One of the top climate economists in the world - Ottmar Edenhofer - on where he sees opportunities in the transition
Ottmar is director of the renowned climate science organization, the Potsdam Institute, a leading thinker on carbon pricing, and an advisor to the European Union and government leaders.
“I would say that as an economist — and in many careers at an early stage — it is important to act counter cyclically, not with the current cycle. Times change, politics change, and the climate damages will be very pronounced in the next few years. We will need many smart, innovative thinkers working on solutions.”
Ottmar Edenhofer is Director and Chief Economist of the Potsdam Institute for Climate Impact Research (PIK) and Professor for The Economics and Politics of Climate Change at the Technische Universität Berlin. He also serves as Chair of the European Scientific Advisory Board on Climate Change (ESABCC) which provides independent scientific advice on EU policy alignment with the 2021 European Climate Change Act and the EU's commitments under the Paris Agreement. Ottmar is a leading expert in the field of the economics of climate change, and his advice is sought on the ministerial and international political level. From 2008 to 2015, Ottmar served as Co-Chair of Working Group III of the Intergovernmental Panel on Climate Change (IPCC) and contributed heavily to the shaping of the Fifth Assessment Report on Climate Change Mitigation which provided the scientific basis for the Paris Agreement. Its analysis on the feasibility of the 2°C target was groundbreaking and provided essential information for decision makers.
Transition Leads profiles top scientists and thinkers — like Ottmar Edenhofer, as well as investors, entrepreneurs, policymakers and executives in the energy & decarbonization transitions who share their insights, personal stories and career advice for the new generation of leaders.
James Socas
We're here with Ottmar Edenhofer who is joining us from Potsdam, just outside Berlin, where he is director of the Potsdam Research Institute, one of the preeminent climate science organizations. Ottmar is one of the world's leading experts on climate, environmental and energy policies, with a particular focus on economic policy. Although he has a very high profile, one little known fact about him is that his office was formerly used by Albert Einstein from the days when the center functioned as an astrophysics observatory.
Ottmar Edenhofer
Yes, that’s true. It was the office of Einstein and also Karl Schwarzschild, who was also one of the great physicists and mathematicians.
James
Those are big shoes to fill, which you are doing quite ably. In addition, to his work at Potsdam, Ottmar is a professor, notable speaker and author, scientific advisor to the European Union, and was a counselor to the late Pope Francis on the environment. He has a very influential role in the world.
Ottmar, we like to start by asking people about where they grew up, were educated, and came to be interested in the field.
Ottmar
Yes, how I started. I was very interested as a child from the very beginning in biology. And I was also interested in economics and in philosophy. These are still my main topics, and of course, these are all related to math. I ended up studying economics and philosophy at university and have degrees in both areas, but at the same time I began thinking more about environmental issues.
I was convinced that you can only carefully consider environmental issues when you have a good economics background, because environmental issues have a lot to do with scarcities and how to manage scarce resources — our limited natural resources and the boundaries and limits of the natural world. I always thought both aspects belonged together, and I had an idea that their convergence would become a more critical area.
When I was growing up, it was not climate at the top of the agenda of major issues — it was nuclear power. It was still the Cold War period in Europe with the debates going on about nuclear deterrence and related topics. I was quite interested in these questions, but then I read a book which for the first time confronted me with the idea of global warming. And I got very interested in the topic, started to do my own readings in physics, learned thermodynamics, and so on. I became convinced that the climate issue might be the critical issue of our time.
But I also thought we were in a very bizarre situation. On the one hand, I thought what could be so wrong when we are heating our homes, driving to work, and doing what really are everyday things? Yet these things are also very damaging. And, of course, the conclusion that I reached back then — and which is now commonly understood — was that when we burn oil, coal, and gas, and we cut down trees around the globe, we are changing the radiation balance on Earth.
And that leads to thinking through the next question: what is the problem if the global mean temperature is rising? Some would say that temperature has always been variable. Why should we now be concerned? And then I started to study the topics related to that question and understood the extent of the unintended consequences to our natural systems and the risks of tipping points that move beyond our control. And that journey led me to start my career in 2000 at the Potsdam Institute, and I was also able to work with the IPCC and other organizations on these same topics.
James
That is a fascinating intellectual journey, and one that others may have followed as they went more deeply into climate questions. Can you share for those less familiar with the Potsdam Institute what its mission is and what role it plays?
Ottmar
Yes, the Potsdam Institute was founded in 1992 as an idea of the German chancellor at the time, Helmut Kohl, who wanted to present something at the Rio Conference [the first United Nations Conference on Environment and Development, a historic meeting that produced the United Nations Framework Convention on Climate Change]. And as we know, when politicians have no idea what to do, they tend to say, “Okay, let's found an institute.” And so, Potsdam was started to focus on fundamental issues of climate and climate science with the role of helping policymakers.
