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March 24, 2007
Global Warming--A Policy Design Problem
Mike is, of course, quite right to note that doing something about global warming comes with real costs. All the bunkum about attacking global warming creating a bunch of new technologies (and implying that it will add to economic growth) is really irresponsible. Of course it will spur new technologies, but not nearly as much as the economic activity that it will eliminate. The real question is whether the benefit to future generations is worth the cost, recognizing that there is a cost?
My non-expert judgment is that the benefits are worth the costs. Because the costs are likely to be so high, however, I do think it’s worth thinking as hard as possible about how to keep them from being any larger than they need to be. There are lots of ways to deal with global warming, not all of which have the same distortionary impact on economic activity, or which create the potential for rent-seeking behavior. I don’t think the economists are terribly helpful in telling us how to value the benefits, since they are fairly far out in the future and very hard to measure with much accuracy, given the uncertainty of all of these projections. But economists are absolutely necessary in designing ways to reduce fossil fuel use without creating unnecessary distortion. In addition, I would add that political scientists are very important to this conversation, since the policies to reduce global warming have to mobilize consent in the short term, and must be able to maintain consent over the long term, without requiring a lot of side payments to do so.
My preference would be to pay for reductions in global warming with fairly simple and direct carbon taxes, which would be used to pay (dollar-for-dollar) for very visible reductions in taxation. That way, the new taxes get balanced in the public mind with highly valued benefits, even if (in the aggregate) they don’t balance out. This gives politicians some protection. And if you trust fund these taxes, and give them back in the form of an annual, flat tax credit for every citizen, there would even be some political cost to reducing the carbon tax (since politicians would be directly reducing the lump-sum tax credit). Reducing global warming is an investment, to be sure, but we can’t count on the ability of the public to value future benefits against present costs to guarantee the political viability of such a scheme. Careful political engineering is essential to correct for the “defect of better motives.”
UPDATE: I unfairly caricatured Mike O'Hare's "less stuff" position, and as it was not really germane to my larger point, I removed that section of the post. I fear it was the consequence of subconscious Kausism.
