An essay on climate economics at National Review.
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Climate policy is ultimately an economic question. How much does climate change hurt? How much do various policy ideas actually help, and what do they cost? You don’t have to argue with one line of the IPCC scientific reports to disagree with climate policy that doesn’t make economic sense.
Climate policy is usually framed in terms of economic costs and benefits. We should spend some money now, or accept reduced incomes by holding back on carbon emissions, in order to mitigate climate change and provide a better future economy.
But the best guesses of the economic impact of climate change are surprisingly small. The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100.
Now, 5 percent of GDP is a lot of money — $1 trillion of our $20 trillion GDP today. But 5 percent of GDP in 80 years is couch change in the annals of economics. Even our sclerotic post-2000 real GDP grows at a 2 percent annual rate. At that rate, in 2100, the U.S. will have real GDP 400 percent greater than now, as even the IPCC readily admits. At 3 percent compound growth, the U.S. will produce, and people will earn, 1,000 percent more GDP than now. Yes, that can happen. From 1940 to 2000, U.S. GDP grew from $1,331 billion to $13,138 billion in 2012 dollars, a factor of ten in just 60 years, and a 3.8 percent compound annual growth rate.
Five percent of GDP is only two to three years of lost growth. Climate change means that in 2100, absent climate policy or much adaptation, we will live at what 2097 levels would be if climate change were to magically disappear. We will be only 380 percent better off. Or maybe only 950 percent better off.
Northern Europe has per capita GDP about 40 percent lower than that of the U.S., eight times or more the potential damage of climate change. Europe is a nice place to live. Many Europeans argue that their more extensive welfare states and greater economic regulation are worth the cost. But it is a cost, which makes climate change look rather less apocalyptic.
India’s $2,000 per-capita GDP is one-thirtieth of the U.S.’s $60,000. The cost of climate change to India is trivial compared with the benefits India could obtain by adopting economic institutions more like those of the U.S. — which themselves are far from perfect.
Growth is not an inexorable force. Each step of growth is hard won and fragile. Growth could be 3 percent or more. Growth could be 0 percent or less. We have seen countries move backwards for decades. Growth risk is an order of magnitude larger than climate risk.
If the question is, “What steps can we take, perhaps costly today, to improve GDP in the year 2100?” hurried decarbonization is not the answer. If the question is, “What steps can we take to improve the well-being of the world’s poor?” climate policy is not the answer, with many zeros before you get to the decimal point. Sturdy pro-growth policies, however unpopular to so many in today’s political class and incumbent businesses and labor organizations, are the answer.
Even 2–5 percent of GDP in economic cost estimates are wildly uncertain — more uncertain even than the meteorological parts of climate models. Imagine yourself in 1921, asked to estimate the impact of carbon emissions on GDP in the year 2000. Well, you would have taken out your slide rule, and looked at how much gas a Ford Model T consumes, how many people will want to travel on coal-fired steam railways, and so on. You would have looked at the statistical association between heat and output. The estimates might have looked pretty bad in an economy dependent on low-tech agriculture and without air conditioning.
And you would have been drastically wrong. Our economy looks nothing like anyone could have guessed in 1921. Your guess of how much our economy would be hurt by (or benefited from?) 20th-century carbon emissions would have been less likely to be even vaguely correct.
Most of all, you would have missed the main story: The 20th century produced the greatest gain in human well-being of all time, by orders of magnitude, despite warming, and despite its upheavals. You would have had no clue of the move to a service economy, far less dependent on weather, or adaptations including air conditioning, transport, high-tech agriculture, and how much cleaner and healthier the 2000 economy would be. If you had ordered a return to horses and buggies, you would have doomed billions to short lives of squalid poverty.
That is the unenviable task of today’s economists who measure the effects of climate change on the economy 80 or more years from now.
Looking under the hood of big models, it is not even obvious that climate change hurts the economy at all. People and companies are moving in droves from the cold Rust Belt and cool, coastal California to Texas, even though Texas is a lot hotter than anything climate change will bring to the former.
In technical terms, estimates of the economic cost of climate change rely in large part on the statistical association between weather and productivity in today’s economy. But all statistical associations offer questions. Yes, on average hotter countries are not as productive as colder ones. But sometimes they are productive — Singapore, for example. So you have to somehow take out the immense effects of government, culture, past investments, and so on. Then you have somehow to deal with the fact that the economy 100 years from now will be nothing like today’s. People will invent new technologies that will help them to adapt. Yes, recent heat waves in Oregon have been damaging. But similar heat in Texas is considered a cool day. How many people will buy air conditioners in Oregon in the next 80 years?
The central uncomfortable fact is that the output of an advanced industrial economy like the U.S., moving headlong into services, is just not that sensitive to climate or weather. The worst heat waves, floods, and storms just do not move national GDP.
GDP is not everything, of course. GDP measures income, how much people earn and how much they produce. It leaves out a lot — the tremendous value of free or nearly free goods, the value of clean air and water, good health, long life, a free and egalitarian society, and so forth. But all of these things are better when GDP is better, and far worse where GDP is worse. Only a productive people can afford them. The U.S. today is immeasurably better off than in 1940, or 1840 on all these measures too. Our air and water are cleaner than just about everywhere else in the world. Our welfare state is much more generous than those of poor countries or what it was in 1940. GDP is imperfect, but if anything it understates the benefits of economic progress.
What about floods and droughts, wildfires, heat waves, all the events you see on the news along with another scolding about climate change? Whether carbon emissions are leading to more weather extremes is actually scientifically contentious. Fortunately, once again, we do not need to get into this debate. Even if these claims are correct, they do not justify draconian climate policy.
I live among wildfires in California, which are very unpleasant. Suppose, for the sake of argument, that the increase in wildfires is entirely due to carbon-caused climate change. But even if the U.S. adopts all the recommendations of the IPCC, or the Green New Deal itself, we will only contain the further rise of temperature. The pre-industrial climate will still not return in our great-great-great-grandchildren’s lifetime.
Even if rising greenhouse-gas emissions are the ultimate cause of more frequent and severe wildfires, the only path to actually doing something about wildfires is to spend money on fire prevention and forest management — clearing out the accumulated brush. (Reforming zoning and planning laws so it’s easier to build in cities will help, too.) It will cost money, perhaps a lot of money compared with historical budgets, but a tiny amount of money compared with GDP or government stimulus programs, or, say, high-speed trains. CalFire’s budget is $2.9 billion, 1 percent of the state of California’s budget, and 0.1 percent of California’s GDP. The supposedly carbon-saving high-speed train is budgeted at $80 billion.
This example illustrates a larger point. If the question is how to blunt the economic impact of climate change, adaptation has to be a major part of the answer. There seems to be a great disdain for adaptation, clearing the brush, building dikes and dams, moving to higher land, installing air conditioners, moving or engineering crops and so forth. Spread over a hundred years, the costs of adaptation are not large. Perhaps climate-policy advocates dismiss talk of adaptation because, by reducing the damage that might be caused by greenhouse-gas emissions, it makes emissions less scary. Climate models are also short on adaptation and innovation, perhaps for the same reason.
