5 Insights from Day 1 of the Yale Climate, Environment & Economic Growth Conference

Lucas Chancel of Sciences Po presented on how climate change exacerbates inequality within and between countries. These environmental inequalities can be analyzed through three dimensions: inequality in relative losses, inequality in the level of emissions, and inequality in the capacity to finance the transition and resiliently face climate challenges. As a result of these inequalities, those who emit the most suffer the least, and those who emit the least experience the most significant losses while not having the resources necessary to adapt to climate change.

Hallegate and Rozenberg’s study conducted in developing countries found that the bottom 40% of the distribution loses 70% more than average. The literature has also found similar characteristics with strong climate inequalities in rich countries.

The challenges ahead include figuring out: how to produce real time estimates and forecasts that can be used by policymakers to target their social policy measures and anticipate climate shocks and their impacts. Also important, is figuring out how to  measure the joint distribution of consumption, income and capital and how these are impacted by climate change.

 – Lucas Chancel

In her keynote talk, Esther Duflo of MIT continued the climate inequality discussion, arguing that while the trade-offs between poverty alleviation and emission reduction remain a public debate subject, evidence that low-income countries will endure the highest costs of rising global temperatures prevails. Tackling climate change will require addressing redistribution across nations, which calls for institutional mechanisms to redirect funds to low-income countries and individuals. Duflo proposed an international wealth tax and a minimum levy on global corporations as potential sources of funds for the loss and damage acquired in low-income countries.

For instance, the mortality impacts of temperature rising alone will be concentrated in  poor countries with estimates, in a business as usual scenario, of 73 extra deaths per 100,000 by 2100 exclusively in poor countries. That is more than  all the deaths from infectious diseases.

In the next many years, the problems are going to be in the south but the principal margins of action are in the North. Have we displayed a great capacity to deal with this?

The funds mobilized through the climate fund is less than 100 billion, but most importantly, it is mostly loans and mitigation. So basically, we are lending money to poor countries to undertake investments that are going to help reduce carbon in the atmosphere for everyone. So it doesn’t seem that it is addressing the issue of cost.

Progress has been made but commitments remain weak. For instance, on November 6, 2023 a basic agreement for a fund hosted by the World Bank was reached but there is no commitment for any country to contribute to that fund … So the low-income countries are very upset because the fund is in the World Bank and the US made it so that no country would want to contribute…. It seems like there is still more work needed.

 – Esther Duflo

Nick Ryan, an associate professor of economics at Yale, moderated a discussion panel with Duflo and Chance focusing on inequality and climate change. They emphasized the need to fully understand the social cost of carbon in low- and middle-income countries when considering compensation at both the nation-state and global levels. The discussions also investigated the role of innovative financing mechanisms to address climate change challenges that would enable just global redistribution. The presenters emphasized the importance of ensuring that the funds mobilized reach the local communities in need.

The most helpful way to go about figuring out the actual social cost of carbon as it plays out in poor countries is to choose your own adventures.… What I hope to do is build this  tool – all of the data is already there – that would help people form their opinions but it will require people to argue publicly what they choose.

 – Esther Duflo

I think the same principle that applies within countries that carbon pricing works when the losers are well compensated, it also applies well on the global stage, so there is still scope for these discussions to be pursued in Europe and other countries as well.

 – Lucas Chancel

Rohini Pande, the Henry J. Heinz II Professor of Economics at Yale and Director of the Economic Growth Center, posed an introductory question – How can new institutions more effectively prevent climate breakdown while reducing poverty? – which set the stage for the central themes of the Yale Climate, Environment & Economic Growth Conference. Pande argued that there is a growing need for immediate action to combat climate breakdown, which disproportionately affects low-income individuals while simultaneously enhancing welfare. Implementation and ambition gaps arise because of these dual goals, suggesting that present institutions fail to find suitable policy solutions. Pande observes that policy discussions have shifted focus from mitigation to adaptation, providing an opportunity for new institutions to come in to meet this dual challenge. 

If we recognize the reality that economic development or growth is going to remain a priority, we perhaps need to think about how we are going to redefine or expand it.

A lot of the action we need is now, and not in the future.

- Rohini Pande 

Islamul Haque, a Postdoctoral Associate at the Yale Research Initiative on Innovation and Scale (Y-RISE), presented research on how Bangladeshi coastal farmers adapt to salinity intrusion through land reallocations. Haque showed that farmers reallocate lands according to crops that yield comparative advantages, shifting from crop farming to aquaculture. However, he concludes that ownership consolidation occurs through the rental land market and that frictions arise when considering the effect of lowered religious diversity, which decreases land reallocation by 50%.

