term outcome is to have a price of zero on carbon. No one demands the stuff. No one supplies it but we’ve basically gotten off carbon.

The only way to do that is through a cap and trade system. You limit emissions. Every time we’ve put a system like that in place it has shown us that we can achieve the target more cost effectively as originally projected.

Eventually right–2050, 2100–now we want to be at a place where the price of carbon, in a cap and trade–system like that, is in fact zero because we have come up with a technology that avoids using carbon in the first place. Right now that’s long–term thinking.

There’s another reason why cap and trade beats a tax and this is actually very much tied to politics of course, which is it is going to take quite a bit to get any of this passed in Washington. Every time you do anything to make anyone of these two systems more amendable to being passed, right, it essentially means giving somebody money.

All right, if you did do that under a tax, there is one way of doing that, which is tax credits–decreases in your tax, right? Every time you do that, emissions go up by definition. You do this under a cap and trade system.

What you do is take money from somebody else and give it to someone who may or may not deserve it but who needs that in order to support the overall policy approach. The overall emissions are staying exactly the same, so the political shenanigans, in order to get the system passed under a cap and trade system, leave emissions intact whereas under a tax, every time you do any of this, emissions go up.

Abbott: Question.

Audience: You just briefly touched on something about which I’m curious which is, whether the tool is a tax or cap and trade. You’re gonna create winners and losers and aside from emissions, how can we utilize those tools to not create the same losers that we’ve always had and worsen the vicious circles that are creating poverty and keeping people in poverty and inhibiting development, etc.?

I would just worry that–I’m curious if there are ways to make a tax or cap and trade work for people who are already not articulated in political systems.

Wagner: There are two answers to this. One is we are trying to solve global warming here, not global poverty. Right, so this is sort of the cop out answer in a sense but there is one policy problem. Let’s come up with one policy solution that targets that.

One solution per problem, right, so if the goal is to essentially–if the goal is to go beyond stopping global warming, then we may want to look at another policy tool altogether for that. Right, sort of regular, sort of income redistribution for the tax system, let’s say. That’s one.

Now the second part of this answer, which I hope is more satisfying to you, is that in most cases, when we have implemented successful systems like this–British Columbia comes to mind here with its carbon tax–something like this is actually built into the system. British Columbia passed its carbon tax.

Was sending out a check in advance of even assessing the tax, refunding a lump sum amount that is going be collected through the carbon tax and on average the ones who pollute less get actually more back than they pay for the pollution and it made better off through the system overall.

You create the right incentives for emissions reductions by charging for the next ton that you emit. Right, and guys like me who fly a lot pay more than the ones who don’t; poorer ones. The rich are hurt more by the system than the poor so in many ways you can in fact design systems.

The most successful ones politically are in fact designed as ones where redistribution is very much built in from the very beginning. That is the case in British Columbia. It’s the case in Australia. It’s the case, up to a point, in California. It’s the case in Europe up to a point.

Again, up to a point right and this goes back to my first answer which is Sweden has other ways of redistributing income than to look at cap and trade and maybe we should of course.

Audience: For a cap and trade system, doesn’t it give a company that pollutes a lot–has a lot of money like Exxon Mobile or BP–doesn’t it give them an incentive to keep their emission–leave their emissions the way they are and just trade it with other greener companies? Is there anything you can do to keep that from happening?

[Audience clapping 30:19]

Wagner: Good question. Yes. I guess there’s a theme and there are again, two answers to this.

[Audience laughing 30:26]

Wagner: One is to say that as soon as you put a system like this into place, you do in fact create incentives for everybody to decrease their emissions up to a point. Right? Now what is true of course is that if it is a lot cheaper for a more environmentally sensitive business to decrease their emissions even further, than for Exxon, there is an element to this that says Exxon, in this case, can essentially buy itself free from its obligation to decrease its own emissions. Right?

That is a moral problem in a sense, that Exxon perhaps should be decreasing its emissions more than anyone else because they have contributed, quote/unquote, more to the problem than anyone else. All right, so ethically there may certainly be an issue here.