Miami might be six feet underwater in 2100, but Amsterdam has been six feet underwater for centuries. They built dikes. By hand. Amsterdam is a very nice place, not a poster for dystopian end of civilization. Buildings decay and need to be rebuilt every 50 years or so. Just start building in drier places. At a minimum, the U.S. government could stop subsidizing construction and reconstruction in flood and fire zones!
What of “tipping points,” stories of unforeseen disasters that the IPCC charitably labels “low-probability low-confidence”? Isn’t it worth taking out insurance? The trouble is that if anvils might fall from the sky, pianos might fall from the sky, too. If this is not just an excuse to spend money on carbon, but instead an open-minded effort to identify all out-of-the-box dangers, we end up spending all of GDP on insurance. Insurance arguments must include some attention to the probability of events and the cost of those events.
Given how small and uncertain the economic costs are, climate-policy advocates really ought to give up the economic argument. Admit that economic losses are just not the issue. Make the standard environmental case, as they successfully did for clean water and clean air: This will cost money. It will reduce GDP, now and in the future. But, argue that it is a cost we must bear to save the environment.
But that argument too needs to be much clearer and better quantified. The media and too much of the scientific literature, such as IPCC reports, offer only hypotheticals and scare stories. For a small donation, pictures of cuddly animals might do. For trillion-dollar costs and regulations, they do not. To justify such costs, we need some dollar value on specific environmental damage of climate change. Yes, the numbers are uncertain. But those numbers are the only sensible framework to discuss spending trillions of dollars on climate now.
Naming costs and benefits is particularly useful to analyze whether some of those trillions are not better spent on other environmental issues. For example, species extinction is a real problem. We are in the middle of a mass extinction. But the elephants will die from lack of land and poaching long before they get too hot or dry. For a trillion dollars, how much land could we buy and turn over to complete wilderness? How many more species would we save that way, rather than spending similar amounts of money on high-speed trains and hurrying the adoption of electric cars? The oceans are in trouble. For a trillion dollars, how much over-fishing, chemical pollution, plastic garbage, or noise could we fix? Economics is about choice, and about budget constraints.
As much as media bleat that climate change is a current emergency with “disparate impact,” the world’s poor face much worse environmental problems: smoky air, chemicals, fetid water, easily preventable diseases. For a trillion dollars a year, we could radically improve their human environment.
Still, climate change is real and undesirable. What should we do about it?
Economics offers a few guidelines. The first is explicit cost–benefit analysis. For every step one wishes to take, figure out how much it costs, and how much it will reduce carbon.
Even though we don’t really know the economic or environmental cost of carbon, cost–benefit analysis is vital so that we do whatever we do efficiently. Avoid doing incredibly expensive things that save little carbon, and don’t ignore unfashionable things that might save a lot of carbon at lesser cost.
Without numbers, we will follow fashion. Today it’s windmills, solar panels, and electric cars. Yesterday it was high-speed trains. The day before it was corn ethanol and switchgrass. Actually addressing climate change in a sensible and effective way is likely to involve unfashionable technologies, and new technologies without political backers. A focus on cost–benefit, carbon per dollar, is vital to allow different technologies to compete, and new technologies to emerge. The alternative — and current predilection — is for different technologies to compete for political favor, a mechanism we all know well, along with its disastrous results, especially regarding innovation and cost reduction.
Nuclear energy is very safe and emits no carbon. Many climate-policy institutions cut their teeth on the anti-nuclear movement of the 1980s. The carbon advantages of nuclear are a bitter pill for them to swallow. Carbon capture and storage removes carbon from the atmosphere. Since it would allow us to burn fossil fuels for a few decades while ramping up alternative technologies, it is disparaged by climate activists. [In California, hydro does not count toward "renewable" goals, given historic antipathy to dams, or perhaps a preference for fish over birds. Nuclear of course does not count.] If warming and the climate change it induces really have apocalyptic effects, then geoengineering to reduce temperatures ought to be at least considered. Are these technologies part of the solution? I don’t know. Only dollars per ton of carbon, or dollars per degree of future temperature, can tell us.
From an economic perspective, the ideal policy combines a carbon tax, whose revenues reduce other marginal tax rates, with strong support for basic R&D.
A carbon tax is a win-win. Many climate advocates disparage the carbon tax, on the view that people will not reduce energy consumption and carbon emissions when the price goes up. If so, great! A bankrupt government can raise a lot of money, and reduce other heavily damaging taxes. If people drastically reduce carbon emissions to avoid a small tax, the government doesn’t earn much money. Great! We save the planet at low cost.
A visible price incentivizes behavior that regulation cannot touch. Maybe rather than buying a Tesla, you should move closer to work — or carpool. Maybe cutting out one international trip does more than buying the Tesla. Maybe zoning and permitting reform will allow building houses so people don’t commute in the first place. Is it easier to decarbonize transport, home heating, cement, steel, or agriculture? Only by setting a price can we know the answers, and incent the millions of little daily decisions that go in to reducing carbon emissions efficiently.
A carbon tax bakes in cost–benefit analysis, and otherwise incalculable carbon-reduction pledges. Just buy the cheapest option and you’re doing your bit.
But the main point of a carbon tax will be to make new technologies cost-effective, and get them going and going more cheaply in the brutally competitive private market, not the cost-plus market of political subsidies.
Thus, if the question is how to reduce carbon as much as possible while damaging the economy as little as possible, an evenly applied carbon tax — even to the coal emissions used to create solar panels and car batteries — is the answer, in place of regulation and subsidies.
Like many economists, I used to start and stop at a carbon tax, for just these reasons and in return for getting rid of all the extensive and ineffective energy regulations and subsidies. But two recent developments have tempered my enthusiasm.
First, across all the various scenarios considered by the IPCC, total warming is robustly related to total carbon. Alternative scenarios, including carbon taxes, simply delay warming and its consequences. Even with alternatives, the coal and oil get burned eventually and the climate warms.
Second, carbon taxes are right now a political nonstarter. You can see this most clearly in the hilarious plea from the White House for OPEC to increase production in order to keep gas prices down. This from the same administration that canceled Keystone, “suspended” the issue of new oil and gas leases on federal lands, and is spearheading a “whole of government” move to rapid elimination of fossil fuels before alternatives are in place, all of which must raise the price of gas. What’s going on? Well, clearly, governments find they must take underhanded, obscure regulatory steps to drive up the price of gas, with plausible deniability, rather than enact simple, transparent, much more effective and much less costly carbon taxes, which voters will notice.
But our current climate policies are not an answer either. Notice how our policy-makers never tell us how much they think each new policy will reduce year 2100 global temperature or raise year 2100 GDP. The reason is that the numbers are tiny. If the question is how to funnel billions of pork to constituencies by painting it green, however, these policies are a natural answer.
The bottom line: A policy focused entirely on making what we do now more expensive, either by regulation or by taxation, will not work. Massive subsidies for alternatives will not work. Innovation, aimed at lowering the cost of noncarbon-energy production, really is the only answer that is going to work. Just as innovation is what made us so much better off than our great-grandparents.
Carbon policy is full of economic fallacies. Mother Earth does not care if solar panels are made in the U.S. or China. She just wants them to be cheap. “Millions of green jobs” are a cost, not a benefit. Our businesses cannot find enough workers already, and taking millions of people away from other activities hurts the economy. Financial regulators are now taking on climate change, justifying this dramatic expansion beyond their legal authority by endlessly repeating a fantasy that “climate risk” imperils the financial system in the near future.
