Noura's MusingsThis space allows me to engage in meaningful conversations while expanding my understanding of the world. The themes I explore are:
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This post is based on an assignment we had to submit for API 165, Energy and Environmental Economics and Policy taught by Joe Aldy, on evaluating the Social Cost of Carbon (SCC) and Target-Consistent Pricing (TCP).
As the world continues to find ways for addressing the challenges of climate change, the debate around carbon pricing intensifies. Two key approaches dominate discussions: the Social Cost of Carbon (SCC) and Target-Consistent Pricing (TCP). Both frameworks offer valuable insights, but their underlying assumptions, methodologies, and conclusions diverge in important ways. In this post, I explore these two approaches, uncover their strengths and limitations, and suggest how we can move forward to design more effective climate policies. What Is the Social Cost of Carbon? The Social Cost of Carbon (SCC) is a tool used by economists to put a price on the damages caused by emitting one additional ton of CO2 into the atmosphere. It essentially tells us how much climate change is going to cost society in terms of things like reduced agricultural productivity, increased mortality rates, and the destruction of property due to extreme weather events. Governments and policymakers use SCC to evaluate the costs and benefits of climate policies. Integrated Assessment Models (IAMs), such as DICE, FUND, and PAGE, are the main tools for calculating SCC. These models try to balance the costs of reducing emissions with the economic damage caused by climate change (Pizer et al., 2014). While widely used, these models are often criticized for oversimplifying the complexities of climate change, particularly when it comes to dealing with uncertainty and catastrophic risks (Stern et al., 2022). The Problem with Relying Solely on SCC Despite its widespread use, the SCC approach has its shortcomings. One of the main criticisms is that it relies on "discount rates," which help economists figure out how much future climate damage is worth today. A high discount rate lowers the present value of future damages, which can justify weaker climate policies. On the other hand, a low discount rate places a higher value on future generations' well-being, supporting stronger action (Aldy et al., 2021). The debate around discount rates reflects deeper ethical questions about how we value the future and what kind of world we want to leave behind. Another issue with SCC is the challenge of accounting for deep uncertainty. Climate change involves not only risks we can predict but also extreme events we can't foresee or quantify, such as catastrophic sea-level rise or the collapse of ecosystems. These "fat-tail" risks aren't adequately captured by traditional IAMs, which focus on expected utility and average outcomes (Stern et al., 2022). This means that SCC, in many cases, may underestimate the true risks of climate change. A New Approach: Target-Consistent Pricing (TCP) TCP, on the other hand, offers a more goal-oriented solution. Instead of trying to calculate the economic cost of each ton of CO2, TCP sets carbon prices based on what is needed to achieve a specific climate goal, such as net-zero emissions by 2050. Kaufman et al. (2020) propose the Near-Term to Net Zero (NT2NZ) approach, a specific type of TCP, which focuses on setting carbon prices that reflect the cost of staying within the near-term trajectory required to meet long-term climate targets. This approach is aligned with international agreements like the Paris Agreement, which seeks to limit global temperature increases to 1.5–2°C. TCP has the advantage of providing policymakers with clearer, actionable guidance. Instead of dealing with the complexities of estimating long-term climate damages (which are subject to great uncertainty), TCP focuses on the immediate policy actions needed to meet specific climate goals. SCC vs. TCP: Where Do They Diverge? While both SCC and TCP aim to guide climate action, their methods and philosophies diverge significantly.
