Michael Greenstone
Big Brains podcst

A Surprising Economic Solution To Climate Change, with Michael Greenstone (Ep. 71)

By outbidding polluters, Climate Vault nonprofit aims to make net-zero emissions a reality


Michael Greenstone
Big Brains podcst

Show Notes

When was the last time you heard a positive story about climate change, a story about someone with a new idea or innovative solution to help reduce our carbon footprint?

This is that story.Michael Greenstone is a Professor of Economics at the University of Chicago, Director of the Energy Policy Institute of the University of Chicago (EPIC) and former chief economist in the Obama White House. Now, he’s developed a new nonprofit called Climate Vault, which could be a powerful new tool in the fight against climate change, and it’s built around a simple idea: outbidding polluters for the right to pollute.

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(Episode published June 17, 2021)



Paul Rand: Where does climate and energy policy go from here? Tune into The Roadmap, a new podcast mini series brought to you by EPIC, the Energy Policy Institute at the University of Chicago, as part of their Off the Charts podcast. Host Rob Meyer, reporter at The Atlantic, joins you Chicago scholars to take a deep dive at the timely climate and energy issues and the evidence behind needed policy changes. The conversation straw from EPIC’s new book, the U.S. Energy and Climate Roadmap. Find The Roadmap wherever you get your podcasts or visit epic.uchicago.edu/roadmap.

Paul Rand: Every day there’s a new headline about our failure to take action on climate change and things just seem to keep getting worse.

Tape: Over the last 10 years, sea levels have risen at an alarming rate. Biodiversity is reportedly declining faster than that of any time in human history and millions of people have been affected by extreme weather like hurricanes and floods.

Paul Rand: When was the last time you heard a story about someone with a new idea, a new solution to put a dent or maybe more into the problem?

Michael Greenstone: When I left the Obama White House and I was like, ‘‘Somebody should do this. This is so obvious.’’

Paul Rand: That is this story.

Michael Greenstone: And I was just getting more and more irritated. And I was like, ‘‘This is so obvious, but...’’

Paul Rand: Nobody’s doing it.

Michael Greenstone: Right. Nobody’s doing it.

Paul Rand: This is Michael Greenstone, former chief economist in the Obama White House, professor of economics at the University of Chicago and director of the Energy Policy Institute.

Michael Greenstone: So, about maybe a year and a half ago, I said, ‘‘OK, forget it. I’m just going to do it.’’

Paul Rand: The idea, it’s called the Climate Vault, and it’s built around a simple but powerful concept.

Michael Greenstone: Basically outbid polluters for the right to pollute.

Paul Rand: Greenstone believes that this idea could be an effective new tool that organizations, and someday even you could use to fight back against climate change.

Michael Greenstone: I think climate is having a moment. And now I think people are feeling the urgency. I think they feel they have to respond for their customers who are demanding it. Their employees are demanding it. And I think a lot of people are thinking, ‘‘Well, I’m going to have to explain this to my kids. And where was I?’’

Paul Rand: From the University of Chicago Podcast Network, this is Big Brains, a show about the pioneering research and pivotal breakthroughs that are reshaping our world. On this episode, revolutionizing the field of environmental economics to combat climate change. I’m your host, Paul Rand.

Paul Rand: Today, Prof. Michael Greenstone is one of the most instrumental figures in shaping national climate policies, both through his work in the Obama White House and in academia, but that almost wasn’t the case.

Michael Greenstone: So, I went to graduate school in 1993 with 100 percent commitment to becoming a labor economist.

Paul Rand: Greenstone had grown up on the South Side of Chicago in Hyde Park and was interested in questions of wealth and poverty.

Michael Greenstone: Some of those are unable to find it an interesting question, where I felt I had something to contribute.

Paul Rand: So he was casting about.

Michael Greenstone: As many graduate students do.

Paul Rand: And he started to bump into questions around the environment. What’s the relationship between the environment and human well-being?

Michael Greenstone: And I had learned all these terrific tools, labor economics tools. And I was like, ‘‘Holy smokes. This is a playground.’’

Paul Rand: In 2009, Greenstone became the Chief Economist for the Council of Economic Advisors to the Obama White House. And that was an interesting time to be there.

Michael Greenstone: Well, first of all, scary because we’re in the midst of the Great Recession and people didn’t really know what was going on.

Paul Rand: And there were a lot of things to deal with.

