Most climate policy discussions center around the question: How do we most quickly (and equitably) decarbonize our economy? While decarbonizing our economy by 2050 is undoubtedly necessary, it would solve only 13 percent of the problem. Granted, under the Paris Agreement, every country’s primary responsibility is to eliminate its own emissions — developed countries have the additional responsibility of contributing to international climate finance. But focusing on domestic emissions and treating foreign emissions as an afterthought is unlikely to be the optimal (defined here as cost-effective) strategy.
The climate doesn’t care about our boundaries between domestic and foreign emissions, as greenhouse gases diffuse evenly throughout the atmosphere. As such, our goal shouldn’t be optimizing just our domestic emissions reductions, but our total (domestic plus foreign) emissions reductions. Unfortunately, we seem to be focused on the former.
One might wonder: How can we have “foreign” emissions reductions? A straightforward example is international climate finance: We donate funds to other countries to help them decarbonize. But there are also less direct examples. These are domestic policies meant primarily to decarbonize our economy, spillover effects indirectly help other countries decarbonize. We might say that these policies have “higher-order” emissions reductions in other countries, in addition to the “first-order” reductions they bring about directly in our country.
Example 1. A classic example of a policy with higher-order emissions reductions is innovation. The U.S. may be wealthy enough to decarbonize its economy using existing technologies alone. Still, if we also invest in new technologies that make the job cheaper, that would also help developing countries decarbonize. This is why Bill Gates stresses using innovation to reduce “green premiums” (the premium one has to pay for a carbon-free version of a good or service). Green premiums are currently too high for developing countries to simultaneously decarbonize while developing and meeting the demands of their growing populations. Our choice on how much to invest in innovation in our domestic policies will determine how far we reduce those premiums, and ultimately the amount of higher-order emissions reductions that we achieve in the developing world.
Example 2. A recent report from Princeton’s ZERO Lab shows that companies that take the lead in procuring “clean firm” power — which comes from non-intermittent sources like advanced nuclear, long-duration storage, and carbon capture and sequestration — would reduce more emissions than if they procured 100 percent renewable energy. While renewables are currently cheaper than clean firm power, they are commonly paired with natural gas, which helps smooth out their intermittency but is of course not carbon-free. Companies that procure some clean firm power can help drive down the costs of clean firm technologies, which would help them compete with and displace natural gas. Although this is an example from the corporate world, the principle is the same: A company’s decision on the kind of power to purchase for its own use can affect the amount of higher-order emissions reductions it achieves beyond its walls.
Example 3. It’s not just about reducing costs or green premiums, though. A third example is that of a carbon border adjustment (CBA). A CBA applies import taxes and export rebates on goods coming in and out of a country with a carbon price. The intention is to ensure that foreign producers are on a level playing field with domestic producers so the latter are not incentivized to move their factories abroad (a phenomenon called “carbon leakage”). However, CBAs also have an indirect effect. Because it becomes less profitable to sell carbon-intensive goods into countries with CBAs, foreign producers are incentivized to green their supply chains. This makes it more likely to sell green goods to other countries, as they have already made an upfront capital investment in green facilities and gained more experience using them.
But wouldn’t this strategy of pursuing higher-order reductions be more expensive than just focusing on our domestic emissions? Not if it offsets the expense of helping other countries finance their emissions reductions.
Suppose Policy A abates 10 domestic kg of CO2 per dollar, while Policy B abates 8 domestic kg plus 1.5 foreign kg per dollar (due to higher-order effects). It may seem like Policy B is more expensive, as it only abates 9.5 kg in total per dollar. But further suppose that (1) our target is to abate 10 domestic kg and 5 foreign kg, and (2) contributing to international climate finance abates 5 kg per dollar (as developing countries have fewer technologies available to them). The straightforward strategy would be to spend $1 on Policy A and $1 on international climate finance to reach our targets, for a total of $2. But Policy B would be cheaper, as we could reach the same targets by spending $1.25 on Policy B itself (abating 10 domestic kg and 1.875 foreign kg) and $0.625 on international climate finance (abating an additional 3.125 foreign kg), for a total of $1.875.
Of course, the reality is more complicated than this simple model, and measuring higher-order effects is difficult. But the point remains: By considering higher-order effects, we may develop policies that provide more emissions reductions at a lower cost. This doesn’t mean we shouldn’t focus on decarbonizing our economy — on the contrary, this is a call to go above and beyond. Higher-order emissions reductions are free lunches that can help us do that, and free lunches would be foolish to give up.