Jon Powers: Derek, thanks so much for joining me at Experts Only. Derek Walker: It’s great to be here, Jon. Thanks. Jon Powers: I’m really excited to dive into this issue because I think there’s a lot of interest in carbon pricing where folks just don’t really understand it. But before we do dive in, I just want to talk about you personally. You grew up in Baltimore. First of all, what drove your interest in first politics, because you used to run the democratic party in Maryland, if I remember- Derek Walker: I did, I did, yeah. Jon Powers: What triggered your interest in politics? Derek Walker: It’s really, for me, it’s always been about trying to make the biggest impact that I can, and as many young idealists do, I thought politics with a capital P was the place to do that. And so I jumped into a job on Capitol Hill, which was very aligned with where I wanted to start my career. I worked with former us Senator Barbara Mikulski, who’s a great role model and mentor of mine. And then I got into more direct politics. I managed a congressional campaign. I advised on a few others. And then I was the executive director of the Maryland Democratic party. Derek Walker: And all of that taught me that, yes, there are many levers within the political sphere and working directly with decision makers, but from a perch outside of the decision-making realm, you can make a whole lot of impact by putting pressure on decision makers to act in a way that aligns with public interest. And so I learned about climate change really for the first time in about 2005 or 2006 in depth when I had a chance to spend a few days with Al Gore and a few other folks who were just really learning the content that the former vice president used for his documentary film, An Inconvenient Truth. And from there, I just decided this is the mission I need to take up for the next part of my career, and that’s how I landed at EDF. Jon Powers: Yeah, interesting. And at EDF, you’ve had a pretty amazing career. Currently you’re the vice president of the US climate, but you’ve really risen the ranks there and have covered a variety of different arenas, like state politics and other topics. Can you talk a little bit about, first of all, why the Environmental Defense Fund, and what has your experience been there? Derek Walker: Yeah, I think EDF is uniquely situated to bring together the environmental integrity, the science, the economics behind the issues that we work on along with the perspective of businesses and investors and multinational institutions. And we also really believe in ambition that’s practical. And as you say, I had a chance to work in state capitals. I’ve had a chance to travel internationally to really talk about the importance of market-based environmental policy. And in my current role, I’m operating a lot of work inside the Beltway trying to push ambitious federal level legislation. Jon Powers: What an important time to be doing that. Derek Walker: It couldn’t be better. And it’s complex, but I think that the window is wide open. Jon Powers: Yeah, I mean, I feel like for a lot of us that have been in the space for a decade now, we’re in the Superbowl of opportunity to- Derek Walker: We sure are. Yeah. Jon Powers: Excuse me. So there’s so much I can talk to you about on climate policy, but I really wanted to spend some time specifically diving into carbon pricing and really give a chance for folks in the renewable industry, in the clean energy industry, a chance to understand what are some of the drivers in this space, what are some of the economic drivers, how could this affect an industry like the renewable space and what they can be doing to hopefully advocate for it as it comes forward. But before getting into that, there’s just a bunch of different variations of carbon pricing. Can you step back for a second and talk about the evolution of the concept of carbon pricing to where we are today? Derek Walker: Sure. And I’ll start by saying, at a high level, what carbon pricing is and what carbon pricing isn’t. What carbon pricing is, is an attempt to correct one of the most profound market failures out there. We’ve gotten to where we are now really on the precipice of some really catastrophic impacts from climate change, in part because it’s taxpayers and the individuals affected by climate pollution rather than those who produce it and put it into the atmosphere who are paying for it. There’s never been a cost. And so the idea behind carbon pricing really came out of the notion that was first really put forward in the IPCC, the very inaugural report from 1990. That’s the international body of scientists that come together to update scientific data on climate change in 1990. And that’s when the first carbon pricing bills came out. So carbon pricing, in a sense, is really about correcting a market failure. Derek Walker: What it isn’t is the only thing we should be doing. And so carbon pricing is, in many ways, a secret ingredient. It’s a killer ingredient that you add that sometimes you might not even know. You go to your favorite restaurant and you say, “That spice, I can’t really recognize, but man, it really makes the dish.” That’s the way I see carbon pricing operating. Especially important to think about renewable energy and other clean energy technologies. Derek Walker: It’s going to take a lot more than just a price on carbon. A price on carbon