Bridging the Gap: A New Way Forward Both SCC and TCP have their strengths and weaknesses. SCC gives us a way to measure the economic impacts of climate change, but it’s riddled with uncertainties and ethical dilemmas. TCP is more pragmatic, offering a clear path to meeting climate goals, but it lacks the rigorous theoretical foundation of SCC. To truly advance climate policy, we need to bridge the gap between these two approaches. One way forward is to integrate the best aspects of both: using SCC to inform the broader economic context while adopting the NT2NZ approach to set actionable, near-term targets. This hybrid framework could provide a more comprehensive roadmap for policymakers, balancing economic efficiency with the urgent need to tackle climate change head-on. Conclusion As we refine the ways we address climate change, it’s clear that no single approach can solve the problem. The Social Cost of Carbon offers valuable insights into the long-term economic damages of climate change, while Target-Consistent Pricing gives us a practical path forward. By combining these approaches, we can design more effective policies that not only optimize economic outcomes but also ensure we meet critical climate goals. This is the challenge of our time: balancing the costs of today with the risks of tomorrow. And as we continue to refine these models, we must remember that the future depends on the decisions we make now. References
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Saudi Arabia's Strategic Role in Global Energy: Lessons from OPEC Simulation and Real-World Dynamics28/9/2024  Source: DALL·E AI (2024) Aldy, J. E. Course API 165: Energy and Environmental Economics and Policy. Harvard Kennedy School, Fall 2024. Team Saudi Arabia, Planet Alpha: Aashis Luitel, Lydia Glock, Noura Mansouri, Ruben Figueroa As part of the course API 165 "Energy and Environmental Economics and Policy" by Joe Aldy at Harvard Kennedy School, we were asked to run a two-week OPEC simulation. This exercise allowed us to step into the shoes of policymakers within the global oil cartel and grapple with the intricate challenges of managing oil supply, pricing, and market stability. The simulation offered a hands-on approach to understanding how OPEC nations collaborate—or defect—within the cartel, and how these decisions have far-reaching consequences for global energy markets. It closely mirrored real-life scenarios, particularly the role of Saudi Arabia as a key stabilizer within OPEC and in global oil markets more broadly. Participating in the OPEC simulation as part of Saudi Arabia’s delegation on Planet Alpha offered an exceptional learning experience, especially in navigating the complexities of cartel behavior, oil market dynamics, and strategic decision-making. The simulation allowed us to grapple with the challenges of coordinating production quotas among OPEC members and balancing short-term profitability with long-term sustainability. Here, I’ll reflect on the experience and the economic lessons learned along the way. Saudi Arabia's Role: Leading the Formation of an OPEC Cartel Saudi Arabia assumed a leadership position right from the beginning. Our strategy was simple yet bold: we proposed the formation of an OPEC cartel, inviting other key oil-producing countries to join forces in controlling production and stabilizing prices. Our objective was clear—to maximize profits for all member countries while safeguarding Saudi Arabia’s interests, given our significant oil reserves. One of the key dynamics we introduced was the creation of a structured approach for setting production quotas. Each country’s oil reserves and production costs were taken into account to distribute quotas in a way that aligned with their market share. By advocating for a strong cartel, we hoped to control global oil output, prevent market oversupply, and keep prices high enough to secure profitability for all. A Cooperative Approach, Initially During the early stages, we prioritized cooperation, closely monitoring other countries’ production levels. By building trust, we aimed to maintain alignment on quotas and communicate openly about any necessary adjustments. Coordination was crucial, and Saudi Arabia facilitated this by creating a WhatsApp group to ensure real-time communication among OPEC members. Through this group, we could quickly address any concerns and adjust strategies when needed. Our initial strategy included limiting production to maintain a price of at least $80 per barrel, a price guaranteed by the final stages of the simulation. This was inspired by several economic models we discussed during the OPEC meetings, particularly the work of Robert Pindyck, who explored the benefits of cartelization for resource-rich countries (See Appendix 1) . Shifting Strategies: From Collusion to Retaliation Despite our efforts to build trust and ensure compliance, some countries deviated from the agreed-upon quotas. Non-compliance among members began undermining the collective effort. To address this, Saudi Arabia issued a warning: if the quotas were violated again, we would retaliate by flooding the market with oil, driving down prices to punish those who overproduced. This threat proved effective in periods 2 and 3, as it led to an increase