FOURTEEN
While the oughts were another lost decade in terms of mobilizing public opinion, there were a few positive developments on the business and finance front—though not in the United States. The most significant was the dramatic expansion of feed-in tariffs (the mechanism pioneered in Europe that provided a guaranteed return to investors in renewables). Making renewables financeable turned out to be the key to dramatic expansion of solar, wind, and other alternatives in a host of nations. The passage of Germany’s renewable energy act in 2000 provided a template adopted by many other nations for financing renewable projects in a way that was fair to both investors and consumers. First other European nations got on board, including France, Italy, Spain, Portugal, and the Czech Republic, then China, India, South Africa, and many other nations. Today, some fifty countries (and many individual states in the United States and provinces in Canada) have some form of feed-in tariff.
Another significant breakthrough came, surprisingly, from a collaboration of a physicist and an evolutionary biologist, and it didn’t generate the attention it deserved. In 2004, Princeton University professors Rob Socolow and Stephen Pacala published a paper in Science in which they provided an elegant, commonsense framework for understanding the task of stabilizing greenhouse gas emissions, as well as a dramatic way of framing the costs of delay. The article, entitled “Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies,” broke the problem down. They showed how much global emissions had to be reduced in order to stabilize greenhouse gases over the next fifty years and then offered a path to achieve those reductions. They identified fifteen “wedges,” each of which would reduce emissions by 1 gigaton. They called them wedges because the longer one delayed in implementing the reductions, the more was required to achieve stabilization. The wedge concept offered an easy way to visualize the costs of delay, because with the passage of time more would have to be done in a shorter period to achieve the goals of any single wedge. If time was the horizontal axis, then the vertical axis—what would have to be done—would get thicker with each year of delay, creating a wedge. In 2004, they calculated that the world needed to reduce emissions by 7 billion tons each year, so that any seven of the fifteen wedges would achieve the goal.
When I interviewed him, Pacala said that “we wrote that article in Science for an audience of one.” He’d been infuriated when Bush’s energy secretary, Spencer Abraham, said that to deal with climate change, we needed a breakthrough as profound as Michael Faraday’s invention of the electric motor. Pacala and Socolow thought that was nonsense and set about trying to prove it.
The wedges ranged from doubling fuel economy for 2 billion cars, to increasing wind-generated electricity a hundredfold (relative to what was produced in 2004), to eliminating tropical deforestation. The World Resources Institute teamed up with Goldman Sachs to try to put some flesh on one of those wedges—increasing solar power. Unfortunately, they focused on concentrated solar power (the use of mirrors to focus sunlight and generate heat, which then drives a generator) at a time when plummeting solar cell prices made concentrated solar less competitive. This illustrates one of the pitfalls of technological wedges—namely that as pioneering technologies rapidly expand their footprint, it isn’t obvious which form of the technology will win out.
Once Socolow and Pacala offered their architecture for how to achieve stabilization with existing technologies, the door was open for others to offer their own wedges. And they have; among those advanced have been carbon-tax wedges and meat consumption–reduction wedges. The Carbon Mitigation Initiative even has a game where teams can come up with their own strategy using their evolving list of wedges.
The good news is that in some cases the world is ahead of schedule in filling in some of those wedges, in some cases way ahead. While the authors estimated in 2004 that the world would need to increase wind-generated electricity by a hundredfold by 2050, wind capacity has since increased so rapidly that what remains to be achieved is only a tenfold increase by 2060. That is completely doable, as we’ve had more than a tenfold increase in just eighteen years. Solar power too has spread more rapidly than expected in 2004. While reducing emissions by a gigaton in 2004 required seven hundred times installed solar capacity, the figure is now a hundredfold increase in what is currently online. In 2004, calculations were that solar would have to grow by about 14 percent a year to fill that wedge. In 2017, photovoltaic installations grew by 34 percent.
Pacala says that the advances in wind and solar have been far more dramatic than they dreamed possible in 2004, and that those two renewables could account for much more than two wedges by 2050, even without further technological breakthroughs. “We never expected in 2004, that fifteen years later, they would be the cheapest forms of electrical energy.” He attributes the extraordinary progress to market competition and subsidies. “Even in the past ten years, the costs of wind and solar have come down between four and five times. The success of wind and solar should be a conservative cause célèbre,” he remarked.
Pacala’s optimism on solar has been backed up by the International Energy Agency (IEA), which has found that the cost of solar has consistently dropped faster than even the agency’s optimistic projections. In its World Energy Outlook 2020, the IEA argued that solar had become “the cheapest source of electricity in history.” In just the year since the 2019 Outlook, solar had become 20 to 50 percent less expensive.
