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Nobel Prize Winners to ICAO: Carbon Emissions Have a Cost

 

Washington DC – An international group of 40 top economists, including 4 Nobel Prize winners and World Wildlife Fund board member Dr. Robert Litterman, has reached out to the International Civil Aviation Organization (ICAO) urging it to reflect the social cost of carbon as it develops a global market-based mechanism to address emissions from aviation.

Unregulated carbon emissions from the aviation sector are the fastest growing source of the greenhouse gas emissions that are contributing to global climate change. After 16 years of negotiations, ICAO has agreed to develop a market solution to reduce those emissions beginning in 2016 and is now beginning to design how that mechanism will work.

In part, the open letter states: “The aviation industry itself should champion appropriate global incentives to cut emissions as soon as possible. Doing so will not only help reduce its contribution to the climate crisis; developing a model global pricing mechanism will also provide an example of how governments can institute similar measures to obligate other sectors to reduce emissions faster.“

Full text of the letter:


April 9, 2014

The Council of the International Civil Aviation Organization
999 University Street
Montréal, Quebec H3C 5H7 Canada

 

Dear Representatives to the Council of the International Civil Aviation Organization:

We applaud the International Civil Aviation Organization (ICAO) and its 191 member countries for the October 2013 Assembly Resolution which calls for the creation of a market-based measure to reduce greenhouse gas emissions in aviation. Indeed, a single, global market-based incentive to reduce emissions is the most cost effective way to address humanity’s contribution to the risks posed by climate change.

This decision rightly recognizes that ICAO, national aviation ministries, and the aviation industry are in a position to lead the effort to create appropriate incentives to reduce on greenhouse gas emissions across the entire global economy.

Climate change is real and greenhouse gas emissions are the major contributor to rising global temperatures. There is uncertainty in our projections of the degree and speed of global warming, but it would be irresponsible for us not to act now on our current knowledge. Furthermore, there is a definite risk that the outcome of global warming on our planet is worse than what scientists expect.

Boundaries may exist in Earth’s natural systems, tipping points where processes become highly non-linear with unknown consequences. The risk of crossing such a boundary grows as the level of greenhouse gases in the atmosphere increases, because no one knows where the first major tipping point lies. This is a risk management issue.

One of the greatest long-term challenges for the aviation industry is that it is competing for the scarce resource of the planet's atmospheric capacity for emissions—or what might be left of it. But it’s an uneven playing field, because other economic sectors have a greater supply of cost-effective opportunities to reduce their emissions.

While many sectors now have commercially mature options to reduce emissions if given the appropriate incentives (e.g. ground transportation can electrify; utilities can switch to renewable electricity generation), aviation will not likely find a cost competitive alternative to liquid carbon fuels for decades to come.

Because aviation requires future atmospheric capacity to burn liquid fuel, the immediate creation of incentives for emissions reduction across the entire global economy is very much in its interest. The aviation industry itself should champion appropriate global incentives to cut emissions as soon as possible. Doing so will not only help reduce its contribution to the climate crisis; developing a model global pricing mechanism will also provide an example of how governments can institute similar measures to obligate other sectors to reduce emissions faster.

The appropriate level for the incentive to reduce greenhouse gas emissions is a function of science, economics, and risk management. It is obvious that there are risks associated with greenhouse gas emissions, but these risks are not only the local impacts that scientists have detected with increasing frequency in recent years, nor the expected impacts such as sea level rise and ocean acidification. The uncertainty created by experimenting with our planet’s delicate chemistry means that the cost is not only what we expect will happen, but it’s also the potential for a series of unforeseen, and possibly reinforcing, impacts that we don’t anticipate. Given the unprecedented magnitude of the experiment and the growing certainty of the science, no one can rule out impacts which represent a threat to life on earth as we know it.

As the ICAO Council and its technical committees develop the global market-based measure over the next few years, the biggest question they must face is at what level to price that risk. That is, how large an incentive is needed for economic agents to cut back on the production of emissions by an appropriate amount? The answer is that for all these agents—whether consumers, businesses, entrepreneurs, or investors—the level of the incentive should equal the expected present value of the discounted damages that may be created by the production of emissions. In other words, the right price for every amount of carbon emitted into the atmosphere should reflect the expected cost of these emissions to society as a whole, taking into account the risks that they create.

Economists refer to this value as the social cost of carbon. Several reputable studies have attempted to calculate the social cost of carbon. The Stern Review estimated it to be about US$85 per metric ton of carbon dioxide emitted into the atmosphere. The recently revised official US government value is $37 per metric ton.

Unfortunately, all available evidence suggests that many countries within ICAO and the aviation industry support a type of market-based measure, which would allow airlines to buy emissions offsets in order to meet an already weak 2020 carbon neutrality target. If ICAO adopts this approach, it would not bend the aviation industry’s total emissions downward and thus would fall short of being a meaningful policy. Such a market-based measure that fails to create appropriate incentives could set a bad precedent and would waste a significant opportunity to move the global climate response forward.

The European Union has just amended its emissions trading system (ETS) for aviation, so that only intra-EEA flights are now included. In the wake of this outcome, it is time for countries to finally come together and develop a global market-based measure that reflects the social cost of carbon. While the responsibility for emissions to date between airlines and among countries may differ, it’s critical that going forward the social cost of carbon be reflected for carbon emissions from airline flights as well as all global economic activities.

