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Daron Acemoglu and William Nordhaus have some disagreements.
This year’s Economics Nobel is not a climate prize — that happened in 2018, when Yale economist William Nordhaus won the prize for his work on modeling the effects of climate change and economic growth together, providing the intellectual basis for carbon taxation and more generally for regulating greenhouse gas emissions because of the “social cost” they impose on everyone.
Instead, this year’s prize, awarded to MIT’s Daron Acemoglu and Simon Johnson and University of Chicago’s James Robinson is for their work demonstrating “the importance of societal institutions for a country’s prosperity,” i.e. why some countries are rich and others are poor. To do so, the trio looked at the history of those countries’ institutions — laws, modes of government, relationship between the state and individuals — and drew out which are conducive to wealth and which lead to poverty.
Long story short, “extractive” institutions set up to reward a narrow elite tend to hurt economic development over time, as in much of Africa, which was colonized by Europeans who didn’t actually live there. “Inclusive” institutions, by contrast, arose in the United States and Canada, where there was significantly more European migration, thus incentivizing the ruling elite to set up institutions that benefitted a broader range of (again, European) residents.
While this research rests heavily on the climate (the reason Europeans avoided African colonies was because of the high rate of disease in tropical climates), it does not touch on climate change specifically. But Acemoglu especially is an incredibly wide-ranging scholar and has devoted some time to the specific questions of climate change — and in so doing has been a direct critic of Nordhaus, Stockholm’s preferred climate economist.
“Existing approaches in economics still do not provide the right framework for managing the problems that will confront us over the next several decades,” Acemoglu wrote in a 2021 essay titled “What Climate Change Requires of Economics,” referring directly to Nordhaus’s Nobel-winning work. “Although the economics discipline has evolved over time to acknowledge environmental risks and costs, it has yet to rise to the challenge of climate change. A problem as massive as this one will require a fundamental reconsideration of some of the field's most deeply held assumptions.”
His criticisms included that Nordhaus’s more gradualistic approach — the latest version of his model spits out that a 1.5 degree Celsius warming target is “infeasible,” and the “cost vs. benefit optimal” amount of warming as 2.6 degrees Celsius over pre-industrial levels with a carbon price that rises to $115 per ton by 2050 — ignores both the best way to reduce emissions and the risk of not doing so fast enough.
Acemoglu is far more optimistic about how policy can direct technological development and less sanguine about additional warming over and above the Paris Agreement limits. He argues that the possibility of theoretical “tipping points,” where exceeding certain climate thresholds by even a small amount may cause dramatic damages, make the risk of such overshoot far too great.
He also took issue with the discount rate applied to spending later vs. spending now in Nordhaus’s models. The basic idea is that a dollar spent today to mitigate the effects of climate change is more valuable than one spent in 2050. But the rates Nordhaus uses — which he derives from real-world investment returns — implies that in order for spending now to be worth it later, the benefits in 2050 or 2100 must be very, very large.
“There is a plausible economic (and philosophical) case to be made for why future essential public goods should be valued differently than private goods or other types of public consumption,” Acemoglu wrote in 2021, arguing that discount rates derived from investment returns, like the ones Nordhaus uses, might not be the best guide to public policy.
So what does the latest Nobel laureate want instead? Well, something like what the United States has been doing the past few years.
Accounting for the economic benefits of domestic or “endogenous” technological development, Acemoglu’s research finds that "the transition to cleaner energy is much more important than simply reducing energy consumption, and that technological interventions need to be redirected far more aggressively than they have been.” He explored how this process could work in papers he wrote over more than a decade, developing a model for this kind of directed technological change and applying it to the United States, starting as far back as 2012.
Across all his work on climate change, Acemoglu argues that a focus on pricing the “externalities” of carbon emissions — the harm emissions impose on everyone that isn’t reflected in the prices of fossil fuels — is myopic. Instead, the challenge is both restricting emissions and fostering clean technologies that can take the place of dirty ones, which have had a remarkable head start in investment.
