good morning to you all good morning ladies and gentlemen good morning uh to you all my name is massimiliano and i teach at the trinidad university welcome back to the festival economics today's presentation has a question as a title how can we slow down climatic change this is the question that we're going to ask i told our guest speaker it might be super close to highlight the importance of climate change and we know that kind of change is very much the focus of a public debate worldwide climate change is a hot issue for the public at large and there's a wide consensus on the need for strong action on the part of governments uh guest speaker is going to refer to the fact that the measures the policies that national governments may adopt are wrong at times so as economists say they are sub-optimal or inefficient and he is probably going to refer to good practices and to brad bad practices adopted on the subject let me introduce now a guest speaker that i see is already with us hi pear per crucial is economics professor at the stockholm university he's the president of the european economic association which is the most important association of economists in europe he got his phd and the minnesota university and then he taught at other universities such as the university of pinston rochester northwestern before going back to stockholm he's going to refer to the importance of his research professor crusoe has written extensively on international reviews of economics and more specifically on the five most important academic journals in terms of economics are those that are named the top five journal are for economics professor cruzel has carried her important work in the field of research he was being awarded an erc which is the most important financing for research at european level to carry out research on the very subject of climate change his research project was focused on the macroeconomic research whereas crusade in fact is a macroeconomist a microeconomist and he's analyzed the interactions between climate change and inequalities having said as much i'd like to welcome professor crusell welcome to trento welcome to the festival of economics welcome to the museum of science moosa which is the place where we are hosting this meeting today and you have some 30 minutes so to have some time for a q a session so you're clearly invited to speak slowly so as to allow for the translation in italian thank you very much professor crusade over to you thank you can you hear me perfect okay all right thank you very much for the invitation to come to trento unfortunately i'm not in trento i'm in stockholm in my apartment um now during these difficult times uh let me go straight to the to the presentation the question here is climate change and how to slow it down what should we do about climate change and as you heard in the introduction there is a scientific consensus that humans cause warming that warming can be substantial there's a little bit less agreement or at least there is uncertainty on how much warming there will be and exactly how warming affects human welfare but there is a consensus we should limit emissions so that is not my question today my question is how should we do it so okay but how so this is where economics comes in uh the how question fundamentally needs to be answered based on an understanding of how our societies work how our economies work and natural scientists they are great but they are not good at this and engineers are also not good at this i think many natural scientists and engineers think they're good at it but i don't think so so as economists we have now a golden opportunity to help the world and showcase actually also to economic skeptics what our subject is useful for and most importantly if we don't solve the how question in a smart and a cheap way i think the world's populations will accept climate change we will not do anything because it's going to be too too costly uh too difficult and too costly so how uh what is the what is the principle or what do economists propose from a classical economics perspective actually the problem of climate change is very easy it's trivial the logic is the following warming warming is a byproduct of economic activity it's some something that happens when we do climate economic activity but it's a case then that we call pure externalities it's something that is a byproduct and this makes market market systems fail so markets are not good at dealing with this however actually exactly a hundred years ago an economist uh solved the problem he figured out what to do and his name is uh arthur pigue and in 1920 he said let's use a tax equal to the damage that is this externality the byproduct of economic uh activity that this the polluter is not paying for the reason why the market isn't working well is that there is an extra damage that the polluter is not paying for so pigue said let's use the tax and make the polluter pay so if you use this tax then markets work well uh without the tax they don't and we get climate change so nobody has really argued with pigoo because pigou's logic is very solid so since 1920 we all agree on this um in this particular area of climate change uh carbon that we emit in the form of carbon dioxide it spreads super quickly in the atmosphere um so if i drive a motorcycle in trento or i drive it in beijing or i drive it in stockholm it has the same effect so the externality is exactly the same so therefore the tax should be exactly the same in trento in beijing in stockholm so the solution following pegu is a uniform global carbon tax uniform means the same in all places this is a picture of arthur piguet when maybe he's thinking about about externalities so we have been repeating this message economists have been repeating this message like parrots but i think the result has been not so good mostly