Climate advocates have done themselves and the planet a great disservice by wrapping climate policy in increasingly shrill, apocalyptic, partisan, and unscientific rhetoric. “Global warming” became “climate change,” reflecting in part effects on rainfall or different geographies, but also inviting media commentary on every weather event to become a sermon. In the Green New Deal and comparable movements, it became “climate justice,” wrapping climate inexorably in a far-left-wing politics of anti-capitalism. The required vocabulary moved on to “climate crisis.” Still not enough: In April the (formerly) Scientific American proclaimed that, in coordination “with major news outlets worldwide,” it would start using the term “climate emergency.” Will “climate catastrophe” be next?
There is nothing in climate science to justify apocalyptic rhetoric. If the question is, “What threatens the collapse of civilization,” war, nuclear war, civil war, pandemic, crop pandemic, and social and political disintegration are far higher on the list. No healthy society fell apart over a slow and predictable change that came over a hundred years. There is nothing in climate science to say life on earth is threatened. Climate has varied far more in the past. The retreat of ice 10,000 years ago came from a much larger and more natural warming, and was a boon to humans, producing agriculture and civilization.
There is nothing in the science that justifies uniting “climate” with a left-wing political agenda. Yet even the IPCC mixes climate change with “sustainable development, poverty eradication and reducing inequalities.” Mixing anti-capitalist politics with climate change makes those skeptical of the rest of the agenda wonder about the objectivity of climate science, and whether the planet really is in such danger.
People are smart, and when they suspect facts are bent to a political cause they stop listening. Actually doing something about the climate will require decades of consistent policy. That will not happen by today’s elites crying wolf and cramming regulations down the throats of a disdained and temporarily distracted electorate.
Too many people, rightly critical of climate policies, attack the science. Though that science is full of uncertainties, the policies that follow from the science are much less certain. Two degrees of warming does not call for the Green New Deal. Economics is the key element in designing a workable climate policy.
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Acknowledgement: This is in many ways a summary of lots of climate economics articles I've read. I didn't festoon it with links and footnotes, but I want to acknowledge once that most is not original but rather a collection of lots of other people's ideas
Updates:
Climate policy tends to jump to "what shall we subsidize and force," as if we live today in free market paradise subject only to externalities. In many cases, getting out of the way is the first answer, not adding counter-subsidies and regulations to the current subsidies and regulations that cause us to emit too much carbon.
Nuclear power is a great example. We do not need lots of funding for nuclear power. We need the current regulatory regime that strangles nuclear to be reformed. More here.
Likewise, @MerijnKnibbe added
With numbers, ...we push for insulation, working at home, solar panels, more people per home, less use of concrete etc etc. ...
Before we "push for" we might think about "allow." Before we subsidize electric cars, trains, hyperloops etc. to move people around with less carbon, we could remove all the barriers to simply letting people live nearer where they want to go in the first place.
And the climate effects of residential zoning, which force low density, lots of house per person, long commutes, etc. are a good example of "allow," as well as things that a price on carbon will naturally enlighten, but since nobody makes a lot of money off of it do not naturally rise to the top of a control and subsidize agenda.
Fracking and natural gas are good cases. The US has led the world in carbon emission reductions for the last 10 years. Why? Windimills? Teslas? Switchgrass? No, fracking and the switch to natural gas. Fracking not on public lands, and actively opposed or even illegal in blue states and by our current Administration. We led the world in carbon emission reduction because fracking was allowed, not because it was mandated or planned! Yes it's a "transition fuel," but that's the whole point.
See the pattern? An innovation made a cleaner fuel cheaper, people switched quickly to it, and emissions went down. That this innovation was privately funded, refined in a brutally competitive market place, and both unexpected and resisted by government at every stage only adds salt to the climate planner's wounds.
Lots of subsidies support suburbs. Infrastructure is a big one. There are lots of good strong towns articles on it, but this is a great one:
ReplyDeletehttps://www.strongtowns.org/journal/2017/1/9/the-real-reason-your-city-has-no-money
Thank you, I think you've covered the most important points of the conversation here. "What's the worst that can happen" is the question that must be asked every time, I find it difficult to understand why this is not a standard part of the process.
ReplyDeleteWe can conclude that leftists are always wrong. About everything. This is a behavioral explanation, which I don't buy.
ReplyDeleteLefties just want to maximize power, and rationally make these stupid climate claims. The way to fight leftism is not to explain anything. Because they are not interested in knowing.
"But the main point of a carbon tax will be to make new technologies cost-effective, and get them going and going more cheaply in the brutally competitive private market, not the cost-plus market of political subsidies."
ReplyDeleteThe "carbon tax" runs up against a limit. For commodities for which the price elasticity of demand is inelastic, a very high "carbon tax" would be required to make it a feasible solution. But at some level, the "carbon tax" becomes Pareto-inefficient, i.e., the point is reached where the tax cannot make improve social welfare without making some worse off. For example, medium- and low-income households in rural or semi-rural settings lacking in public transportation alternatives. If the back-up technology is a Tesla-S, then it is not a "back-up technology" in the true sense of the term.
Increasing the consumer price level by levying a "carbon tax" in an effort to render cost-ineffective technology "cost-effective" is poor public policy.
The current government of Canada has announced such a policy viz. its national "carbon tax", and intends to raise that tax levy to Cdn$170 per metric ton of CO2-equivalent by AD 2030. The current level of the national "carbon tax" is Cdn$45 per metric ton. We will see whether the government is returned following the federal election being held on the 20th of September this year. All of the opposition parties have pledged to maintain that target level for the national "carbon tax", and some have promised to go further in terms of the tax and other measures to curtail CO2 emissions from households, commerce and industry, so there is no real debate on the issues taking place. The assumptions are not being tested.
For a real-time full-scale laboratory for CO2 curtailment policies look across the US-Canada border. All of the parties in the contest are vying to see who can be the first across line and do their best to wreck the greatest havoc to the economy and government finances. There are no vaible conservative market-based alternatives on offer this election. It matters not at all that Canada's contribution to global climate change is a de minimis 1.6%, or that reducing this figure to 0.16% will not have a material effect on global GHG emissions or the course of "climate change" going forward. It has become an article of faith that Canada must "do its 'fair share'" irrespective of economic consequences. Worse, the public policy alternatives being pitched cannot demonstrate that the outcome is achievable without draconian measures or that the benefits outweigh the costs. We can agree that "fools rush in where angels fear to tread." To see an entire country put its collective future on the line in this fashion is unusual but not unheard of. It bears watching.
Old Eagle Eye,
Delete"The carbon tax runs up against a limit. For commodities for which the price elasticity of demand is inelastic, a very high carbon tax would be required to make it a feasible solution. But at some level, the carbon tax becomes Pareto-inefficient, i.e., the point is reached where the tax cannot make improve social welfare without making some worse off. For example, medium- and low-income households in rural or semi-rural settings lacking in public transportation alternatives. If the back-up technology is a Tesla-S, then it is not a back-up technology in the true sense of the term. Increasing the consumer price level by levying a carbon tax in an effort to render cost-ineffective technology cost-effective is poor public policy."