Now overall what you get though, through a system like this, you get the largest amount of greenhouse gas emissions reductions than you can possibly achieve. When you look at the global ethics there isn’t much that’s more ethical to look to a system that achieves the biggest reductions possible.

Right, which is exactly the reason why environmentalist like me–environmental economists, economists in general–look to something like this and say, “Given that the goal is emissions reductions, let’s go for the system that does it best,” and being cheap is part of being good in this case, because the cheaper you can do it, the more emissions you will get as a result. Great question.

Audience: You mentioned that the only solution to this problem, of several that you mentioned, and in that case I assume there have been other kinds of policies that have been looked at and rejected for whatever reason. I’m wondering if any had been considered which is closer to kinda’ the market approach basically where people will make a decision favoring the environment and be much less coercive.

I realize we’re used to tax policies and so forth and they’re ultimately coercive in some way but that would perhaps give more credit to people eventually thinking this is a good idea and in their own market decisions would favor a better environmental approach.

Wagner: So something like a carbon tax, price on carbon or a cap on carbon with a resulting price on carbon, does exactly that for individuals. It gives them the incentive to decrease their emissions and rewards those who decrease their emissions. Right?

Now you also asked about are there alternatives to something like this? Right now, for example, given that we do not have a federal cap and trade system in place, what we do have is EPA regulating CO2. We have the Supreme Court deciding that yes, CO2 greenhouse gases are in fact a pollutant and EPA has the power to regulate CO2 under the Clean Air Act as a result.

It is not the most efficient, best way of doing it but it certainly is a way to decrease emissions. It turns out in certain areas it is actually a much better way of decreasing emissions than even something like a cap and trade system could do. Transport is one example–CAFE standards, fuel economy standards for cars.

The ones that are currently being in place decrease emissions about six or seven times more than would’ve happened under the most comprehensive cap and trade system. There’re in fact, quote/unquote, better, more effective policies out there that get bigger environmental results.

In this case also at fairly low cost in the fuel economy case through essentially ways of saying, “It is in your interest to be driving a more fuel–efficient car in the first place. It is better for you and the planet.” Having a policy in place that allows you to now have this choice to drive a more fuel–efficient car, which you didn’t have before, is actually better for you and your bottom line as well.

There are certainly other policy tools and there are dozens more like this that use market–type approaches–some more, some less. Many are almost as cost–effective, certainly more politically viable in many ways, but cap and trade and carbon taxes are certainly not the only answers here.

There are others out there that sometimes to get us to even more emissions reductions than cap and trade would’ve done.

Abbott: Yeah.

Audience: Gernot, when you commented on the union dividend legislation that’s being put forth, I know the Citizens Climate Lobby activity behind that and not call the carbon tax a fee but that a dividend with fees assessed at the point of entry for fossil fuel and that the dividend is distributed equally to citizens so that’s why [inaudible 36:51]. [Audience member quite far away from microphone and very difficult to understand.]

Wagner: Fee and dividend is essentially a way to–can I comment on fee Wagner dividend, a system that essentially assesses a fee on fossil fuels or caps fossil fuels. In other words, caps a dividend and then pays or sends a check to citizens as a result of recycling the revenue back in terms of decreases taxes, income taxes, payroll taxes for example.

Frankly, it’s a way to rebrand cap and trade, right? Under the cap and trade umbrella, one version is you sell every single allowance, collect a lot of money in the process, turn around, take that money and pay it back in terms of payroll tax deductions for example–payroll tax reductions–income tax reductions. That is exactly what cap and dividend is.

Fee and dividend is essentially another way of saying a carbon tax where you’d assess a tax and as a result of collecting a lot of revenue on that side, now send everybody a check. That’s what British Columbia has done. Would it be a good approach? If it gets 60 votes in the Senate, absolutely–

[Audience laughing 38:13]

Audience: Well, ’cuz you said criticism of the cap and trade in Europe hasn’t really succeeded in carbon emissions and it does sort of pick winners and losers and so I thought that paying dividend was the attempt to answer that to not really pick a winner and loser as more a [inaudible 38:25].

Wagner: Let me repeat that. There’s some criticism in Europe that the emissions trading system didn’t decrease emissions?

