Wednesday, August 7, 2013

Litterman on carbon finance

I just read a very nice article by Bob Litterman in CATO's "Regulation" on the finance of carbon taxes. It includes a review of some of the recent academic calculations.

(Related, Ronald Bailey at Reason.com takes on the Administration's latest cost of carbon estimates, and reviews Robert Pindyk's recent NBER working paper "What do the models tell us?" also covered by Bob.)

Like just about every economist, Bob favors a carbon tax or tradeable emissions right over the vast network of regulatory controls on which we are now embarked. I might add that getting rid of the large subsidies for carbon emissions implicit in many country's policies would help before we start taxing.

But let's get to business, how big should the carbon tax be?


It's a hard question. The economic costs of warming are hard to assess. Moreover, they come in a century or more, when presumably our descendants are much wealthier than we are, and hopefully have technologies we have not imagined. Or civilization will have collapsed so they have a lot more pressing problems. How do we trade off costs now and uncertain benefits in a century?  What discount rate should we use?

Bob has good points on this question that I hadn't thought of, and are good applications of finance thinking (as you'd expect from Bob) which is sort of my excuse for covering it here.

Carbon beta

First, climate costs are likely to have a strong negative beta, and thus climate investments have a large positive beta.

Here's the thinking. The rate of economic growth over the next century is a major uncertainty. Will the historically unprecedented growth of the post WWII era continue, say 2% real per capita? Or does our current scleroscis settle us into 1% growth? Or are the end-of-growth prognosticators right? When you compound over a century, these add up to truly major uncertainties over how wealthy our descendants will in fact be.

But they also add up to truly major uncertainties over how much carbon we will emit in the meantime. If growth stops, carbon emissions stop too. Yes, it's not one for one (a perfect correlation). Technology choice matters; everything from windmills to deregulated nuclear power to driverless cars and trucks makes a difference. But there is a strong positive correlation.

So, if carbon is a bigger problem, our descendants are more likely to have lots of money, technology, and resources to deal with it. If they are poorer, then carbon is likely to be a lesser problem. In finance language, projects with a strong positive beta require a much higher expected return, and a high equity-like discount rate. This consideration drives us to tax less now.

Catastrophes

But, Bob goes on, how do you price catastrophe risk? Though the central tendency of the present value of economic costs of carbon emissions are surprisingly low -- even moving all of Florida up to the Georgia border is only money after all, and you have a century to do it -- there is a chance that things are much worse.

We're all thinking about "black swans" and "tail risk" these days. Shouldn't we pay a bit more carbon tax now, though the best guess is that it's not a worthwhile investment, as insurance against such tail risks?

The problem is,
Massachusetts Institute of Technology economist Robert Pindyck... argues that too many non-GHG-related low-probability, high-damage scenarios exist. He writes, “Readers can use their imaginations to come up with their own examples, but a few that come to my mind include a nuclear or biological terrorist attack (far worse than 9/11), a highly contagious ‘mega-virus’ that spreads uncontrollably, or an environmental catastrophe unrelated to GHG emissions and climate change.” He concludes that society cannot afford to respond strongly to all those threats.
Indeed. (Fun for commenters: come up with more. Asteroid impact. Banking system collapse. Massive crop failure from virus or bacteria. Antibiotic resistsance....) If we treat all threats this way, we spend 10 times GDP.

It's a interesting case of framing bias. If you worry only about climate, it seems sensible to pay a pretty stiff price to avoid a small uncertain catastrophe. But if you worry about small uncertain catastrophes, you spend all you have and more, and it's not clear that climate is the highest on the list.

This thought fits nicely into the modern research on "ambiguity" and "robust control" (for example see Lars Hansen and Tom Sargent's webpages for a portal). This line of thought often argues that you should pay a lot of attention to unlikely catastrophes, especially when it's hard to quantify their risks. And Pindyck's point (as I see it) gets to the central problem with that line of thought: you have to draw an arbitrary circle about which unlikely events you pay a lot of attention to, and which ones you pay no attention to.

If you worry about anvils falling from the sky, maybe you miss the piano falling from the sky. And if you worry about anvils, pianos, dynamite, and so on,  you just don't get out of bed in the morning.

It's also related to the tendency people have, in Kahneman and Tversky's famous analysis, to overweight some small probability events -- nuclear reactors, airplane crashes, terrorism -- and to ignore others -- coal dust, cab crashes on the way to the airport.