will guide investment and send a signal point, the signal in the right direction. But it’s not a substitute for really rapidly increasing our R&D funding at DOE, putting in place performance standards, having strong building codes that really drive electrification and a whole number of other things. So that’s really what it isn’t. It’s not a silver bullet. Jon Powers: Yeah, absolutely. Do you think because of the, maybe for lack of a better term, the lack of implementation of carbon pricing over the last 20 years, a lot of those other things have begun to … I mean, think about where the solar market is today. It’s actually a very mature. The wind market, we’re seeing offshore wind in a way we’ve never seen before, hopefully in this next decade. But a lot of that had to happen because carbon pricing wasn’t there, and so some of those other ingredients, using your language, we’re able to continue to move forward. And this is an accelerant to that. We’re going to bring the next layer of steroids into the game. Derek Walker: Yeah, I think you’re right. I think carbon pricing can be a boost, but it can also be an insurance policy, because we know that we need to reach a certain level of climate pollution in order to start turning the dial back on climate change. And you mentioned that there’s a couple of different primary ways of doing carbon pricing. One of them is really through taxing greenhouse gases, taxing carbon directly. I think that is well-established in economic literature. And in fact, it’s generally preferred by many, especially academic economists. And the other idea is really around emissions trading, which sets a limit, but gives polluters some flexibility within that limit, which declines every year to meet their obligations. And so those are two primary ways that have traditionally been thought of. But actually- Jon Powers: Can we go into those just a little bit? Derek Walker: Yeah, we sure can. Absolutely. Jon Powers: So when you look at the concept of a carbon tax or a lot of the terminology thrown around is cap and trade. People look at not understanding how all these things fit together. So for me, it’s really important that folks understand the different verticals here. So when you think about a carbon tax, how would that work? And walk us through maybe a case study of how that would be implemented. Derek Walker: Sure. So with the carbon tax, the government would essentially determine which sources of pollution the tax would apply to. You hear a lot from critics that the government is trying to tax every small farmer or take away your cows or take away your hamburgers. That is absolutely not what a carbon price is. There’s a strong inventory in the US of where pollution comes from, and regulators and policy makers would essentially decide where to put the tax and then what level to set it. Derek Walker: So most carbon taxes would start at a certain level and then increase over time. But at a baseline, it would increase at the rate of inflation, which is essentially keeping it flat. Increasingly what you see in proposals is that the price would also be accompanied by an adjustment feature if the pollution that that tax was supposed to address is not going down fast enough, based on the price that’s set, then there would be potentially an automatic adjustment mechanism. The tax would actually go up faster than the rate of inflation in order to account for the need to drive pollution down further. Derek Walker: But as soon as that carbon tax is implemented, then you suddenly have an incentive across the whole economy, but especially across the sectors that are covered by the tax that advantages low and zero carbon technologies and solutions. A lot of that, what you were alluding to, the growth of wind and solar and batteries and other things that have become fairly mature over the last decade in the absence of carbon pricing, would then have yet another signal that would benefit those technologies becoming even more accessible and more affordable to more customers. Jon Powers: So if you’re a coal producing plant. You’re producing a certain amount of carbon, you’re taxed based on that carbon. So the tax itself is being paid by the producer, correct? And then they’re going to most likely roll that cost into their cost of power. So really now coal, it’d be a more costly power into the marketplace? Am I thinking about that correctly? Derek Walker: That’s true. I mean, I think that one of the reasons why we’re in the situation we’re in now where wind and solar are so ascendant in the markets is because there’s already less demand for coal in the system. It hasn’t taken regulation to get us there. And so, yes, I think that any effective carbon price would further hasten the transition away from coal, and also from oil and gas, as they also are high polluting fuels. Jon Powers: that correctly that the tax itself is being paid by the producer? Derek Walker: It’s different for different sectors. So it’s different for the power sector versus the transportation sector. But in the power sector, it’s either paid by the utility that delivers that power to the end user, or it’s paid by the generator. One way or another, that cost is incorporated both at the wholesale and the retail level. Jon Powers: And how about on the transportation side? Derek Walker: On the transportation side, it’s usually paid by the owner of the