In “The Environment and Directed Technical Change,” published in 2012 and co-written with Philippe Aghion, Leonardo Bursztyn, and David Hemous, Acemoglu argues that a mixture of carbon taxes and research subsides could “redirect technical change and avoid an environmental disaster” by imposing a cost on dirty technology and boosting clean technology.
Such an approach would probably rest heavily on positive subsidies and encouraging clean technology and less on a carbon tax, the four write (although a carbon tax would still help to “discourage research” into polluting technologies). It would also need to happen soon.
“Directed technical change also calls for immediate and decisive action in contrast to the implications of several exogenous technology models used in previous economic analyses.”
This framework does not precisely match United States policy — we have no carbon tax — but it does somewhat approximate it. The Biden administration’s approach to climate policy centers on large-scale investments in clean technologies, whether they’re tax credits for non-carbon-emitting electricity production or financing for clean energy projects from the Loan Programs Office, combined with a suite of Environmental Protection Agency rules that are intended to reduce pollution from fossil fuel power plants (along with an actual direct fee on methane emissions).
This approach is embedded within an overall industrial policy that’s supposed to make the economy more productive — a counter-argument to the idea that climate spending is an economic drag that trades off with environmental harms in the future. Acemoglu, too, questions the idea that there’s a tradeoff between economic growth and spending to combat climate change. Not only could renewables be cheaper than fossil fuels, “an energy transition can improve productive capacity and thus lead to an expansion of output, because transition to cleaner technologies can boost investment and the rate of technological progress,” he and his co-authors write.
Acemoglu has also weighed in on one the more controversial questions in climate policy and economics: the shale gas boom. In a 2023 paper written, again with Aghion, Hemous, and Lint Barrage, he weighed the effects of dramatic increase of domestically extracted natural gas, focusing on the importance of technological development. The Environmental Protection Agency attributes the decline in US greenhouse gas emissions since 2010 in part to “the growing use of natural gas and renewables to generate electricity in place of more carbon-intensive fuels,” due to natural gas replacing coal electricity generation. While this logic has come under fire from some activists and researchers who say the government’s models underestimate methane leakage from natural gas operations, Acemoglu took a different tack.
Yes, natural gas substituting for coal reduces short-run emissions, he and his co-authors concluded, but also, “the natural gas boom discourages innovation directed at clean energy, which delays and can even permanently prevent the energy transition to zero carbon.” They backed up this assertion by pointing to a decline in the total share of patents rewarded to renewable energy innovation between 2009 and 2016.
The way out is that same mix of carbon prices and technology subsidies Acemoglu has been recommending in some form since Kelly Clarkson was last on top of the charts, which “enables emission reductions in the short run, while optimal policy would ensure that the long-run green transition is not disrupted.”
If the Biden Administration’s climate policy works out, it will look something like that, and the prize will be far greater than anything given out in Stockholm.
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A new subsidy for metallurgical coal won’t help Trump’s energy dominance agenda, but it would help India and China.
Crammed into the Senate’s reconciliation bill alongside more attention-grabbing measures that could cripple the renewables industry in the U.S. is a new provision to amend the Inflation Reduction Act to support metallurgical coal, allowing producers to claim the advanced manufacturing tax credit through 2029. That extension alone could be worth up to $150 million a year for the “beautiful clean coal” industry (as President Trump likes to call it), according to one lobbyist following the bill.
Putting aside the perversity of using a tax credit from a climate change bill to support coal, the provision is a strange one. The Trump administration has made support for coal one of the centerpieces of its “energy dominance” strategy, ordering coal-fired power plants to stay open and issuing a raft of executive orders to bolster the industry. President Trump at one point even suggested that the elite law firms that have signed settlements with the White House over alleged political favoritism could take on coal clients pro bono.
