Kolstad: First of all, I was doing math and physics in my graduation.

Then, I went on to teach in Africa for two years to secondary school and realized that the problems of developing countries were much more important than the world I thought before, and if I keep working math and physics then I will not be working towards the solution of these problems. So, I switched to economics from math and physics in late 1970s, when energy and environment were big issues. My PhD and dissertation is in energy and environmental economics and thats how I started in that area. As you will look around in Delhi School that many people what they are doing in graduate school and PhD program, they keep doing throughout. Natasha: The main contention with environment as a public good is that of non-excludable and non-rival nature. Its very hard for free markets to come up with efficient solutions. So, the non-excludable part can be sorted by assigning property rights. What solutions would you propose for the non-rival nature? Kolstad: there are not really any free market solutions for the non rival nature. I think I wrote that in a paper recently. So, you really need a government intervention or a social intervention to achieve free passage. You can achieve some movement using other mechanisms but it wont be efficient. As you know from your studies, the non-rival nature of the market will still buy some goods but not enough of it or too much of it. Natasha: So the second question, I would like to ask is that environment is a public good, so most of the debate goes around these two characteristics (the non-rival and non-excludable nature) and a lot of the problems where free market fails is because of these two. Talking about agriculture, intuition points towards a relationship between poverty and environment. So when you are taking a Marxian perspective, you could say that in a country like India with high population growth and poverty, farmers what they typically tend to do is take the same price of land marginalize it into different sectors and practice more intensive methods of agriculture resulting in a reduction in yield capacity of land. This results in a reduction in nutritional levels of soil which thereby leads to lower yields. So, neither the nonexcludable nor the non-rival factors play a role over here because of essentially the land is farmers, he is growing his crops on the field. Could you just comment on it? What is causing the problem of this nature? Its a vicious cycle that the farmer is trapped into. Kolstad: Non-rival and non excludable are not the primary issues here. Economists just choose them to understand why Marx markets dont work so well. But, there are a lot of other issues which play a major role in real world markets. You, of course know more about Indian agriculture than I do, but typically in subsistence farming a farmer hires labor for land and farms intensively so that he get higher yields than you would get otherwise, and you are claiming that the land gets depleted. Natasha: So, there is another debate on inverse relationship between farm size and productivity. But intuitively it would seem that a farmer with a small land holding has a fixed amount of land, so he wouldnt be able to acquire more land for sufficient yields. Thus, he ends up putting more labor into it but the ideal practice is to leave the land uncultivated for a season for the soil to recover all the nutrition but he cant afford to do that. Is there a solution that can be provided from the environmental perspective?

Kolstad: From what you just described to me. I dont think its an environmental problem. I just think it is not being practiced correctly. If letting the land run foul for season increases long run productivity, then I think the problem is that farmer has a high discount rate which I justified because he is a subsistence farmer. He is worried more about what happens tomorrow than what happens two years later. It doesnt seem like and environmental problem. Still its a real problem. I think a lot of property programs can address that and that other people will know more about it. I know the reason the farmer has more children is one because he wants it and other because of social security needs. All these result in an increase in population pressures. I dont know the answer to increase population pressures, but if another hectare of land is desirable, then I think probably easy availability of finance can also solve the problem. Natasha: If you must give one sustainable solution to the problem without hurting the environment. Kolstad: What environment are you talking about? Natasha: The soil which is over utilized Kolstad: So if the farmer walks away from the soil for 5 years, will the soil regenerate completely? Natasha: At this point in time I cant comment on that. Kolstad: You know not everything is sustainable development. Sustainable development in environmental context is ecosystem which surfaces from natural environments such as atmosphere and water, where we try to preserve it for future generations. But not all of mankinds problems are environmental problems. The one that you are talking about is more related to poverty and assisting below average income people to make better decisions is not environmental but it is certainly an interesting topic of investigation. Natasha: I am not thinking of it from an environmental perspective. I am just trying to figure out whats going wrong with the soil that is losing its nutritional value. Kolstad: If you listen to the talks upstairs, they are all about this poverty problem to lift up the fraction of population which is living in difficult conditions Vinayak: Sir, as you mentioned in your paper developing economies tend to show a disconnect between consumer preferences about emissions and govt. policy Kolstad: Not developing countries, but non democratic countries. So, India does not come in the domain of the paper. Vinayak: So, in this case the environmental Kuznetss curve which predicts that eventually emissions will fall as income rises. In this case will the peak occur much later? Kolstad: thats only for certain pollutants such as sulphur dioxide. If I get your question correctly, you are asking that for non-democratic countries will take longer to get to the top of the curve. Now the