Michael Greenstone: Some people like buffets, other people don’t, I love buffets. And it was like a buffet. There was 20 interesting topics that the president or his team needed to know answers to. But in the end, the thing that I spent most of my time on was something called the social cost of carbon.

Paul Rand: This was Greenstone’s first big idea that ended up reshaping national energy policies.

Michael Greenstone: In February 2009, I was having launch in the White House mess with my friend Cass Sunstein. And I said, ‘‘Boy, it’s going to be hard to pass a cap-and-trade bill that raises energy prices in the midst of this recession. The president been very clear: He wants to do something about climate change. That really only leaves regulation. And if you want to do regulation, there would have to be benefits to the regulations. It can’t be that the regulations cost $47 billion, but the benefits are measured in tons of CO2, which is something nobody understands. And so there was born the idea that the U.S. government should have a kind of uniform social cost of carbon. That is monetary value of the benefits of reducing CO2.

Paul Rand: To make that kind of calculation, Greenstone and his team had to ask how much damage will a ton of carbon dioxide emissions released today cause in the future? They came up with a cost of 50 U.S. dollars for every ton of carbon dioxide that’s released into the atmosphere.

Michael Greenstone: So, the idea is that to have regulations, they have to at least be subject to a benefit cost test. And before there was a social cost of carbon, the benefits were measured in tons of CO2 and the costs were measured in dollars. And that’s a very unfair fight. Dollars are always going to win. So, what the social cost of carbon is, it’s the monetary value of reducing a ton of CO2. So it’s the avoided climate damages measured in dollars. And you could just multiply that by the reduction in CO2, from a particular regulation and voila, you have the benefits in dollars of doing this regulation and they could be contrasted with the costs. It’s kind of the key Jenga piece in the regulatory approach to confronting climate change. It’s used in every single regulation or every single policy that determines how much the U.S. is going to reduce its CO2 emissions.

Paul Rand: But Greenstone wanted to do more. He wanted to find a way to not only inform our governments about the costs of our actions, but actually to put a tool in the public’s hands.

Michael Greenstone: What struck me was that there were lots of people, individuals and institutions, who wanted to do something about climate change. And what government was doing was not enough. They want to do more. And the available choices in my view were pretty bad.

Paul Rand: And all of this brings us to Greenstone’s next big idea. It’s a nonprofit called the Climate Vault that allows organizations and individuals to offset their carbon emissions with pollution permits.

Paul Rand: So, let’s break that idea down. First, what’s an offset?

Michael Greenstone: The idea of an offset is yes, I’m going to use energy and it’s going to cause a release of CO2 in the atmosphere. But I’m going to find somewhere else on the planet, and I’m going to pay those guys to do something that will take CO2 out of the atmosphere and the most popular version of that is basically to pay people not to cut down their trees or pay people to grow trees.

Paul Rand: This is an idea that took off in the 90s.

Michael Greenstone: Paul Rand and his family decided that they want to reduce their carbon footprint. They get matched with some tree farm in Maine say, and that’s usually through a third party who was probably going to take a little off the top. And everyone’s really happy about that transaction. You and your family are happy because you feel like you did something good. The guy in the middle and or the consultant feel pretty good because they’re taking a little off the top. The tree guy’s pretty happy because he was just oftentimes just doing his business in Maine or whatever, growing trees. And now he’s got some extra money. And the only party that matters, that’s not at the table, is the planet. Nobody’s there to represent the planet’s interest. It’s nice if you and your family feel good about it, but the planet really just wants fewer tons of CO2 in the atmosphere.

Paul Rand: Unsurprisingly, this approach to offsets doesn’t really work.

Michael Greenstone: What has turned out in the last quarter century is those offsets have really time and time again, failed to deliver the promised carbon reduction. But this is all coming from a totally laudable place. Shouldn’t there be a better way? And what was staring me in the face and I thought staring the world in the face, was well, there’s these regulated markets for CO2, they’re called cap and trade markets.

Paul Rand: Can you explain what that is? What a cap and trade market is please.

Michael Greenstone: Yeah, sure. There’s one in California. There’s one in New England along the Atlantic coast, Province of Quebec has one. The EU has a very, very big one. The government that oversees them, let’s just take the state of California as an example, says, ‘‘We decree that there can be no more,’’ and I’m going to make up the number here, ‘‘Than 10,000 tons of CO2 admitted in the state of California in this year. And that’s it.’’ Okay. ‘‘And not just that, we’re going to print 10,000 permits. It allows the holder to emit a ton of CO2. And at the end of the year, we’re going to count up what everyone emitted and you better hold a permit for every time you admit it. And if you don’t, you’re going to have to pay a massive penalty much larger than it would have been.