we have no effect politicians are not really listening to us there are some exceptions one is some countries have climate cha have carbon taxes sweden has a high carbon tax but also in the eu there's a trading system that is similar to a carbon tax and that's also good but the exceptions are very few and they are only relevant in in countries that emit relatively small fraction of the total world emissions so the question now is why are people not listening to economists and there are some candidates one it that it's maybe the tax sounds strange can we really trust the tax it sounds more natural to do other things like regulate another possible explanation is that people don't understand why a tax is so good a third reason is that they might feel that the tax is not fair to some people so in this presentation i will focus a bit on explanation too that people don't understand why the carbon tax is good i will also touch on uh explanation three so this is uh illustrating uh that we repeat carbon taxes and pegul taxes like parrots but people don't listen okay an interlude here is actually a self-critique uh i would like to suggest that economists are actually not so good at explaining things we have beautiful insights and formulas we have if you study economics and i believe some of you who listen now or have studied economics we read in our textbooks about conditions for optimal behavior firms households government often this is expressed in abstract mathematics uh we use so-called marginal conditions the pigou tax is an example exactly of this and there is also a nice formula to calculate how big the good x would be so this is all this is what we do but what we are not so good at is explaining why our solutions are so much better than these other solutions that people suggest and actually it's even worse than this i think economists are not so used to comparing to other alternatives that are not good we actually don't know why and i think in many cases what we propose is not much better it may be better but only marginally better only a little bit better so uh the question now is in this area what what is the pigou tax much better or is it just a little bit better but but in general i think we have to be self-critical in economics and and ask ourselves is our proposed solution so good really uh i found this picture this illustrates self-critique all right so how much better is the pigoutax than the alternative so in my recent research that i have carried out together with two colleagues in uh stockholm john hussler and connie lasson we have examined the pegutax and compared it to some alternatives that other people propose that politicians like uh sometimes and that are worse but the question is how much worse this is a picture of john hustler and this is a picture of me to the left and conurson to the right so this is the team so we we looked at three particular ways of not following economist advice the first one is that you use the right kind of policy you use a global uniform tax on carbon the pigou tax but you set it at the wrong level you set it either too high or too low so we looked at that type of mistake another mistake is that you use a more carbon tax but you don't use a uniform carbon tax you use different tax rates in different parts of the world this is very common for politicians to propose their argument is fairness uh for example in developing countries should we really require them to tax carbon when they are struggling so that's you know another deviation from the pingu principle a third one is to not text carbon but instead instead of taxing carbon we promote green energy so these are these are the three alternatives we have looked at um and we found that the mistakes from not using the carbon tax are actually very costly we did not know this so this was not expected we we had no idea we looked at all these alternatives that people mentioned and and we got a little bit scared so let me quickly report these findings first of all it's very costly very costly for humanity to set the carbon tax that is at the wrong level if you set it very low so if you hope that climate change will not be very big or that it will not be very difficult for us to deal with not very costly then it's it's if you believe that's true um but it turns out to be wrong and you really should have taxed that is very costly the second thing is if you let the developing countries use no taxes but we use taxes in the rest of the world it's also very costly and finally if you don't tax carbon and instead use green investment policy it's also very costly or at least very hazardous very dangerous we have one exception which is a mistake you can make is that you set a high carbon tax thinking that climate change is not um sorry thinking that climate change is very drastic or costly when actually it turns out that it's not so bad that is not very costly so actually if you act thinking it's very bad and you set a high tax that's okay it involves a cost but a very small cost this is a picture of the person so this is nord house i hope you saw his listen to him the other day william wardhaus developed the kind of framework that we have used to answer these questions this this is actually a picture of nordhouse when he is visiting stockholm to receive his nobel prize and if you see in the picture here there's a little shiny shiny uh object on his jacket this is actually a replica of uh of the nobel prize the nobel prize is big it's huge and it's very heavy and it's made of gold but this one is is just a symbol so it's a very cool thing to have on your jacket because very few people have it okay so what what is it that nordhouse helped us with nordhaus helped us construct quantitative theory is what we call it his first model was called dice obviously celebrated it has equations from natural scientists sciences