The same observation: One of my skepticisims of the current almost exclusive focus on carbon and global warming in the environmental community is that we may miss the real environmental problems. Most of the world breathes awful air and drinks awful water. Climate change is not even on their list of environmental problems. And the environmental effects of social or economic collapse or another war might dwarf warming.

All in all, I'm not convinced our political system is ready to do a very good job of prioritizing outsize expenditures on small ambiguous-probability events.

Alternative investments

Once we reduce things to money, which is what economists do, a bunch of unconventional and unsettling analysis opens up. (This isn't in Bob's piece, mea culpa only.) The economic case for cutting carbon emissions now is that by paying a bit now, we will make our descendants better off in 100 years.

Once stated this way, carbon taxes are just an investment. But is investing in carbon reduction the most profitable way to transfer wealth to our descendants?  Instead of spending say $1 trillion in carbon abatement costs, why don't we invest $1 trillion in stocks? If the 100 year rate of return on stocks is higher than the 100 year rate of return on carbon abatement -- likely -- they come out better off. With a gazillion dollars or so, they can rebuild Manhattan on higher ground. They can afford whatever carbon capture or geoengineering technology crops up to clean up our messes.

Put that way, though, the first question might be why we are leaving our descendants with $18 trillion of Federal debt, and a bill for $70 trillion or so of unfunded liabilities. Once we reduce the question to investment now to benefit the economic well-being of our descendants, it's not at all clear that investing in carbon reductions is the best place to put our money.

The greatest thing we can invest in for the economic well being of our 100 year descendants is strong, decades-long  economic growth. Needless to say, the overall economic policy mix and especially the environmental policy mix is not pointing in that direction. A lot of environmental policy actively discourages growth.

Nonlinearities

Bob points out one good case against this analysis. It is possible that carbon abatement is a very special investment with very special state-contingent rate of return.
There is a very small chance that climate effects may not just reduce subsequent growth, but may cause it to plummet catastrophically. Such scenarios require positive feedbacks; for example, warmer temperatures cause the release of methane from the currently permanently frozen tundra, triggering catastrophic warming impacts beyond the ability of future generations to adapt. How should society today rationally price the possibility of such unknown, very-low-probability outcomes in the future?
In my investment context, reducing carbon emissions now has a very special property that alternative ways of investing money don't have -- it turns off this low probability but huge negative-return scenario.

That's a good point -- but it means the entire case for a strong carbon tax now relies on how likely such extreme nonlinearity is.

Economics after all? 

I suspect this sort of analysis will be profoundly unsettling -- how about infuriating -- to people who worry about carbon and other greenhouse gases. It's not just about money, I suspect they might say, it's not about giving our descendants wealth; it's about giving them a healthy planet. The economist might say, so what's that worth to you? Some finite number, no? Sure, we inundate Florida, but our descendants are $100 trillion richer, so they can afford to rebuild Florida on higher ground. Problem solved with $90 trillion extra in the bank. Somehow I doubt Greenpeace will go back to saving whales even if that argument were decisively proved.

As much of a died-in-the wool economist as I am, I have to admit some sympathy. (Or maybe "ambiguity?") Consider species extinction. Our short time on Earth coincides with a greater mass extinction than the asteroid that killed off the dinosaurs. And the extinction rate is not abating.

Now, I can't point to an economic cost, and people who hold up development projects to save some small species have a hard time doing the same. The best arguments I have read (admittedly not an expert) is of the sort that there might be some snake in the rain forest has a medically useful venom. More generally, "biodiversity is good." These is again, the  small probability of huge but unquantifiable benefit option-value argument.

Really, is that the best we can do when staring at the K-T boundary, and realizing that future alien geologists will see a more dramatic layer, with far more interesting chemistry, where we lived? The feeling nags that it can't be a good thing for us to move on from the dinosaurs to see if we can beat the Permian-Triassic extinction in the spectacular-geology department. (Global warming is a is a tiny component of extinction -- we got megafauna with spears.) I welcome suggestions on how to voice this view in economic terms.

Perhaps systematically worrying about small and unquantifiable probability events isn't such a bad thing. But paying attention to vague unquantifiable worries leads to a lot of stupidity, like banning genetically modified crops.

