Severin Borenstein, one of the high-candlepower sources in the energy/environment community, has an excellent post on things that make sense and things that don’t for improving energy behavior in transportation. Just read it.
I would only cavil at his easy identification of a climate charge (erroneously called a carbon tax) and a cap-and-trade scheme (which is not his main point). These are not Tweedledum and Tweedledee, no matter how many times economists assume the canopener of “when the market equilibrates we get the same result with either one”. Just one example of a Really Big Difference: to set a climate charge, the government needs to know how much greenhouse gases (GHG) are being emitted now, and the damage one more ton causes at that level, i.e., the marginal benefit of reduction over a narrow range around current conditions. This is not chopped liver, but consider that to set the cap for a cap-and-trade scheme the government needs to know this whole marginal benefit function for reducing discharges over a fairly wide range, and also the same function for costs of reduction, to see where they cross. The latter of these has been historically very difficult to construct, as it comprises mostly predictions of the cost of doing things we have never done. Remember in the seventies, when engineers and executives at all the car companies came to Washington and swore that the slightest messing with exhaust pollution would make all our cars stop in the middle of the street, cost a fortune, and generally cripple all of American culture. They probably believed it, but it doesn’t matter: they were wrong by a country mile. Estimates of the cost of GHG reduction will also be way too high, and one of the great advantages of the carbon charge is that it doesn’t require us to make them.
I completely agree. What I don’t get is how the sensibly optimistic prediction that market ingenuity will allow us to do cheaply stuff that now looks horribly expensive fits with the idea that preventing climate change will require massive and painful lifestyle changes. In addition to technological change, there’s also acclimation; stuff that seems like a horrible deprivation now will barely be felt if it’s phased in over a quarter of a century. Relative prices are always changing; recall the man who said in 1910 that his family would never be rich enough to afford a motorcar, but would never be so poor as to have to do without servants.
I agree with Mark that there is a good chance that preventing climate change won’t be very painful. I, too, am a technological optimist. But “a good chance” is no lead-pipe cinch. Remember “Electricity too cheap to meter?”
Individual technological predictions often fall flat. Artificial intelligence, controlled fusion, and paperless payments have been on the near-time horizon for decades. Furthermore, the pace of innovation typically slows to a crawl with increasing technological maturity-consider pharmaceuticals. Or, for that matter, the internal combustion engine.
But painful or not, I think that the cost of not addressing climate change is far greater than any cost of addressing it.
I believe Dame Agatha Christie would take offense to the sex change.
Thanks for sending me to this smart writer. I want to plump for his footnote #1 as the most important part of the piece: “..the additional concern that pollution taxes can raise revenues that allow reductions in other distorting taxes – such as on wages — while subsidies often increase the need for those other distorting taxes.”
YES! Do a carbon tax. Make it high enough to replace, let’s say, the employer side of Social Security - or the worker side, doesn’t matter much. And drop Social Security to account for it. What happens? You get some reduction in carbon emissions, because people find fuel more expensive. You get some increase in employment, because people find labor less expensive. It’s all good. In a few years, if you think too much carbon is being burned, raise the tax and use the money to make Obamacare less expensive. Or subsidize CALPERS - there’s a pit you can throw money into! Or rebuild railbed across the country. One of the things about carbon is that benefits are long term, so you can experiment to see if you are doing enough. You don’t have to know the marginal benefit of reduction, if you know that the social harm of a carbon tax is less than the social harm of the taxes it would replace.
Could you put the climate charge/carbon tax proceeds towards helping the non-rich adopt newer and cleaner tech?
My guess is that fighting over what to do with that money could be a big part of the delay, I’m sorry to say.
Btw, has anyone figured out why the web page is assuming I have a gigantic monitor? I know I should probably know how to fix this (well, in some way that doesn’t make the type smaller), but I do not. A small thing in the scheme of things, but *annoying.* ; >
Unrelated comment: something has changed in the way the page is formatted. The text on the front page is not being wrapped at the edge of the screen but continues about a quarter of a screen further. It is so wide that even sliding over to the edge of the sidebar still doesn’t show all the text. Makes it hard to read.
NCG, DGM, I believe it’s due to the large image in the Caption contest post. You can hold down the key and hit the minus key a few times—I think this works with most browsers—though that may make the text too small to read.