More than 95% of the farmlands in developing countries are inherited, and there are cultural barriers to selling lands.

Given the nature of the rental market transactions, rental contract enforcement between different religious groups is very important. Given the country’s division, there is substantial tension between different religious groups.

This paper provides optimism for climate change adaptation; we can imagine that the reallocation process is not going to be frictionless, and as a result, farmers in developing countries will potentially bear a disproportionate burden from climate change and cause a divergence in income between rich and poor countries.

– Islamul Haque

Kelsey Jack of the University of California, Santa Barbara, continued on the topic of adaptation strategies in the agricultural sector, which she noted is highly exposed to climate shocks and predominantly low-income employed. Jack used a randomized controlled trial of 180 villages in the depleted soil region of Zinder in Niger as her case study. She explored how adopting demi-lunes, a water-harvesting intervention technique, relied on improving training capacities, information access, and monitoring.

Even though these are not particularly new practices, adoption levels are quite low.

Intensive agricultural practices deplete the soils and lead to land degradation and land retirement, potentially increasing people's vulnerability to future climate shocks.

– Kelsey Jack

Gregory Lane of the University of Chicago presentation centered on limitations to available adaptation tools in low-income contexts. Lane focused on monsoon variability in India and used a cluster-randomized trial of over 250 villages to assess how long-range monsoon forecasts affect farmers’ beliefs, adjustment methods, and agricultural productivity. He concluded that forecasts shift farmers’ beliefs and that good and bad news cause increases and decreases, respectively, in the percentage of cultivated land.

The forecast is going to cause more change than the insurance because what the forecast is telling you is the likely realization of this monsoon arrival, so you can better adapt your specific crop choice to this likely realization.

In particular, one of the problems is that agricultural risk not only harms welfare but discourages investment in agriculture overall.

 – Gregory Lane

Using a historical perspective, Sunil Amrith – Renu and Anand Dhawan Professor of History at Yale University – briefly presented on the different questions and concerns that arise when balancing economic growth and poverty alleviation with environmental protections. These environmental policies and agendas can be at odds with government actions even when environmental and climate justice constitute a significant agenda for their leaders. Amrith’s example of Indira Gandhi showed how state leaders and their governments don’t always align on priorities and actions.

So I think one fundamental challenge when I think we are thinking about environmental justice and the politics of environmental justice has to do with how we think about the future.

Adaptation is a much more difficult idea to grasp in cultural and intimate terms.

The social and political polarization does shape what justice means, including environmental and climate justice for different groups and how it is perceived.

Perhaps one thing that can come out of an interaction between economists, people in the policy world, and some of us in humanities is to try and understand how particular national and regional histories offer different pathways and blockages to the kinds of changes that I think we all feel are necessary to bring about.

 – Sunil Amrith

Rohini Pande moderated a discussion panel that included Haque, Jack, Lane, and Amrith. The discussion explored ways micro and macro economists can work together to use interdisciplinary insights to guide policymakers to novel context-dependent solutions to the climate crisis in low- and middle-income countries. In thinking about adaptation, there is a realization that scale, risk factors, and expectations play a significant role, and having better predictions will be vital in dealing with adaptation challenges. Combating adaptation issues locally, as these contexts require lower-cost solutions, should be prioritized before moving to more ambitious, state-level efforts.

I don’t think there’s any question that the scale of anthropogenic climate change is genuinely without precedent, but what isn’t without precedent are the institutions we have with which we are confronting that, very much an outcome of short- and long-term history.

 – Sunil Amrith

It’s tempting to think that people should give up everything else in favor of adaptation, and that’s almost certainly not the case in almost every context, and so thinking about the adaptation decisions as part of this broader problem that communities, households, and policymakers are trying to solve brings a unique perspective.

 – Kelsey Jack

The first requirement for improving resilience is that you will adjust your behavior based on new information.

 – Gregory Lane

Natalia Fabra of the Universidad Carlos III de Madrid presented vital challenges and strategies in expanding renewable energy investments and discussed the complexities of integrating renewables into electricity markets. She emphasized the need to redesign market structures, address intermittency through storage and demand response, and highlighted the importance of market incentives to promote renewables and supporting technologies like storage in the transition to low-carbon electricity systems. 

The success of the energy transition very much depends on how we organize institutions, in this case how we organize market institutions and in particular who the counterparty of these contracts is going to be.

[These mechanisms] not only make better use of renewable resources but also contribute to reducing generation costs and emissions, strengthening security of supply by minimizing peak demands, and mitigating market power. 