fuel when it leaves the refinery. So, if it’s conventional transportation fuel, we say it’s at the refinery gate. That’s where it’s assessed based on the embodied carbon, the tons of embodied carbon. Jon Powers: Yeah. Interesting. Derek Walker: And that’s where I think I wanted to mention that the important feature in any carbon price, one important feature in any carbon price is ensuring that especially low and middle income consumers are made whole and that they don’t experience a disproportionate cost associated with the imposition of a carbon tax. And so there are ways to do that by making sure that there’s a dividend or bill rebate associated with the carbon price being put in place. Jon Powers: And then on the cap and trade, the emission trading system structure, how would that function in the marketplace? Derek Walker: So there would be an annual limit set on the amount of pollution that was allowable with a declining limit that got you … Let’s say that you wanted to get to 50% of a reduction by 2030 from current levels. You would basically say, “Okay, here are the sources to cut that are covered. Here’s the current allowable emissions. Divide those up into emissions allowances.” And that goes down every year. And in order to emit, in order to pollute, basically if you’re a covered source, you would have to surrender the number of allowances every year. And that that allowable amount goes down. Jon Powers: Who is establishing those allowances? Is it EPA? Is it DOE? Derek Walker: Well if it’s at a state level, so in California where they’ve had an emissions trading system now for over eight years, that’s the state government agency that regulates air pollution is responsible for running that program. And then in the Northeast where there’s a consortium of 10 states that are doing emissions trading system across the region, it’s actually a centralized organization, non-profit organization, that runs that, but it’s really driven by each individual state. Right. Jon Powers: And if it ends up getting implemented at a federal level, who do you see being the owner of that responsibility? Derek Walker: I think it’s most likely EPA, because EPA has a lot of the authorities delegated by Congress to do those things, and overseen by Congress. But the federal government could set up an independent entity to run that. I mean, I think there needs to be certain key criteria. There needs to be strong accountability. We need to be able to have both accurate and transparent and routine measurement and verification to ensure that the emissions are actually going down, and in some sectors, the measurement is easier than others. And there needs to be assurances that the market isn’t gamed and manipulated. There’s not a lot of evidence that that happens. A lot of the programs that have been put in place have really operated extremely smoothly. And even though it’s a common criticism or a common fear that market manipulation occurs, there’s been a high degree of confidence and satisfaction among the market participants in places like California and. Jon Powers: And then, I really want to dive into, okay, what’s the art of the possible here now, politically and what’s the state of play in terms of policy. But there’s another thing people hear a lot about in this space and it’s the social cost of carbon, which really doesn’t totally fall into those two verticals, but as a different approach to the market. If you’d just outline for folks, what is the social cost of carbon? And does it play into those verticals, or is it just a completely different policy approach? Derek Walker: Well, it plays into it. The social cost of carbon is essentially a measure of what the overall cost of pollution is on society holistic. And that would include things like the increase in healthcare costs, not only preventative care, but also treatment associated with things like asthma and heart disease that are increased because of pollution. It factors in to some degree, the costs of disaster preparedness and clean up associated with climate impacts. And it also, you always hear the discount rate argument, which is essentially how much does it cost now to avoid an impact on future generations? Derek Walker: And so the social cost of carbon also tries to take the long view and acknowledge that we’re talking about planetary systems and the impacts that occur over, in some cases, decades or hundreds of years. And so the social cost of carbon for that reason is a bit of a moral conundrum in the sense that you actually are forced to make certain decisions about future generations. And it has become a place where there’s a big argument between losing jobs and sacrificing economic growth in the near term versus protecting future generations and the possibility of a habitable planet. And so in that sense, it’s a ripe playing field for the old arguments, which are largely just proven that you have to choose between economic growth and the environmental protection. Jon Powers: And just to simplify, at least the way I’ve always thought about it, the first two buckets are focused on generation, right? Carbon tax. And this is the impact or this is the longterm. In traditional climate sense, this is adaptation. What are we dealing with long-term to adjust to this? Derek Walker: Yeah, it’s adaptation. It’s also, I think what it will highlight is that if you have a carbon price in