But metallurgical coal is not used for electricity generation, it’s used for steel-making. Moreover, most of the metallurgical coal the U.S. produces gets exported overseas. In other words, cheaper metallurgical coal would do nothing for American energy dominance, but it would help other countries pump up their production of steel, which would then compete with American producers.
The new provision “has American taxpayers pay to send metallurgical coal to China so they can make more dirty steel and dump it on the global market,” Jane Flegal, the former senior director for industrial emissions in the Biden White House, told me.
The U.S. produced 67 million short tons of metallurgical coal in 2023, according to data from the U.S. Energy Information Administration, more than three-quarters of which was shipped abroad. Looking at more recent EIA data, the U.S. exported 57 million tons of metallurgical coal through the first nine months of 2024. The largest recipient was India, the final destination for over 10 million short tons of U.S. metallurgical coal, with almost 9 million going to China. Almost 7 million short tons were exported to Brazil, and over 5 million to the Netherlands.
“Metallurgical coal accounts for approximately 10% of U.S. coal output, and nearly all of it is exported. Thermal coal produced in the United States, by contrast, mostly is consumed domestically,”according to the EIA.
The tax credit comes at a trying time for the metallurgical coal sector. After export prices spiked at $344 per short ton in the second quarter of 2022 following Russia’s invasion of Ukraine (much of Ukraine’s metallurgical coal production occurs in one of its most hotly contested regions), prices fell to $145 at the end of 2024, according to EIA data.
In their most recent quarterly reports, a number of major metallurgical coal producers told investors they wanted to reduce costs “as the industry awaits a reversal of the currently weak metallurgical coal market,” according to S&P Global Commodities Insights, citing low global demand for steel and economic uncertainty.
There was “not a whisper” of the provision before the Senate’s bill was released, according to the lobbyist, who was not authorized to speak publicly. “No one had any inkling this was coming,” they told me.
But it’s been a pleasant surprise to the metallurgical coal industry and its investors.
Alabama-based Warrior Met Coal, which exports nearly all the coal it produces, reported a loss in the first quarter of 2025,blaming “the combination of broad economic uncertainty around global trade, seasonal demand weakness, and ample spot supply is expected to result in continued pressure on steelmaking coal prices.” Its shares were up almost 6% in afternoon trading Monday.
Tennessee-based Alpha Metallurgical Resources reported a $34 million first quarter loss in May, citing “poor market conditions and economic uncertainty caused by shifting tariff and trade policies,” and said it planned to reduce capital expenditures from its previous forecast. Its shares were up almost 7%.
While environmentalists have kept a hawk’s eye on the hefty donations from the oil and gas industry to Trump and other Republicans’ campaign coffers, it appears that the coal industry is the fossil fuel sector getting specific special treatment, despite being far, far smaller. The largest coal companies are worth a few billion dollars; the largest oil and gas companies are worth a few hundred billion.
But coal is very important to a few states — and very important to Donald Trump.
The bituminous coal that has metallurgical properties tends to be mined in Appalachia, with some of the major producers and exporters based in Tennessee and Alabama, or larger companies with mining operations in West Virginia.
One of those, Alliance Resource Partners, shipped almost 6 million tons of coal overseas. Its chief executive, Joseph Craft, andhis wife, Kelly, the former ambassador to the United Nations, are generous Republican donors. Craft was a guest at the White House during the signing ceremony for the coal executive orders.
Representatives of Warrior, Alpha Metallurgical, and Alliance Resources did not respond to a requests for comment.
While coal companies and their employees tend to be loyal Republican donors, the relative small size of the industry puts its financial clout well south of the oil and gas industry, where a single donor like Continental Resources’s Harold Hamm can give over $4 million and the sector as a whole can donate $75 million. This suggests that Trump and the Senate’s attachment to coal has more to do with coal’s specific regional clout, or even the aesthetics of coal mining and burning compared to solar panels and wind turbines.
After all, anyone can donate money, but in Trump’s Washington, only one resource can be beautiful and clean.