Paul Rand: So, Greenstone thought, why not participate in those cap and trade markets?

Michael Greenstone: Then basically outbid polluters for the right to pollute, take those permits out of the market. And when you take them out of the market, in this example that I’ve cooked up about California, let’s say that your family wanted to take out a hundred tons. You would effectively be reducing the cap from, in my artificial example, from 10,000 to 9,900. And now all the polluters in California would be stuck only emitting 9,900, not 10,000. You would have certainty that at least within that jurisdiction, you reduced emissions and that you got a good deal because that’s what the market price. And you got big carbon bang for your buck.

Paul Rand: So, thus the concept of a vault and you are going to get money, whether from organizations, corporations, businesses, or it sounds like individuals.

Michael Greenstone: Yeah.

Paul Rand: And they will buy into this and say, ‘‘We want to reduce our carbon footprint. We think we can buy these through Climate Vault.’’ And you will lock them away, unable to have them used again.

Michael Greenstone: Yes. The idea is take those permits out of circulation and collect them in the vault.

Paul Rand: And so eventually over time, I’m assuming what happens in the case of the state of California, is you’re going down that path, is they continue to shrink the amount of permits that are available because they set targets and they shrink to meet them. Is that right?

Michael Greenstone: Exactly. And usually those are tied to some... We want to meet the Paris goal or we want to be carbon neutral by some year or whatever it is, but they shrink it over time. Exactly.

Paul Rand: So, you have this idea. So, you see the system working in certain parts of the country, certain parts of the world, and you say, ‘‘Wait a minute, I think I have a solution that could work here.’’

Michael Greenstone: Yeah. So, we could have stopped there. But through this collaboration with Andrew Daley, Bala Srinivasan and Don Wilson, who is a university trustee, Don had this other second idea and we figured out a way to stitch them together. And he said, ‘‘Well, look. When you look at every single climate action plan, they all have this magical moment where global emissions for CO2 start to go negative.’’ And so first of all, that’s mind bending. What does that mean for global emissions to go negative? What it means is that the world has installed all these machines, technologies that remove carbon from the atmosphere and that there’s so many of them operating, that they actually remove more than remitting. And that’s how we can go negative. That doesn’t just happen by magic, that people invest a lot in inventing new technologies. There has to be a market signal. There has to be some profit opportunity.

Michael Greenstone: Well, what if we could create a market signal for carbon removal? The idea is that those permits sitting in the vault can serve that market signal. We are taking those permits and we’re saying to the world, ‘‘Come one, come all. If you have a good idea for carbon removal, if you do a ton of at least a ton of carbon removal, we’ll give you one of our permits.’’ Now the carbon removal company doesn’t really care about the permit. It’s just a piece of paper.

Paul Rand: Its worth something though.

Michael Greenstone: Yeah. They want the money. They’ll sell it back into the cap and trade market that we purchased it from. And they’ll monetize that. And the power of that is suddenly they have a customer for their product. Before there was no customer for carbon removal, and now they have this kind of big and robust customer for their product. And that’s useful for selling what they’ve created, but it’s also super useful if they need to raise capital. Because currently if you have a good idea for carbon removal, you’ll go to the venture capitalists. The venture capitalists will say, ‘‘That’s a terrific idea, but just tell me, who are you going to sell this product to?’’

Paul Rand: Right. Right.

Michael Greenstone: Then they all have to look at their shoes and kind of leave the room. Now they can say, ‘‘Oh, we have a customer for this.’’ And that should give the venture capitalist confidence to front them money or to make investments in their company.

Paul Rand: So, you are making a little bit of a trade-off because there was a commitment to take this out of circulation, but you’re making a calculation that if we let them sell this back, they will get money. And hopefully their technology, which you vetted is going to remove out what’s actually gone back into the atmosphere. Thus, you’re going to make that work that way. Is that right?

Michael Greenstone: That’s exactly right. And so what’s absolutely paramount is that our promise to you and your family, that the atmosphere would be down a hundred tons of CO2, that we remain faithful to that. Absolutely paramount. And so in the first instance, we’re doing that by taking those permits out of circulation. But if and when these opportunities arrive to do carbon removal, we will then effectively have zeroed out the reduction in the cap and trade market, but only in exchange for a hundred tons of carbon removal. And as far as you are concerned as a donor to Climate Vault, it should be all the same to you because you’re still getting a hundred tons. You just got it a different way.