In fact, the decarbonization of electricity in the United States has dramatically exceeded expectations of fifteen years ago. A Lawrence Berkeley National Laboratory study, Halfway to Zero: Progress Towards a Carbon-Free Power Sector, led by Ryan Wiser, looked back at 2005 expectations for future electricity production and compared them with what actually happened as of 2020. As the study’s title asserts, they found that in 2020, direct power sector emissions were half of what was expected by experts in 2005, just fifteen years earlier. One reason was the shale revolution, which made natural gas plentiful and dirt cheap. Another was the growth of renewables, which exceeded expectations by about 90 percent. The biggest reason for the decline, however, was an extraordinary decrease in power produced by coal. Instead of rising by 480 billion kilowatt-hours, coal power plummeted by 1.720 trillion kilowatt-hours, a nearly two-thirds drop!
Pacala cited the degree to which natural gas has displaced coal as a positive surprise—though he admits that too much escaped methane during drilling could nullify the advantage of natural gas (methane has twenty-eight times the greenhouse gas potential of carbon dioxide). Apart from the shifts in the power sector, another positive surprise is the surge in the shift to electric vehicles. “Talk in 2004 was all about increasing vehicle mileage,” he said. “Nowhere were electric cars in the conversation. For one thing, we lacked the capacity to deal with millions of distributed sources.”
The enabling technology, he notes, came from an unexpected quarter. The explosive growth of smartphones drove innovation in battery technology. Lithium-ion batteries could be scaled up, and competition among electric vehicle makers has dramatically expanded the range of the vehicles, lowered the costs of the batteries, and extended their life.
The surprising power of innovation and technological transformation has caused Pacala to up his goals. “The natural surprises have been on the ugly side,” he notes. “The technological surprises have been on the bright side.” Back in 2004, he felt it would be a home run to simply freeze emissions at 2004 levels by 2050. Now, with climate change already hitting hard, he acknowledges that this is not enough. “Back in 2004, no one would have predicted that across all industrial nations, emissions are declining in every respect,” he noted. But the problem is that emissions in developing nations are still rising. The new goal is net-zero emissions, and he feels that achieving that goal by 2060 is entirely feasible.
While the concept of wedges offers a path forward, it also offers a warning. Recall that each of the wedges gets fatter over time, reflecting the fact that as each year passes without stabilization, more greenhouse gases accumulate and more future emissions must be cut in a shorter time. Because greenhouse gas emissions have increased since 2004, the amount that must be cut to achieve stabilization has increased from 7 gigatons a year to 8 gigatons a year. With global emissions still growing at 2 percent a year (and expected to grow by 5 percent in 2021 as the world recovers from COVID-related shutdowns), that number will continue to rise, making it ever more difficult to stabilize emissions at a level that doesn’t entail catastrophic warming.
Another accelerating trend during the oughts was an increasing divergence between the United States and the rest of the world with regard to action on climate change. Perhaps nowhere was this more striking than in policies relating to coal, the most egregious contributor to greenhouse gas emissions. Shortly after his inauguration, George W. Bush launched a National Energy Policy Plan under the leadership of Vice President Dick Cheney. It called for “regulatory certainty” for coal, a code word for a rollback of regulations. Bush followed that up by launching a Clear Skies Initiative (yes, there’s a long history of Orwellian naming habits in the White House), which actually did roll back regulations. In response, coal production trended up throughout the Bush years.
The rise in coal production came to a screeching halt by the end of 2008 and then plummeted. The reason had nothing to do with the readoption of regulations or any “war on coal” instituted by the new Obama administration. Rather, a flood of cheap natural gas and (a few years later) the extraordinary rise in wind power made coal uneconomical for electricity generation. Support for this conclusion came from the Trump administration, perhaps the most pro-coal government anywhere on earth, anytime in history. Despite efforts that extended to attempts to rig markets to force generating companies to buy from the dirtiest, least efficient plants, coal use continued to fall steadily during his administration. That said, there is no doubt that it would have fallen faster but for the Trump administration’s desperate measures, and it would have been even further along the curve to oblivion were it not for the George W. Bush administration’s attempts to bolster coal use.
For a picture of what might have happened in the United States were it not for four coal-friendly administrations, consider the path taken by Germany, another economic powerhouse with major coal reserves. Since the adoption of the Renewable Energy Act, German coal use has seen a steady decline. More to the point, the country beat the goal of a 40 percent cut in greenhouse gas emissions by 2020. By contrast (and only due to COVID-19), the United States ended 2020 with greenhouse gas emissions slightly lower than 1990 levels. German achievements have come about despite having cut back on its reliance on nuclear power, which put an added burden on other sources to make up the difference.
