Gernot Wagner teaches climate economics at NYU, and writes Bloomberg’s Risky Climate column. His research, writing, and teaching focus on climate risks and climate policy. In his new book Geoengineering: the Gamble, Wagner provides a balanced take on the possible benefits and all-too-real risks. Despite those risks, he argues, geoengineering may only be a matter of time. Not if, but when. He believes that modern-day policies, like clean electricity standards, cap-and-trade systems, and lots of other rules and regulations follow the same principle: increase the price of carbon and other greenhouse gases.

PKU Financial Review: China has committed to peak carbon dioxide emissions before 2030 and to achieve carbon neutrality before 2060. What is your comment on that? Is the target achievable or too aggressive? What is the biggest impact it will have on China's future energy development?
 
Wagner: Last fall's announcement of a net carbon neutrality target date of 2060 was a surprise to many, and a very positive one at that. China joins a long list of countries with such goals, including the EU, Japan, and US President Biden's declared goal of a net-carbon neutral electricity sector by 2035. The most important part, of course, is the near-term implementation. There, the 14th Five Year Plan took some further steps, but much more, of course, needs to be done to achieve net carbon neutrality. Given how many infrastructure investments are in place for decades, the time to set China on a low-carbon, high-efficiency path is now.
 
PKU Financial Review: Lots of economists believe in the role of carbon taxes, which controls carbon emissions by carbon price adjustment. Nordhaus even calculated the appropriate tax for each ton of carbon dioxide: 50 US dollars. However, for some countries that do not have the ability to upgrade energy technology, price adjustment alone is not enough. Feasible clean energy alternatives are also extremely crucial. Therefore, carbon taxation has not become a worldwide consensus. Now the Biden government has begun to promote carbon taxes again. What do you think of it? How will such policy develop in near future?
 
Wagner: Carbon taxes are no panacea, but the principle -- that higher carbon prices mean lower carbon emissions -- is, of course, crucial to any climate policy. The very first time someone tried to regulate fossil fuel consumption was King Edward I, in early fourteenth century England, when he banned the burning of sea-coal in his kingdom. The penalty for repeat offenders: death. Nobody would mistake that for a carbon price, not least because the ban was not instituted for climate reasons. The principal concern at the time was local air pollution. But the principle, of course, is very much the same: a high price -- infinity in this case -- for something implies less of it.
 
Modern-day policies, like clean electricity standards, cap-and-trade systems, and lots of other rules and regulations follow the same principle: increase the price of carbon and other greenhouse gases. That principle should very much be at the core of any climate law or regulation.

 
PKU Financial Review: What do you think of the carbon trading mechanism in the Global Climate Club? For example, a steel company based in Europe must purchase carbon emission allowances. To avoid such cost, it needs to upgrade production technologies, which is expensive and difficult to achieve in the short term. Thus for this company, shrinking production capacity and buying cheaper steel from India is a more rational choice. In this way, European steel production will decrease and workers get unemployed, but global carbon emissions will not be reduced. What’s your opinion on the "Free-Riding" phenomenon in the global carbon trading mechanism?

Wagner: Carbon trading, in many ways, is just such an application of carbon pricing, albeit an indirect one: set a cap on emissions and, thus, create a price. The EU was the first major jurisdiction to institute a carbon market, and it has strengthened its system over time. The idea of "climate clubs" or "carbon clubs": a set of countries, the “club,” goes it alone on more ambitious climate policy in an effort to overcome the impasse of global climate negotiations. That idea often goes hand-in-hand with tariffs. Assessing tariffs based on the carbon content of goods is complicated, but will lead to stronger climate policy and better economic outcomes.
 
PKU Financial Review: Apart from carbon taxes, many countries are also prepared to encourage and subsidize new energy sources. However, there are two different options. For example, the major difference between the Biden plan and the Wyden plan in the United States is whether tax credits are granted to only new energy sources such as wind and solar power, or granted to all energy sources as long as they are originally intended to reduce carbon emissions? How do you think the energy structure will change in the future? Will solar energy become the most important energy type?
 
Wagner: Subsidies are indeed an important part of sensible climate policy. Economics 101 tells us to price carbon, Economics 102 tells us that taxes alone aren’t enough. In much the same way that there are negative spillovers from too much carbon pollution that need to be taxed, there are also positive spillovers from technological change. This goes for basic research and development—think scientists doing foundational work in a lab. It also goes for RD&D, with an extra “D” for deploying existing technologies. Add a third “D” for demonstration, if you want to demonstrate your insider knowledge: RDD&D. The fourth, RDDD&D for diffusion, appears to not have caught on. Every one of these letters deserves to be subsidized.
 
The reasoning is simple. Inventors tinkering in their garage might stand on the shoulders of giants, but by and large they consider the benefit to themselves only when deciding how much to invest. They don’t consider that they are creating shoulders for others to stand on. That logic goes for the R, and it extends through every one of the Ds. Diffusion often comes in the form of network effects. When someone puts a solar panel on the roof, his neighbors are more likely to do so, too. The right answer: Subsidize.
 
Perhaps the most famous climate-related case is solar photovoltaic (PV), with prices declining by around 90% in a decade and about 99% since the 1970s. The reason? Subsidies every step along the way.
 
In many ways, it is subsidies that ought to come first, before pricing carbon. First make new technologies cheaper to allow for carbon to be priced.
 
PKU Financial Review: There is a saying that if you want to invest in ESG, it´s better to buy stocks of large technology companies. Technology giants are said to be closer to the concept of GREEN. For example, the Carbon Transition Fund issued by BlackRock is more like an ETF that holds shares of Apple, Microsoft, Amazon, Alphabet and Facebook, etc. What do you think of such mindset? Do we actually have a solid ESG investment guideline in the market? If not, how should we develop one?
 
Wagner: Equating "ESG" with investing in large technology companies is, I believe, the result of us not quite knowing what to make of "ESG" in the first place. In many ways, ESG selection criteria are replete with negative screens: no oil, no coal, no gas, no tobacco, no poor labor practices, no gambling or other vices. What's then often left in the end are high tech companies.
 
I might suggest to go one better than this: don't just divest from fossil fuels. Actively bet against them! The clean energy transition is clearly only a matter of time. It's when, not if. Timing, of course, is important, but the trend is clear.



Gernot Wagner, Climate Economist at New York University
 This article is translated and published in PKU Financial Review.