Back to carbon taxes

With all that in mind, where do I stand on carbon taxes? Usually, when something is this muddy, it means we're asking the wrong question, and I think that's the case here.

I think we're way too focused on the amount of the tax and way too unfocused on its operation.

I think we should be talking about a carbon tax in place of  all the rest of our rather calamitous energy policy. Subsidies for windmills, for rich people to buy Tesla cars, HOV lanes, fuel economy standards, subsidies for photovoltaic roofs, tax credit for energy efficient appliances, certified buildings, ethanol, high speed trains, low speed trains, and on and on. Throw out the whole department of energy, the EPA's ability to regulate climate emissions, and every other nagging energy regulation, and give us a carbon tax instead (and real-time tolling to eliminate congestion). Set the level of the carbon tax at the cost of all this other junk, and achieve better results at a fraction of the cost.

The first-order issue is the monstrous inefficiency and increasing corruption of our energy regulation. Get the clean carbon-tax system in place, then we can talk about the level of the tax. In that world, a tax rate twice or even three times too high will have much fewer distortions than what we have now, and will produce both better growth and a cleaner environment.

Alas, as with the consumption tax and any other perfectly obvious policy, we can't seem to trust that the deal will be kept.


35 comments:

  1. Pardon my cynicism but we've seen this movie before.

    A carbon tax will be stuffed with favors to special interests until it turns into yet another government-made sausage, replete with regulatory blanks to be filled in later by anonymous unelected bureaucrats.

    And when the added cost of carbon causes price inflation and economic stagnation everyone will complain. While we hamstring ourselves economically over a phenomenon that that may or may not be anthropogenic, China and India are building new coal-fired plants.

    However, SOMETHING MUST BE DONE - no matter how useless or ill-conceived - so "something" will be done. I recently had this discussion with someone on another internet forum and they said, "It may not help that much but it HAS to be done". You can't reason someone out of a position that they haven't been reasoned into.

    Otter: I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part!

    Bluto: We're just the guys to do it.

    Ultimately, people will stop using disposable plastic plates and cups when the cost of throwing one away exceeds the cost of washing a reusable one.

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    1. Love the Animal House reference!!! :-)

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  2. Sir,

    That was wonderful, just absolutely, tearfully, and heart-breakingly wonderful.

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  3. “I think we should be talking about a carbon tax in place of all the rest of our rather calamitous energy policy. Subsidies for windmills, for rich people to buy Tesla cars, HOV lanes, fuel economy standards, subsidies for photovoltaic roofs, tax credit for energy efficient appliances, certified buildings, ethanol, high speed trains, low speed trains, and on and on. Throw out the whole department of energy, the EPA's ability to regulate climate emissions, and every other nagging energy regulation, and give us a carbon tax instead (and real-time tolling to eliminate congestion). Set the level of the carbon tax at the cost of all this other junk, and achieve better results at a fraction of the cost.

    The first-order issue is the monstrous inefficiency and increasing corruption of our energy regulation. Get the clean carbon-tax system in place, then we can talk about the level of the tax. In that world, a tax rate twice or even three times too high will have much fewer distortions than what we have now, and will produce both better growth and a cleaner environment.” - Dr. Cochrane



    What if climate change is merely the classic do-gooder intention hijacked by the rent seeker? One can surely argue that “…all the rest of our rather calamitous energy policy” is classic do-gooder intention hijacked by the rent seeker.

    What if rent seekers have determined, over time, that rent seeking narrow do-gooder subjects such as bicycle safety or auto safety or any of the multitude of rent seeking areas, creates limits to rent seeking. That the rent seeker has learned that narrow subjects limit rent seeking opportunities.

    That a broad subject, the all encompassing subject would allow for unlimited rent seeking. That is, the rent seeker is seeking the broadest possible subject to rent seek.

    We return to the classic do-gooder intention hijacked by the rent seeker: climate change. Climate being so very, very broad and “change” being anything thing/any aspect one would like to argue.

    Therefore, alarmists and deniers aside, questions posed and phenomena identified by public choice theory may be the real questions to examine.

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    1. Good point. But clearing out all the subsidies clears out the rent seekers. Then if we come to the scientific conclusion that global warming is not an issue, it will be much easier to lower the tax. One more good argument for a big effort to substitute the tax -- with no exemptions for special groups -- for the plethora of subsidies.

