Romesh Vaitilingam interviews Matthew Kahn for Vox

September 2011

Transcription of a VoxEU audio interview [http://www.voxeu.org/index.php?q=node/7043]

Romesh Vaitilingam:  Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Professor Matthew Kahn from the University of California at Los Angeles. Matt and I met in London in September 2011, where we had a wide‑ranging conversation about climate change and the incentives that people have to reduce their greenhouse‑gas emissions or to adapt their lives to a warmer planet.

Professor Matthew Kahn:  There's seven billion people on the planet, and the American dream appears to be many people's dream, a conception of the good life of having your own car if you can afford it, having your own house. We each have our own conception of the good life, but many people are embracing the American dream, and this, per capita, is a high‑carbon dream. I have my students do the following arithmetic. If seven billion people on the planet all purchase a car and all drive 10,000 miles a year, and if they each drive a car that gets 10 miles to the gallon, you can double‑check my arithmetic, but I believe we'd need seven trillion gallons of gasoline a year. When you start to add up this consumption across billions, it means we're going to create a huge amount of greenhouse‑gas emissions. Despite all the lofty rhetoric of cap‑and‑trade and carbon pricing, the world has not adopted these incentives. We're running this experiment of climate change.

Romesh:  Do you think there's any hope in the kind of discussions that are going on around Copenhagen that we can actually put a lid on these things? Or are the aspirations of the population, as you've described, going to be too much?

Professor Kahn:  Let me tell a happy story that I hope comes true. California has this policy, AB32, started by then‑governor Arnold Schwarzenegger. "The Terminator" had an ambitious goal that California reduce its greenhouse‑gas emissions, by the year 2050, to 80% below the 1990s levels. There's a whole suite of policies‑‑more fuel‑efficient cars, green buildings, solar panels‑‑to achieve this goal. My hope was that California would be a green guinea pig and would show that you could have the win‑win of economic growth and lower carbon. But the rest of the United States and the rest of the world is freeriding. Up to this point, there's a lot of people hoping that we will rein in our greenhouse‑gas emissions. But world population is growing; GNP, despite the recession, will continue to grow; and we're not reducing emissions per dollar of GNP fast enough. That's the arithmetic of coming climate change.

Romesh:  How do you see this linking to the crisis that, certainly, the Western world is going through at the moment, and the talk, perhaps, of green technologies being a way out, the next big innovation, the next step that could rejuvenate our economies?

Professor Kahn:  You've raised a crucial question. I'm going to tell you a joke of Rush Limbaugh making fun of me. With Matt Kotchen, an economist at Yale, we wrote the following paper. We took a look, using data from the United States on how people are using Google, what people are searching for. Now, they're always searching for Paris Hilton and Britney Spears, but what we document in our paper is, in those states in the United States where unemployment has gone up the most, there's been the largest decline in people searching for the words "global warming." We interpreted this‑‑and Rush Limbaugh made fun of us for documenting this‑‑that the recession has distracted people, that when you are worried about your job and there's job insecurity, you focus on short‑run challenges rather than medium- and long‑term challenges.

An indirect answer to your question is, we voted on Waxman‑Markey in the United States, the key cap‑and‑trade bill, right in 2009, in the midst of a recession. It did not help Barack Obama that we were in the middle of a recession, and Republican opposition was even harder against that bill because of the recession. We're not in the mood right now to think about the challenge of climate change, and yet our greenhouse‑gas emissions just keep rising.

Romesh:  Do you think it's a problem in the States that, in a way, the country hasn't really suffered some of the repercussions of global warming, whereas some of the developing countries really have?

Professor Kahn:  You just put your finger on salience—after Hurricane Katrina, that a silver lining of disasters is a wakeup call. You're right that some economists have written papers where they've collected survey data: "From a scale of one to five, how concerned are you about climate change?" Knowing your geography and knowing the date of the survey, they merge in whether there's been a recent heat wave. All else equal, these researchers have shown that, yes, respondents are more likely to believe in climate change and to have it on the brain if there's been a recent, salient shock. Many environmentalists are kind of hoping for a good left‑cross to put Republicans in the mood. Al Gore's in the mood to vote for carbon tax, but what would it take to get Dick Cheney in the mood?