in our per-barrel revenue. However, coordination remained imperfect, and by period 4, further defection forced us to follow through on our threat. We flooded the market, contributing to a significant drop in oil prices. Our intention was to make it clear that defection would be costly for everyone involved. However, this strategy only led to greater defections from other countries, forcing us to rethink our approach. Maximizing Individual Profits Amidst Defection By period 5, it became clear that long-term cooperation was no longer viable. Saudi Arabia shifted focus to maximizing individual profits, overproducing in order to benefit from our low marginal costs, even if it meant accepting lower prices. Our revised strategy aimed to produce as much as possible while keeping prices above a critical threshold. In periods 5 and 6, this approach worked well, with relatively favorable prices and high production volumes ensuring substantial returns. However, when prices plummeted in period 7, we cut back production slightly to prevent losses. From there, we maintained a steady output level until the final period, prioritizing profitability despite fluctuating market conditions. Economic Models and Strategic Decision-Making Throughout the simulation, several economic models and theories guided our strategic decisions. Inspired by Pindyck’s work on the cartelization of exhaustible resources, we recognized that controlling production and ensuring compliance were key to maximizing long-term profits. Pindyck’s insights into the benefits of cartel behavior—such as controlling supply to maintain high prices—were evident in our initial strategy of quota enforcement (See Appendix 1). However, the simulation also highlighted the difficulty of sustaining long-term cooperation in the face of individual incentives to defect. This tension between collective action and individual profit-seeking became a central challenge, forcing us to continuously adapt our strategy in response to other countries’ behavior (See Appendix 2). Key Lessons Learned
Insights on OPEC Dynamics and Saudi Arabia's Role in Global Energy Stability In the simulation, the role of Saudi Arabia stood out as pivotal, echoing its real-world significance in stabilizing global oil supply, particularly in times of crisis. Saudi Arabia’s ability to quickly increase or cut oil production gives it considerable leverage to influence global oil prices. This aspect became even more pronounced during moments of defection, when member countries chose short-term gains over collective stability. Saudi Arabia, with the lowest marginal cost of production at $6 per barrel, responded by threatening to flood the market with oil—a tactic it has employed historically, as seen during the 2014-2016 oil price war. The 70% drop in oil prices from their 2014 highs to an average of $47 per barrel has heavily impacted oil producers. The price slump is due to factors such as an oil glut, lower demand, and the rise of U.S. shale extraction. The simulation also highlighted the tension between short-term energy security and long-term sustainability, although the climate and environment goals were not factored into the simulation, in the real-world, such a challenge exists and adds complexity to energy geopolitics. The Russia-Ukraine conflict has highlighted the growing priority of energy security, particularly in Europe, where countries are relying more on coal to replace Russian oil and gas, contradicting COP26 commitments (Mansouri, 2022). Saudi Arabia plays a dual role in this dynamic: on one hand, acting as a “safety valve” during energy crises by increasing oil production and continuing investments in oil, while on the other hand, reallocating its oil wealth to advance Vision 2030, which aims to diversify energy sources and reduce dependence on fossil fuels. Further, geopolitical dynamics continue shaping the global energy landscape. As alliances in the Middle East shift—partly due to the waning influence of the United States and the growing presence of Russia and China—Saudi Arabia has strategically positioned itself through multi-vector partnerships. The alliance between Saudi Arabia and Russia has significantly strengthened their influence over global oil markets, ensuring that they can collectively stabilize prices and mitigate volatility, even during periods of geopolitical upheaval like the Ukraine conflict. The economic impact of these decisions was also a crucial learning point. Saudi Arabia’s ability to capitalize on high oil prices, as it did during the price surge to over $130 per barrel in early 2022, strengthened its GDP growth and reinforced its economic dominance. The simulation emphasized how oil revenues remain critical for countries like Saudi Arabia, but also pointed to the importance of forward-looking strategies, especially in a world gradually shifting toward sustainable energy. The introduction of a new technology at $80 per barrel in the later stages of the simulation prompted difficult decisions about maintaining short-term oil revenues versus the sustainability of its oil reserves. In real life, this informs a nuanced strategy to delicately balance between carbon management technologies that would become readily accessible in the future and the rising