and economics and these equations are calibrated like you calibrate the thermometer you calibrate the equations so that they match uh historical data then you can use these equations to simulate um paths of economic outcomes and climate outcomes based on different policies and the equations also allow you to have well-defined notions of how good or bad this is for human welfare so the model uh in this case is analyzed using a computer it's not so easy you can't just use pencil and paper you need to program and that's what we have done so now let me show you um the results the basic results the the first picture is just to emphasize some important things that are well known so this is not our contribution but it's um it's it's important to understand that on the x-axis you have time on the y-axis you have uh the temp the global temperature and here you see some curves uh the first three curves are basically on top of each other it is how warming will evolve if you have no taxes or if you have taxes in the eu the the red curve is if you have taxes on all forms of carbon the black curve is if you have attacks only on coal in the eu and what we see is that taxing in the eu it doesn't really matter much you don't help the world in terms of lowering warming almost at all you can't see the difference here so this is this first point down here taxation only in the eu doesn't help at all why it's because we are such a small part of the world so no matter what we do in the eu we just can't solve the climate problem the second important point is that if you use a global tax and either on all sorts of carbon or just on coal you move the line down quite a lot so from in year 2200 without taxes you're almost eight degrees warming but you go all the way down to three degrees if you tax carbon uh or only coal in in at the level and i should say this level is at the level of the eu tax right now at um so even the eu tax which some people think it's too low that tax helps a lot you know the difference between this point and this point is huge so a global tax is great you also see that even here it doesn't matter if you tax all forms of carbon or coal what's the difference well the green line does not tax gasoline does not tax petroleum and you see that it doesn't matter so the second point is uh warming is all about coal taxing oil or not makes no difference why because there is a very small amount of oil compared to the amount of coal so stop using oil it doesn't really make a big difference the big difference is coal okay finally you see a blue curve or a turquoise uh curve and that's the swedish text so the swedish tax rate is very high so if we all use the swedish tax in the world you would get warming down to um just about 2 degrees but the key thing here is that you you can achieve a lot by using the eu level you don't have to go all the way to the swedish tax but you have to use it globally all right so that's a little bit background now let me show you uh how to compare the pigoo text to alternatives the first one was that you used the right kind of text but at the wrong level so here you see a curve again it's time on the x-axis on the y-axis you it's not temperature now it is how much you lose as the fraction of all of our consumption so it's a little bit like fraction of gdp and what you see here is two curves one is the black one it describes when we set a low tax but the correct level is to have a high text and more precisely we have set the tax here to be close to zero when actually the damage is based on the pessimistic scenarios in the ipcc reports okay so then you see that by the year 2200 the losses are very large i mean the losses over here are similar to a permanent great depression if you know the the depression that happened in the 1930s all over the world so by the time we get to 2200 we are in a very bad shape if we use a low tax and it reality turns out to be bad however if you use a high tax when actually climate change isn't very big or climate change doesn't hurt us very much then you get the costs down here the red line and you see that these are just a couple of percentage points of gdp so in other words it makes a difference which kind of mistake you might make if you set it too high it's not a big problem but if you set the carbon tax too low it's a big problem and i think this is a very important argument why a high carbon tax is an excellent precautionary instrument it protects you in case you turn out to be wrong the second policy experiment is what i said that you use a carbon tax but you don't use the same level in all countries so let's take just one example here so the idea here is suppose we want to limit heating to 2.6 degrees this is still quite high but 2.6 degrees by the year 21.65 but let's allow africa and india to not use any taxes so let's let them off the hook as i say in in the u.s so they have no tax but we are taxed in the rest of the world so that we hit the 2.6 degree target here you see the welfare consequences in different regions of the world so on the y-axis you see again consumption loss percentage consumption loss and you see that the gains in africa and india these are the two bars here they are two percent of their consumption roughly but we lose we are all below zero eu loses more than five percent the u.s loses almost twenty percent china loses more than five percent and and these other regions oceania and so on also lose so in total we we lose a lot and they don't gain much okay so a non-uniform tax is a very bad idea because it would be much better to have a uniform tax and compensate africa and india in other ways okay so it's just not a good proposal to say not that to not tax uh carbon in africa and india okay the third example and my last example is is maybe the most popular one which is push for green innovation everybody likes