Published: October 1, 2012
A collaborative global decision on carbon dioxide emissions pricing must be made soon, or the risk of a catastrophic incident linked to the warming of the earth will rise.
That is the word from Robert Litterman, chairman of the risk committee at Kepos Capital. Litterman, who recently retired from a 23-year career in risk management at Goldman Sachs Group, Inc., gave his warning—and his prescription—in a public lecture at MIT Sloan Sept. 20.
Litterman is the inaugural recipient of the S. Donald Sussman Award, presented to individuals or groups who best exemplify the career of Donald Sussman, a successful investor in quantitative investment strategies and models. Recipients receive a $100,000 cash prize and share their insights on quantitative finance and the financial industry in public lectures at MIT Sloan.
Litterman called the Earth’s atmosphere a reservoir, one that fossil fuel emissions are filling toward an unknown overflow point. That overflow is disaster, and he recalled the devastating Johnstown Flood of 1889 as a metaphor for risk, catastrophe, and responsibility.
Governments must recognize the inherent risk in emissions, determine the cost of that risk to society and price that risk accordingly, Litterman said.
“To this day, governments are not pricing climate risk appropriately, and elected officials should be held strictly accountable for this failure,” he said.
“By some irrational convolution of logic, the...United States government fails to recognize that if $20 [per metric ton of carbon dioxide] is the appropriate credit for reducing emissions, then $20 is also the appropriate tax for those creating those same carbon dioxide emissions,” he said. “And although it now recognizes the cost of emissions in regulatory policy, through tax policy the U.S. government continues to incentivize our economy to fill the atmosphere with emissions.”
But even as scientists and environmental advocates warn of the potential danger, no single country will volunteer to lead the way on pricing carbon emissions, Litterman said. He argued for a global agreement to set an admissions price based on science and economics, and free from political motivation. A common atmosphere, he said, requires a common price.
Taxing emissions is not regulation, he argued. He appealed instead to a free market philosophy that recognizes increasing risk should come with a price. Once that price is set, he said, governments should get out of the way.
Litterman is also a board member at the World Wildlife Fund. That organization and a group of economists—including five Nobel Memorial Prize winners, two MIT economists, and MIT Sloan Dean Emeritus Richard Schmalensee—are urging the U.S. government to participate in setting a global price on carbon dioxide emissions in aviation.
Meanwhile, society moves forward with blinders on, he said, with no idea of when, where, or how a catastrophe might occur. Any delay in setting an emissions price will inevitably mean a higher price, should one ever be set, he said.
“Human society has not slammed on the brake,” he said. “It is not braking at all. The government foot is still pressing hard on the fossil fuel accelerator.”