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    2. John,

      "Good point. But clearing out all the subsidies clears out the rent seekers. Then if we come to the scientific conclusion that global warming is not an issue, it will be much easier to lower the tax."

      I have a research grant funded by federal tax dollars to investigate the effects of global warming. Those tax dollars come from carbon taxes. What is my monetary incentive to reach an objective conclusion that global warming is or is not an issue?

      How do you reach an objective scientific conclusion when your monetary incentives are aligned against reaching such a conclusion?

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    3. Anecdotally, I'd caution against Frank's argument. It's not unfair to ask the question, but when it comes to trust I give persons the benefit of the doubt until I have empirical reason to believe otherwise. I have a lot of friends who are researchers in science, and they often complain about failed experiments. It's not in the nature of their mindset or training, normally, to prop themselves up like that. More common in the social sciences where philosophical views are being battled out.

      How am I supposed to know, for example, that you aren't some oil exec putting researchers on the stand to tarnish their objectivity? The questioning never ends except at aporia or arbitrary line drawing. Icentives, incentives incentives! The truth is, people are motivates by an array of factors that extend beyond grants. High among these for people in research is a sense of pride in their work, and absence of shame. Fudging the numbers typically grants neither while risks much.

      Remember the so-called "climategate" scandal? Remember how it wasn't really a scandal? Just saying.

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  4. See:

    http://en.wikipedia.org/wiki/Milankovitch_cycles

    Even if you buy the high atmospheric CO2 concentration leads to higher than normal temperatures on Earth, normal temperatures on Earth can get pretty damned cold.

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    1. There's a difference between TREND and CYCLE. One can be on the trough of a cycle while still trending upwards!

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    2. Jefftopia,

      http://en.wikipedia.org/wiki/File:Vostok_420ky_4curves_insolation.jpg

      You should notice that we are at the peak of this cycle (approx. 100,000 years per cycle) both in terms of atmospheric CO2 content and temperature.

      And this begs another question - should we commit to ending ice ages by stabilizing the Earth's orbit? Should we levy an ice age tax and use it to fund large solar powered earth stabilization rockets?

      I know I am arguing ad absurdum, but it seems silly to be concerned over man's contribution to climate change when there are significantly larger forces at work.

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    3. Interesting piece. I did some more searching and found that there is wide skepticism towards Milankovitch's theory with respect to global climate change. Let's leave this for now.

      Global Climate change discussions leaves some gaping holes in the debate. Even if Milankovitch's hypothesis is 100% accurate, we still have the problem of, for example, urban pollution, where CO2 and other noxious gasses are pushed by prevailing winds into cities, which then trap the gas.

      So how we should treat environmental issues extends far beyond the cliche "omg global warming" debate.

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  5. Professor Cochrane,

    You said: "The economic case for cutting carbon emissions now is that by paying a bit now, we will make our descendants better off in 100 years.

    Once stated this way, carbon taxes are just an investment."

    If you were talking about investing in green energy or other ways to fight climate change, I would agree. But, you are talking about taxing an externality. You are a believer in free markets and have told me on this blog before that, for example, there is no optimal level of saving that economists or the government can decide upon; the amount arrived at through a free market given few distortions is optimal.

    Similarly, the government and/or economists should not decide whether investing in stocks or in fighting climate change is optimal. We set up a free system, which includes taxing externalities fully. A carbon tax is not simply an investment in the future. A carbon tax forces consumers and producers to take into account all costs of their decisions. The correct carbon tax does not impose costs and benefits like an income tax that feeds into investments for roads and bridges. Rather, it pushes our system closer to a free and competitive market.

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    1. If the free market involves persons "dollar-voting" to reach optimality, then I don't see why voting politically cannot be considered reaching an optimality. If we, as a society, elect officials, and we elect them based on a platform that we are aware of, then it seems that the solution the government arrives on should be optimal with respect to some social welfare function. The political voting and choice to not relocate to another state/country was through voluntary consent, just like the free market.

      Thoughts?

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    2. First, we elect one president, two senators, and one member of the house, so it is difficult to make our voting choices based on a variety of economic decisions that these officials will make.

      Also, the extreme of what you are talking about is communism. Some goods, such as parks and national defense, are best provided by the government. Yet, most goods are optimally distributed by a free market system. If we let a majority-rule government interfere, then it is likely that total production will fall and most of us will eventually be worse off. Without prices arrived at in a free market, it is impossible to know the values each person places on various goods and services.