marginal cost of depleting reserves. The simulation also touched upon the complexities of cartel behavior. Each member country weighed its self-interest against collective outcomes, leading to cycles of cooperation and defection. As highlighted by Pindyck's (1978) analysis on producer gains from cartelization, cartel members often find short-term temptations difficult to resist. However, Saudi Arabia's capacity to reestablish discipline within OPEC highlighted the country's central role as a stabilizer in global oil markets. By threatening to unleash its full production capacity, Saudi Arabia could realign defection-prone members, ultimately preserving the group's collective interests. In the article Almutairi et al. (2021) the significant role that OPEC’s management of spare capacity was analyzed, emphasizing its role in stabilizing oil prices and supporting the global economy. The authors examine how OPEC's reserve capacity has historically helped reduce oil price volatility, particularly during market events from 2001 to 2020. OPEC’s ability to maintain spare capacity as a buffer against supply and demand shocks creates substantial economic benefits, lowering the monthly volatility of oil prices from 17% to 11% over the period studied. The paper estimates that OPEC’s spare capacity adds an annual global economic value of $193.1 billion, largely by preventing severe supply disruptions and minimizing GDP losses. The paper examines three distinct subperiods—commodity boom (2001-2014), market-share campaign (2014-2016), and OPEC+ (2017-2020)—and shows that OPEC's spare capacity was particularly effective during the commodity boom and OPEC+ periods in reducing price fluctuations. However, during the market-share campaign, OPEC focused on protecting market share rather than stabilizing prices, which made the use of spare capacity less impactful. The rise of U.S. shale oil, known for being more price-responsive, is also discussed as a factor that might reduce OPEC's influence on global oil prices. However, the study concludes that, while shale oil helps stabilize prices, its smaller share of global supply limits its overall impact on diminishing the significance of OPEC's spare capacity. Ultimately, the OPEC simulation provided an invaluable lens through which to analyze Saudi Arabia's role as a stabilizer in global oil markets. Saudi Arabia’s geopolitical and energy strategies have evolved in response to the shifting global order, at the intersection of multipolarity and energy security concerns. The simulation brought insights into these tensions to life, showing how delicate the balance is between cooperation and defection, short-term and long-term goals, and geopolitical influences. It became clear how Saudi Arabia continues to play a critical role in global energy markets. Its leadership within OPEC and its ability to navigate both the current fossil fuel-dominated energy landscape and the transition to sustainability have positioned it as a key player in shaping global energy policy. As the world faces ongoing geopolitical and environmental challenges, Saudi Arabia’s decisions within OPEC will likely remain pivotal to global energy security as it continues to lead in managing global oil supply stability while advancing its Vision 2030 goals, its role in both the present energy landscape and the transition to a more sustainable future remains critical. References Aldy, J. E. Course API 165: Energy and Environmental Economics and Policy. Harvard Kennedy School, Fall 2024. Team Saudi Arabia, Planet Alpha: Aashis Luitel, Lydia Glock, Noura Mansouri, Ruben Figueroa Almutairi, H., Pierru, A., & Smith, J. L. (2021). The value of OPEC’s spare capacity to the oil market and global economy. OPEC Energy Review, 45(1), 29-43. https://doi.org/10.1111/opec.12199 DALL·E AI (2024). Image representing Saudi Arabia's strategic role in global energy: Lessons from OPEC simulation and real-world dynamics. Image generated using OpenAI's DALL·E model. Mansouri, N. Y. (2022). The Emerging Saudi Power Momentum: How the Conflict in Ukraine Shapes Saudi Energy Policy. In Energy Politics in the MENA Region: From Hydrocarbons to Renewables? (pp. 75-92). ISPI Report. Available at: https://www.ispionline.it/en/publication/energy-politics-mena-region-hydrocarbons-renewables-36797 OpenAI, ChatGPT. (2024, September). Used for conversational assistance, providing summaries and enhancing the style of writing. Pindyck, R. S. (1978). Gains to Producers from the Cartelization of Exhaustible Resources. The Review of Economics and Statistics, 60(2), 238-251. Retrieved from JSTOR.    A Talk by Joseph Nye, Mason Seminars, Harvard Kennedy School. In his talk to the Mason Fellows, Joe Nye reflected on the rise and evolution of U.S. global power, drawing from insights shared in his memoir, A Life in the American Century. Born at the dawn of what became known as the "American Century," Nye offered a deeply personal account of his experiences in international affairs. He spoke about his lifelong journey witnessing and shaping U.S. foreign policy, particularly through the framework of neo-liberalism, emphasizing his work on understanding the dynamics of both hard and soft power and how these forces have influenced leadership on the global stage.