I would say that any government policy whose desired effect is to raise the consumer price level is a poor public policy choice - carbon taxes, VAT, any consumption tax, crop destruction, paying people to sit at home, etc, etc.
The reason is simple - government policies that seek to raise the price level place the burden of risk on those that can least afford to take risk.
A Pareto optimal government policy would be for the federal government to subsidize clean energy technologies through the sale of government equity rather than through direct taxation or borrowing. In this way, the burden of risk is shouldered by those that choose to take risk rather than by taxpayers as a whole or worse.
I don't expect you to understand.
I have explained the concept of government equity to you a number of times, each time falling on deaf ears.
Old Eagle Eye,
Delete"The carbon tax runs up against a limit. For commodities for which the price elasticity of demand is inelastic, a very high carbon tax would be required to make it a feasible solution. But at some level, the carbon tax becomes Pareto-inefficient, i.e., the point is reached where the tax cannot make improve social welfare without making some worse off. For example, medium- and low-income households in rural or semi-rural settings lacking in public transportation alternatives. If the back-up technology is a Tesla-S, then it is not a back-up technology in the true sense of the term. Increasing the consumer price level by levying a carbon tax in an effort to render cost-ineffective technology cost-effective is poor public policy."
I would say that any government policy whose desired effect is to raise the consumer price level is a poor public policy choice - carbon taxes, VAT, any consumption tax, crop destruction, paying people to sit at home, etc, etc.
The reason is simple - government policies that seek to raise the price level place the burden of risk on those that can least afford to take risk.
A Pareto optimal government policy would be for the federal government to subsidize clean energy technologies through the sale of government equity rather than through direct taxation or borrowing. In this way, the burden of risk is shouldered by those that choose to take risk rather than by taxpayers as a whole or worse.
I don't expect you to understand.
I have explained the concept of government equity to you a number of times, each time falling on deaf ears.
FRestly, you'll have to provide a specific example of what you mean by the term "government equity".
DeleteI already did in several previous posts.
DeleteThe thread has been lost. Give it another go.
DeleteGovernment equity would consist of fixed term, zero coupon, non-transferrable securities that would be redeemable in fulfilling a future tax liability. For instance, US Treasury sells you a five year security with a 6% annual return. 5 years from now you can use that security to fulfill a federal tax liability.
DeleteNotice how this is different from a government bond. With bonds, tax payers as a whole make the interest payments on the bonds. With the equity as I have described, the owner of the security is ultimately responsible for his / her own returns on investment.
Notice that under law, this would not constitute borrowing by the federal government subject to limit set by Congress.
To borrow (in a legal sense) means to receive an asset from someone with the intent of returning that asset (with or without interest) at a future date. Obviously when money is borrowed, the exact same money (bills, coins, etc.) are not returned because money is fungible.
With government equity, money would be given to the federal government to purchase said equity, but no money would be returned by the federal government when the equity is redeemed.
In essence, the federal government would be selling tax breaks through the Treasury department - something that the Laffer curve Republicans can't seem to get their head around. In you want to cut taxes, then sell tax breaks that constitute a legally binding contract that cannot be undone by a future President / Congress.
There is a lot more to this regarding trade balance, economic incentives, productivity, war bonds, etc. that I would be happy to explain if you are interested.
Old Eagle Eye,
DeleteFrom your above:
"For example, medium- and low-income households in rural or semi-rural settings lacking in public transportation alternatives. If the back-up technology is a Tesla-S, then it is not a back-up technology in the true sense of the term. Increasing the consumer price level by levying a carbon tax in an effort to render cost-ineffective technology cost-effective is poor public policy."
Is government equity sold to high disposable income households in any setting (rural, urban, or anything in between) and used to subsidize "cost ineffective" technology Pareto optimal and good public policy?
Your concept of "government equity", as explained through the example given above, is similar to "tax farming" that was common in France and sometimes in England and in the early years of republican America after independence. A capitalist or several capitalists would pay a lump sum in money to the government in exchange for the right to collect taxes from a portion of the population in a given region or district for a given number of years. The government receives the lump sum of money in advance of the tax liability accruing, and the capitalist(s) receive the monopoly on collection of those tax liabilities when those liabilities are due. Often the "tax farmer" would extract more than the amount of the tax liability due at the time of collection.
DeleteIn your concept, the relationship between the government and the capitalist or tax payer is slightly different. Under your vision of "government equity", the tax payer swaps an uncertain liability in the future for a certain lump sum payment in the present. The example has the lump sum payment in the present equal to the discounted value of the future tax credit, at a face value of K dollars on maturity T years from the present date. The discount rate is 6% per annum.
The capitalist or firm that responds to the government's "GEqty" contract, has expectations of a future taxable income and a matching future income tax liability. For simplicity, assume that the capitalist's income follows a stochastic Brownian Motion process with a drift rate of alpha (α) per unit time and a volatility of sigma (σ) per square-root of unit time, supported over the real number line (-∞, +∞). Let S(t) be the taxable income level at time t. Then, dS(t) = α dt + σ dB(t), gives the instantaneous change in S(t) in the interval ( t, t+dt]. The expectation and variance of dS(t) are S(0) + α t , and σ² t, respectively. Consequently, S(t) ~ N{S(0) + α t, σ² t}.
The payoff, V(T), to the investor, at maturity (t = T), is given by:
V(T) = τ S(T) – [min{τ S(T),0} + max{τ S(T) – K, 0}].
V(T) is stochastic, and Normally distributed. The expected value of V(T) is obtainable in closed form.
The expected payoff is given by:
E{V(T)} = τ∙[S(0) + α∙T]∙[Φ{h(K/τ)} – Φ{h(0)}] – τ∙σ²∙T∙[φ{h(K/τ)} – φ{h(0)}]+K∙[1 – Φ{h(K/τ)}]
where, Φ{h(x)} is the CDF of the Normal distribution, and φ{h(x)} is the pdf. The function h(x) = [x – S(0) – α∙T]/[ σ∙√T] is the Normal variate.
The marginal tax rate applied to the taxable income to obtain the tax due is τ.
This completes the development. The expected net present value of the payoff is
F(0, T; S(0), α, σ, τ, K, ρ, δ) = exp(–ρ∙T)∙E{V(T)} – exp(–δ∙T)∙K
The variance of the NPV of the payoff is exp(-2∙ρ∙T)∙E{[V(T) –E{V(T)}²]}. This quantity is obtainable in closed form.
The investor(s)/capitalist(s) are risk-neutral in outlook. The investment is accepted if F(0, T; S(0), α, σ, τ, K, ρ, δ) is positive. This criterion, not the discount rate that the government is offering on "GEqty" is determinative for the final investment decision for this class of investor.
The features of GEqty that distinguish it from GBond are (1) non-transferable, (2) not exercisable prior to maturity (T periods forward), (3) only useable for settling tax liabilities payable to the US government, (4) not a refundable tax credit. These features will limit broad uptake of the GEqty securities.
The instrument is best characterised as a forward contract that is non-tradeable and without intrinsic value prior to maturity; consequently, it will be of little interest to speculators. It has no value as a hedge instrument.