The dramatic gap between the United States and Germany was the result of an enormous surge in renewables in Germany, principally wind and solar. Between 2000 and 2020, German power production from nonhydro renewables has grown more than tenfold and now accounts for roughly 40 percent of power generation. United States reliance on renewables has also grown, but nonhydro electrical production is still only 11 percent of power generation.
It must be stipulated that Germany and the United States are not perfectly comparable. Germany had the benefit of the modernization of the former East German territory after the Berlin Wall came down. On the other hand, the United States has vastly more land at latitudes better suited for solar than Germany, as well as vastly more potential for wind energy. Moreover, while Germany has dramatically outperformed the United States in terms of cutting emissions, it only ranked twenty-third on the Climate Protection Index, a measure of emissions reduction performance put together by a consortium of climate groups. Sweden ranked fourth (the index leaves the top three spots open because the judges feel no country has done enough to avoid dramatic warming), and the United States ranked dead last of the sixty-one nations assessed, right behind Saudi Arabia.
Two terms of George W. Bush inflicted both real and intangible damage on action on climate change. The tangible damage came from the increase in fossil fuel emissions at a time when other developed nations were cutting. Incalculable damage was done by having the administration of the world’s largest economy and greenhouse gas emitter spend eight years actively sabotaging efforts to combat global warming. GOP mockery of the threat gave cover for politicians in other countries to drag their feet. There is no doubt that had Al Gore been president during those eight years, the atmosphere would be less burdened with greenhouse gases today.
The United States is not a monolith, of course. Even as the White House undermined action, states and cities launched their own initiatives. California, then the seventh-largest economy on the planet (and now the fifth), passed a Global Warming Solutions Act in 2006, setting a goal of reducing the state’s emissions by 40 percent by 2030. Other states and dozens of cities adopted decarbonizing measures. Unfortunately, in global terms the absence of support from the federal government was the bell that rang the loudest.
The indictment of the United States in no way blesses the actions of the other developed nations. For instance, while the European Union has done a better job of cutting its emissions than the United States has, those nations “import” a significant amount of emissions from developing countries. When an Italian buys a toy made in China, the making of which produces a pound of CO2, the greenhouse gas emission is produced in China, but its production was stimulated by demand in Italy. In this fashion the European Union has “offshored” its emissions. It looks good on paper, but the atmosphere has significant additional greenhouse gases created by the European Union that is not on the European Union’s books. A study that was led by system scientist Steve Davis that was published in the Proceedings of the National Academy of Sciences in 2010 found that Austria, France, Sweden, Switzerland, and the United Kingdom imported about one-third of their emissions in that fashion.
There were other accounting tricks. In the oughts, a good portion of purported emissions cuts claimed by the European Union, for instance, came from a misbegotten project that was a brainchild of the Kyoto Protocol. To incentivize developing nations to industrialize while reducing emissions, the treaty had a Clean Development Mechanism (CDM) through which industries could pay for projects in other countries that would show marginal improvements in emissions and then use those credits to offset their own emissions. The idea seemed ingenious—a factory that might spend $100 million reducing carbon emissions might get more bang for their buck in terms of emissions by spending the money on a solar power project in Ecuador.
There were two problems from the get-go. One was that it was a zero-sum game; even if it worked properly, the CDM didn’t reduce emissions, it just didn’t increase them. The second was that it didn’t work properly: much of the money went to those who figured out how to game the system, and some of the money actually increased emissions. Credits, for instance, went to landfills to capture methane even though some of the methane-capture projects had been up and running for more than a decade. In one case, a major credit went to build a coal-fired power plant in Gujarat that became a significant source of greenhouse gas emissions in India.
One problem was that for the CDM to work as intended, the sellers and buyers of the credits actually had to care about reducing greenhouse gas emissions. A significant number of participants just wanted either the credits or money and couldn’t care less about saving the planet from climate change. The CDM also contained perverse incentives in the sense that it undermined efforts a nation might take to reduce emissions without being paid to do so. Why spend money to reduce emissions if you could get paid to do it?
The cap-and-trade system of the CDM is one attempt to put a price on carbon, and many were launched in the first decade of the new millennium. In 2005, the European Union started its own trading system to limit carbon, which is now the largest such system in the world. Consortiums of states in the United States, including California, provinces in Canada, states in Australia, and various countries around the world have also tried to put a price on carbon. The overarching principle is the simple concept of “polluter pays.” It was used successfully in the early 1990s to reduce acid rain by setting up a market to put a price on sulfur dioxide emissions. The carbon market has expanded wildly, with $215 billion in carbon trading carried out in 2019 according to the market data firm Refinitiv.