– Natalia Fabra

Catherine Wolfram of MIT discussed the Inflation Reduction Act (IRA), focusing on its impact on energy markets, macroeconomics, and its comparison to the carbon price. Wolfram evaluated the IRA's incentives and associated fiscal costs against projected emission reductions and potential macroeconomic effects, emphasizing its significance as an alternative to inaction amidst escalating societal costs of carbon emissions. The presentation concluded with a brief discussion of the ongoing research, which explores distributional implications and future policy options beyond the IRA to achieve emission reduction goals while addressing fiscal considerations.

Let's not compare the IRA to the Almighty. The Almighty is the carbon price. Let's compare IRA to the alternative. The alternative would have been to do nothing, and as I said at the beginning, I think that would have been very difficult.

It's much more expensive to the world economy to be emitting these tons of carbon than it is to spend the money through the Inflation Reduction Act.

 – Catherine Wolfram

Jose Antonio Miranda brought an industry perspective to a panel discussion on renewable energy markets and provided comments on the topics and findings covered by the researchers in this session. Miranda is the CEO of Avangrid Renewables, which is making significant investments in wind and solar power in the US.

IRAs are truly a game changer. Thanks to the IRA we are going to see battery storage that before was very difficult and is now starting to be more and more common. That is going to be a tremendous help for the transmission bottlenecks.

We know that tax equity is a bottleneck that could derail all this growth that we are projecting. Thanks to transferability, [probably] this is not going to happen and we can enjoy the 50% plus that Catherine was protecting. 

– Jose Antonio Miranda 

Nicholas Ryan facilitated the panel conversation with Antonio Miranda, Fabra, and Wolfram. They delved into the dynamics of the energy market, highlighting the pivotal role of successful policies in enabling renewable energy markets. The presenters explored the intricate tradeoffs in investment, revenue certainty, and market design, unlocking insights into the complexities of renewable energy models and the crucial need for diverse options in this evolving energy landscape. The discussions touched on recent policy changes, including the European Union's electricity market design and the US Inflation Reduction Act (IRA), emphasizing the significance of reducing red tape for a sustainable energy future.

Offshore wind is an energy that has to be focused on areas where there are no other renewable solutions that you can deploy at scale. It is expensive but still less expensive than fossil fuel… in the last year, due to recent supply chain disruptions.

-Jose Antonio Miranda

 

In an economic sense, there are two market failures: the fact that we are not pricing carbon, but there are also the innovation market failures.The IRA has a lot of this and other things like subsidies for direct air capture. There are definitely ways in which IRA will hopefully spur new technological innovation. 

– Catherine Wolfram 

It is been an incredible two decades of revolution in the energy sector, but it is only the start and there is still a huge amount of work to do. 

– Nick Ryan 

Valerie Ramey of the University of California San Diego shared the motivation, theoretical and empirical approaches and results from her co-authored new research on the effects of global warming on global growth. Drawing on indirect evidence of technological growth spillovers worldwide and recent empirical estimates of the dynamic effects of temperature, the research showed that temperature changes have a persistent, but not permanent, impact on global growth.  

Growth is typically tied together between most countries; it seems unlikely that temperature would have permanent country growth effects… The frontier countries [for innovation]] are bliss point countries, are not in the hot regions, and may not have as great of an impact in the short run.

Too many people in the literature haven’t thought about what the treatment effect is: whether that temperature shock is temporary, or permanent, or somewhere in between.

The effect of the shock may depend on the average country temperature; a positive shock may have an effect on India, but could have a positive shock in Sweden.

 – Valerie Ramey 

Allan Hsiao of Princeton University presented on the consequences of rising sea levels in Jakarta, the second-largest city in the world, which faces frequent and worsening flooding and where the government has proposed a sea wall. Hsiao described his recent paper, which explored how the government’s proposal may complicate Jakarta’s adaptation to rising sea levels by creating moral hazard (where developers continue developing the city’s coast in anticipation of the government’s defense against sea level rise). Hsiao’s paper quantifies this moral hazard by constructing a dynamic spatial model of urban development and flooding, finding that moral hazard generates coastal lock-in by delaying inland migration. The presentation described how his model can be used to evaluate various policies for reducing the lock-in.

The developers [in the model] maximize private profit, ignoring the high social cost of building high sea walls into perpetuity, so they do not internalize that high public cost.

The first best is ‘gradual managed retreat.’ Without [that policy] commitment, the full force of moral hazard is at play: developers push the government into bailing them out, with current developers exploiting the current government and future developers exploiting the future government, which gets stuck intervening.