Kuznetss curve is very controversial and we are interpreting it for a single country here and as a gross measurement. If you do interpret it that way, the peak will be delayed. Vinayak: But even in non developing countries, the focus of the government is on non-environmental issues, such as welfare of the people. So, will there be a delay in that case too? Kolstad: That is the reason the curve has that shape. It is because in the early stages when you are living at low levels of income, you dont care about emissions, you care more about basic needs such as education, food etc.. That is the demand side. On the supply side, you are moving from agricultural to industrial economy, and you are building manufacturing. For example, Bangladesh is building garment factories. So, those two forces together contribute towards the population as a whole not caring much about the environment, and structural changes result in the upper part of the curve. In China, people are now saying we dont like pollution in cities which results in structural changes in the economy. In India as well, we are seeing industries are becoming cleaner.

Sadhika: So, talking about China we see the Chinese have started experimenting with the cap and trade policy, and what are your views on that and what do you think about Americas discontinuation of this policy, and if not cap and trade, how do we reduce emissions? Kolstad: Well, in Chinas case, I dont really know the status of cap and trade. I know theyve been talking about putting it in place but I dont know the current status of that, but I think its not a bad idea for a place like China. An economy with a mixed private-state sector, such as like China and maybe to a certain extent like India, where weve got some state enterprises or not really purely private enterprises mixed in with private enterprises, economic incentives sort of dont work the same way as those two categories of polluters, but cap will work and thats why that may be more effective in China. In the US, cap and trade used to be very popular during the 90s or early 21st century. After all we put in the sulfur cap and trade system which worked well and is the reason why the Europeans put in a cap and trade system. But it has got out of favor politically, in part because it seems susceptible to a lot of interest group manipulation, you know everybody wants a free permit or they change the rules a little bit to favor one industry. I think nowadays there is more support behind a carbon tax. A carbon tax is seen as solving some of the financial problems, fiscal problems that a lot of countries are having today; getting enough money , making income taxes too high, so well see what happens there. Im not sure that will work too well in China because if youre running the Chinese National steel Company, if there is such a company, profit is not quite as important to you as it is to a private company so what is a carbon tax going to do to you ? How are you going to respond to a carbon tax? These are some of the unanswered questions; its not quite clear what would happen and how effective it would be. We have a pretty good idea of what private firms would do if a carbon tax were imposed but not so much for a state enterprise or a pure public enterprise.

Natasha: So when you were questioning the carbon tax in a recent paper of yours which showed in the US youd collected data and you showed that it is regressive in nature. So India has also imposed a carbon tax in 2010 I suppose so is the regressive nature of the tax because of the tax structure itself or is it because of some characteristics of the United States population that need not transfer to India? Kolstad: Certainly India is different than United States so could be different here, but typically if youre poor your consumption bundle is different than if youre rich. So you all here are relatively well off compared to subsistence farmers in India and how you spend your money is different from how they spend their money and we all know that the first thing you spend money on are basic necessities, which includes food and housing and some energy, whether its firewood (the opportunity cost of time to collect it or you actually buy firewood in the market or whatever) or charcoal. As you get richer, and I dont mean really rich, I mean middle class, you substitute other things, you might go to a restaurant or use services that are not so carbon intensive so thats the main reason why it is regressive. It is not strongly regressive in the United States, it is just somewhere regressive, I think because something like in terms of the lowest quintile or decile compared to the highest decile or quintile. The data is probably available for India, I dont know but India collects a lot of data, so somebody could look at the regressivity of the carbon tax here as well. Often, a carbon tax is not a carbon tax. Often a carbon tax will be levied on a very narrow sector. Carbon tax is supposed to be a broad tax, anyone who emits carbon pays, no exceptions or very few exceptions. A lot of countries put a very narrow tax or a very small tax such as a rupee per tonne of carbon, which is no tax at all, and so we are talking about a real tax of the order of twenty dollars a tonne which is about a thousand rupees a tonne or more.