The American Century: A Historical Perspective Nye’s career coincides with the U.S.’s ascension to global primacy, which began in the mid-20th century. The term “American Century,” coined by Henry Luce in 1941, encouraged the U.S. to play a more prominent global role after World War I. However, it wasn’t until the attack on Pearl Harbor that the U.S. fully embraced its position on the world stage. Emerging from WWII as both the strongest economy and military force, the U.S. dominated global affairs for decades. Reflecting on this period, Nye compares the global experience of the last 80 years to the parable of the blind men and the elephant: different parts of history are perceived in isolation, yet they form part of a much larger narrative. Nye argues that reflecting on these decades offers a valuable perspective on current global events and America’s role in shaping the international order. Soft Power vs. Hard Power: A Lasting Legacy Perhaps the most enduring contribution of Joseph Nye is his concept of “soft power.” Unlike hard power, which relies on coercion and military might, soft power is the ability to influence through attraction—using culture, political values, and diplomacy. However, as Nye points out, soft power is not a constant. For instance, U.S. soft power in the Middle East has been undermined by the ongoing conflict in Gaza and Palestine. Shifts in perception and public opinion can weaken a nation's ability to attract and persuade. This highlights the fragility of soft power and the long-term efforts required to maintain it. Nye’s reflections emphasize that soft power cannot be manufactured or overly controlled. Attempts to manipulate culture too much risk turning into propaganda, which in turn erodes credibility. True soft power comes from authenticity—freedom of expression, diversity, and the ability to allow criticism without repression. China’s Soft Power Challenge Nye also touches on China’s growing global influence and its attempts to enhance its soft power. With investments in initiatives like the Belt and Road Initiative and Confucius Institutes, China has been actively pursuing global appeal. However, Nye argues that China’s efforts remain hampered by its tight control over civil society and its confrontations with neighboring countries. For China to truly build soft power, Nye suggests it must relax these controls and open itself to the creativity and richness of its people. Only through greater openness can China compete with democracies like the U.S. in terms of cultural and political influence. Managing U.S.-China Relations: The Future of Power As U.S.-China relations evolve, Nye advocates for a strategy of “managed competition.” This approach acknowledges the intense geopolitical rivalry between the two nations, yet also recognizes the necessity of cooperation, particularly on global issues like climate change. According to Nye, finding common ground on these shared challenges is essential to avoid conflict. In a world where global challenges transcend national borders, soft power can be the key to fostering international cooperation and avoiding the pitfalls of hard power rivalries. Nye’s reflections on managed competition highlight the delicate balance between competition and collaboration in shaping future world affairs. Lessons from History: Political Polarization and AI Nye also reflects on political polarization, both past and present, noting that while today’s polarization is concerning, it is not unprecedented. The turbulence of the 1960s, with protests against the Vietnam War and widespread social unrest, was arguably even more volatile. Studying history offers perspective, helping us differentiate between what is genuinely new and what is a repeat of past challenges. Nye also looks to the future, particularly the rise of artificial intelligence (AI), which has the potential to reshape society in profound ways. He draws comparisons between the uncertainty surrounding AI and the historical uncertainty of nuclear power. Just as nuclear energy was once seen as the future, AI carries similar transformative potential, though its timeline and long-term effects remain uncertain. Conclusion: The Power of Persuasion in a Changing World Joseph Nye’s reflections remind us that while the forms of power may change, the importance of persuasion—soft power—remains a constant in international