Future taxable income, S(T), must exceed the maturity value K in order to realize the investment rate, δ, which is the discount rate offered by the government. Given the risk-reward imbalance in GEqty, it will be poorly received if ρ > δ.
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DeleteOld Eagle Eye,
Delete"The features of GEqty that distinguish it from GBond are (1) non-transferable, (2) not exercisable prior to maturity (T periods forward), (3) only useable for settling tax liabilities payable to the US government, (4) not a refundable tax credit. These features will limit broad uptake of the GEqty securities."
That's funny because our system of Social Security has many of the same features (not transferrable, not exercisable prior to maturity, etc.) - do you see a limited broad uptake in people making Social Security payments?
These features MIGHT limit broad uptake of GEqty securities in the banking / insurance industry, but only because they are designed towards individual tax payers and companies outside the banking / insurance sector purchasing them.
Mutual funds hold tax deferred savings I would think would be interested in them though.
"The instrument is best characterised as a forward contract that is non-tradeable and without intrinsic value prior to maturity; consequently, it will be of little interest to speculators. It has no value as a hedge instrument."
Why do I care if it has value to speculators? It has value to any productive US citizen that has a long lifetime of future tax liability. And as a hedge instrument for firms engaged in the production of goods, it has a lot of value.
If a firm borrows at 4% nominal and has government equity returning 6% nominal, what is their after tax cost of debt service? Negative 2%?
And so if a firm's after tax cost of borrowing can in fact be negative, why would it need to ever raise prices? (See zero bound for nominal interest rates).
"This criterion, not the discount rate that the government is offering on GEqty is determinative for the final investment decision for this class of investor."
Please stop thinking of this as a financial instrument meant to be bought and sold by banks, insurance companies, and hedge funds.
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DeleteOld Eagle Eye,
Delete"Revenue raised as proceeds of a forward contract that offsets future income tax receipts shifts spending from the future period into the present period. The government raises the present value amount of P(0) = exp(-δ∙T)∙K dollars in exchange for contract that will diminish future income tax receipts by P(T) = K dollars."
And the value of all future income tax receipts can be considered infinite absent armageddon, foreign conquerer, etc. under any non-zero tax rate. So what has actually been reduced?
"The application takes from Peter (the future would-be recipient of government services valued at cost of P(T) dollars in period T) to pay Paul (the present period recipient of a subsidy valued at P(0) dollars in period 0) to adopt a cost ineffective technology today."
There is a HUGE difference. Under my scenario, the federal government does not TAKE from Peter. Instead, Peter is willing to forgo holdings of a liquid transferrable asset (money) for an illiquid asset that offers a risk bearing rate of return.
"Peter is made worse off, and therefore GEqty is not good public policy."
Peter is willing to take risk, the same way that any purchases of corporate equity is willing to take risk. Whether Peter is made better off or worse off depends predominately on what Peter does after taking that risk.
"As shown elsewhere in this thread, GEqty is an inferior security to GBond paying the same yield to maturity."
Why do you think GEqty should pay the same yield to maturity that a GBond does?
GEqty is a risk bearing asset and investors should be compensated for that risk.
Should corporate equity always pay the same rate of return as corporate bonds?
You have complained in previous posts that the Fed has suppressed interest rates on government bonds through open market operations. Suppose Treasury started selling equity that could not be purchased by the FOMC and the Fed continued to conduct open market operations - what do you think would happen to the spread between GEqty and GBonds?
"Two wrongs don't make a right."
You have yet to convince me that government equity is the second wrong, nor did you identify that government subsidies are the first wrong.
Treasury sets rate of return offered on government equity equal to output gap plus potential real GDP. As output gap gets large (during recession), Fed funds rate falls (dragging down bond yields) but rate of return offered on government equity increases - see countercyclical tax policy.
DeleteOEE,
DeleteThe problem that I see is that you seem incapable of evaluating the government's financing decision in and of itself (See Irving Fisher's Separation theorem). So let me ask it this way - federal government sells equity (as I describe it) and uses the proceeds to retire debt.
Is this good public policy from:
1. A trade balance perspective?
2. An independent central bank perspective?
3. An economic incentive perspective?
4. A productivity perspective?
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DeleteOEE,
Delete"A non-transferable security that can only be used by the purchaser to pay a future tax liability on a set date, that security being personal to him alone, and is extinguished should he perish before said date arrives, is not a desireable wager."
To someone that is "Old" as you profess to be through your moniker, probably not. To someone that is young and has a lifetime of tax liability ahead of them, I would say that it a pretty desirable wager.
"Your last paragraph sets up a 'straw man'. GEqty doesn't exist, and likely will not exist in any form."
Because? An "Old" person like you has no interest in it?
"Social Security payments paid from employment earnings are mandated by law."
And government equity as I have described it would be a legal form of retiring a tax liability - so what is your point?
"A point that you should note, as a reader of John Cochrane's blog, is that the U.S. primary surplus is not affected by the method of financing used to raise funds for the government. The primary surplus determines the price level, if you follow John's argument."
No, John's argument is that the retirement of debt determines the price level. Whether that happens through a surplus or through the conversion of debt to equity has the same effect.
"Your penultimate remark--you need to ask yourself, what sparked the recession in the first place? More often than not, it was the CB raising the overnight interest rate or the FF rate to a level inconsistent with the natural rate of interest."
And the "natural" rate of interest is determined by what precisely? My inclination is that it is in part determined by the liquidity of assets. When the federal government sells illiquid assets (for instance Social Security benefits or equity as I have described it), this will have a tendency to raise the natural rate of interest.
"Even if GEqty existed, there'd be no takers for it in a recession---Cash is King!, if you recall."
Really?!?! And there were no buyers for corporate equities during the last recession, the recession before that, and the one before that? That's your argument?
"In fact, in a recession, the value of GEqty would plummet to zero. Why?--because taxable income plummets to zero and below zero in a recession. Contrary to your notions, GEqty is pro-cyclical, not contra-cyclical."
Some gains on GEqty would become unrealized, that it is why it is a risk asset. The contra-cyclical aspect is the rate of return offered by Treasury (as I have already explained).
"But, if debt retirement is your thing, you have two choices"
I have already explained "my choice".
"We've exhausted this topic. Time to move on."
Okay, here is your argument from above:
"But at some level, the carbon tax becomes Pareto-inefficient, i.e., the point is reached where the tax cannot make improve social welfare without making some worse off."
And here is your proposal for reducing debt:
"....increase taxes across the board, or implement a national ad valorum sales tax, such as Canada's GST which taxes all goods and services with a few exceptions."
And a national sales tax would be Pareto inefficient for the same reason that a carbon tax is Pareto inefficient.
"...(2) is next to impossible in today's America, but will be forced upon Americans if and when Congress fails to vote an increase in the debt ceiling this month or next."
Try again - see US Constitution Section 2, Article 3.
"We've exhausted this topic. Time to move on."
Just remember. You started this discussion by worrying about who gets harmed in a carbon tax policy proposal. I offered a solution where risk is willingly absorbed by individuals (rather than thrust upon those who can least afford to take it).
Finally,
Delete"A point that you should note, as a reader of John Cochrane's blog, is that the U.S. primary surplus is not affected by the method of financing used to raise funds for the government. The primary surplus determines the price level, if you follow John's argument."
https://johnhcochrane.blogspot.com/2021/09/inflation-in-shadow-of-debt.html
The title of John's latest article is "Inflation in the shadow of debt", not "Inflation in the shadow of primary deficits".