it but the point here is suppose we only do that we don't use uh carbon tax we don't don't use the fossil tax so suppose there's no pig tax but instead we make green technology more productive over time with some kind of government policy in the example here we set two percent improvement per year compared to all the other sectors of the economy so the green sector just gets better and better and better and in ten years time two percent per year means a lot and a hundred years even more so here are the results so again you see on the x-axis this time on the y-axis now is we have back temperature and the key lines are really the green and the black the black um uh is sorry let's let's let's look at them let's look at the green only the green only shows you that uh you have significant warming uh here we don't go all the way out to 2200 but if we did you would see that you would go all the way up to eight degrees so it doesn't really help to have fast green innovation um if you don't change anything else so neutral coal i'll explain in a moment so this result is a little bit strange maybe but the key thing is it doesn't help the climate why because green energy helps us use more energy energy becomes cheaper we will use more energy but in all our calculations it doesn't really get rid of coal the reason is that coal and green energy are not very good substitutes it may be that they may become very good substitutes in the future but right now they are not economists have estimated how close substitutes they are and we base our calculations on those estimates of how good substitutes they are but it turns out they are not very good substitutes and that's why green innovation it's good because it creates more energy but it does not get rid of coal some green subsidy is not a good pegutax substitute what you can see in the graph is if you have slower productivity growth in the coal energy production and you could see this stagnant coal here the blue and the black they mean that these are down here that is that regardless of what happens to green if coal production is less and less efficient over time that's good for the climate why because then coal will not be used so much so this is a little bit like taxing coal okay so what you want to do in the end is get rid of coal that's the important thing and green technology doesn't necessarily get rid of coal so if you like green technology fine but you have to make sure it gets rid of coal that's the key inside here and we are very worried that the world's governments will push for green energy without making sure that they get rid of coal the the beauty of the pigue insight is well how do you get rid of coal you just tax cold okay if you tax call you get rid of it why coal is not very productive coal is not very profitable um in the u.s over the last 20 years the coal industry has almost disappeared why because there's some competition from other energy sources and there just a small amount of competition that turns out to be a close substitute will get rid of coal a small tax would also have gotten rid of those industries so whatever you do it has to make sure to shut down coal it's just that globally we don't have a good um substitutability between green energy and coal so my conclusion here is actually mostly it's not my own work but mostly it is that it's a very productive area to work on economics and climate change we can evaluate common policy proposals and we can help determine how good or bad they are and in our experience in the last few years we have found that many policies that are proposed are really very bad compared to a pigou tax and it's our job to explain this to politicians to the public we cannot hope that others will understand it if anyone understands it it's economists so we this is what we have to do uh our job but in a general sense what are what is this study we have to do cost benefit analysis um and we always do cost-benefit analysis cost-benefit analysis applied to climate change it's just a very very important topic and that's why we should be active in this area others don't know how to do it so even though it wasn't obvious to me before doing research i'm now actually even more convinced that taxing carbon globally uniformly at a high rate is the way to go and let me finish with then repeating like a parrot the message of arthur pigue so i'm done okay professor thank you very much professor cruzel for this fascinating presentation and for the very clear arguments we're now collecting questions and i'd like to invite those who are attending the meeting and those who are following the meeting online to voice their questions and i'd like to break guys myself asking a question to professor crusoe crusoe as you know in trento there's a very close attention to the subjects of local autonomy so my question is has to do with what the local government can do with the look of what the local community can do to tackle the challenges of climate change let me just refer to elenor norstrom who's the first woman being awarded the noble award for economy uh her research has been focused on the opportunity for the local community to govern certain uh areas that are similar to the ones that you refer to so the question as follows is what the local community can do what contribution can come from the local community to try and solve this problem i my unfortunately my answer is not much this is a global problem it's not the problem that you solve on the local level um i understand that many people really want to help and i mean this is true in many parts of the world maybe not all parts of the world but certainly true in sweden everybody wants to help and i think the the the frustration is that it is a global problem actually the most important thing in the world is that china stops using coal it doesn't matter what you do in toronto