The current government can help the future government by taking a short-term loss in order to have long-run gain – but that’s only if they care about the future government.  

The damages from climate change will be borne by developing countries primarily, and the brunt of those damage will be borne by cities in developing countries – so more research in this space in particular is incredibly important.

 – Allan Hsiao

Samuel Kortum, the James Burrows Moffatt Professor of Economics and Professor of Management at Yale University, responded to the papers and presentations by Ramey and Hsiao, noting that both highlight the different ways that economists can contribute to estimates of the global social cost of carbon. Kortum characterized Ramey et al.’s approach as “top-down” since it seeks to estimate the macro-level effects of climate change on growth at the global level. In contrast, Hsiao’s “bottom-up” approach aims to estimate the specific and micro-level effects of rising sea levels on Jakarta. He highlighted the benefits and drawbacks of each approach: bottom-up approaches offer greater granularity and fewer methodological “leaps of faith” than top-down approaches but are too time-consuming and costly – so careful top-down approaches are also needed to help policymakers make critical short-term decisions in response to climate change.

[Ramey and her co-authors’ paper combines] Valerie’s knowledge of the time series, Pete’s knowledge of the growth theory, and Ishan’s knowledge of the environmental issues – it’s really a dream team – [to produce] careful analysis of the dynamic responses of GDP and temperature itself to a temperature shock.

[Allan’s paper shows that] even when you do try to adapt, it’s kind of messy, you don’t do it in a least-cost way, and that raises the social cost of carbon.

Countries aren’t going to grow forever, one faster than another; we’re kind of pulled together, through things like technological diffusion.

It would be preferable to build up from tangible cases, like the Jakarta case in Allan’s paper, and build a whole set of such instances where we really know what’s going on at the micro level and we basically just add them up. But of course, that’s a pretty tall order, because just one case takes years to do properly, and we may not have time to wait around for that. We need to make decisions now on policy with reasonable values for the social cost of carbon… [and the top-down approach] may get us a reasonable value in a short amount of time.

– Samuel Kortum 

Costas Arkolakis, a Professor of Economics at Yale University, moderated a panel that included Ramey, Hsiao, and Kortum, where they further explored the issues raised in the papers and Kortum’s remarks. The panelists discussed how macro analyses of the economic effects of climate change often overlook heterogeneity within countries in terms of climate variation and variations in population distribution – or, as Arkolakis said, “space matters.” They noted that top-down analyses often overlook the role of adaptation. Hsiao noted that moral hazard and political economy issues are not limited to low-income countries. Audience questions focused on the limitations of using GDP alone to understand the economic effects of climate change and other methodological issues raised by both papers.   

It is important to think about how much heterogeneity there is in a country… You can think about this in terms of adaptation within countries: [a resident of] Tucson [might spend summers] in the San Juan Islands, so adaptation becomes very easy if there is heterogeneity within country borders.

– Valerie Ramey

To get a causal effect, the shock needs to be unanticipated...  but given how slow the average person has been to wake up to climate change – it’s only recently that you’re seeing variations in housing prices and insurance rates in places like Florida, for example – our approach to identifying the unanticipated shocks is not a bad approximation.

– Valerie Ramey

A tax is also a commitment to actually enforce the tax, just like permitting and zoning is a commitment to actually enforce and punish people if they don’t go into the right place.

– Allan Hsiao

This political economy [aspect] is very fundamental and not just a lower-income country thing. For the sea wall that is going to be built in New York City, [the plan is for it] to be financed 50% by the federal government, 25% by the New York state government, 25% by the New Jersey state government, and 0% locally in New York City.

– Allan Hsiao

Anthony Smith, William K. Lanman, Jr. Professor of Economics and Chair of the Economics Department at Yale, spoke about his work at the intersection of macroeconomics and climate science, where he pioneered high-resolution integrated assessment models. By merging Earth system models with economic frameworks, Smith's research evaluates regional climate change impacts and policy outcomes, fostering interdisciplinary collaborations and leveraging computational power to inform crucial policy decisions.

 The more we can get people together, like in rooms like this and get interaction going, the more we can build more plausible and interesting models.

We need micro and macroeconomists, climate scientists, ecologists, geographers – all those papers today can inform the macro model that I'm building. 

– Anthony Smith

Tejal Karnitkar of the National Institute of Advanced Studies delved into the dominant role of Integrated Assessment Models (IAMs) in shaping climate policy decisions, shedding light on their limitations in addressing equity and justice. Highlighting persistent inequalities across regions and the disproportionate burden on low and middle-income countries in mitigation efforts, Karnitkar underscored the urgent need for revised modeling frameworks to ensure fairness and resilience-building opportunities for vulnerable regions. 