Thanks!!!
Followup question: which key do I hold down, and is the “minus” key the same as the dash?
Oops! I type in Ctrl as the key to hold down, but, the way I formatted it, the comment software filtered it out and I didn’t notice. Yes, the dash, hyphen or minus key depending on use.
This is the first O’Hare post I’ve ever not understood. And to have Kleiman agree really makes me doubt myself. I always thought that a cap was called for when there was a known hard limit above which it was dangerous/extraordinarily costly to go. I understand the debates around the various x ppm tipping points, but isn’t that the situation we are in?
If you know damage per unit, charge for it; if there’s a hard boundary, set it.
I understand that it is useful to know cost function when estimating the economic impacts of a cap, but we don’t *need* to know those to set the cap. What am I missing?
(To be clear, I know a hard boundary is going to produce a very small # of carbon permits, which will be politically difficult. But so will a climate charge set to reflect actual damages. For this Q, set aside the politics and, if necessary, correct my economics.)
Knowing whether there’s a “hard limit” and if so, what it is, is equivalent to knowing the MC/MB functions and observing a vertical section/large step up in the MB curve. We don’t know that, though there’s lots of theory and conflicting predictions (for example, about what level of CO2 will stop the Gulf Stream when). I know of no science predicting a tipping point close to where we are in CO2 levels (not discharges continuing for years). But if we knew of such a big step, and that we were close to it, just set the tax at the value at the top of the step. You still don’t want to have to predict compliance costs if you can possibly help it.
I didn’t mention that allocating rights to a cap amount is as messy and difficult as setting the cap, or worse.
Yes, that’s the other unspoken assumption behind the idea that a cap is equivalent to a tax: that the rights will be auctioned off rather than handed out as legislative goodies.
I’m not sure I’m buying this argument, although I can’t claim to be an expert. It does seem pretty clear that we need to be in the vicinity of net-zero greenhouse gas emissions by 2060 or so. Whether you get there in 2050, 2060, or 2070 might be a function of economic analyses, but that’s a marginal difference. So it might be easier to start with a cap allocation over time than it is to know you have to head in that direction and figure out a tax that takes you there.
The other and better argument IMHO is that allocating rights is how you grease the wheel. It’s not pure, but it gets things done.
We already have a global political agreement on the target number: 2 degrees C of warming from pre-industrial as a reasonably safe limit. It may well be wrong, i.e. unsafe, but a huge amount of effort has gone into reaching it, and it’s not the case that the policymaking starts from zero. The remaining amount of carbon that can be burnt without breaching the limit has also been plausibly calculated (565 gigatons, in 2012). Like Brian, I think that setting up a global cap-and-trade regime with that cap is an immense political challenge, but not a technical policy problem.
But until such a régime is agreed, a national carbon tax is much simpler. Mike’s point that it’s hard to assess the costs of emissions reductions years in advance is neatly illustrated by the collapse of the EU’s emissions trading system. The allocations were initially set too high and the degression not steep enough, so the permit price has reached near-zero. The EU is getting close to allocation cuts that will bring the scheme to life again, but it’s a fearful kludge.
Would there be a downside to doing both? If I had to choose, I might guess that as humans, we are less likely to get our act together enough to do the cap correctly. Though strangely, it has been put in place in some local areas, which I guess is surprising.
Personally, I prefer the climate I had 30 years ago to the one I have now, so even a 2 degree change makes me sorry. Couldn’t there be some way to incentivize actual reductions, someday, possibly?
I’m with anonymous, not O’Hare here — and unlike addictions issues, this is in fact something I know a little about. We are far closer, scientifically, to having a estimate of a reasonably safe level of greenhouse emissions that we are to having an estimate of the damage (in dollars) from a marginal ton of emissions. For other pollutants, the argument might make sense, but for greenhouse gases, setting a safe level is far, far, far easier than figuring out the exact damage caused by a marginal ton of emissions; it’s not even close. Yes, we might be wrong about the safe level, but we’re far more likely to be much more wrong about the marginal cost of a ton of emissions.
There’s room for other kinds of arguments for a tax instead of tradable permits- easier to administer, no issues with allocating initial permits, simpler to explain and therefore politically easier, possibly easier to implement piecemeal across different jurisdictions, etc. But this economic argument about certainty over damages is not one of them.