place, it is unlikely that that price is going to come anywhere near the social cost of carbon, even a fairly conservative estimate. And so what it highlights is that to really tackle climate change and to provide the societal protections and benefits necessary to safeguard people in communities, you have to have a lot of other complimentary measures in place other than just a carbon price in order to really generate the level of investment in community and resilience and protection that you need. Jon Powers: Excellent. So let’s step into the current state of play. And I do want to talk about a federal more than at the state level. that do follow this. I think we’re at a possibly very monumental tipping point with the new administration that is very driven by moving some of these policies forward. We’ve got a significant infrastructure bill that’s on the table that has things that will support the clean energy industry, the renewable energy industry, address climate change, like really never before. And it’s an incredibly exciting time. And how in that current debate on the federal level, and I’m going to the politics of in a second. But on a policy level, what’s being put forward and what are some of the reasonable paths ahead to actually see this achieved? Derek Walker: Well, a lot of what’s being put forward now is how to spend money rather than how to raise money. And so the carbon price, though it’s really about tackling climate change, is often seen as how to raise money and how to protect the climate. So a lot of the current debate is focused strictly on the investment side. And to the extent that those investments are paid for, it’s corporate tax increases that have really been the central point of discussion, or at least the proposals from the Biden administration. Derek Walker: And so, there’s actually a split screen in some ways where you have members of Congress are still working on introducing carbon pricing bills. We’ve had several already in this Congress and a couple that are coming up here in the Spring. But that’s happening almost in a dissociated way from the conversations about how much do we need to inject into the economy right now to really stimulate economic recovery that fits into this Build Back Better frame, which I think is really critical. Derek Walker: And so, there is a possibility, and there’s been discussion, and there’s been some promotion of the idea that you might have a carbon price that could be put in place as a revenue generator through a budget reconciliation process. Whether that’s likely or not is unclear. What is clear- Jon Powers: If we were having this conversation a year from now, and you were going to put a wager down, where would you wager right now? Derek Walker: Yeah. I mean, a year from now, I think that we’re going to start seeing the fruits of these near term investments in infrastructure, investments in communities, investments in innovation, and in a sense, those outcomes will create political momentum for instituting a carbon price to move things along even faster and to really leverage the ingenuity of the private sector. I think that in the near term, it’s unlikely that a significant carbon price actually gets enacted, but these steps forward that are being put in place now and that are being proposed now, can be really important seeds for getting a carbon price enacted and making the case for a carbon price going forward. Jon Powers: Let’s talk about the politics of it for a second, not from a Republican Democrat perspective, but from an industry perspective. I mean, I think just about a month ago, the American Petroleum Institute, maybe the first time, came out and supported carbon pricing. I’m not sure the details of what they supported. But regardless, the fact that you’re having fossil fuel companies at some level being vocal and supportive of some of these solutions. They may be saying different things behind closed doors, but publicly are saying things they’ve never said before. How is that preparing the stage? How do you see that impacting the current debate and in the DC bubble? Derek Walker: Well, I think that businesses are realizing that they have to be able to tell a story about climate ambition within their own advocacy and within their own operations. And individual oil and gas companies have supported carbon pricing for a long time. But this is really the first time that API has walked forward with something. Derek Walker: And I think that what it shows is that, A, the corporations, even stalwart entities like API that are not seen as forward-leaning, are still ahead of where Congress is on this. Now, API would rather see a carbon price in exchange for virtually anything else. And so, in a sense, they’re saying that a carbon price is their silver bullet and what they would be willing to do, but it would be at the exclusion of all these other measures that we’ve been talking about. Derek Walker: But there are a lot of other companies beyond API that are coming out and saying that a price on carbon needs to be part of the solution set. And that’s extremely exciting. How much that changes the politics is a little bit unclear because I think that political polarization is still the governing force inside the Beltway right now. And so companies are trying to choose between where the public is and where politics is, which should be a little bit closer than