Audience: Well, I know that –

[Cross talk 38:38]

Wagner: And–

Audience: – Citizens Climate Lobby. I don’t know if that’s true.

Wagner: Well, it is not. That’s the short answer but the long answer is that emissions certainly went down in Europe, quite significantly so. Now it turns out about two–thirds of those emissions reductions over the last two years was because of the recession. The other third was because of the comprehensive package of climate policies, cap and trade being the signature policy there.

It is incredibly difficult to disentangle the effects, whether it was in fact Greece taking a nosedive, versus Germany subsidizing its solar energy. Overall, emissions certainly went down in Europe and went down quite significantly, and cap and trade in a sense, is a way to ensure that that is the case.

Abbott: I think you had a question.

Audience: Yes. Yeah, I don’t follow this issue professionally so this is a really naïve question but why so much focus on carbon emissions instead of carbon extraction? Why not limit the extraction of the stuff, turn an oil depletion allowance around to become an oil extraction tax or cap it so it doesn’t come out of the ground to begin with?

Wagner: Well, if you could that globally, sign the Canadians up to it. Sign the Saudis up to it. It would have a similar effect, right? It is sort of the ultimate upstream carbon tax in saying, “Let’s not tax carbon at the point where it’s being burned. Let’s tax carbon at the point where’s it being extracted.”

Same effect overall. Of course the real issue is how to implement–how do you get 60 votes for that, globally, in the UN Senate. Right? In the global senate, not just in the U.S. Senate–that’s the real issue.

Audience: You’ve actually answered the question I’m gonna ask but I wanna ask it again from sort an American perspective.

Wagner: Okay.

Audience: The question I want to ask is, in the United States, this topic is framed as government regulation decreasing, decreasing choice, therefore decreasing innovation opportunity and the government’s strong hand coming down and therefore decreasing market opportunity for innovation and growth and success. That’s how it’s framed in the U.S.

Wagner: By whom?

Audience: By the people who frame it that way–

Wagner: Okay.

[Audience laughing 41:30]

Wagner: Yes.

Audience: Well, no. Right. Here’s how I would say it. It’s framed by a strong theme in the United States that the free market, which arose in 1776 from Adam Smith, in a sense, is tied to the very notion of American democracy and therefore when you have a big government, right, or you have these sorts of tax issues, you’re attacking American democracy.

Wagner: Yup.

Audience: That’s the framing–

Wagner: Sure.

Audience: – and that’s the core so can you give us some advice on how to speak to that so that the cap and trade is not framed as a market failure but that this sort of approach is actually an extension of the market or something we should expect to happen. That somehow this is part of the free market, ya know, etc. Do you have any thoughts there?

Wagner: Sure. We right now, live in the most socialist system you can imagine in the sense that every time I board a plane, 7 billion people pay the cost and I get the benefit. The benefits are fully privatized. The pollution costs are fully socialized on the most global level you could imagine–socialized among 7 billion people.

Right, so Sweden in this case, with a fairly high carbon tax and being a part of the European Union Emissions Trading System, has a more free market system than the U.S. We socialized up the wazoo so this is not about limiting choice, like Michele Bachmann’s Light Bulb Freedom Act notwithstanding.

[Audience laughing 43:32]

Wagner: This is about freeing markets in the truest sense possible. Right, this is about not going crazy among us environmentalist here, trying to make the right decision and limiting our own choice. This is about having the choice to buy–I don’t know how many hundreds of different types of light bulbs you can buy at this point, because of the innovation driven by something that is being framed by people who frame it that way as limiting choice.

Really, I mean the core answer is that this is a way to address rampant socialism and the system we are living in right now and in fact that’s a message that works fairly well, right?

[Cross talk 44:26]

Audience: I mean you can use some transparency–

Wagner: It turns out it rallies the socialists on the one hand who say, “Hey, don’t disparage us. Socialism is good.” Then my response to anyone who sends me a response to my Op/Ed in the New York Times is basically saying that, right? My response would’ve been, “Well, yeah, but this is not about you. Shut up.”