Romesh:  What would it take, I wonder? There is this whole constituency in the United States that we're seeing, the opposition to a lot of what Obama is trying to do, opposition to the whole idea of government intervention in people's lives. How do you deal with that?

Professor Kahn:  That's the $64,000 question. Let's take Rick Perry, a manly man who may be my next president. What would it take to put him in the mood to push a carbon tax? As an economist, I'd say if he thought the price were lower. Right now, there's a debate in the United States on, if we enacted carbon pricing, how many jobs would we lose? Would that accelerate job leakage to China and other places? If a Rick Perry could be convinced that the price in terms of economic loss would be low‑‑and some optimists claim that it'll create jobs‑‑then a Republican would come around. If a Republican thought that his or her family and narrow self‑interest would be hurt by climate change, coming back to the salient shocks, that would put them more in the mood. But Texas has just had a brutal summer. It's had very high heat and very little rain. Looking at Governor Rick Perry, the candidate for president, he doesn't seem to have been softened on these issues by this salient summer.

Romesh:  Tell me a little bit more about California's experience of thinking about these issues, because, as you say, it was at the forefront of discussing some of it, thinking about limits on car emissions. But there hasn't been that much progress. Would that be fair?

Professor Kahn:  Here's the story, and it's the recession again. Jerry Brown is now the governor. He was governor 30 years ago, when he was dating Linda Ronstadt and he had more hair. He's now back, and he has bona fide liberal credentials. The Air Resources Board is the regulatory body in California, and they have been moving slow on implementing AB32. One detail: under the California proposed cap‑and‑trade, the electric utilities who use natural gas or fossil fuel‑‑it's cleaner than coal but still dirty‑‑they were going to fall under the cap. It was going to be a very loose cap, which means that the price per tonne of carbon was going to be quite low, not an onerous disincentive for releasing carbon. The Air Resources Board delayed this regulation by a year. Some people are whispering‑‑California has an unemployment rate of 14% right now‑‑that, while Jerry Brown has publicly endorsed AB32, the act to reduce greenhouse‑gas emissions, the Air Resources Board is moving slowly to implement this. One might wonder whether he has nudged them to do this slowly, to minimise Republican opposition.

Romesh:  Let's talk a little bit about the possibility of the world's population adapting to climate change. Let's say we accept it as it's going to happen. How are our societies going to adapt? Some parts of the world, presumably, are going to suffer badly. Perhaps some parts of southern California will return to desert. Perhaps some parts of northern California might benefit. What's your perspective on the different impacts on different parts of the world in terms of adaptation?

Professor Kahn:  So I've been one of the bad boys on climate adaptation, that I wrote what my mother claimed was a thought‑provoking book, and I'm still waiting for my critics to actually read it. In my book Climatopolis I don't engage in geographic determinism. I name some names. My critics have made fun of me, because on page seven of my book, I say that Moscow is a place that might be able to adapt to climate change, and yet it suffered greatly from the heat wave of the summer of 2010. But what I would say‑‑and this comes back to your point about salient shocks‑‑is the people of Moscow never expected 100‑degree days in summer. Last year, they suffered from these. Fool me once, shame on you; fool me twice, shame on me. The silver lining of suffering this disaster is the people of Moscow will update their perception of risk and will now take precautionary actions like buying an air conditioner.

A point that I argue in my Climatopolis book is, as the climate scientists make progress on learning what climate change will actually do to different geographic areas, self‑interested households like you and me will incorporate this information and make better choices, along a whole bunch of dimensions, whether it's living along the coasts, whether it's building our homes out of material that are at less risk of fire, whether it's purchasing an air conditioner that's more energy‑efficient.

A theme of my book is that capitalism will help us, to protect us against this evolving threat. I've taken a little bit of hate because, during this deep recession, capitalism, apparently, it's been claimed, is the villain that caused all our banking issues, and the fat cats and the income inequality, and here's Kahn celebrating capitalism as the hero rather than big government. I'm a bad boy.

Romesh:  Perhaps you can explain a little bit more how you think about that, as capital or markets, presumably, getting incentives right, being the solution, rather than the top‑down view of thinking, "Government's got to come in with regulations. It's got to be coordinated at an international level." How do you think about that?