Paul Rand: Carbon removal is one of those pie in the sky ideas that is so incredibly difficult to scale, but could radically shift the fight against climate change. So, how are these companies going to be selected?

Michael Greenstone: If we start making these trades of permits for carbon removal from fly by night carbon removal companies, we will have done nothing good for the planet.

Paul Rand: Mm-hmm (affirmative).

Michael Greenstone: So, I have been friends with former Secretary of the Department of Energy, Ernie Moniz and I said, "Would you be willing to chair a committee, which we’re going to call the tech chamber of global experts, who would vet the technologies, both ex-ante, is this technology make any sense? And the next post, did they deliver?’’ He and I put together a list of kind of five archetypes of we’re going to want someone who’s really good on terrestrial carbon removal. Think of plants that have really big roots that can suck up more CO2 and someone who’s good on oceans and on and on and on. Ranked in order of the three top people we would like for each archetype. And we just sent out the invitations. And the amazing thing is the number one person in each category said yes. And so we have this complete rockstar group of world experts. And so we have put together this tech chamber and this check chamber is going to do the vetting that these technologies are real.

Paul Rand: All right. So, the skeptics at this stage of the interview are now saying, ‘‘Well, they’ll just make more carbon permits or they’ll move to another state or they’ll go to another country. And then what does that get you?’’ How do you counter that?

Michael Greenstone: Yeah, it’s a great question. The nasty version is they’re just going to start pretty more permits in California. And for everyone you take out, they’re going to print another one. And so your net effect will be zero. But there are very clear rules as to when they can print more permits. And we’re obviously tracking those rules very carefully. And if we ever get anywhere near those, what they’re called price ceilings, then we would just stop purchasing permits from those markets. But our long run answer is really that this is a way to get a real ecosystem going for carbon removal.

Paul Rand: After the break, the future of the Climate Vault.

Paul Rand: Thank you for listening to Big Brains. If you’re enjoying our podcast, please take a minute to give us a review and a rating and tell a friend about the show too. We hope to share these conversations about pioneering research with as many people as possible. Again, thanks for listening.

Paul Rand: Michael Greenstone’s Climate Vault has a lofty mission, to significantly reduce new CO2 emissions while supporting new technologies to eliminate the existing CO2. And while that sounds great in theory, is there demand for it? Well, I asked Greenstone how it’s going so far.

Michael Greenstone: It’s going great. When we launched, we’d already had donations that allowed us to purchase more than 200,000 tons of CO2.

Paul Rand: And what is that worth by the way?

Michael Greenstone: Yeah. I think it’s about two and a half million dollars now.

Paul Rand: And who were some of your early backers by the way?

Michael Greenstone: The early donors include Texas Pacific group, the private equity firm, the University of Chicago has been a donor. Vanderbilt had a plan to make themselves, I don’t know if I have the year right, but carbon neutral, I don’t know, by 2045? Once they started talking us and they saw, ‘‘Oh, this is a reliable and an inexpensive method.’’ They said, ‘‘Forget it. We’re going to go carbon neutral now.’’ DRW, the financial trading firm, has gone carbon neutral with us and we have a series of conversations that are ongoing. I think there’ll be some very exciting announcements about other firms and institutions that are going to go carbon neutral using Climate Vault. Without giving away any particular secrets, I will just say there has certainly been a lot of attention on the carbon intensity of Bitcoin recently, and that would probably be a good area to try and find ways to decarbonize. And that’s certainly hasn’t escaped our attention. One other area where I think there’s a lot of exciting opportunities. There’s just a tidal wave of interest in ESG investing.

Paul Rand: Absolutely. And spell that out, environmental social governance.

Michael Greenstone: Yes. Yes. And so that’s like an area that is in my view, dying for clarity of mission, clarity of purpose, as it relates to the environment part, the typical strategy is, ‘‘Oh, I don’t like fossil fuel companies, so I don’t want to hold them in my portfolio. So, I kind of want to have the S&P 500 minus, let’s say Exxon and other possibilities.’’ Now that’s all well and fine. And I think people should hold whatever stock they want to hold. The acid test that we try to apply in Climate Vault is, but does the planet care? And I think kicking Exxon out of your portfolio fails that test. It is unlikely to have a meaningful, if any impact on global emissions of CO2. And so effectively a lot of ESG investing, I think makes people feel better about themselves, but it does very little for atmosphere concentrations of CO2, or very little for the planet.