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    3. I hear and agree with you on the whole, but I'm not sure if I see a response to my questioning in your writing here.

      @first paragraph: True, one president, two senators, some congressmen and women. But, we also do this, *as a society*, willingly and well informed of the risk of not having our platforms instantiated. An individual may not get what she wants out of Congress, but, on the whole, the decisions of Congress should reflect the preferences in aggregate of the population.

      @Second paragraph: While Communism is a farce, technically, "it" (whatever Communism entails) IS optimal iff we democratically elect a communist government, because *society* has weighed the trade offs and determined that "it" is worth it.

      Let's not delve into philosophy here. I just wanted to conjecture that optimization doesn't necessarily have to come from market forces. The economy may crawl towards equilibrium from elsewhere.

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    4. I think Jefftopia would be wise to read something about Arrow's Impossibility Theorem or the huge literature on voting and welfare.

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    5. Well said Walter Nicholson. All that aside, Cochrane certainly believes we should allocate resources through a free market. I am curious to see how his views expressed above are consistent with that belief.

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  6. Under some discount rate assumptions it would be economically rational to poison our great grandchildren.

    I agree with firstly doing away with subsidies for CO2 production. It makes no sense to speak of taxing and subsidizing CO2 at the same time.

    Carbon taxes as government revenue generators might be more economically efficient than alternative tax measures and carbon taxes might be the most economically efficient way to reduce CO2 emissions.

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    1. One way to reduce CO2 emissions would be to extinguish the coal mine fires burning around the world.

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  7. I've found Bjorn Lomborg, the skeptical environmentalist, and the Copenhagen Consensus publications to offer reasonable perspectives on Climate Change (fka Global Warming) solutions. Even if you accept global warming as a "fact" (which I've seen reported Mr. Lomborg does), the cost of usual "solutions" seem to vastly outweigh the benefits. Even if global warming and the disasters alarmists predict unfold, market based solutions have to be more efficient than the crony capitalism "solutions" that we already have. It shouldn't take complex mathematical models to undestand that efficient resource allocation should favor solving current problems such as bad water and air which have much less expensive solutions over future potential problems with very expensive solutions.

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  8. You may want to correct a typo: "If growth stops, carbon emissions stop too." Carbon emissions are related to GDP, not GDP growth.

    The carbon tax has another argument in favor of it: we should tax things we want less of rather than things we want more of. If we are pro-growth and anti-carbon, we can replace taxes like the income tax with the carbon tax in a revenue-neutral way and come out better off.

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    1. That, plus excise taxes are more efficient and more inheriently fair as they leave less room for finagling and cronyism.

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    2. Didn't logic get thrown out the window?

      "The carbon tax has another argument in favor of it: we should tax things we want less of rather than things we want more of."

      Okay, so you are successful in taxing away carbon emissions. Meaning that as carbon emissions fall, the government collects less revenue from taxing them.

      "If we are pro-growth and anti-carbon, we can replace taxes like the income tax with the carbon tax in a revenue-neutral way and come out better off."

      And how is the successful taxing away of carbon emissions revenue neutral?


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  9. I love the logic. Society cannot afford to deal with all low probability catastrophic scenarios, therefore it should deal with none of them. Genius!

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    1. I didn't say that. We can't deal with all of them, so we need to choose carefully.

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  10. Professor, one of the premises here is that we can (with enough money) undo everything wrong that we are doing or going to do, correct?

    I believe that one of the main points in this discussion is: and if we can't? And if we can´t move people from Florida to Georgia, or Mars??

    And the costs of leaving Florida are just of the moving and the building of new houses? Really?

    Regards,

    Marco

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    1. That's not a premise, it's an important condition. The methane nonlinearity scenario is the case where more resources won't be enough, and investing in carbon reduction today is the one special investment that makes sense.

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  11. I am not satisfied with the argument about beta, since it doesn't address the national/international aspect of the problem.

    First of all, beta with respect to what market? Not the U.S. market, since global warming is global.

    And second of all, are we discussing a one-country tax or a global tax?

    If we're discussing a one-country tax and a beta between the cost of one-country carbon emissions and the return on that country's markets, Litterman's argument seems to make no sense. Only if we're discussing a global tax and a global market beta (whatever the "global market" even is!), does it make sense to me.