[Integrated Assessment Models] are at the heart of the projections made, even in the IPCC 6. Some of the first IAMs came out of the Department of Economics at Yale.

Global Model Scenarios from IAMs disproportionately dominate the summary for policymakers, which then get even more disproportionately picked up by the media, and then even more distilled and used, without the accompanying context in COP decisions.

Most of the macroeconomic models that pursue pareto optimality, and frameworks that are used, frees income inequalities at current levels, not allowing any more conversions that is considered reasonable based on historical trends.

Current solutions are geared towards finding optimality where it is both spatially and temporally cheaper. So if it is cheaper to reduce emissions through agricultural and forestry in developing countries, versus pollution due to oil, gas and coal use in developed countries, that’s what will be the solution. So, you have extreme levels of energy inequality persisting across model scenarios, and thus there are higher mitigation burdens by these models on developing countries in the short and long run.

 – Tejal Karnitkar

Regina Rodrigues of the Federal University of Santa Catarina underscored the disparity between climate science production and practical application, particularly in regions facing heightened climate hazards. She highlighted that the prevailing top-down approach in climate science often prioritizes data and models over addressing real-world decision-making needs, leading to a scarcity of usable climate information for vulnerable regions due to insufficient data, inadequate model representation, and a failure to integrate valuable local knowledge. Rodrigues also noted that the current framework of climate change science often focuses on singular, definitive questions, overlooking diverse uncertainties and multiple hypotheses that could provide more nuanced insights into addressing climate-related challenges.

The case is that there has been a call for usable, actionable climate information. Yet, in spite of our awareness and global efforts, it is widely recognized that there is a significant gap between the production and the use of climate information. I argue that this is due to us, climate scientists, focusing on better data/models rather than better decision-making.

Top-down approach is inevitably driven by the climate scientists themselves and, as such, violates the core principles of co-production. Traditional ways of producing aggregated climate information can leave climate scientists empty-handed for many regions of the world, especially in the Global South. 

– Regina Rodrigues

Climate scientist Piers Forster of the University of Leeds, highlighted advancements in climate modeling techniques, emphasizing the importance of collaborative conversations between scientists and economists for more accurate surface temperature projections. He underscored the need for inclusive dialogue, expressing concerns about decisions made without understanding the underlying assumptions, and urged for collective action within the community to effectively influence policy changes for addressing climate challenges.

Climate modeling has been included by economists in their macroeconomic work and models, like the United States government used to calculate their Social Cost of Carbon with, and I absolutely appreciate the citations – but I would appreciate far more than that the conversations. It was done without talking to us. So, it’s people like us who are the only ones who understand the assumptions that go into the climate modeling.

I think what I would appreciate even more than the conversations, are changes. Projection of course, depends on factors that you economists know better, like GDP and the population changes, and it would be good to work out a way to interact by the conversations we have.

When we act together as a community, we can do things. The IRA was a good opportune example where there are these consistencies. 

– Piers Forster 

Jessica Seddon of Yale University moderated a panel discussion with Smith, Karnitkar, Rodrigues, and Forster that delved into the complex interplay between climate science and policy formulation. The dialogue underscored the urgent need to bridge scientific research with actionable policy steps, citing concrete examples of how data-driven strategies can bolster climate resilience. Moreover, the conversation emphasized the significance of fostering multi-stakeholder collaborations, citing successful case studies where diverse partnerships propelled the implementation of impactful and equitable climate policies, urging a concerted effort to address the escalating climate crisis.

Don't start with the objective function of minimizing cost, but perhaps start with the objective function of maximizing resilience. 

– Tejal Karnitkar

But I think we should be looking at extreme weather events as well, putting in weather as well as climb[ing] into the models and recognizing that weather can impact locally. Maybe not, it doesn't, you know, we don't get a hurricane across the whole US. We get that hurricane locally, so we need to model those somewhat more local impacts and then study how we can share those risks across governments or countries. 

– Anthony Smith

But when I think about the bottom-up approach in terms of climate science with communities, then I think we would change because in this conversation it can change even how they vote. And that's what I think is going to make much more impact than trying to talk to the politicians and change their mind. 

– Regina Rodrigues

We come with ideas, things that need to be studied and be understood. But when we go to the communities, that is not exactly what they need. Thus, we now have a new activity that we go to the communities and talk to them and then create the information, and not try to adjust the information that we already have. It’s a bottom-up approach that we are trying to do, from the beginning. 

– Regina Rodrigues