Stanford Energy Seminar: Pricing Carbon Emissions
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Bob Litterman, Chairman of the Risk Committee and a founding partner, Kepos Capital LP
Monday, October 13, 2014 | 04:15 PM – 05:15 PM | | Free and Open to All
The appropriate time path for emissions prices, which economists call the “Social Cost of Carbon,” should be thought of as the solution to an optimal control problem. The price of carbon is the brake that society uses to accelerate or decelerate the rate of usage of the atmosphere's unknown capacity to safely absorb emissions. Right now the incentive to reduce emissions is strongly negative, i.e. governments around the world heavily subsidize the creation of emissions. Potential climate-risk tail events, together with societal risk aversion (which is best observed in the equity risk premium) and expectations of technological change determine the appropriate time path for emissions prices. Societal understanding of this issue is at a tipping point. As expectations of incentives being created sooner and higher increase, the valuations of stranded assets, such as coal and coal fired power plants will decline. But understanding how forward expectations of carbon emission prices drive current valuations is complex. It is also important to understand that it is not the act of pricing emissions that destroys the value of these assets – it is the economic externality that has already destroyed their value. What the recognition of that externality will do is to reduce their current false valuations. Exxon and Shell have, in their public discussion of stranded assets, shown that they do not understand this issue. Paraphrasing Upton Sinclair, “It is difficult to get a company to understand something, when the valuation of its assets depends on it not understanding it.”
Brief Bio:
Bob Litterman is the Chairman of the Risk Committee and a founding partner of Kepos Capital, a New York City based systematic global macro firm. Prior to joining Kepos Capital in 2010, Bob enjoyed a 23-year career at Goldman, Sachs & Co., where he served in research, risk management, investments and thought leadership roles. He oversaw the Quantitative Investment Strategies Group in the Asset Management division. While at Goldman, Bob also spent six years as one of three external advisors to Singapore’s Government Investment Corporation (GIC). Bob was named a partner of Goldman Sachs in 1994 and became head of the firm-wide risk function; prior to that role, he was co-head of the Fixed Income Research and Model Development Group with Fischer Black. Bob serves on a number of boards, including Commonfund, where he was elected Chair in 2014, Resources For the Future, Robert Wood Johnson Foundation, the Sloan Foundation, and World Wildlife Fund. Bob earned a Ph.D. in Economics from the University of Minnesota and a B.S. in Human Biology from Stanford University.
What Is the Right Price for Carbon Emissions? Cato Institute, Summer 2013, Bob Litterman
The Other Reason for Divesting, Ensia | Environmental Magazine, November 2013, Bob Litterman
An Analysis of the Dismal Theorem, Yale University, Cowles Foundation Discussion paper, January 2009, William D. Nordhaus
Energy and Carbon — Managing the Risks, ExxonMobil
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