An interview with Mark Trexler: “Climate change poses the ultimate game theory problem…”

About Dr. Mark Trexler

Dr. Mark C. Trexler directs the Climatographers’ work on climate risk knowledge management. He was previously Director of Climate Risk for DNV based in Oslo, Norway, and prior to that directed Global Consulting Services for EcoSecurities. His work on climate change dates back to the World Resources Institute (1988-1991), and as President of Trexler Climate + Energy Services (TC+ES) from 1991 to 2007. TC+ES was the first consulting firm in the United States to specialize in business climate change risk management.

In addition to private-sector clients around the world, Mark has worked with national and international clients including The Nature Conservancy, the United Nations Development Programme, the U.S. Environmental Protection Agency, and the Global Environment Facility. 

Mark is widely published on the technical and policy issues relating to climate change mitigation and carbon markets, has served as a Lead Author for the Intergovernmental Panel on Climate Change (IPCC), and is a member of the editorial board of Mitigation and Adaptation Strategies, a leading climate journal. Mark’s graduate degrees are from UC Berkeley, he has spent almost 10 years living abroad, and speaks five languages.

The interview

Praveen Gupta: Why do you say “climate change is a “wicked” problem, and the last 30 years suggest we may not be able to solve it”?

Mark Trexler: “Wicked problems” constitute a class of problems that are particularly hard to solve, in part because they have no obvious or single so with respect to the ozone hole as an environmental problem, for example, all countries had to do was mandate the phasing out of a particular class of refrigeration chemicals, and then let the market figure out how to replace those chemicals with chemicals that would not damage the ozone layer. Observers often draw an analogy between phasing out CFCs and phasing out greenhouse gases or GHGs. But phasing out GHGs is far far more complicated than phasing out CFCs, and that’s part of what makes climate change a wicked problem. Just think about some of the characteristics of the problem:

• The countries that have primarily contributed to the problem are not the countries that will suffer the most from climate change.
• Our political systems are set up to tackle short-term problems, and politicians have very few incentives to tackle longer-term problems, particularly if they involve upfront costs or disruptions.
• Industrialized countries owe their prosperity to the use of fossil fuels, which constitute an almost perfect way of storing and transporting energy, and now we are saying those countries need to rapidly phase out their use of fossil fuels.
• There are many legitimate uncertainties when it comes to the future of climate change, and how we might effectively tackle climate change, and those uncertainties complicate public and policy decision-making.

When you combine these and many other aspects of the climate change problem, it starts to become quite difficult to figure out how to thread the needle in solving the problem. One could certainly say that technological innovation over time will lead to a low carbon economy, and that is most likely true and a process that is already underway, but it will not happen in time to avoid potentially catastrophic climate change. That is really the dilemma here.

To substantially accelerate the transition to a low carbon economy requires the kinds of policy decision-making and leadership that are politically very difficult to deliver, as we have seen particularly in the United States. But even internationally, climate change poses the ultimate game theory problem, in which countries have all sorts of incentives to act or not to act based on their perceived self-interest. And when you’re dealing with a very large international community that perceives very different self-interests, how do you generate the collective action that would tackle climate change in the relevant time frames, which at this point one can count in decades?

PG: Why must companies recognize climate change as a systemic risk? 

MT: There are two ways to think about the relationship of the business community to climate change. First, as a business risk and/or opportunity that companies should treat like they would any other business risk or opportunity. Second, as a societal problem that companies have an obligation to step in to try and solve, in effect proxying for the missing societal decision making.

In recent years, as the prospect of successful policymaking to tackle climate change has declined in many parts of the world, the idea that companies should step up and tackle the problem has grown. I personally don’t see how that can actually work, since at the end of the day companies are not responsible to the general public and to voters, they are responsible to shareholders and to stakeholders.

It is easy to say that we have transitioned from a shareholder business model to a more public-interest business model, but I’m skeptical. That doesn’t mean there is not a rationale for companies to try and tackle climate change. After all, climate change does pose risks for many companies. The problem is that companies tend to think over very short periods of time, while climate change is occurring over much longer periods of time.

One way of seeing that is that companies generally use an economic discount rate of 10 to 15%, which in effect means that anything happening more than a decade into the future just does not matter to business decision-making. But is there a category of climate risks that could manifest during periods of time that are relevant to business decision-making? The most obvious of these is systemic risk. For example, we could see a climate change-induced global food shock happen at any time, that throws the world into political turmoil and economic recession, creating enormous business disruptions and risks.

"And the only way to actually mitigate climate change reliably and quickly, assuming that’s possible, to begin with, is through public policy."

There are many potential systemic risk issues associated with climate change, from environmental migrants to global conflict. Systemic risks are not something that individual businesses are generally able to manage or hedge against on their own. At the end of the day, the only way to really manage the larger business risks of climate change is to actually mitigate climate change. And the only way to actually mitigate climate change reliably and quickly, assuming that’s possible to begin with, is through public policy. This means that companies should be giving a lot more attention to their policy footprint than they are today when they’re focusing almost entirely on their carbon footprint.