Two former Department of Energy staffers argue from experience that severe foreign entity restrictions aren’t the way to reshore America’s clean energy supply chain.
The latest version of Congress’s “One Big, Beautiful Bill” claims to be tough on China. Instead, it penalizes American energy developers and hands China the keys to dominate 21st century energy supply chains and energy-intensive industries like AI.
Republicans are on the verge of enacting a convoluted maze of “foreign entity” restrictions and penalties on U.S. manufacturers and energy companies in the name of excising China from U.S. energy supply chains. We share this goal to end U.S. reliance on Chinese minerals and manufacturing. While at the U.S. Department of Energy and the White House, we worked on numerous efforts to combat China’s grip on energy supply chains. That included developing tough, nuanced and, importantly, workable rules to restrict tax credit eligibility for electric vehicles made using materials from China or Chinese entities — rules that quickly began to shift supply chains away from China and toward the U.S. and our allies.
That experience tells us that the rules in the Republican bill will have the opposite effect. In reality, they will make it much more difficult for U.S. companies to move supply chains away from Chinese control. The GOP’s proposed restrictions require every developer of a critical minerals project, advanced manufacturing facility, or clean energy power plant to sift through their supply chains and contracts for any relationship with a Chinese (or Russian, Iranian, or North Korean) entity. Using a Chinese technology license, or too many subcomponents, or materials produced in China — even if there are few or no alternatives — would be enough to render a company ineligible for the very incentives they need to finance and build new U.S. energy production or manufacturing facilities.
This would put companies in the position of having to prove the absence of Chinese entanglements (and guarantee that there will be none in the future) to qualify for tax credits, an all but impossible task, particularly given the untested set of new rules. Huge portions of the supply chain have flowed through China for decades, including 65% of global lithium processing and 97% of solar wafer manufacturing. American companies are already working to distance themselves from Chinese expertise and components, but the complex, commingled nature of global supply chains and corporate business structures make it infeasible to flip the switch overnight.
On top of that, the latest version of the bill would impose a brand new tax on any new solar and wind projects that have too much foreign entity “assistance,” while providing the Treasury Secretary carte blanche for determining what that might be. The result: An impossible bind, whereby the very sectors that need the most support to disentangle from China are now the ones most penalized by the new Republican “foreign entity” restrictions.
The fact is that China is ahead, not behind, in many energy sectors, and America desperately needs help playing catch-up. Ford’s CEO has called Chinese battery and electric vehicle technologies “an existential threat” to U.S. automaking. In energy supply chains for nuclear, solar, batteries, and critical minerals, China is not merely producing cheap knockoffs of American inventions, it is churning outcutting-edge battery chemistries, advancedmanufacturing processes, and high-speedcharging systems, all at lower cost. And at least until the Inflation Reduction Act enacted incentives for U.S. manufacturing and deployment, the gap between the U.S. and China waswidening.
These untested foreign entity rules will widen that gap once more. Since the start of the year, developers have abandoned more than $14 billion in domestic clean energy deployment and manufacturing projects, citing the uncertain tariff and tax policy environment, and that was before the new tax on solar and wind. New analysis from Energy Innovation finds that the latest version of the bill would reduce U.S. generation capacity by 300 gigawatts over the next decade — multiple times what we will need to power new data centers for artificial intelligence. Stopping clean energy projects in their tracks is also likely to trigger an energy price shock by constraining the very energy technologies that can be built most quickly. In the end we will cede not only our supply chains to China, but also our competitive edge in the race for AI and manufacturing dominance.
Fortunately, we have all the ingredients in this country already to achieve energy leadership. The U.S. boasts deep capital markets, a highly skilled manufacturing and construction workforce, a strong consumer economy driving demand, and, in spite of recent attacks, the world’s greatest universities and national labs. We simply need policy to provide a workable path for companies to invest with certainty, bring factories back to the United States, hire American workers, and learn to produce these technologies at scale.