The most fundamental thing we researched at first was the question of whether burning fossil fuels increases the global mean temperature. That may sound surprising, but at the time this linkage was not as clearly accepted as today. Of course, the fundamental physical effect — the greenhouse gas effect — was clear, but it was not certain that it was burning fossil fuels that was causing the problem. So that question very much dominated our work at the beginning, with a strong focus on climate physics.
And then increasingly the Institute began to study the impacts of climate change. There was a huge research program on the Thermohaline circulation [the ocean’s “conveyor belt" which cycles warm water and cold water, creating effects like the Gulf Stream], which we are now finding is at real risk of breaking down sooner than expected due to the changes in water temperatures and salt content.
I was one of the first economists and social scientists at the Institute, and when I got there, people asked, “Why in the world do we need an economist to understand the climate system?” But then it became clear that if you want to solve the climate problem, you must reduce emissions, which is not a science problem but an economic problem. A supply and demand problem.
In my first project at the Institute, I and a colleague started to think about the supply side — how much fossil fuel capacity do we have underground, and could a scarcity of fossil fuels solve the climate problem? Meaning do fossil fuels become so scarce that the price for coal, oil and gas keeps increasing, with the result that market forces get rid of the problem? But we soon realized there is an enormous amount of fossil fuels underground, much more than we can store in the atmosphere.
This was the starting point to connect the international resource markets for oil, coal, gas, including the market for wood, to our work. And people began to see that it might, after all, be useful to have an economist at the Institute.
James
We’ll come back to the linkages between economics and climate that you have noted. Let me ask you about the something you said to me a year ago that Europe was on track to hit its policy goal of a 55% reduction in emissions [from 1990 levels] by 2030. I read the latest projection is a 54% reduction, so right on target, which is really remarkable.
You have been very involved in these policies, to what do you attribute the EU’s success?
Ottmar
A very interesting question. I would argue that the most important contribution of Europe was the implementation of an emission trading scheme. And this is a very nice story, because it was an idea we imported from the US, and one of the most forceful proponents of it was my friend, Rob Stavins from Harvard University.
I can tell you most environmentalists were not very keen on emissions trading at first. They thought there was something deeply wrong with the idea of trading pollution. The environmentalists preferred to promote renewables. And indeed, in Germany, we promoted renewables to a large extent through a subsidies scheme and other policies.
But interestingly enough, we found that when you bring renewables into the system in that way, it does not lead to your goal of emissions reduction. That seems counter-intuitive, but the economic explanation is that when renewables come in, it forces fossil fuels to be cheaper to remain competitive. And so the relatively more expensive natural gas fired plants get used less, and the less expensive coal fired plants get used more. And as we know burning coal is more emissions-intensive than gas. So after an enormous amount of money was spent, emissions did not decline.
Some colleagues of mine did an investigation into the question of what was the reason some countries were able to create a structural break in emissions? How did these countries achieve a decline? The paper was published in Science, and it showed that out of 1,500 policy packages, only 63 were successful. And all of them that were successful had one important component, and this was carbon pricing. So, it’s fair to say it's not just anecdotal evidence; it's overwhelming evidence that carbon pricing is important to success. But carbon pricing is very difficult politically.
In Europe, emissions trading was the way to achieve an implicit carbon price for a quite simple reason. Although many people in the 1990s advocated for a carbon tax in Europe, this was and is not practical under the European Constitution. To establish a tax without a veto, you need 100% acceptance. So not politically possible. Therefore, the only way to establish successful economic pressure in Europe was through an emission trading scheme.
Of course it's not the only thing that was done. There have also been new standards in the car industry and other sectors. It is always a package of policies, but emissions trading was critical.
James
If you put yourself in the shoes of a young economist or young professional who aspires to be like you, to do the work you are doing, it seems the convergence of policy and economics and climate is a very rich vein right now. There's a lot of work to be done, a lot of policy innovation required. I know you have said that carbon is the ultimate externality in the system, but it is very hard to price it. It's our biggest market failure.
What specific areas do you see open on the policy or economics side for young people to be thinking about?
Ottmar
I will tell you what I think is one of the most important things we need to do, and this was reinforced in my experience as co-chair of Working Group III in the IPCC [the Working Group III scientists are focused on climate change mitigation, assessing methods for reducing greenhouse gas emissions, and removing greenhouse gases from the atmosphere].
We understand the climate problem. We know that deforestation and burning of fossil fuels increases global mean temperature, which in turn leads to dramatic impact in terms of loss of property, loss of resources, health effects, and loss of life. But we need agreement on a way of translating these impacts into economic damages and to then calculate the “social cost of carbon” based on the best climate econometrics [the social cost of carbon is a monetary metric for the damage caused by the emission of an additional tonne of CO2].