When I co-authored the first textbook on business climate risk in 2011, I suggested that successful climate risk management on the part of business should be thought of primarily in terms of businesses pushing for public policies like carbon pricing that would actually help solve the problem. However, policy advocacy is still not a significant part of most companies' approach to climate change. And this isn’t just the fault of companies; most observers and NGOs are telling companies that their primary focus should be to reduce their emissions, and to get to net zero, as if that was going to solve climate change. And if every company in the world did go to net zero it would obviously have a big impact on climate change. There is no prospect for translating individual company behaviors into that kind of collective outcome.

PG: What ought to be the key concerns regarding carbon pricing, carbon offsets and carbon markets?

MT: I got my start in the topic of climate change 35 years ago when I was hired by the World Resources Institute in Washington DC to work on the first carbon offset project. At the time, carbon offsets were a voluntary initiative, no one was really talking about mandatory climate policies and I think it’s safe to say that most people saw carbon offsets as an interim measure that encouraged companies to acknowledge climate change in the first place and to begin to take some steps against climate change that would not be overly costly.

Over time, however, and as public policy has failed to materialize, particularly in the United States, the idea of carbon markets and even voluntary carbon markets playing a critical role in tackling climate change has taken hold. In recent years, leading observers have suggested that the voluntary carbon market needs to expand 100-fold in order to substitute for public policy and successfully tackle climate change.

Carbon markets are one way to put a price on carbon emissions, which most economists would suggest is the best way to tackle climate change. In effect, you would be internalizing the externality that greenhouse gases are creating in terms of future damage. The question becomes what price do you put on carbon that would effectively internalize that externality? Most economic studies suggest, for example, that the social cost of carbon – a measure of the economic damage associated with emitting each ton of CO2 equivalent – is probably somewhere between $50 and $500. 

But efforts to put an official price on carbon at such a level have been politically very unpopular except in a few circumstances. Some Nordic countries have had a significant price on carbon for quite a few years, and very recently the European Emissions Trading System has seen its price of carbon rise up to something close to $100 a ton, but generally speaking, carbon is priced far below these levels, particularly in the case of market mechanisms like carbon offsets.

PG: So what challenge does that pose?

MT: In fact, the average price of a carbon offset being traded even today is probably less than $5, and in many cases, it’s less than two or three dollars. Now if one could reliably assume that for that little money, one could actually avoid the emission of a ton of CO2, or permanently remove an additional ton of CO2 from the atmosphere, then the gap between the price of carbon offsets and the social cost of carbon might not be a big problem. But the reality is that one cannot successfully avoid large-scale emissions for less than $5 per ton or successfully remove large quantities of CO2 from the atmosphere for less than $5 per ton.

"If you think of these as fake offsets, studies suggest that 80% of the market might be made-up of fake offsets."

Study after study has pointed out that a large fraction of carbon offsets do not play the role that would be expected of a successful carbon offset. They represent tons that would never have been emitted anyway, as well as tons that would have been removed from the atmosphere anyway, with or without the existence of a carbon market. If you think of these as fake offsets, studies suggest that 80% of the market might be made up of fake offsets. And fake offsets can be very inexpensively brought to market since you don’t actually have to do anything to create them. So that has really helped to depress the overall price of carbon offsets, which serves the interests of companies and organizations who are primarily looking for a low-cost alternative to reducing their emissions, but it does not serve the interests of climate change mitigation.

And that is a fundamental aspect of the problem that we’ve seen with carbon offsets. Carbon offsets are being used to advance two objectives. First, decreasing the costs of reducing a company’s emissions. And second, mitigating climate change. The problem is that you cannot maximize both of these objectives at the same time. The more you focus on reducing costs, the more the environmental integrity of the market is going to suffer.

The more you focus on environmental integrity, the more expensive the market is going to be for carbon offsets. At the end of the day, someone has to balance these two objectives and decide how we’re going to structure the market. Are we more concerned about cost effectiveness or about environmental integrity? The answer to that question has huge implications for how we design carbon offset markets. 

Recognizing that offset markets can never be perfect, the question becomes how imperfect should we allow them to be. Are we willing to accept 5% fake offsets, 10% fake offsets, 20% fake offsets? Surely the answer cannot be 80% fake offsets, as many studies continue to suggest is the actual case.

"And if offset markets continue to be dominated by fake offsets, then I think one can argue that they are little more than a distraction."

Redesigning the offset market to go from 80% fake offsets to 20% fake offsets would be difficult, and would involve substantial changes to what can qualify as a carbon offset. But there has been very little appetite within carbon offset markets and the carbon offset industry to undertake this kind of fundamental redesign that starts from the first principles of what we are expecting this market to accomplish. And if offset markets continue to be dominated by fake offsets, then I think one can argue that they are little more than a distraction.