Natasha: One of the concerns was that mostly electricity is linked to coal and how carbon tax would in a way affect the fiscal deficit and the coal imports and that was one of the reasons it was brought into public attention. Kolstad: Well it would affect them. Coal and electric utilities for power is probably the biggest easy target of private policy because there are alternatives to coal, I mean even in India there are alternatives to coal and coal is usually the cheapest, but if you change the cheapness with a tax then other fuels get readily used but if I tax the petrol for your car, you cant put a fire button in your car, the only thing you can do is change your behavior in that case so its why electric power is often the target of these policies.

Aakash: On a similar note, as you mentioned strategies wont work in a similar way for US and China or for that matter for US and India. In your paper, Public Goods Agreements with Social Preferences in May 2012, you mentioned that when the wealth of nations is not equitable, the wealthier nations have a preference to defect out of the coalition. What measures do you suggest to give them incentive to not defect?

Kolstad: Well youre talking about a theoretical paper. Whenever youre hearing theory like this morning, I dont know how many people went to the talk this morning about poverty and status, you need to be careful in extending these theoretical to very practical questions. What youre saying is true, that if countries are, not inequitable, but if theres some dispersion in the per capita income of different countries then it may be more difficult to hold a coalition together; thats an observation. What to do about it is another question and my personal feeling and it goes beyond those papers is that you want small groups of countries to decide to do things and not try to bring a large group of countries, not try to get Afghanistan, Kazakhstan, Togo, not try to get everybody into the agreement. Focus on a core group of countries, maybe two core groups of countries; rich countries where the dispersion will be smaller, the Europeans, the Americans, the Japanese and few others decide to do something together not paying any attention to anybody else and then maybe China and India and Brazil also decide to do something independently. That would be better than what we have now, where you have everybody acting independently. It wouldnt be perfect but it might be a much more stable relationship. Thats just a speculation though; Im not suggesting that Aakash: So do you think that even countries in the nowadays scenario give more importance to short term preferences than long term preferences? So as we saw, in case of developing countries, the immediate need is to grow. Do you think they will give more importance to short term needs instead of really long term needs like significant importance to climate? Kolstad: Well its not just developing countries. In fact I think thats one of the defects of democracies. If you have a dictator, they can have a preference for long term policies and theyre done. With a democracy, my observation of politicians is that they dont think long term, they think short term. Thats not from my research, thats from reading the paper. They want to get re-elected and thats one of the problems of a democracy; the long term seems to be very difficult, it takes a politician real courage to put in place a program that has no short term benefits but long term benefits. Usually they try for a combination; something with short term benefits and long term benefits. The great example in the US in the recent times is what we call the interstate highway system where President Eisenhower in the 1950s decided we would put in dual carriageways, freeways all over the country; the reason was so that we could better protect ourselves from invasion by the Russians I guess. So there was immediate reason for doing it, but the long term benefits were really where the benefits were, and the Space Program was put in place for a similar reason. A lot of innovation came about because of immediate need. Climate change is a real problem because all Im asking the current generation to do is sacrifice for the benefit of people that are coming in a hundred years, thats why politically it is difficult to sell. Sadhika: Id like to add to that point. Recently what happened in Uttarakhand, the flash floods that took almost a thousand lives, was also a result of the rampant stone crushing activities along the banks of the river, and this was despite the High Courts warning of demolishing all structures that were within 200 metres of the river, and so this is the thing, I mean the development strategies are myopic, they dont think of the implications.