"Climate policy is ultimately an economic question."
ReplyDeleteClimate change is a global (not local) phenomenon. As such, it's scope exceeds the reach of a national central bank or taxing authority.
"The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100."
The UN has no global taxing or monetary policy authority.
"Carbon capture and storage removes carbon from the atmosphere."
Carbon capture and storage removes both carbon AND oxygen from the atmosphere (hence the term carbon di-OXIDE).
From an economic perspective, the ideal policy combines a carbon tax, whose revenues reduce other marginal tax rates, with strong support for basic R&D.
"A carbon tax is a win-win."
Wrong, wrong, and wrong again.
First, any tax is a localized economic policy trying to address a global phenomenon and doomed to fail for that reason alone.
"Many climate advocates disparage the carbon tax, on the view that people will not reduce energy consumption and carbon emissions when the price goes up. If so, great! A bankrupt government can raise a lot of money, and reduce other heavily damaging taxes."
Win - government raises revenue and other "damaging" taxes fall or remain unchanged
Lose - private sector carbon emissions keep climbing
Lose - public sector carbon emissions remain the same or rise
"If people drastically reduce carbon emissions to avoid a small tax, the government doesn’t earn much money. Great! We save the planet at low cost."
Win - private sector carbon emissions falls
Lose - public sector carbon emissions are unchanged or rise
Lose - government revenue falls and other "damaging taxes" must be increased to make up for the shortfall
Do you know what the term win-win even means?
Frank,
DeleteYou are certainly very smart and I agree with your point about this being a global issue and thus one country is constrained from large action. But the last line of your post is unncessary and beneath you.
Talk about missing the forest for the trees...
DeleteJames,
DeleteWin-Win (aka a positive sum game) is a term I believe was coined by Daniel Carnegie (not to be confused with Andrew Carnegie - Pittsburgh Steel magnate) and it has a very specific meaning in game theory - see:
https://en.wikipedia.org/wiki/Win-win_game
In two party game scenarios there are four possible outcomes:
Scenario #1 - Player 1 - Win, Player 2 - Lose
Scenario #2 - Player 1 - Lose, Player 2 - Win
Scenario #3 - Player 1 - Lose, Player 2 - Lose
Scenario #4 - Player 1 - Win, Player 2 - Win
I would think that at least a basic understanding of game theory is required course work for an advanced degrees in economics (Maybe I am wrong). I don't think I am that far out of line questioning why a trained economist has trouble with the subject.
As an example - it's not like I am poking fun at a garbage man because he doesn't know what a spreadsheet is.
Sorry,
DeleteDale Carnegie (not Daniel):
https://en.wikipedia.org/wiki/Dale_Carnegie
@Frank
DeleteTo be fair, this is a blog post and win win is often, if not mostly, used in popular lexicon in a casual manner. Much like saying something is "infinitely better or worse".
That's how I interpreted his win win comment, even as someone who has done coursework in game theory.
James,
Delete"To be fair, this is a blog post..."
To be fair, this is a blog post titled "The Grumpy Economist" written by someone who advertises their position in economics at a prestigious university:
From JC's sidebar:
"In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. "
To be fair, the article even comes out and says in the very first sentence:
"Climate policy is ultimately an economic question."
To be fair, this article is a reprint from an article published by the National Review (JC provides the link above).
And so no, this isn't just some backwater blog of an economist speaking his mind.
The National Review has a total circulation of around 75,000 paying customers.
To be fair, nothing like "this is just one lay person's opinion" was ever included in the article.
Excellent summary.
ReplyDeleteYour friend Bjorn Lomborg would be pleased.
It's interesting how 'We must accept the science' is a mantra while 'we must reject the economics' is not said. Both are empirical.
What do you think of research spending? Lomborg and others are keen on this. With luck we'll get fusion in the next 15 years. It would be amusing to see the climate concern dissembled with improvements in fusion, or perhaps in storage.
Of course, as Paul Ehrlich said "In fact, giving society cheap, abundant energy at this point would be the moral equivalent of giving an idiot child a machine gun. "
I would like to know where a carbon tax was implemented or similar top it and emissions rose. I am also unaware any country that differentiates private and public emissions.
ReplyDeletehow much tax depend on a host of factors.
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DeleteThis comment has been removed by the author.
DeleteProvincial or State governments as we call them down under do not count.
DeleteIt has to be a national carbon tax or ETS or a simply price on carbon.
A host of factors could explain that. On the other hand businesses always react to market mechanisms as we saw here.
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DeleteAs always governments could do a lot by doing less:
ReplyDeletea) stop subsidizing roads: this is a normal practice everywhere. You don't pay for using most of the roads. why?
b) Europe has been subsidizing coal mines in western Europe for 30 years, despite the fact that it was an uneconomical business (no carbon tax needed to get that goal!). They will be subsidizing coal mines in Poland till 2049
c) In USA, conservative estimates put U.S. direct subsidies to the “local fossil fuel” industry at roughly $20 billion per year (not joking!)
d) All over the world government subsidies petrol consumption. Just 5 countries: Iran, China, Saudi Arabia, Russia and India, subsidies fuel consumption to the tune of more than US$200 billion per year. And there are much more: Thailand, Ecuador, ...
Government can do a lot by just stopping "doing a lot” (as it is, most of the times, the case). Most of this “lot” they are doing now is an economical nonsense so, very likely suppressing this subsidies would be pro-climate and pro-growth (you can “keep your cake and eat it” in this case).
I absolutely agree. In fact, the US has a debt ceiling vote coming up - Congress should go home and not vote on it all.
DeleteIn that event, it would be up to the Executive Branch (Treasury Department - Janet Yellen) to come up with the funding to make government payments under the "Take care" clause in US Constitution, Article II, Section 3.
Good post. For sure, fuels taxes and nukes.
ReplyDeletePerhaps an X-prize for a commercialized solid-state battery.
And remember, until very recently the problem for humans was an Ice Age. Indeed Ice Ages have been the norm, for a few hundred thousand years.
Actually for large scale energy retention, air liquification is the best bet going forward - see:
Deletehttps://www.man-es.com/energy-storage/solutions/energy-storage/liquid-air-energy-storage
https://www.ge.com/renewableenergy/stories/laes-technology
Not only does it provide energy retention for "green" sources, it also pulls also those nasty gases out of the atmosphere like Nitrogen, Oxygen, and Carbon Dioxide.
"How much does climate change hurt?"
ReplyDeleteA proper estimation of the economic impacts of alleged Anthropogenic Global Warming should also include the potential benefits -- e.g., reduced deaths due to cold weather, increased agricultural output from higher atmospheric CO2, increased usable land in Canada & Siberia, etc.
An economist once told me that years ago when the Climate Scam was still young, he had been charged by a UN bureaucrat with sketching out the issues possibly raised by Global Warming. Accordingly, he prepared two briefing papers -- one addressing possible costs from Global Warming, and the second addressing possible benefits. When he presented the papers to the UN bureaucrat, the official ceremoniously dropped the one listing benefits into his trash can -- Not Interested!
