The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  Climate change was far from the biggest and most urgent issue for the administration. Much of Bush’s tenure was dominated by an epochal crises—the fall of communism in Eastern Europe and the collapse of the Soviet Union, and then Iraq’s invasion of Kuwait and the Gulf War. Bush and his team demonstrated enormous skill in negotiating their way through these crises, working with allies, and building coalitions. The Gulf War ended in March 1991; the Soviet Union dissolved itself in December 1991.

  But allies mattered to Bush and he was under pressure from the Europeans. Prime Minister Thatcher insisted that her cabinet sit through a day-long tutorial on climate change. The European Community’s environmental commissioner publicly denounced Bush for his “hostility” to specific targets and timetables on emissions. The Germans argued that the United States needed “to accept the stabilization commitment.”23

  “A MAJOR HARANGUE DOWN THERE”

  But now Rio was getting very close. The indecision about the president’s plans had become palpable.

  “Wouldn’t it be difficult for you, having sold yourself as an environmental president, not to go?” a reporter asked at a press conference.

  “I think it could work out either way,” the president replied. “What I want to do is see if we can’t hammer out consensus so you have a meeting that is viewed as positive instead of a major harangue down there.”24

  Finally, in April 1992, agreement was reached on a greenhouse gas convention. It called for a stabilization of greenhouse gases, though without targets.

  The United States could accept this agreement. Bush would go to Rio. There were other compelling reasons as well. Bush saw himself as an environmentalist, and wanted to be seen as a Teddy Roosevelt Republican. He also recognized that the leaders of those key allied countries with whom he had worked so closely—on the fall of communism and the collapse of the Soviet Union, and then in the Gulf War coalition—would be in Rio, and he did not want to let them down. And then there were domestic politics. Just a little over a year earlier, in March 1991, in the aftermath of the Gulf War, Bush held an extraordinary—indeed, stratospheric—90 percent approval rating in the polls. But as the nation sunk deeper into a recession, Bush’s poll numbers plummeted, and he was no longer the decisive war leader but increasingly portrayed as just “out of touch.”

  In the spring of 1992, as Rio approached, and with the November election not that far off, Bush was being pummeled every day by his two putative opponents: the data-processing billionaire Ross Perot, running as an independent, and the badly trailing Democratic candidate, Arkansas governor Bill Clinton. The daily barrages included a constant fusillade of criticism on his environmental policies. Bush was guilty, Clinton declared, of “grievous errors” on the environment and for being the “lone holdout to environmental progress.” Were Bush not to go to Rio, the onslaught would only be worse, and his claim to be a Teddy Roosevelt Republican would be totally for naught.25

  One other thing had changed. The leading opponent of his going to Rio—White House Chief of Staff John Sununu—had left the administration.

  “THE DIPLOMATIC FREE-FOR-ALL”

  And so Bush went, heading into a Rio Summit that was described at the time as a “fractious 12 days of diplomatic free-for-all.” It was also a monstrous event: more than 160 heads of state and governments and international organizations; 10,000 other government officials; and another 25,000 people—activists, NGOs, business leaders, and journalists. Many of the NGOs were an integral part of the negotiating process in a way that had never happened before; others were holding their own parallel earth summit. Still others were out protesting ; some activists hung a huge banner on the iconic Sugar Loaf Mountain that overlooks Rio denouncing the conference as a sellout.

  There were certainly no shortages of harangues. Judged solely by the applause and excitement, the most popular head of state was Fidel Castro. The Cuban leader demonstrated his mastery of haranguing, whipping himself and his audiences into a fury as he denounced capitalism and consumerism as the scourge of the environment. This was despite the enormous and grim environmental degradation just then being revealed, with the fall of the Iron Curtain, in the ex-communist lands of Eastern Europe and the former Soviet Union.

  For his part, George Bush tried to respond to the harangues. “America’s position on environmental protection is second to none,” he shot back, “so I did not come here to apologize.” It was to little avail, for he was typecast, as the New York Times put it, as “the Darth Vader of the Rio meeting.” And it was not just him. When William Reilly, the leading advocate for a climate treaty in the U.S. government, landed in Rio, he was greeted by his photo in a newspaper under the headline “Arch Fiend Arrives in Rio.”26

  On the second to last day of the Earth Summit, amid all the hullabaloo, the United Nations Framework Convention on Climate Change was signed. The very first signatory was George H. W. Bush, on behalf of the United States. Some 153 other leaders signed on. A few months later, the U.S. Senate approved the convention, making the United States the first industrial nation to fully ratify it. Climate change was now embodied as a global priority in an international agreement adhered to by virtually all the world’s countries.