Kolstad: But these are short term implications. If you make it possible for floods, it could be next year that you have a flood, so that problem should be easier for a politician to solve, because he may still be in office or she may still be in office when the bad thing happens as well as the good thing. Sadhika: Also, even if this is not about bribing the officers to get an environmental clearance, flouting norms is because businesses see the need to meet these norms as a roadblock in their development path. Its just that they are not incentivized enough to take care of the environment and treat it as it is. Its because theyre being forced to meet the norms, they dont have the latent motivation to take care of the environment. Kolstad :Well, change the laws. It seems to me that those are the sorts of things that the people would tell their politicians that we want action on this, because its my house thats going to be flooded next year in the flood, so i want you to act on it and if the politiian doesnt ... im not saying theres corruption, but if the politician doesnt vote for things, then as they say throw the rascal out, dont vote for them next time. india seems to be able to deal with that kind of problem. having stronger laws that are enforced ... its the long term plan...long terms a hundred years, fifty years...thats very difficult; politicians will be dead, current voters will be dead, very difficult to put a high priority on that Q. Looking at the bigger picture in terms of economic terms actually, so is there any economic way to incentivise long term benefits instead of short term benefits? You also mentioned the same ... that although its a theoretical point of view, you mentiond a set of transfers that can actually be used to ...by ...wealthier nations to balance out the incentives to leave than to not leave, so is there a set of transfers that you can suggest so that the long term benefits are actually given more importance than short term I was talking about an agreement ...well, thats an excellent question ... umm, think about this problem, climate change, as an externality problem; think of it as a very simple textbook example and if we have a market failure and putting this carbon up in the air and its causing problems for the future and were arguing that if you fix ths externality, well be able to move closer to the pareto frontier, well be able to move to the pareto frontier . So theres a pareto improvement thats possible. Now, what is a Pareto improvement? It means its possible for everybody to be better off in fixing this ...its not that some people will be worse off; even though some solutions have some people being worse off, there is a solution where everybody is better off... and if you think about that, what that means is that ... phrased in practical terms and i havent seen too many people phrase it this way, but if you look at ... what are we currently doing for the future? Were making investments for the future, and rather than reduce our current consumption maybe we should redirect some of our investments for the future into climate change if we think the future will be better off, you know, compared to building a dam for the future vs. doing something about climate change moves some of those future investments into climate change without taking it out of current consumption . so there has to be a way... if this is a problem where we all can be made better off there has to be a way of structuring things so that its not such a conflict between the future and the present ... but I dont know what that way is

That has to do with the problem of measuring the benefits of ... quantifying the benefits . we know what 1 dollar would give us from putting it into building a dam and not what it would lead to in climate mitigation.

Thats a good point, but it could also be that we just think climate change is a good idea to fix today but we have a difficult time understanding just exactly why its a good idea to fix today cause we dont know what the damages or benefits are of doing that fixing; and if we could quantify them the argument would be clear as to why its better to divert a dollar from this dam to climate mitigation ...also we dont know what the cost is of reducing carbon, and we dont what the cost is for the Indian economy, we dont know what it is for the American economy, what it would cost to reduce emissions by 10% for instance;would it would mean massive unemployment ...chaos in the economy, or would it be simply easy to do? You just dont know the answer to that. Q...since were talking about cost reduction, to take care of the environment, so we are still ? to point that in the Indian context really making investments towards energy saving or reduction of carbon emissions ...in a practical sense it wont lead to a big impact on the global climate, but recently the US secretary of state had visited India and he was constantly emphasizing as India and United States to be joint partners in the reduction of energy use ... to take take steps together. So in terms of an equity perspective, as you said that equity is probably ... this is the phase where it features as opposed to many other fields, so when youre making an agreement, do these climate agreements take into account the historical perspective that most of the developed nations have been around for longer, and thus they are to be held more accountable for taking steps to ensure that CO2 emissions and other greenhouse gas emissions should be curtailed and they are more responsible or accountable for that, or is it that what happened in the past has happened and lets just look at what each country is contributing from today ... You can write anything into an agreement, there is no agreement now so anything can go into an agreement... when i think that i dont know what Kerry was talking about as secretary of state but i think the fairness part is that one of the problems the American politicians have selling it in the US is that other countries not willing to cooperate..im not saying India ... countries in general and the more countries cooperate, it is easier for him as a politician to convince the American politicians to do something. But youre also asking about historic responsibility which is the term they use for that. And it is true most of the stuff in the air now came from the US, Europe and former Soviet Union ...most of it but what does that mean? It is very difficult to say that it means for sure that they should be responsible for the problem. That may be the opinion of a lot of people. But its not a fact that responsibility should fall like that. if you look at Indian law for instance or Chinese law or law all around the world. Ask yourself how does law look at the problem? Suppose you were doing something and you thought was perfectly harmless . Suppose you were throwing a plastic bottle away and you didnt think anything of it. But in 20 years time it turns out you were doing a very bad thing but you didnt know it. Now are you responsible for that under Indian law under Chinese law. And the law has looked at this and said if you dont know youre doing wrong then we are not going to hold you responsible for it. But