On behalf of concerned citizens and future generations, we ask you to grasp the important opportunity before the aviation sector today and lead a global effort to develop a model market-based measure to create appropriate incentives to reduce greenhouse gas emissions that can be extended across all sectors of the economy. Time is running out to decelerate humanity’s growing contribution to climate change, and to ensure that aviation is given a license to operate in the future.

Sincerely,

Eric Maskin, Ph.D
2007 Nobel Memorial Prize in Economic Sciences
Adams University Professor,
Harvard University

Lars Peter Hansen, Ph.D
2013 Nobel Memorial Prize in Economic Sciences
David Rockefeller Distinguished Service Professor
University of Chicago

Thomas Sargent, Ph.D
2011 Nobel Memorial Prize in Economic Sciences
William R. Berkley Professor of Economics and Business,
New York University

William F. Sharpe, Ph.D
1990 Nobel Memorial Prize in Economic Sciences
STANCO 25 Professor of Finance, Emeritus,
Stanford University

Daron Acemoglu, Ph.D
Elizabeth and James Killian Professor of Economics
Massachusetts Institute of Technology

Frank Ackerman, Ph.D
Senior Economist
Synapse Energy Economics
Cambridge, MA

Marianne Bertrand, Ph.D
Professor of Economics
Booth School of Business
University of Chicago

Patrick Bolton, Ph.D
David Zalaznick Professor of Business
Columbia Business School,
Columbia University

Lucas Bretschger, Ph.D
Professor of Economics/Resource Economics
Swiss Federal Institute of Technology (ETH)

Mark Carhart, Ph.D
CIO and Partner,
Kepos Capital, LP

Varadarajan V. Chari, Ph.D
Professor of Economics
Heller-Hurwicz Economics Institute,
University of Minnesota

Mireille Chiroleu-Assouline, Ph.D
Professor of Economics
University of Paris 1 Pantheon-Sorbonne

Lawrence J. Christiano, Ph.D
Alfred W. Chase Professor of Economics
Northwestern University

Kent Daniel, Ph.D
Professor of Finance
Columbia Business School,
Columbia University

Darrell Duffie, Ph.D
Dean Witter Distinguished Professor of Finance,
Stanford University

Martin Eichenbaum, Ph.D
Charles Moskos Professor of Economics
Northwestern University

Arminio Fraga, Ph.D
Founding Partner
Gavea Investimentos
Brazil

Fan Gang, Ph.D
Director, National Economic Research Institute (NERI), China
Member of China's National Climate Change Expert Committee

Joshua Gans, Ph.D
Jeffrey Skoll Chair in Technical Innovation and Entrepreneurship
Rotman School of Management
University of Toronto

Reyer Gerlagh, Ph.D
Professor of Environmental Economics
Tilburg Sustainability Center & Economics Department
Tilburg University
The Netherlands

Christian Gollier, Ph.D
Director, Toulouse School of Economics
Program Director, Center for the Economic Analysis of Risk (CEAR) at Georgia State University.

Lawrence H. Goulder, Ph.D
Shuzo Nishihara Professor of Environmental and Resource Economics
Stanford University

Pierre-Olivier Gourinchas, Ph.D
Professor of Economics
University of California, Berkeley

Michael Greenstone, Ph.D
3M Professor of Environmental Economics
Massachusetts Institute of Technology

Michael Hannemann, Ph.D.
Julie A. Wrigley Chair in Sustainability, School of Sustainability and Department of Economics, W.P. Carey School of Business
Arizona State University

Harrison Hong, Ph.D
John Scully ’66 Professor of Economics and Finance
Princeton University

Paul Joskow, Ph.D
Elizabeth and James Killian Professor of Economics, Emeritus
Massachusetts Institute of Technology

Frank Jotzo, Ph.D
Associate Professor and Director, Centre for Climate Economics & Policy
Crawford School of Public Policy
Australian National University

Timothy J. Kehoe, Ph.D.
Distinguished McKnight University Professor
University of Minnesota

Robert Litterman, Ph.D
Partner, Kepos Capital LP
Former Head of Risk Management, Goldman Sachs

Yu (Ben) Meng, Ph.D
Guest Lecturer, Haas School of Business
University of California, Berkeley

John Quiggin, Ph.D.
Professor/Australian Research Council Laureate Fellow
University of Queensland

Roberto Schaeffer, Ph.D.
Professor of Energy Economics
Energy Planning Program, COPPE
Universidade Federal do Rio de Janeiro, Brazil

Jose Scheinkman, Ph.D
Theodore A Wells ‘29 Professor of Economics
Princeton University

Richard Schmalensee, Ph.D
Howard W. Johnson Professor of Management & Professor of Economics, Emeritus
Former Director, MIT Center for Energy and Environmental Policy Research
Dean Emeritus, MIT Sloan School of Management
Massachusetts Institute of Technology

Katheline Schubert, Ph.D
Professor of Economics
University of Paris 1 Pantheon-Sorbonne

E. Somanathan
Professor, Economics and Planning Unit
Program Director, Centre for Economic Research on Climate, Food, Energy, and Environment
Indian Statistical Institute, Delhi
India

George Tauchen, Ph.D
W. H. Glasson Professor of Economics and Finance,
Duke University

Frederick van der Ploeg, Ph.D
Professor of Economics
University of Oxford

Ambassador Linda Tsao Yang
Chairwoman
Asian Corporate Governance Association

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