It is a very fascinating area and very difficult area because for the solution we need a common understanding of the damages, and those damages span timeframes, and span geographies and national borders. So, calculating the social cost of carbon and getting consensus is an area where someone can make a massive contribution.
The second area, I would say, is thinking carefully about policy instruments. Really asking the hard questions and doing the analysis of what worked and what did not work. Otherwise, policymakers cannot implement the right measures. So, for me that is also a rich area for someone to focus on.
And then there are two other areas which are extremely important. The first is net negative emissions. If you look at our current course, we are on a trajectory where we will cross the 1.5°C limit for decades. If we want to bend back the temperature curve at some stage, we need net negative emissions, which means we need technologies which absorb CO2 from the atmosphere. What kind of policy instruments do we need to encourage that work and that innovation?
We have now a research project at the Potsdam Institute about how we can transform emission trading schemes to finance net negative emissions. If you think about it, net negative emissions have a very peculiar economic characteristic. When someone emits CO2 as we have been discussing, they can be subject to a carbon price or penalty in some form as there is a cost to that emission — it is the “polluter pays” principle which we have in other areas.
And so it follows by the same thinking that if you take CO2 out of the atmosphere through an engineered process or a natural carbon sink, then you should receive a reward for doing so. That is logical. But who should pay that reward? Given the state of budget deficits, it is unlikely to see finance ministers pay, even though what is being done is for the common good. So, we have to think about a market mechanism. Perhaps this can be done through the emission trading schemes. There is lots of work that has been done on how to impose regulations, prices, standards on emissions, but we have very little insight on these net negative emissions questions.
And the final area, related to where we are today, is that we need to be examining geo-engineering options, like solar radiation management, which should be discussed carefully, not only from an ethical point of view but also from an economic point of view.
Last year I was invited to give the annual Thunen Lecture to the German Economics Association, which is an event where an economist is asked to highlight a critical topic in the field. I talked about carbon dioxide removal — or "planetary waste management" — and how it is both essential to meeting climate goals and how it is also becoming much more cost effective and therefore practical. Most economists, to be honest, are a little bit skeptical about climate economics, but I received a lot of support for my remarks.
Rob Griffen
Ottmar, you're at Potsdam and able to think fairly freely given your mandate. A lot of young economists or younger people engaged in these topics will either be working at corporations or advising companies as consultants, and there are many businesses who may not want to see a price on carbon add to their costs for obvious reasons. They don’t want to “internalize their externalities.”
If you were advising a young economist or young businessperson, how would you tell them to navigate that challenge?
Ottmar
It is a good question, but I would say that in my experience there are many companies, many sectors which are very interested in these topics. Many have no choice but to be interested as part of their business. I know that you are in a specific political situation right now in the United States, but irrespective of the outcome of any election, climate change will continue. Politicians might have a point of view or change policies, but they cannot stop the functioning of the laws of thermodynamics.
What does that mean for a younger person interested in economics? It means that, particularly the banking, reinsurance, and insurance sectors, have an inherent interest in these issues. These are also sectors that for young economists who don't want to become academics, they are very natural places to work. Also think about all the multilateral banks around the globe; they have established departments for climate economics. So yes, some of this work will be changed in the short term because of the current right wing, populist movement around Europe and in the United States. But nevertheless, climate effects will continue and will need to be addressed.
Let me give you an example in Europe. We have now a parliament which is very much dominated by the conservative and right-wing parties, and all those politicians believe that they are supported by the farmers. And farmers — or specifically the political associations representing farm interests — have historically had an anti-climate attitude. But now in Europe, farmers are under enormous water stress. They are being forced to adapt to climate change. And when they have to adapt to climate change, who do they call? They ask climate scientists and economists, “What should we do?”
I would also say that as an economist — and in many careers at an early stage — it is important to act counter cyclically, not with the current cycle. Times change, politics change, and the climate damages will be very pronounced in the next few years. We will need many smart, innovative thinkers working on solutions.
Rob
That’s great advice “to skate to where the puck is headed.” To follow up on the earlier question of cutting-edge areas, where do you see opportunities for people to focus given the growing role of AI?
Ottmar
An important question we will have to deal with is how the growing role of AI affects resource consumption. Many economists think we will see a dramatic increase in labor productivity through AI. But what will happen when the growth rate of energy and resource productivity will be lower than the growth rate of labor productivity? In that case, energy and resource consumption could increase substantially. Artificial intelligence could push the economy towards its resource and energy constraints with increasing energy and resource prices. This could lead to a paradoxical result: despite rapid technological change, an AI-driven economy could become even more dependent on energy, land and nature. This is a very interesting question for someone to research.