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  12. "Put that way, though, the first question might be why we are leaving our descendants with $18 trillion of Federal debt, and a bill for $70 trillion or so of unfunded liabilities."

    Hmm, but won't that $18tr will be owed to our descendants? And if we talking globally, it doesn't matter if those creditors are American or not. Unfunded liabilities? Isn't that our descendants' grandmothers' pensions and medical bills? Our descendants can either pay taxes for that, or look after their grandmothers directly (or of course let them die).

    That's not a criticism of the idea that making our descendants wealthy might be better than reducing CO2/growth.

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  13. I would love to see fuel taxes, carbon taxes, and sales taxes completly replace income taxes. Of course that is a pipe dream as those in power do not want to give up their ability to pick winners and losers using the tax code.

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  14. Tim Worstall pointed out that Europe has chosen to rely on fuel taxes rather than CAFE emission standard type regulation. The superior results speak for themselves:
    http://www.forbes.com/sites/timworstall/2013/08/07/why-we-want-a-gasoline-tax-not-cafe-standards/

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  15. "Throw out the whole department of energy,"

    I'm not totally against your position on energy policy, but I don't think you understand what the department of energy does. They aren't really a regulatory body--states regulate their own energy companies, and the EPA, not DOE, handles all federal regulations on energy production. Actually, most of what DOE does is nuclear security. It's an indispensable function, no matter how much you hate government. The rest of what DOE does is hand out a small amount of research grants for basic science. That's also unambiguously good for the economy.

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  16. One issue not mentioned is that when the US imposes a tax on carbon, the resulting reduction in the demand for oil and coal will cause other countries to buy more. The net reduction in world CO2 emissions might be 1/2 of the US reduction in CO2 emissions or less. This would be the case if the demand and supply for oil and coal were of equal magnitude and the shift caused by the tax is regarded as a shift in of the US demand for oil and coal. If the world supply of oil and coal is perfectly inelastic (for example, to take an extreme, oil and coal reserves will be used up in a century no matter what the price), then a US carbon tax will only determine where CO2 will be emitted, not how much.

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  17. Don't efforts to reduce carbon emissions also have negative beta (especially under something like cap & trade)?

    If the economy is booming then demand for emitting carbon will be high, so the cost of carbon permits will be high and we will spend a lot to reduce emissions.

    If the economy is stagnant then demand for emitting carbon will be low, so the cost of carbon permits will be low and we will not spend much to reduce emissions.

    (This is one argument that gets made in favor of cap & trade vs. a carbon tax. Under cap & trade this dynamic happens automatically; with a carbon tax there would be pressure in these directions but it would require government action to change the tax rate.)

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  18. 1. Excellent insight into mitigating black-swans. It's something that Taleb does not emphasize.

    2. The "carbon tax" discussion is not broad enough. The EPA needs a mechanism to tax externalities along some estimation of the cost of that externality. Mercury production, plastic cup production, natural gas and carbon production all fall under the same category.

    A huge benefit of broadening the discussion would be gaining experience with the system, and refining it over the years. Then, when handling some big, once-a-millenia thing, we'll be better prepared.

    3. Once we have an "environmental damage exchange" set up, the challenge is that nebulous valuation functions might lead to corrupted implementation. One way to avoid this would be to have competing insurers literally insure the environment. It could work like this:

    a) Federal regulators figure that mercury producers/users must be insured against the cost of environmental catastrophe. They also have to define "damage" and the "healthy" state. Tricky.
    b) The mercury goes to a number of "environment insurance" folks, who estimate the probability and magnitude of the environmental costs of whatever the producer is doing.
    c) The producer buys the insurance, and the insurer is on the hook to cover any costs down the line.

    This way: a) The producer has incentive to make production safe. b) The insurer has incentive to price the damage as accurately as possible c) In case of catastrophe, there are funds ready to be deployed for cleanup. d) If a company is "incorrectly" earmarked by the government as requiring insurance, the premium should be very low.

    4. This would have been a nice way to have handled the BP disaster. Imagine if BP had to buy environment insurance for it's rig. The insurer would probably have pointed out that poor construction necessitates a larger premium, and BP would have built the thing right. Otherwise, the insurer would be on the hook to pay damages to everyone. After the disaster, the insurers would re-calibrate risks and raise premiums.

    With experience with these once-a-decade problems, we'll be better able to handle global-warming.

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