[Audience laughing 44:49]

Wagner: This is about everyone else who frames it exactly like you just–

[Cross talk 44:52]

Audience: – you write, “Dear Socialist.”

[Audience laughing 44:55]

Wagner: I did have a pretty–a canned email for that, yes.

[Audience laughing 45:00]

Audience: Hi. How expensive does gas have to get in order to get people to drive less? Is there a magic number?

Wagner: The magic turns out to be whatever round number is above the number we currently have.

[Audience laughing 45:17]

Wagner: Right, so right now it’s something like $3.90 or something a gallon, right, so $4.00 is, “Oh, my God.”

Audience: [Too far from microphone to be clearly heard 45:26]

Wagner: I mean this is the psychology of it all, right, essentially of, “Is there sort of a single answer that I can give you where it says all right, at $10.00 a gallon we will not drive.” No, but we do know that for every–it’s a five cent increase in the price of gasoline, people drive three percent less in the short run. In the short run, right

In the long run, as in, right–short run basically means you choose not to drive and you don’t have to. Right, you still have to go to work. You still have to go to the grocery store but you maybe combine trips or don’t visit your grandmother in the next state over or something along these lines, right?

Sort of where you have a choice not to drive. In the long run of course, what it means is well, you move closer to work. You buy a more fuel–efficient car. [Inaudible 46:26] if you live in a city, as opposed to, or the suburb or you sort of–you do all things that would allow you to adjust your driving even further.

In the long run the responsive cause is much, much higher. In fact if you look at some comparisons–the U.S. and Europe where we have much, much higher gas prices in Europe than here in the U.S.–there’s a significant response that goes much, much beyond the short term response that I’ve told you–the three percent decrease for a five cent increase mainly because yes, you can plan a city around a higher gas price or a public transport system around a higher gas price.

Abbott: Okay. We have time for maybe two more questions.

Wagner: There’s someone over–there’s one right here.

Abbott: Someone on the corner here, yeah.

Audience: My question is pretty simple and maybe naïve but what I heard you say was we have a clear problem–carbon emissions–that’s connected to global warming. We have a clear solution–a cap and trade system or similar incentivization system–that would result in reduced carbon emissions and therefore, control global warming. This is very straightforward and then there’s some stuff in the middle that’s causing some problems. Getting 60 votes in the Senate or whatever it is.

Wagner: Yeah, so the minor things. Yes.

[Audience laughing 47:53]

Wagner: The details.

Audience: What I wanna know is where does that fit into the story? I haven’t read your book, but where does that fit into the story of how smart economics will save the world? It seems to me that is an important part of the world.

If one redescribes the problem, not simply as a problem of, “We know what’s wrong. We know how to fix it,” then there’s this sort of problem of getting there but rather as a problem of we have these governing institutions.

One of the purposes of these governing institutions is to allow us to collectively articulate and imagine problems, develop solutions and implement them. We need to take those governing institutions seriously in the process of both articulating the problem and moving towards solutions.

When you responded to a question earlier over there you said, “Let’s take one policy problem at a time. This is not a problem of global justice. It’s a problem of global warming.”

What if it is a problem of global justice or what if there are people who say, “What I’m worried about are problems of global justice. Problems of global warming are problems for people like Columbia University professors.”

I mean your actor at the beginning of your story who’s buying a car, it seems to me is that kind of actor who has a sort of thick world that they live in, that they inhabit, where there’re many things that are entering into this decision about buying the car, much more than is on that sticker.

In a sense, that is the complicated, messy world that’s standing between the problem and the solution. So the question is, how does economics fit into this picture apart from giving very simple articulations of problems and solutions, that maybe are sort of articulations that don’t fit with what other people are worried about?

Wagner: Okay, so there are a few things built in here. One is, is global warming a global justice issue? Yes, it actually of course because it’s the poor in developing countries who will suffer most. Right? That’s one response.

Now the second response sort of, who is this book for, in a sense so if you’re all convinced that my policy is the way to go and here is the way to get there, then well, it’s just sort of the messy politics of it all but you don’t need to read up about why this policy is good in the first place.