The problem is that these programs have done little to reduce emissions. Many price carbon too cheaply, which is why cap-and-trade schemes are often popular with the big carbon emitters. In many cases, the supply of carbon permits is greater than the demand, which drives down prices. A survey of carbon pricing schemes by Matto Mildenberger and Leah Stokes for the Boston Review notes that half the world’s carbon prices are less than ten dollars a ton, between a fourth and an eighth of what the World Bank assessed as necessary to meet the mild terms of the Paris Agreement and a tiny fraction of what would be necessary to actually prevent global temperatures from rising beyond 2 degrees Celsius.
Polluters also like carbon trading schemes because many are structured in such a way that carbon prices directly hit consumers, which makes it easy to launch slick campaigns arguing that climate change programs are vanity projects of insufferable elites that hurt the little people. In many cases, carbon trading schemes are a win-win-win for polluters. If they have to live with them, as in California, their lobbyists can make sure they’re not too pricey. Also, polluters can use the threat of higher prices to rouse the working public, and quite often, if the emitting industry is sufficiently critical to an economy, they can stop them altogether. Or polluters can get an exemption, as was the case in New Zealand, where agriculture was exempt from the carbon trading scheme even though the sector accounted for half of the country’s greenhouse gas emissions. To make things worse, state and regional trading schemes often pop up in areas that already have strong climate action programs and not where they might do the most good.
James Hansen recognized these flaws early on and testified about them before Congress. His preference was for a carbon tax. It’s more difficult to game and could be targeted, as a small number of giant businesses account for a significant percentage of emissions. For instance, Secunda, a coal-powered chemical plant owned by Sasol in South Africa, has been named as the largest single-site emitter of greenhouse gases in the world. As reported by Bloomberg, its 56.5 million tons of greenhouse gases are more than the annual emissions of countries such as Norway and Portugal. The Carbon Majors Report asserts that just one hundred companies are responsible for 71 percent of greenhouse gas emissions since 1988.
Unfortunately, it’s also easy to rally people against a new tax, and that’s exactly what has happened when a carbon tax has been proposed over the past decades. In fact, opposition to a carbon tax in Australia helped propel Tony Abbott to become prime minister in 2013. (Abbott has said that he thought climate change would turn out to be a good thing. He made these remarks before a substantial part of his country was incinerated by wildfires in 2018.) The fact that a carbon tax can be recycled as a dividend to relieve the burden on the poor and middle class gets lost in the crude bumper-sticker messaging that befogs the discussion of any new tax proposal.
As noted, the insurance industry had the potential to become the most colossal financial force for change with regard to climate. Yet the industry was not a force for change in the 1990s and still wasn’t in the oughts. One reason was their aforementioned ingenuity at spreading risk, while another was that in the regions most exposed to climate risk, the state stepped in to socialize the risk, albeit in a camouflaged way. Exhibit A is the state of Florida.
It’s been argued that most of the growth in Florida since 1960 could be attributed to two factors: the spread of air-conditioning and the availability of affordable property insurance. Whatever the reason, the growth has been spectacular. By the end of the decade roughly 80 percent of insured real estate in Florida was on or near a coast. Notably, much of this growth occurred after Hurricane Andrew, and even after the extreme hurricane seasons of 2004 and 2005. (The first year set the record as the costliest season in U.S. history, and 2005 surpassed that record.)
In a world of functioning risk markets, insurance costs and bigger exclusions should have begun an orderly movement of people away from the coasts. The retreat should have extended beyond Florida to Alabama, Georgia, South Carolina, and other regions in harm’s way. Instead, the opposite happened.
Reinsurers did pull back from Florida and other at-risk markets after the 2004–2005 hurricane-related losses. This threatened to precipitate a spiral in which either increasing insurance costs or unavailability of wind insurance would cause real estate prices to crash and banks to go under. The state dodged this bullet thanks to a plethora of state and federal programs that stepped in to fill the gap with underpriced risk insurance (a real estate crash did happen in Florida in 2008, but the cause was the collapse of the mortgage market, not hurricane risk).
Florida’s backstops date back to 1970, and there are now three Florida programs plus federal flood insurance assuming risks that the private market won’t insure or supporting policies that would otherwise be unaffordable. Because these programs subsidize risks private insurers will not, they more resemble public spending programs than insurance. The most dramatic example of this is the National Flood Insurance Program—NFIP—which has been in deficit since Hurricane Katrina. In 2016, Congress increased its debt by $16 billion, and then in 2018 canceled $16 billion in debt owed to the government (actually, to taxpayers). This is not a business model any private insurance company could emulate, as private companies do not have the option of canceling debt outside of bankruptcy or restructuring.