i'm sorry it doesn't matter what we do in stockholm we have to what we have to do is try to convince our our politicians that this is a global problem and it has to be solved in global collaboration eleanor ostrom's work was fantastic but it did not have to do with commons problems of externality problems on a global scale they had to do with problems that were on a local scale this is a global scale that is also why it's so difficult we have to educate ourselves what you can do in trento is to educate others outside trento so for example actually in the case of sweden we had some very good initiatives and we were able to influence the european union to change the system for car for um trading permits so this system we have in with um trading permits for carbon dioxide in europe it didn't work very well before now it works much better because this there were some swedish politicians who informed partly by economists um proposed and managed to change the system so actually insightful and knowledge can help politicians make better decisions and i think that's the best thing we can hope for unfortunately we cannot do much in toronto okay there's a question that has been placed by actually two questions beatrice has asked a question who should have the authority who should introduce this tax international organizations are not legally binding so there could be some free riders there's another question there's another question please thank you second question do we need greater international cooperation and greater culture among a greater dialogue amongst people of different cultures over to you professor purcell um absolutely it has to be some form of international collaboration but an important point is that we don't need a world government we the tax can be applied by even by the trento municipality you can collect the taxes locally so long as we all agree that we tax it doesn't matter what we use the revenues for but we all have to tax so if china imposes that attacks great the revenues from the tax go to the chinese government they could do whatever they want with revenues the important thing is that they tax okay so we need to have international discussions to try to agree to tax okay but again that the implementation is local so there are ways that for example nord house has been discussing that you can have climate clubs or ways to combine trade agreements with a requirement to tax so for example we can import goods from italy without any tariff unless the italians don't tax carbon then you have to pay a tariff so you know you can combine the tax in in in these climate clubs north house and other people call it that is one way to try to get rid of the free riding problem there is a free riding problem absolutely but this is why the governments need to talk to each other and when they do that they have to realize that if they don't agree it will be very costly and it will also involve some compensation because as you see some areas will be more effective than others and so it's important to to come up with compensation for the losers but on that we can gain if we talk to each other okay there's another question that luigi is raising china is still building a coal power station and relies on coal for 94 for 49 of its energy consumption so how can we act on china uh in terms of coal consumption do you uh trust xc in the uh turning away from cold in 2016. oh him personally i i have met the prime minister actually but i have not met the president i i china has recently said that they will they will implement very very important changes to try to deal with climate change i think we still have to wait and see what they will do i i as i said i agree china uses a lot of coal um i think there are two things that make you know could be good one is that um coal um coal-powered plants are bad for the local pollution and the chinese don't like that so they don't like coal plants so much um so i think that stops them from expanding too quickly but i think there are also ways to you know there's something called carbon capture there are ways to use coal but maybe filter so that the carbon dioxide can be kept and stored and there are techniques for doing this and right now they're expensive but that type of technology could maybe be used and we can help the chinese install these kinds of carbon capture technologies i think carbon capture is potentially very important but more generally what we can do is we can try to also help with green innovations that are that can be translated to chinese uh circumstances so that are close substitutes to coal but you know that depends on the region and so on exactly what they will look like but it's a big challenge and but we this is what we have to think about not about what we do in europe okay so we have another question what is the most realistic way to involve countries and agree on this universal tax on co2 so is there a way to do that well as i said i think the the best way is to to try to explain that the alternatives don't work okay so this is partly just education i think most of politicians don't understand that the alternatives are not good so i think i think that's important i think it's also important to do some form of compensation for the ones that we lose from a carbon tax and there will be people who lose so it's important not to for forget compensations but in general um you know i'm not a politician but i think that there is a big gain for everybody at the world as a whole so you just have to sit down and think about compensation packages i think many many um politicians have been unwilling to do that but i think going back to my first point a basic point is that people don't understand that the alternative is bad okay so the time available to us has ended i would like to thank professor chrysella that was present and all the best thank you you