I’m not sure I would say that they are a fig leaf for the fossil fuel industry. They are a fig leaf for society's overall inability to actually tackle climate change. The same challenges that have led to a lack of public policy in this area, are leading to a lack of environmental integrity in carbon offset markets. It is in effect the same problem.

PG: Can addressing the climate crisis be left to market mechanisms? 

MT: in recent years we do seem to have decided that markets are the only way to tackle problems. This is a relatively recent development and has been encouraged by decades of organized efforts to promote the role of the market over public policies and regulations for tackling social problems. There is no question that one could tackle the climate crisis through markets. For example, one could have designed an international agreement focused on coordinating the pricing of carbon around the world to achieve the necessary reductions in greenhouse gas emissions. One could impose a carbon tax that would have the result of radically reducing greenhouse gas emissions, either very quickly or over time.

The problem is that in designing most of the market mechanisms that are out there, with carbon offsets being an example, the rules get “gamed” in such a way that the market does not achieve its original objective. I made the point at a climate change conference of the parties (COP) many years ago in a talk that I was giving there, that policymakers always forget that there are 1000 very smart people in the room next door just waiting to figure out how to game whatever the rules are that the policymakers come up with. Unless policymakers very actively think about the problem of gaming and close the loopholes that would allow such gaming to occur, then the objectives of the policy are probably not going to be met.

"So to assume that we’ll simply use markets to tackle climate change is something that we should approach skeptically."

So the question really isn’t can we leave the climate crisis to market mechanisms? The question is, can we implement market mechanisms in a way that would successfully tackle the climate crisis? The answer so far has pretty clearly been a “no.” Which means that if we are going to radically accelerate a low carbon transition, it is going to require much more direct policy intervention and rules. Einstein has a great quote to the effect that you cannot solve a problem with the tools that led to the problem in the first place. And markets have certainly been a big contributing factor to climate change. So to assume that we’ll simply use markets to tackle climate change is something that we should approach skeptically.

PG: With the dissolution of the Net-Zero Insurance Alliance, what happens to the measurement and disclosure of GHG emissions associated with insurance underwriting portfolios?

MT: The Net-Zero Insurance Alliance is one of many business collaboratives with the stated goal of helping to tackle climate change. And many of these do focus on carbon footprints. For example, I recently read a white paper on how law firms should be calculating the carbon footprint of their legal advice. This is somewhat analogous to the idea of calculating the carbon footprint of an insurance underwriting portfolio.

You may have heard that last year the inventor of the doodle (labradoodle among many others) apologized to humanity for that invention. I sometimes wonder whether those of us originally involved with the concept of carbon footprinting should apologize to humanity for that invention. Because there is a far greater emphasis on carbon footprinting today than is warranted by the impact of such footprinting on carbon emissions at the corporate or global level. There is this idea that we “manage what we measure” and that, conversely, we don’t manage what we don’t measure. But that is an overly simplistic approach to tackling climate change.

If we were to put an effective price on carbon emissions, for example, companies would reduce their emissions without spending a great deal of time calculating those emissions. And they would focus on their Scope 1 emissions as opposed to their indirect Scope 2 emissions and the vastly more complicated Scope 3 emissions. It is not at all clear what all of the effort going into Scope 3 emissions calculations around the world is actually going to accomplish. And emissions are a relatively poor proxy for business risk, unlike the relationship of global emissions to global societal climate risk.

There will be no direct correlation between appropriate insurance premiums and the carbon footprints of the companies buying those policies. I would much rather see insurance companies communicate the topic of climate risk much more effectively to governments and to companies, with the goal of promoting the necessary public policies, than to focus on calculating the carbon footprint of their insurance portfolios. I’m not quite sure what the goal of such footprinting actually is, and how it is supposed to contribute to the larger goal of climate change mitigation.

PG: What’s your vision for the Climatographers?

MT: I’ve spent about 35 years working on climate change, and founded the first US-based climate risk advisory firm in 1991. Wearing different hats, I’ve worked with companies and agencies all over the world on all kinds of climate change issues. I founded the Climatographers in 2012 after being forced out of my last job as part of a merger and acquisition in which my new managers refused to accept me into the organization because I had the title Director of Climate Risk. At the time my wife and I considered what direction we wanted to go in our future work on climate change, and ended up focusing on the intersection between climate risk knowledge management and climate risk business advisory.

Our view is that information exists to influence almost anyone’s thinking on climate change, and in particular business decision-makers, but that people rarely see the information that would influence their decision-making. That’s why we started building more than a decade ago the Climate Web as a decision support tool for business learning and business risk management around climate change and climate risk. And we use that tool to help companies come to grips with climate risk assessment, climate risk disclosure, and much more.

So our vision for the Climatographers is the somewhat quixotic one of trying to turn the almost infinite deluge of climate-relevant information today into actionable knowledge that might actually get individuals and companies more focused on doing the things that would really matter for climate change.

PG: Wonderful talking to you, Mark. Many thanks for the fantastic insights. I wish you all the very best for the ongoing evangelizing.