Florida’s most recent program is the Citizens Property Insurance Corporation established by the Florida legislature in 2002 by rolling two existing backstops into a nonprofit insurer of last resort with a cap on the rates it could charge. It quickly became the largest insurer in the state, which tells you all you need to know about whether other insurers think that the rates charged are sufficient to sustain a viable business. Big insurers such as Allstate and State Farm pulled back after the losses of 2004 and 2005, and by 2012, Citizens was insuring 1.4 million properties. The private market was largely given over to smaller undercapitalized insurers.
Risk can be ignored, it can be spread, and it can be shifted, but if it is real, it cannot be destroyed. Should some major storm bankrupt the pool, the state was empowered to cover the losses by issuing bonds, which would be financed by a surcharge on all insurance, even auto policies, in the state. One estimate puts coastal property value at $2.8 trillion, with Florida assuming $511 billion of that risk through its state insurance fund. Underpricing risk is (or should be) a mortal sin in the insurance industry, and the pool was financially precarious from the beginning. A study of the insurance market conducted by Florida State University concluded, “Florida could be one major storm away from having to take all wind risk.”
In the event of a shortfall following a hurricane, Citizens’ structure imposes assessments that can extend to all insured properties in the state, even those not at risk from hurricanes. The ultimate backstop is the state’s taxpayers. Because its rates are by definition below market (otherwise the private market would absorb all business), the structure of Citizens combined with the demographics of the state implies that poorer Floridians living away from the coast are prepared to subsidize more affluent Floridians who have blithely passed on their hurricane risk to the entire state. One wonders how the portion of the state’s taxpayers who live safely away from the coast feel about assuming that risk?
In fact, there was some pushback. The politics that surrounded Citizens became fractious, and remain fractious, but in the oughts and subsequent years, the backstops subsidizing coastal property owners have been sufficiently generous that few moved away. Florida, which had 8 percent of the U.S. coastal population in 1960, according to the U.S. Census, had about 15 percent in 2000 and nearly 16 percent in 2008—again, after the damaging hurricanes of 2004 and 2005. In Florida the main disincentive to moving to the coasts was rising prices, not because of increased insurance but because, with the exception of the collapse during the Great Recession, people were willing to bid up prices to live there.
Behind the scenes, there were increased stirrings in the insurance industry. During the decade, the reinsurance industry did begin to move toward adjusting to more frequent storms—after the 2004 and 2005 hurricanes, reinsurance rates in Florida rose 25 percent or more—but these efforts were largely countered by state programs that moderated the increases passed on to customers. Property owners remained largely oblivious to the economic threat of climate change.
I was involved in one of those behind-the-scenes efforts in 2004 and 2005. In a report entitled Climate Change Futures: Health, Ecological and Economic Dimensions, the Harvard Medical School’s Center for Health and the Global Environment teamed up with Swiss Re and the United Nations Development Programme to develop scenarios for how impacts from climate change might unfold in several different spheres. I helped edit the report and write the Executive Summary. The report anticipated a lot of the impacts that have become prominent in the seventeen years since it was published. These include the spread of infectious disease, the die-offs of reefs, an increase in nonhurricane windstorms, and even the increase of wildfires in the American West.
Most noteworthy, however, was what might be regarded as one of the report’s failures. At the outset, the sponsors hoped to price the economic impacts of rapid climate change. It’s one thing to project the economic impact of global warming if it progresses at a stately pace (as the 2006 Stern Review tried to do), but it’s an entirely different problem if the model for climate involves significant changes and their derivative impacts over just a few years, the new paradigm of climate change that scientists had adopted. In the case of Climate Change Futures, the contributors ultimately threw up their hands. The problem was that with rapid climate change a number of nonlinear effects came into play, and while the authors could talk about “discontinuities” in the climate system, about runaway positive feedbacks, and about “stepwise” climate shifts, the unpredictability and myriad possible interactions of these factors made it near impossible to integrate them into a precise scenario of future economic impact.
This should have been a loudly ringing alarm, but like many other such alarms it was ignored outside the climate change community. Still, if the oughts were yet another lost decade in terms of real action on climate change and public concern about the threat, behind the scenes, innovations in finance, technological progress, and a dawning realization in the leadership of developing countries that they too were in the crosshairs of global warming all set the stage for important developments during the second decade of the new millennium. It was not long after the oughts ended that the reality of climate change and the price it was imposing became impossible to ignore.