Michael Greenstone: And so our alternative is hold whatever you want to hold. Don’t have Exxon. Do have Exxon, whatever it is. But we can help, be it people’s own holdings or ETFs or mutual funds or whatever it is, portfolios. We can calculate the total emissions that are associated with your holdings. And so just to give a concrete example, if you held 1% of IBM, we would assign you 1% of IBM’s emissions. And if you held 2% of GM, we’d give you 2% of GMs emissions. So we can calculate that for any portfolio. And then we say, ‘‘Great, this is how many tons of your portfolio is responsible for now use Climate Vault to decarbonize your portfolio.’’ Then you can truly from the kind of laudable ESG instincts, do something that is very impactful for the planet.

Paul Rand: And so the donors, you mentioned organizations and they will look at it and say, ‘‘We want to participate in this as a way of getting these down and then you can also do individuals and they can participate too. Is that right?

Michael Greenstone: Exactly. Right now, we’re starting out with organizations, big ones, and it’s a little bit like the Willie Sutton quote, they asked him why he robs the banks and he said, ‘‘Well, that’s where the money is.’’ And so we’re starting with the places where the carbon is. But I think we very much have in our sights, the idea that there could be a consumer version of this. So, for instance, why couldn’t you, when you buy a car and there’s that terrible moment where you’re sitting in that cramped office and the salesman is playing the game where he’s running the back to the general manager, and then you’re arguing about the price. And then they’re like, ‘‘Oh yeah, but this car doesn’t have a steering wheel and it doesn’t have formats. And so do you want those things?’’ And there’s no reason that you couldn’t decarbonize your car for its whole lifetime right there.

Paul Rand: Yes. Right.

Michael Greenstone: That could be an option. And so GM could offer that.

Paul Rand: Wow. Big idea.

Michael Greenstone: And Ford could offer that. And so I think there’s lots of opportunities to meld this Climate Vault idea on to existing products that use fossil fuels and involve the release of CO2.

Paul Rand: Once you start imagining the applications, you almost can’t stop. For instance, many of us do a lot to try and offset our personal emissions. Recycling, turning off lights, buying electric cars, but what if your workplace could offer it to decarbonize your household as a benefit? What if airlines could offer an upcharge and your ticket price to decarbonize your flight?

Michael Greenstone: Now, I want to say these kind of voluntary efforts I think are important and can be quite impactful. I do think the magnitude and the scope of the climate problem is such that without robust policy, it’s going to be very, very hard to really turn the tides. But I think there’s plenty of room, as you were saying from government, from nonprofits, from for-profits. I think all to make a contribution to this. I think probably everyone’s going to have to be rowing in the same direction.

Paul Rand: Michael, say we’re back at this a year from now, and you’re saying, ‘‘Boy, I’ve had a great year. We’ve made a real impact here.’’ What do you think you’re going to point to that’s going to make you feel like you’ve had a great year?

Michael Greenstone: Yeah. So, I think in a year or two, honestly, I think it will be a failure if we’re not taking out a couple million tons a year at a minimum.

Paul Rand: Okay.

Michael Greenstone: So, that’ll be delivering those benefits to the planet. But in addition, I think it’s really important that we find credible carbon removal projects that we can purchase their services from or make this trade for. In a year, we want to be up to doing a couple million tons and we want to have several carbon removal projects funded.

Paul Rand: Well, I’m hoping that even through this podcast, that people are going to listen to this particularly big organizations to say, ‘‘That’s interesting. I’d like figure out how I can get my organization involved in this.’’ Where do you send them? To learn more and get involved?

Michael Greenstone: Yeah. climatevault.org. It’s a great place to start. And certainly there’s ways to send emails from there or you can send an email directly to me.

Paul Rand: If you’re getting a lot out of the important research shared on Big Brains, there’s another University of Chicago Podcast Network show you should check out. It’s called Not Another Politics Podcast. Not Another Politics Podcast provides a fresh perspective on the biggest political stories, not through opinions and anecdotes, but through rigorous scholarship, massive data sets and a deep knowledge of theory. If you want to understand the political science behind the political headlines, then listen to Not Another Politics Podcast, part of the University of Chicago Podcast Network.

Matthew Hodapp: Big Brains is a production of the UChicago Podcast Network. If you like what you heard, please give us a review and a rating. Show is hosted by Paul M. Rand and produced by me, Matthew Hodapp, with assistance from Alyssa Eads. Thanks for listening.

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