Geologist Marion King Hubbert is remembered for launching the fears of Peak Oil with his 1956 paper on that topic to the American Petroleum Institute. However, his message in that paper was rather upbeat -- While the world would run out of fossil fuels within a time scale measured in decades, there was no need for concern since the planet has sufficient resources to support abundant nuclear energy for at least a millennium. He prognosed that, in the long sweep of time, the period in which human beings had relied on fossil fuels would be seen as a very short interlude.
Ah! The 1950s, when mankind looked with excitement to a future filled with promise!
Thank you John, a strong summary of important points.
ReplyDeleteMy only quibble is that you should attribute the increase in frequency and severity of natural disasters to climate change. And while the best response is mitigation/adaptation, that shouldn't preclude limiting emissions simultaneously.
Why? Are we even sure there is an increase in natural disasters? Sure costs have gone up but with hurricanes this is because the coastal populations and property values have increased. Does climate change cause earthquakes?
DeleteWhy? Are we even sure there is an increase in natural disasters? Sure costs have gone up but with hurricanes this is because the coastal populations and property values have increased. Does climate change cause earthquakes?
DeleteWho cares why the damages are higher, as long as their increased frequency and higher amplitudes are part of the reason and taken into account. Higher sea temperatures have hurricanes carry more water (heavier rainfalls --> more flooding). Simply read forecasts by reinsurance companies, who insure the tails of flood, storm and other catastrophes. No, earthquakes frequency and severity are not likely to increase, but with higher ocean levels the resulting damage will be larger in coastal areas (esp. for earthquakes occurring at least partly under the ocean).
DeleteWhen you hear the statement: "This is due to climate change” you can be sure, at least, that this is a statement with no scientific value.
DeleteThe right kind of statement would be: "There is an X% probability that what we are experiencing is due to normal variations in the frequency of "event Y"".
Trying to make "climate” more deterministic that it really is, does not help in any way. Only to politicize the whole thing. You can still have the position you deem correct but have an “obligation” to express yourself properly.
[It is the same thing, by the way, when you talk about covid deaths: the right kind of statement is: "The number of deaths due to Covid19 is between X and Y with a 95% confidence interval" ... this is how the CDC used to report annual deaths due to the flu. Somehow, we oversimplify problems by making them more deterministic than they really are, precisely when oversimplification is least needed]
Tort will compute cost and benefit more accurately then any other method. Tort gets the scientists involved. If you consume CO2 at pre-industrial rates, then prove it and collect damages weighted by uncertainty. The tort system takes you to the most direct path and computes cost benefit more accurately than any other method.
ReplyDeleteIt is not popular, it does not give anyone the avenue to cheat, and almost everyone want to cheat.
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ReplyDeleteThis comment has been removed by the author.
ReplyDeleteOld Eagle Eye, you'll have to provide a specific example of what you mean by the term "free existence".
DeleteThis comment has been removed by the author.
DeleteWhether the PCAs represents an unacceptable government intrusion into personal freedom or not, comes down to whether or not you think there is a "natural" limit to the amount of CO2 that can be emitted per year.
DeleteIf you think that this limit does exist and its “natural” (meaning it is not the invention of a benevolent ruler or a group of them), then what the PCA + a well-organized “PCAs exchange market” does is:
a) to stablish clear "property rights" regarding CO2 emissions (by clearly defining who has the "right to emit"). Something that is now missing, and
b) reducing the cost of transaction for this "property rights" to almost 0.
Both conditions should allow the Coase Theorem to work for us, getting the most efficient "pursuing of selfish goals by free people" compatible with the "natural limit" of CO2 emissions per year.
If you don't think that there is a “natural” limit to the amount of CO2 to be emitted, then the whole PCA scheme is (another) unacceptable government intromission.
Couple of things that should improve the scheme:
a) The issuance of polluting rights and the polluting rights exchange market(s) should be “privately owned” and "global".
b) The amount of pollution rights issued each year should be "voted" (as opposed to fixed by “experts” working for government(s)) yearly (¿?). Each citizen participating on the scheme should "vote" for a number of rights to be issued (any figure between 0 and the amount authorized the previous year … or something along these lines). The number of rights voted by each individual will be then added up and equally distributed among all the citizens participating in the scheme.
[By the way, following Coase Theorem, the "emission rights" will end up, in the absence of transaction costs, being used by the same activities no matter whom you assign them to initially. The scheme is just handing the monetary value of this "property rights” to somebody. Better to every citizen that to the oil and cement industries, but these rights will end up being used be the same activities in both cases]
EED,
Delete1. The issuance of polluting rights and the polluting rights exchange market(s) should be “privately owned” and "global".
Okay, so a major private polluter also issues polluting rights - how is this an improvement?
2. The amount of pollution rights issued each year should be "voted" (as opposed to fixed by experts working for governments) yearly. Each citizen participating on the scheme should vote for a number of rights to be issued (any figure between 0 and the amount authorized the previous year … or something along these lines). The number of rights voted by each individual will be then added up and equally distributed among all the citizens participating in the scheme."
As the first voter in the first year (and a polluter) I vote for an infinite amount of pollution rights to be issued. Any other votes added to mine is still infinite. Don't like my vote, fine I won't participate in the scheme and continue to pollute anyway.
EED,
Delete"Both conditions should allow the Coase Theorem to work for us, getting the most efficient pursuing of selfish goals by free people compatible with the natural limit" of CO2 emissions per year."
If I am pursuing my own selfish goals, why should I give any consideration to future generations?
Meaning, if I am unlikely to be subject to the worst effects of green house gas emissions since they won't occur until well after I am dead, why should I even consider PCA's either instituted by government or arranged in the private sector?
You don't care about future generations. You just "believe" there is a "natural limit" to the amount that can be emitted today (if you don't "believe" that, the whole scheme does not make sense). This belief sure requires a certain "suspension of disbelief" a la Coleridge" (it would not be the first time in human history) or considering yourself living "forever" (a la Ricardo-Barro). But yes, you need that first.
DeleteYou cannot vote for an infinite number of rights. There would be limits to the maximum you can vote for. You should have the alternative of voting for "no reduction" (same amount that last year).
In private hands would be the management of the whole scheme. The number of CO2 rights to be issued would be defined by the individulas and controlled/limited by the government. The only government role would be “policing” compliance (not managing the scheme, not setting the maximum, …)
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DeleteEl emperador,
Delete"You cannot vote for an infinite number of rights. There would be limits to the maximum you can vote for."
Limits set by who - government or private individuals? As a private individual I vote to the set limit for PCAs issued to be infinite.
Old Eagle Eye, the government(s) are going to address the "climate change problem". That's a fact. Whether you like it or not. The solution of "doing nothing" is politically gone (whether or not "doing nothing" is the best solution is totally irrelevant).
Deleteand it seems that the government(s) are going to tackle this issue in the most damaging possible way: an increase in "ad-hoc" rules and regulations, a reduction in international commerce, an increase in the direct participation of government(s) in the economy, etc... The Green New Deal and the European Recovery and Resilience Facility can give you an idea of how this is going to be tackled.
Facing this reality, you can:
a) Keep pointing out the idiocy behind most of the policies being adopted and the inconsistencies and utterly nonsenses of the arguments behind them
b) Try to design the most efficient solution you can think of IF global warming were a real problem.