James
Ottmar, let me ask you a question that may seem to put you on the spot. You've commented, as have others, that there's a finite budget of how much more CO2 can go into the atmosphere to stay within the agreed limits, and as we continue to see high levels of emissions, we will cross over that budget, and the implications will be felt in warming and other consequent effects. It is physics, as you have noted, not politics.
How optimistic are you that we will address these challenges?
Ottmar
There is an expression that optimism is something for ill-informed people. So I don’t like to be characterized as an optimist. But I have hope, and hope is a different thing than optimism, because if you have hope, then you can think about a different way forward. You see a different potential within today’s reality, and this is hope. If you have no hope, then you believe we are doomed to take the current reality as something which will be sustained forever, and I don’t share that grim outlook.
That said, I believe that the international conferences are in a deep crisis, because in the end while many things are negotiated, they are not implemented. And of course, our emissions levels keep rising. For example, we have seen a recent focus on announcements of huge amounts of money into what is called “climate finance.” But while people agreed on a large number — and the “rich” countries promised something to the “poor” countries — there was no plan or firm commitment on how to raise the money.
As an alternative, we could try to think a little bit differently. What is a way to raise the money we need and to start in a more modest way that could grow? We could think of a coalition of countries — and start with a small coalition like the European Union — where we put a simple price tag on our oil and gas imports. Europe would benefit from this, because that price mechanism would serve to reduce our oil and gas inputs where we are highly dependent on resources outside of our control. This lower demand would lead to a lower market price for gas and oil around the world. Now other countries also benefit. And what if Europe partnered with China on this initiative? It's not completely unrealistic as China also is very reliant on imported fossil fuels.
Then the question is, what do the large exporters of oil and gas do? Will they start flooding the market? We studied that question and believe it's very unlikely. So, the effect is a small decrease in emissions. And even apart from climate change, there is an increase in energy security. With this money Europe — or Europe and China acting together — could, for example, help to finance the coal phase out in Vietnam or could finance carbon dioxide removal in Africa or Latin America.
I'm not arguing that this is something which solves the challenges of staying within the 1.5°C or 2°C limit, but it would be a starting point. And as you know, if you want to become a professional in any career — professional athlete, scientist, politician — you need training; you need to go step by step. And I think this could be a starting point that could be initiated at COP30 in Brazil. If three or four countries would announce such a thing, this would be a tangible success.
James
That's a very interesting idea that I hope we will be reading about in a few months. Rob, should we finish up?
Rob
Sure. We have two questions that we ask at the end. The first one may be difficult given your broad range, but was there anybody who was particularly influential in your thinking, as a mentor, as somebody who wrote books, somebody who you learned a lot from?
Ottmar
You might be surprised that it was a German Jesuit who had a very strong influence on me — Oswald Nell-Breuning — who I met when he was 90. He was instrumental in Germany in establishing our social security system, designing a scheme where workers have the means not only for a wage increase, but also can participate in the wealth and capital accumulation of the place they work. He had seen the challenges in Europe of our labor problems, and he was extremely interested in designing concrete reform proposals.
I should also mention Elinor Ostrom, the first woman who received the Nobel Prize in economics. She influenced me because she was focused on the local commons, the shared resources of a community. And there were other influences like James Mirrlees with his optimal taxation theory and welfare economics, and Bill Nordhaus. And, of course, also, I benefited a lot from conversations with Nick Stern, Martin Weitzman and also Rob Stavins.
James
That is an impressive group of the top thinkers in climate economics!
Our last question is in the spirit of practical advice. Are there any words of wisdom you would give to a young person coming out of school or early in their careers as a key to success? Or, if you prefer, is there a book along those lines that you would recommend?
Ottmar
I have to say there is one book that stands out written by Samuel Bowles, a book on microeconomics for undergraduates, and a similar one for the graduate level.
When I first studied economics, I went to one of my professors and I asked him if he could tell me the implications of microeconomics for policy making. What can a politician learn from microeconomics in carrying out real world policy? And the professor said to me, “If you are interested in economic policy, you should not study microeconomics.”
And so, I took another course where a professor, a typical old German professor, lectured on economic policy and produced all sorts of recommendations. And one day I asked him, can you tell me the theoretical underpinning of your policy advice? And he looked at me and said, "What do you mean by theoretical underpinnings?” This was deeply frustrating. The good thing in the books by Samuel Bowles is that he trains people to think really hard about the theory that supports a policy recommendation, theory which resonates with the real world.
James
Ottmar, that is a terrific way to circle back to your career of sitting at the intersection of economics and policy and trying to bring about tangible, positive change in the world as it exists.
Rob
Yes, and thank you for speaking with us and for your work and the great work of the Potsdam Institute.
Ottmar
Good to have this conversation with you.
EDITED FOR LENGTH AND CLARITY
photo credit: PIK/Ausserhofer