it is right now. But it isn’t. And so, one thing that I think is- Jon Powers: Can I ask you a question on that, because there was a recent … Anthony went to Yale, put out some great … I don’t know if you’ve ever read his stuff out of the climate communications program there. Derek Walker: Really terrific stuff from them. Jon Powers: Yeah. Amazing, amazing. The public is much further ahead than really the Republican party. Let’s put it that way. Lindsay Graham, for instance, this week finally came out and acknowledged climate change was an issue, which is funny because 10 years ago, he almost co-sponsored the Senate climate bill. So looking at the listener to this podcast, what can they do to help change that? How do we push so that our voices are in that echo chamber in forcing the change that we need to happen here? Derek Walker: I think it’s about delivering a message that this is not about altruism. It’s not about some sort of a kinder, gentler approach to policy. It’s about pragmatic, how do we keep our economy going? How do we stay relevant? How do we not get our lunch and our dinner continually eaten by the EU and China who are heavily investing in the clean energy technologies, the future, and making significant commitments to climate action. Derek Walker: I think it’s about saying that there is no path to prosperity that is anything other than one that’s characterized by climate ambition. And delivering that message, providing cover for political figures who are increasingly coming out and talking about it. It being climate as something that can deliver economic value. Having investors and corporate leaders and innovators saying that, echoing that is vital, because it’s just not going to be possible for the White House and for Congress to keep their foot on the pedal if we don’t have folks with credibility in the market saying that same. Jon Powers: Yeah, no, I completely agree with you. And I think it’s just a separate voice to bring to the table. But I think a lot of people struggle on, “Okay, so to what do I do? Can I sign up to learn what are your talking points? To be part of a lobby day.” Where would you direct folks to be able to take action? Derek Walker: I think there are a lot of incredible organizations right now, like Series, and the We Mean Business Coalition, and even smaller ones. Derek Walker: So there’s a lot of coalitions, but there’s also, now, especially with Zoom visits to the Hill, members are taking a lot more meetings directly with their constituents and with stakeholders. And I think the business voice, bringing the business voice directly to members, to let them know privately that when they speak out publicly, there’s going to be an echo chamber of support behind them. And whether it’s through participation in pack activities, or through individual giving, or through advocacy support through things like op-eds or going on the radio. If business leaders and investors can say, “Look, we have your back. We have your back.” And it’s not, “We don’t have your back because we were going out on a limb. We have your back because guess what, your constituents are lined up behind you and we can guarantee that we’re going to be one of them that’s going to be lined up behind you publicly when you stick your neck out on this.” It’s not really about sticking your neck out. It’s about doing what voters and communities actually want. Jon Powers: Yeah, I agree. It’s not a monumental effort to get involved. I mean, full disclosure, Derek knows this, I’m on the board of Environmental Defense Fund Action. There’s places you can sign up to get the ability to link into your member. But it’s also just writing a local op-ed, and being here in Buffalo, the Buffalo News is way more impactful to your localized members than doing it in the Washington Post Derek Walker: Completely, Jon. Completely. That’s exactly right. Jon Powers: We need everyone to take action on this to drive change. And it may not happen this summer with the infrastructure bill, but I think pay close attention to carbon pricing. This is going to be on the table here over the next year. Derek, thank you so much for the time today and really helping walk me through, and others, this super complicated issue. Derek Walker: Thanks, Jon. I really appreciate it. And glad to talk with you anytime. Jon Powers: Yeah, absolutely. And I’ll ask you the same question I ask all my guests at the end. If you can go back to yourself in Baltimore and you could sit down before he got into politics and could grab a coffee or a beer with yourself, what piece of advice would you give yourself? Derek Walker: Always stay true to what you feel in your gut. I mean, I think that a lot of the political game involves posturing, and maneuvering, and it challenges you to really depart from the values that you hold dear. And I think that usually when I think about where I am today, I’ve returned to my values. But being involved in politics was a little bit of a challenge sometimes on that front. Jon Powers: Yeah, absolutely. Well, Derek, thanks so much. I really appreciate it. Derek Walker: Thank you. Jon Powers: And thanks to the team, and Environmental Defense Fund, and our producers Colleen Young and Carly Battin for putting this together. As always, you can get more episodes at cleancapital.com. I look forward to continuing the conversation. Thanks. Derek Walker: Thank you.