Professor Kahn:  I'm sort of a Hayek guy, and you put your finger on it. So let's do it, and let me come up with a case that makes it crystal‑clear. After Hurricane Katrina, we recognized that there's certain areas in flood zones at increased risk of flooding and that these risks are higher than in the past. In a capitalist system, if insurance companies can charge higher premiums in those flood zones, if we can spread the information about what are the new flood zones under the new climate‑change realities, households will want to build their homes with materials that can withstand floods so that they face less risk from Mother Nature. But let's turn things around. If there's more households who demand flood‑resistant homes, all of a sudden there's a market for suppliers. A big theme in my book is that anticipated suffering actually creates new opportunities for entrepreneurs.

A joke I like to crack is, if all Republicans don't believe in climate change, that could actually help to save them, in the following sense: If 2% of the public are forward‑looking entrepreneurs who anticipate the risks we're going to face from climate change, then the 98% Rick Perrys who are blindsided will be willing to pay a fortune for products that help them to adapt. That anticipation that there's going to be a market creates huge opportunities for the 2% of people who foresee what climate change could hold for us.

Romesh:  A lot of the campaigns by the environmental movement, if you like, try to appeal to people's better nature, I guess. They say to them, "Reduce, reuse, recycle. Think about your kids." But you're thinking more in terms of appealing more to the basic incentives, more monetary incentives, if you like.

Professor Kahn:  I've studied both ends of that. In some work with my wife, we had data for a California electric utility on everybody's electricity bills, and we were able to merge, by street address, political party of registration. All else equal, people registered in the Democrat and Green Party consume less electricity. Liberal environmentalists walk the walk. They do engage in voluntary restraint. But most people need some sort of price to avoid being a polluter. You can't just rely on appeals for voluntary restraint. What you correctly noted, and which I talk about in my book, is adaptation and climate‑change mitigation are two very different incentive issues. For climate‑change mitigation, there's a free‑rider issue: "Why should we reduce our emissions if we know that China's increasing theirs?" But in the case of adaptation, we have all the right incentives, out of self‑interest, to think through what we can do to protect our families given the realities that we face‑‑heat waves, water shortages, and a variety of other challenges from climate change.

Romesh:  What about the issue of alternative sources of energy? Renewables is a big issue here in Europe. I imagine it must be discussed in the United States, and California is probably a perfect place to, for example, make use of solar energy.

Professor Kahn:  Two points there. Under Governor Schwarzenegger's AB32, there is a 33% Renewable Portfolio Standard. In English that means that California is expected, in a few years, to get 33% of its power from renewables. There's an open question right now of what those renewables will be and how much this will raise electricity costs in California. A second, global issue with renewables is the following. For the people of poor nations to adapt to climate change, they're going to have to get richer and consume more electricity. Electricity helps to keep food cold, it helps to air condition, and it helps to protect under extreme climate conditions.

It would be awful if an unintended consequence of poor people in poor nations consuming more electricity, if that came from fossil fuels, if that exacerbated climate change. If, in the developing world, they get their electricity from renewables, that would help to break the link. We could have the win‑win of economic development without rising greenhouse‑gas emissions. My hope is that the innovative nerds in the EU and the US and China will come up with the renewable‑energy breakthroughs and these will diffuse broadly through intellectual‑property diffusion.

Romesh:  Final question. You do work on cities in the United States, but you also do work on cities in Asia. Are you getting different feelings for how these cities are approaching these issues around climate mitigation and climate adaptation?

Professor Kahn:  In China, the powerful premier has made reducing the economy's energy intensity a top priority. The reason for that, I believe, is that China is importing a lot of its energy sources. In China, there's going to be sort of an amazing race, as the 1.3 billion people there get richer. An optimist would hope that their energy intensity, which is energy consumption per dollar of GNP, if that could fall faster than GNP rises, then during a time of economic growth, you could have a greening of their economy. Capitalism always has this quantity effect of consuming and producing more, but it also has this quality effect of having greener products, of getting lower emissions per mile of driving. If that quality effect can dominate the quantity effect, then we can have the free‑market environmentalist fantasy of free‑market growth and green cities.

Romesh:  Matt Kahn, thank you very much.

Professor Kahn:  Thank you.