These two different approaches are frequently intertwined but the only thing they have in common is that both are, very likely, useless: no matter what you do, the economy will be damaged, and the “global warming problem” will remain unaffected by all the government designed measures.
I fin the second approach more stimulating. At least allows us to think on the main characteristics of the solution IF this were, indeed, a problem. These are, I think:
1.- The problem is "global”, and any possible solution should be global too. This is not as bad as it seems. It is "global" but just 10 countries (counting the EU as "one" country) represent 75% of the problem. 10 countries seem like a "manageable" forum (we have seen worse).
2.- The problem is a "common good" kind of problem and will tend to be managed by the government(s). Solutions that try to limit the government(s) role to an absolute minimum (i.e., Just enforcement) will have a higher chance of success
3.- The "right to emit" CO2 is very badly defined (if at all). The "good solution" should include a clear definition of the "right to emit" and should also stablish a clear ownership of those emission rights. Sure, enforcement is going to be an issue, but we have some experience (although not very encouraging) dealing with issues like this (i.e., fishing)
4.- For this system to work a mechanism of exchange that provide a costless negotiation of these rights should be designed.
Any very needed alternative to "letting the government(s) and the environmental extremist" dealing with this issue should score well in this 4 "metrics". PCAs is not the worst I have seen.
But I remain open to any alternative that your creativity can come up with.
In any case, don't worry, government(s) (and their voters) will never let the market take care of the global warming problem. They crave for any occasion to be needed and this is a great one. They will never let this opportunity to "do things and save humanity" go.
El Emperor,
DeleteThe problem isn't with government per se or even democracy as a form of government. The problem is with the two party system of governance that allows extreme elements from either side to have an out-sized share of influence in public debate and policy.
"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…" - Winston Churchill
El Emperor,
Delete1. One problem with letting government operate an exchange of CO2 emissions for permits is that government (with a military) is a larger emitter of CO2 in and of itself (see tort law and disinterested third party). On a national level, the system of courts is viewed as that disinterested third party in a dispute. There is no international court system that has the power of enforcement standing behind it.
2. The second problem is using government sponsored money as a medium of exchange for CO2 permits. Government with abilities to tax and coin money can outbid any private company or individual for the right to emit.
"But I remain open to any alternative that your creativity can come up with."
First, a disinterested third party is any scientifically verifiable measure. All parties (including government) agree on this measure and how emissions should be adjusted according to that measure.
For instance, most nations have orbiting satellites that can measure solar output. And so, CO2 emissions could be regulated to be an inverse of solar output (higher solar output results in lower allowed emissions and vice versa). From an engineering controls system perspective, this can be considered a negative feedback mechanism since global temperatures are also affected by solar output.
The tougher part is enforcement. Obviously monetary penalties are pointless since a government itself could be in violation and can tax it's citizenry or print / coin money to pay any penalty. I would think that waging World War III against any offenders is off the table.
What could be done is for member nations in the pact to have a small voting interest in the makeup of each other's government. For instance, in the US, Congress could include a small delegation of representatives representing the rest of the world. It's obviously not a perfect solution - they would still be outnumbered by the rest of Congress representing the US voting populace.
But they could serve as watchdog group not answerable to the rest of Congress or the US voting public. Their votes would still carry the weight of law in a US court system.
Just some thoughts.
Most excellent essay!
ReplyDeleteAren't you assuming a lot of ergodicity? Can a significant portion of people be worse off despite GDP growth? Isn't the Easterlin paradox relevant, and increasing suicide and overdose rates?
ReplyDeleteWhen making bald-face assertions about the desirability of growth, shouldn't you acknowledge those of us who prefer to live like in the stone age? Why do you coerce participation in your economic system? Where can I opt out?
"Climate policy is ultimately an economic question."
ReplyDeleteI disagree. If the cost and benefits of carbon emissons happened in a closed system controlled by a single government (e.g. the USA) then it would be an economic question. In this case economic policies that optimised the various costs/benefits for levers such as letting carbon emissions continue, reducing carbon emissions and/or mitigating the effects of global warming.
However, to the average USA-an taxpayer the cost of the country of Kiribati (vulnerable to the impacts of global warming) becoming uninhabitable is zero. And the benefit of helping that country is zero. So the economic policy formed by USA-an politicians will ignore that cost when finding the answer to any such economic question they are asked.
The question is both political and international. Because if Kiribati becomes uninhabitable due to global warming, are the 119,000 inhabitants going to be gifted an equivalent chunk of beachfront real estate in the USA to form their new country? And is this going to accepted by USA-ans based on it being the economically efficient response to continued USA-an carbon emissions? I didn't think so either.
Your essay frames the question in terms of GDP percentage points of rich-country economies. But I see nothing of the accounting for the costs the polluting-countries have externalised onto poor non-polluting countries. Making the residents of Kiribati "whole" for the loss of their country seems like a big cost that is ignored.
I also find the phrase "climate justice" grating. But at least it recognises that the cost carbon emissions in rich countries disproportionately falls on the people in poor countries. And a rich country optimising its climate policies to optimise for its own costs/benefits is exactly the kind of injustice that gets people to march in the streets.
The rapid increase in living standards since the 1800's is the single greatest achievement of mankind. It is not taught. Most people are completely ignorant of just how wonderful that transition has been, like everyone in the world winning the lottery. Instead they teach the industrial revolution as a handful of important inventions/processes (steam engine, trains, assembly line etc.) and carefully balance the ledger with all the downsides (Child labour, sweatshops, Triangle fire etc.). It's like getting life saving heart surgery and complaining abought the pain. Was it worth it? Probably, but it sure hurt alot. Capitalism, the mother of all this fabulous growth gets blamed for the bad stuff, while "science" is given credit for the good stuff. I say truly, the worst possible climate change scenario you could imagine wouldn't be as bad as going zero carbon today.
ReplyDeleteWhy are suicide rates increasing? Why don't I get to choose whether living among capitalists is worth surgery? Why can't I choose to die in nature, of natural causes?
DeleteThanks for this post.
ReplyDeleteThe entire argument here rests on the opening premise "... the best guesses of the economic impact of climate change are surprisingly small. The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP."
I think if I had confidence in such a convenient prediction then I'd have no trouble concurring with almost all of your subsequent arguments. However, I think there is good reason to doubt it.
Nordhaus, who won the Nobel Memorial for this work, used a survey of experts (10 economists, 4 'other' social scientists & 5 natural scientists) to provide the foundations of his estimations of climate effects on GDP. This led to similar figures as cited above (3 degrees & 3.6% GDP).
However, as Nordhaus himself notes, the estimates from the natural scientists were '20-30x' higher than those of the economists. The forecasts of the realities of 3 degrees (or more) warming from climate scientists are extremely grave. Many predict that 4 degrees would result in the end of civilisation (Moses, A. (2020). ‘Collapse of civilisation is the most likely outcome’: top climate scientists. Voice of Action. Melbourne, Australia.). In my view, it is right to say that economic models have not demonstrated a strong grasp of e.g. 'tipping points'.
Therefore to me, the only thing economists should be concerned with is reconciling these two utterly opposed forecasts. Until then, it feels like we're sleepwalking into an almighty gamble.