relations. In a world that faces increasing complexity, from the rise of AI to the challenges of global competition, nations that invest in soft power will have a distinct advantage in shaping the future. As we move further into the 21st century, Nye’s insights into the balance between hard and soft power, and the lessons from his life during the American Century, offer valuable guidance. The ability to attract, inspire, and lead through persuasion will be essential for navigating the global challenges ahead. Whether through culture, diplomacy, or political values, soft power continues to be a vital tool in shaping the future of international relations. In an era where cooperation on global issues is more critical than ever, Nye’s reflections on power and influence provide a timeless reminder that persuasion, authenticity, and credibility are the keys to maintaining global leadership. References Nye, J. S. (2024, September). Reflections on U.S. Global Power and the Evolution of Soft Power. Lecture presented to the Mason Fellows, Harvard Kennedy School, Cambridge, MA. OpenAI, ChatGPT. (2024, September). Used for conversational assistance, providing summaries and enhancing the style of writing. Inspired by Ricardo Hausmann’s DEV 130 Course on "Why So Many Countries are Poor, Unequal, and Volatile" OpenAI, ChatGPT. (2024, September). Used for conversational assistance, providing summaries and enhancing the style of writing.The study of economic history is essential to understanding the forces that have shaped our world today. As part of Ricardo Hausmann’s DEV 130 course on Why So Many Countries are Poor, Unequal, and Volatile, two significant readings--The World Economy: A Millennial Perspective by Angus Maddison and The Economy 1.0 (Unit 1: The Capitalist Revolution)—offer compelling insights into the evolution of global economic growth, inequality, and the dynamics of capitalism. Let's break down the key themes from these texts, which provide a rich understanding of how economies have diverged and converged over centuries. Global Economic Growth Over a Millennium:
While Maddison’s analysis focuses on the long-term millennial view of economic growth and divergence, The Economy 1.0 emphasizes the role of capitalism in shaping modern economies. Both works highlight how economic systems, institutions, and technological progress have led to both the widening and narrowing of global income gaps over time. Although some regions have prospered more than others, there remains hope for convergence, as seen in the resurgence of Asian economies. These readings offer a valuable framework for understanding how we arrived at today’s global economic landscape and what forces will shape the future. Conclusion: A New Era of Economic Growth The conditions that allowed for rapid economic growth during the Industrial Revolution, the colonial era, and post-World War II are not replicable in today’s world. Environmental degradation, the legacy of colonialism, and the evolving global order present significant challenges. Countries can no longer exploit resources and labor unconditionally, and the need for sustainability has introduced new constraints. Additionally, the global order is far more interconnected and competitive, with multiple power centers vying for influence. The challenge for modern economies is to find new pathways to growth—ones that prioritize sustainability, equity, and long-term wellbeing over the short-term extraction of wealth. Innovation, technological advancements in green energy, and more inclusive governance models will be critical to creating a future where growth can still occur without the exploitation and environmental destruction that defined earlier centuries. These insights help us understand both the historical context of economic growth and the complexities of replicating such success in today’s world. While the era of rapid, unbounded growth may be over, the opportunity for sustainable and equitable progress remains if nations can navigate the challenges of our time. References Maddison, A. The World Economy: A Millennial Perspective. OECD Development Centre. CORE Econ. The Economy 1.0: The Capitalist Revolution. Available at CORE Econ. OpenAI, ChatGPT. (2024, September). Used for conversational assistance, providing summaries and enhancing the style of writing. |
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