if you do know its wrong when you do it,then we could say youre negligent and hold you responsible for the damages. So thats about the only guidance we have on how historic responsibility should be treated. The other one is the fairness part of international agreements that a couple of you asked about.it might be viewed as fairer for the historically responsible countries to bear a bigger burden, but they will. You cannot rush it. Its not like they dont have money . the Europe and the US should be expected and will pay more than their proportionate share of the costs for countries that are poor. Im sure that will be case. But the fairness in the historic responsibility context, it may help green countries like China and India into an agreement. But if the us says thats the past, you have to live with that. Thats going to make India mad or China mad and then theyre going to say we are not going to sign it . so thats the sense in which fairness is necessary to make an agreement actually work. I mean there are many ways of looking at historic responsibility. The Americans dont say this,but they could say well you know all these people who are in this Us came from Europe, India. So theyre responsible, not us. So it can go several ways. Q.Sir, a lot of countries particularly the developed ones are taking measures to curb down on their unsustainable energy consumption ways. For example China is targeting a 16% reduction in energy intensity by 2015. with the economies of China India and the middle east accounting for 60% of the increase. Sir what are the immediate and long term steps needed to bring the world onto a more sustainable path and is this true partly because of the rebound effect you talked about yesterday? Why even after taking these steps, the total energy demand is actually rising i.e. is the rebound effect outweighing the positive effects?

Well first of all, I wouldnt pay much attention to what countries say they are going to do. It is easy to say im going to do something. But as an economist which you all are, the numberone rule which you should note down is look at what they do and not what they say and it is particularly true in this context. The energy intensity target, that can be very deceptive. George Bush announced a reduction in intensity of about 20% I think over the next 10 years. Then if you looked at the data of the previous 10 years, just structural changes in the economy reduced energy intensity by 2% a year. So saying im going to do 20% over 10 years is not saying anything at all. And Chinas energy intensity is probably coming down as well I dont know. So,Look at what they do. But in terms of a shortage of innovation which I think is a part of your question, without a price on carbon or with low prices of energy..which we still have low prices for ebergy, coals cheap, oil is relatively cheap, natural gas is cheap in many parts of the world, no price on carbon, if youre an inventor, what do you invent? Youll probably invent a better cell phone, not a way of saving one rupee a month on your electricity bill. Thats just the reality of it. Increasing the incentives for innovation is a great way of getting more innovation. Q. Sir as the years go by there will be a shortage of these natural resources, so these prices will rise. They will you know, but in the long run saying they will rise..the earth will eventually cool off and fall into the sun. its true. But thats not relevant for knowing what we should do over the next 30-40 years. Because it may not be for a very long time

Q. Can the rebound effect actually outweigh the positive effect? The rebound effect would actually make it more difficult than an engineer would think. But youre an economist. So you know the rebound effect is nothing separate. Its just that if you make a better product that doesnt use as much energy, people are going to want more of it and use it more which is actually that people are better off..welfare has gone up. But youre not saving quite as much energy as the engineer thought you would because behavioural changes have substituted. So you know innovation which results in the rebound effect occurring is probably good for society but it makes it harder to reach your goals of energy conservation Q. So it will take a longer time to reach your goals? Yeah, or maybe you have to revise your goals. One of the two. Thank you so much Professor Kolstad.