With the Inflation Reduction Act’s domestic production incentives and supply chain restrictions, hundreds of companies stepped up over the past few years and made that bet, pouring billions of dollars into American supply chains. Should they be enacted, the reconciliation bill’s foreign entity rules would slam the brakes on all that activity, playing right into China’s hands.
There is a way to apply a set of carefully crafted restrictions to wean us off Chinese supply chains, but we cannot afford to saddle American energy with new taxes and red tape. If we scatter rakes across the floor for companies to step on, they will just throw up their hands and send their investments overseas, leaving us more reliant on China than before.
On taxing renewables, climate finance, and Europe’s heat wave
Current conditions: Parts of Northern California are under red flag warnings as warm air meets whipping winds • China’s southwestern Guizhou province is flooded for the second time in a week • A potential bomb cyclone is taking aim at Australia’s east coast.
Late on Friday Senate Republicans added a new tax on solar and wind projects to the budget reconciliation megabill that sent many in the industry into full-blown crisis mode. The proposal would levy a first-of-its-kind penalty on all solar and wind projects tied to the quantity of materials they source from companies with ties to China or other countries designated as adversaries by the U.S. government. “Taken together with other factors both in the bill and not, including permitting timelines and Trump’s tariffs, this tax could indefinitely undermine renewables development in America,” wrote Heatmap’s Jael Holzman. Here are a few reactions from politicians and industry insiders:
The Senate began debating the GOP’s megabill yesterday. Republican Senator Thom Tillis of North Carolina was one of two from the majority party who voted on Saturday against debating the bill. Shortly thereafter, he announced he wouldn’t run for re-election next year after President Trump threatened to back his primary challenger. On Sunday evening, Tillis took to the Senate floor to give an impassioned speech denouncing the bill’s Medicaid cuts and defending wind and solar tax credits. The Senate will resume work on the bill today with what’s known as a “vote-a-rama,” during which senators will offer and vote on amendments that could yet introduce significant changes. A final vote from the Senate on the bill is expected sometime today.
The fourth International Conference on Financing for Development kicks off today in Spain, offering world leaders an opportunity to reform the world’s financial aid systems. The conference happens once per decade. This year’s delegates have already adopted the “Sevilla Commitment,” which commits to closing the $4 trillion financing gap for global goals such as ensuring everyone has affordable and reliable energy, making cities sustainable, and mobilizing $100 billion in climate mitigation funding each year toward developing countries. As Reuters explained, the text focuses on helping poor nations pay for adaptation through debt swaps, potential pollution taxes, and other creative funding mechanisms. More than 70 world leaders will be there, as will World Bank President Ajay Banga and representatives from the Gates Foundation. The U.S. government will not have a representative at the talks. The Trump administration withdrew after trying and failing to remove any mention of “climate” and “sustainability” from the conference’s draft text. Some sources told Reuters the event could be more successful without the U.S. there to “water down objectives.”
The European Union is considering changing its climate law to allow countries to lean on international carbon credits to reach emissions targets. The original goal was to cut direct emissions by 90% by 2040 compared to 1990 levels, but some countries have pushed back on that ambition, citing costs. A draft of the proposed change shows that the European Commission would allow high-quality carbon credits to account for 3% of the emissions cut starting in 2036. As Politico explains: “Such credits will allow the EU to pay for emissions-slashing projects in other, usually poorer countries, and count the resulting greenhouse gas reductions toward its own 2040 target, rather than the climate goals of the country hosting the project.” Accounting for 6% of global greenhouse gas emissions, the EU ranks fourth on the list of highest polluters, behind China, the U.S., and India.
Meanwhile, Europe is facing a punishing early-summer heat wave that is already smashing records and triggering weather alerts. A few numbers:
Nearly a third of the citizens of the Pacific island nation of Tuvalu have applied for the world’s first climate visa, which would allow them to permanently migrate to Australia.