  WHAT THE FRAMEWORK CONVENTION SET IN MOTION

  The Framework Convention’s ultimate objective was far-reaching, perhaps more far-reaching than many signatories realized. The goal was “the stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” The phrase “dangerous anthropogenic interference” became a famous and muchquoted piece of jargon. “Anthropogenic” was a Latinate way to refer to mankind itself. The convention centered attention on the release of greenhouse gases as the result of human activity—principally burning coal, oil, and natural gas, along with the cutting down of forests.27

  As part of the agreement, the developed countries took on commitments to control their emissions; the developing countries had no obligations other than monitoring. In addition, the developed countries agreed to “provide new and additional financial resources” to help developing countries reduce their emissions. The concept of “joint implementation”—countries’ encouraging companies within their borders to work with similar groups in other countries—was introduced. Overall, the convention emphasized that dealing with climate change would be a process that would extend over many years, even decades. And its execution demonstrated that the character of international negotiation was changing—that nongovernmental organizations were now sanctioned as part of the process, with their own more-or-less guaranteed seats at the table.

  The U.S. administration’s own experts had calculated that the United States could manage to hold emissions by 2000 at 1990 levels through new energy-efficiency programs and new environmental technologies. “That was just wrong ,” Reilly later said. “We did not anticipate the fabulous economic growth that the United States would experience in the 1990s. Emissions actually rose 11 percent in the 1990s. On the other hand, if there had been targets, that would have enabled policies that would have led us to be more efficient.”28

  As it was, the Framework Convention on Climate Change—the agreement that came out of Rio—was remarkable. Not because of its targets, for it had none save the “aim” to reduce emissions in 2000 to 1990 levels, but because it existed at all. Four years earlier, climate change had not even been on the political agenda in the United States, nor on that of many other countries. Yet in less than half a decade, what heretofore had been an obscure scientific preoccupation had been turned into something that the international community had gone on record promulgating as an urgent and fundamental challenge to humanity and to the planet’s well-being.

  The road to Rio was actually quite long; it had begun more than two centuries earlier, in the Swiss Alps. But what had started as an obsession by a handful of researchers with the past, with glaciers and the mysteries of the Ice Age, was now set to become a dominatin
g energy issue for the future.

  24

  MAKING A MARKET

  The idea was reprehensible—morally reprehensible. Create a market in pollution? Trade “allowances” that give companies the right to sell their pollution like a commodity? Put a market price on environmental degradation? Unbelievable!

  That was the response of many environmental organizations, academics, and many others to a revolutionary idea: using the mechanisms of the marketplace—buying and selling—to solve environmental problems.

  One prominent political theorist put the objections in philosophical terms: “Turning pollution into a commodity to be bought and sold,” he declared, does the grave disservice of removing “the moral stigma that is properly associated” with pollution. The head of a major environmental organization was more blunt. “Economics,” he said, “is an advanced form of brain disease.”1

  That may have been the common reaction in the late 1980s and into the 1990s when the battle over using markets to curb pollution was at its fiercest. This particular form of “brain disease” arose from the world of ideas, from a debate among economists about how to subject pollution to the laws of economics. Then, intrigued by its possibilities, and at the same irate with the rigidities of conventional regulation and frustrated by inaction, a small group of “policy entrepreneurs”—economists, environmental activists, and officials—seized upon the idea of using the market to address climate change. Instead of an abomination, it came to be seen as the “better” way to take on the challenge of climate change—and, indeed, as the essential tool. They eventually called it cap and trade.

  The ambitions held for it were breathtakingly large; it was intended to do nothing less than remake the world’s energy marketplace and the character of energy in every person’s life and thus many of the daily choices that we make. How did this come about? It goes back to what John Maynard Keynes called the “academic scribblers”—those who come to influence subsequent politicians and lawmakers and “practical men” in general—none of whom have any idea that they are channeling thinkers they had never heard of in the first place.

  THE “SCRIBBLER IN CHIEF”

  In this case, there was even a “scribbler in chief”—Ronald Coase. Yet Coase would have seemed a most unlikely candidate for this post. Born in 1910, he suffered as a child from “weakness” in his legs, thought to be polio, as a result of which he had initially been put into classes for physically and mentally handicapped children. He managed to learn to read only by studying the labels on bottles of medicine. But, at age 11, his father, a postal worker, took him to a phrenologist, who, seeking to bolster his confidence, said, “You may be inclined to underrate your abilities.” It was good advice. The next year, Coase managed to switch into a regular educational track. He made up for lost time and ended up with a Ph.D. from the London School of Economics. In 1951, he emigrated to the United States.2

  Four decades later, in 1991, at age 81, he received the Nobel Prize in economics, mostly for two enormously influential articles. For the work of a Nobel Prize winner in economics, both articles were strikingly devoid of any mathematics save simple arithmetic. But they were very powerful in their arguments. In one, “The Nature of the Firm” published in 1937, Coase took on a very basic question—why do people coalesce into companies in a market economy rather than remain as freelancers in a sea of the self-employed? The answer, he said, was “transaction costs”—costs are lower within companies, things are easier to get done, and efficiency is higher.