Now, given the messy politics, given the fact that we didn’t get 60 votes in the Senate in 2009, the all too typical response from many environmentalists, unfortunately, is to say, “Well, let’s forget about this. We can’t do much about that.” Right?

That’s sort of too much money involved and campaign finance reforms and all these things that we can’t influence ourselves. Let’s do what we can actually influence as individuals and very quickly you’ll be at recycle more, offset your emissions from flying.

Choose Costa Rica versus Mexico for your next vacation for the eco–vacation aspect of it all, drink tap water as opposed to bottled water, refuse plastic bags at the checkout counter–so all the things that us environmentalists basically can do and can influence and it happens to also us feel good in the process. That is the real danger here and this is half of the audience for this.

Instead of a book, it should’ve been a frying pan, just sort of you whack over the head and say–

[Audience laughing 51:42]

Wagner: – wake up. This is not the answer. Just because there are these impossible market forces pointing against what you want to do and the messy politics that doesn’t allow you to redirect those market forces in a sensible direction and combat rampant socialism in the process–just because of that, you shouldn’t retreat and do some more organic farming in your backyard. That’s not the answer.

The answer is in fact to still look at policy. Right? Those are one type of people. Those are the environmentalists.

Now the second type of people are the ones who actually, frankly matter in this, which are sort the independent voter, the marginal voter. It turns out–study after study in a sense–we can’t convince them by asking them to recycle more and join the movement and then vote for green policy.

That’s not the approach that gets the 60 Senators to vote for this–what gets constituents to ask the 60 Senator to vote for this. It is in fact the message, sort of the anti–socialism message perhaps, but essentially a message that says, “This is not about banning flights.

“This is not about telling you what you should or shouldn’t do. This is about the prices and getting outta the way.” Right, it’s about as free market as it can possibly get. Frankly those are the ones who don’t necessarily buy this message immediately.

Let’s put it that way. It would be nice but with whom, once you sort of go through the logic, right? Like they’re thinking libertarian–not the movement libertarian–who this clearly resonates with, who says, “Absolutely, but these greeno’s have been breathing down my neck for way too long, telling me what to do and to recycle and to do all these things.”

Finally someone says, “Here’s a solution that it is about as free market as it gets.” It has nothing to do with banning choice, limiting choice or banning innovation. If anything it’s the exact opposite.

Abbott: Okay, one very quick question.

Wagner: And quick answer–

Audience: What place do you think that lifecycle assessments and maybe like total costing–type research has in these sort of policies that will have to made on what are impacts and what do products actually use when we cost this stuff?

Wagner: Here’s a dirty secret in much of this. Right? Europe has been decreasing its emissions. Turns out, Europe has been decreasing its emissions associated with production. Part of the answer to decrease your emissions is to move the factory across the border, but you still consume the same amount.

You just don’t produce it anymore. Now it also turns out it was not environmental policy that led to that to happen. It wasn’t that the factory moved across the border because of environmental policy. It was because factories are moving the border as it is, right–cheap labor and cheap rent and lots of other factors that lead to that.

It is certainly, probably the driving factor why certain European countries–we’re looking at Norway in this case–have decreased their emissions quite significantly, much, much beyond anyone has ever projected mainly because factories picked up and moved somewhere else. Again, not because of environmental policy but because of other factors that then led to emissions reductions associated with production.

Where does lifecycle assessment come into this? Well, what you really want to do is look at how emissions associated with consumption are behaving. In fact, maybe what you really want to do is go to the opposite extreme of taxing extraction but look at the carbon content of everything that you buy and essentially have a value added tax, in a sense, for the carbon that you actually end up buying in the end.

All right, emissions associated with consumption. Are you working on this as part of your PhD? Lifecycle assessment?

Audience: Possibly, yeah.

Wagner: I can tell you there is certainly a lot of work to be done for exactly this reason, right? We ought to be decreasing emissions associated with consumption, not just with production. Globally doesn’t make a difference. For individual countries of course, it very much does and it’s the consumption that matters in the end.

Abbott: Okay. Please join me in thanking Gernot–

[Audience clapping 56:45]

Wagner: Thank you.

[End of Audio]

The above transcript provided by Landmark Associates.