  The second article, the result of a friendly debate with Milton Friedman, was “The Problem of Social Costs.” Published in The Journal of Law and Economics , it ended up one of the most cited articles in the history of economics. Over time, it became the foundation for the idea of using markets to solve environmental problems. Coase’s thinking was much influenced by his studies of state-owned industries and regulation, and what he saw as their gross inefficiencies. Coase argued that markets and pricing systems could provide better solutions than direct government intervention and control. To make his argument, he homed in on externalities, or what he called “harmful effects”—in this particular instance, the unwanted pollution that is consequent from economic activity.

  This question of externalities—undesirable side effects or consequences—is something with which economists have long struggled. Early in the twentieth century, the economist Arthur Pigou had argued, with great influence, that the way to deal with externalities, which are not reflected in the price of a good, was for the government to intervene and place a tax on the externality. Think of it as a sort of sin tax. A one-dollar tax per pack of cigarettes or a fifty-cent carbon tax on gasoline would be examples of Pigovian taxes. But Coase was sure that Pigou was all wrong, that he was placing far too much faith in the wisdom of government and that he failed to understand the role of property.

  Coase’s examples focused on legal issues involving pollution, some going back to the Middle Ages. What happens if the “conies”—another term for domesticated rabbits—that a medieval landlord was raising on his estate for fur and food were instead to start burrowing into the estate of his neighbor, and then proceed to breed and multiply wantonly, thus despoiling the neighbor’s estate? What about “smoke nuisance” from a neighbor’s burning of coal? These were questions of property rights and relative values that the contesting neighbors would put on them. The way to solve these questions, Coase argued, would not be through a regulation or a tax, but through the marketplace. “All solutions have costs,” Coase wrote. “Direct governmental regulation will not necessarily give better results than leaving the problem to be solved by the market or the firm.”3

  Coase never talked about actually trading pollution rights, but the idea is inherent in what he wrote. His ideas would be taken up and specifically applied to environmental issues by others. In Pollution, Property & Prices, published in 1968, the Canadian economist John Dales argued that the best way to clean up pollution in the Great Lakes was with a “market in pollution rights.” Dales made his arguments in English; David Montgomery, writing a Ph.D. at Har vard a few years later, made parallel arguments in equations. But both came to the same point: Would it not be preferable, more efficient, and less costly, they asked, if emissions could be traded as though property, or at least quasi-property, just as you could trade currencies or oil, or stocks and bonds, or real estate?4

  “THE WAR ON POLLUTION”

  In the late 1960s and early 1970s, economists were turning their attention to pollution, which was rising on the political agenda. In 1970 President Richard Nixon established the U.S. Environmental Protection Agency to lead, in his words, the nation’s “war on pollution.” This marked the opening of an era of much more intense environmental regulation. That regulation generally took the form of administrative control and micromanagement, with detailed standards, mandates, and requirements, down to nitty-gritty prescriptions for specific technologies and tightly policed compliance—for instance, setting the maximum of so many pounds of emission per hour per machine. This approach became known as “command-and-control” regulation, a phrase suggestive of the centrally planned, highly inefficient “command economies” of the Soviet Union and its satellites.

  But, starting later in the 1970s, some very modest experimentation with more market-based approaches began in the United States at the federal level, and in a couple of states.5

  “OLD ENOUGH TO REMEMBER”

  In the early 1980s, the decision was made to phase out lead from gasoline because of its toxicity. “Knocking” had chronically afflicted the early auto engines, sometimes so loudly that it was impossible to ignore, and often doing great damage to the engines. Years of research finally eliminated knocking in the 1920s with the introduction of tetraethyl lead as an additive. As late as 1963, tetraethyl lead was hailed as “undoubtedly one of the most remarkable innovations of the twentieth century.”6

  Yet less than two decades later, there was consensus that lead was
a menace to human health and that, whatever its value to engines, it had to go. During the Reagan administration, a substantial part of one cabinet meeting was devoted to the question of how to get lead out of gasoline. As the discussion proceeded, President Reagan shook his head and recalled that, when he was a teenager, the introduction of tetraethyl lead had been celebrated as one of the greatest advances in motor fuels and auto performance ever. As he looked around the cabinet table, Reagan encountered only blank, uncomprehending looks. He shrugged. “Oh, well,” he said,” I guess I am the only person old enough to remember this.”7

  Under the lead phaseout, refiners—instead of being given detailed requirements—were allowed to trade lead “permits” among themselves, providing an economic incentive for those that could get rid of lead more quickly than under a mandate system to do so. This was a market-based solution. The lead program proved much more successful than expected. By 1987—that is, within five years—lead was gone from gasoline, and the cost proved much lower than anticipated. The road to future pollution reduction seemed to be paved with lead. Maybe there was something to this market approach, after all.8

  In the presidential election year of 1988, two senators took on a self-assigned mandate—to inject vigorous “new thinking” about the environment into the campaign. Tim Wirth, who had chaired the June 1988 global-warming hearings, was a liberal Democrat, and John Heinz, a moderate Republican. They had been at the forefront of environmental issues in their respective parties. The two senators organized what became known as Project 88. As project director, they hired a young Harvard economics professor named Robert Stavins. “They wanted new ideas,” said Stavins. “They hired an economist, and so they got economic ideas.”9