Thursday, April 9, 2009

It’s 2009: Why Are We Still Dealing with Voodoo Climate Economics?

You would think the basic facts would be clear by now, but you would be wrong. A New York Times article this morning on Missouri’s fear of higher electricity prices under carbon regulation had lines like:

[Politicians from Missouri] are concerned that the new costs would get passed on to consumers...., to farmers from rural Missouri and to employers like the energy-hungry Noranda aluminum plant in New Madrid in the southeast of the state, which has 1,000 workers. And they worry that in an already wounded economy, increased costs could turn one of the relatively few economic blessings into a blight.

Where to begin? The whole point of issuing permits for carbon is to dramatically raise the cost of burning these fuels; people are supposed to cut back on goods and services that use them, thereby preserving a liveable planet. There is no “would” or “could” about it: if we want to limit climate change we have to get hundreds of millions of people to change their consumption habits (and firms to change their production methods). Since we don’t want to do that with regulations, police and prisons, we will do it with prices.

Given that, the core economic problem is how to carry out this program with the minimum cost to the well-being of our fellow humans. Part of this is about efficiency, getting the most carbon reduction for the lowest cost. Another part is about investment and innovation, building a low-carbon economy that produces a high quality of life for all of us. But front and center are those higher prices that we will have to pay for goods that continue to require carbon fuels.

In the voodoo view of the world, money just disappears down a black hole. Consumers pay higher prices, the economy suffers, and that’s the end of the story. It doesn’t take much economic sophistication, however, to notice that the money has to go somewhere—specifically, it finds its way to the companies that acquire carbon permits in the first place, and that’s why the permits are valuable. Now, either those companies get the permits for free and make out like bandits, or the permits are auctioned. If they’re auctioned, the money from those hard-pressed Missourians is now in the hands of the government agency that ran the auction. At this point we have a new sales tax. But we don’t want a new sales tax. So the government agency can simply rebate all the money back to the public, ideally on a simple, equal per capita basis. This means that the folks from Missouri highlighted in the Times article would be earning carbon revenues and not just paying them. They can stimulate their economy by spending this loot on other items that don’t pump carbon into the atmosphere and whose prices haven’t gone up.

True, on average people in some regions will come out somewhat ahead or behind on the deal, based on the sort of energy infrastructure that’s currently in place, current commuting patterns, climate and such. No doubt a carefully constructed policy package would offer sweeteners to the more impacted areas, like extra investment funds. But these considerations are second-order compared to the voodoo vision of higher prices that just vanish into thin air.


Michelle Schaeffer said...

"At this point we have a new sales tax. But we don’t want a new sales tax. So the government agency can simply rebate all the money back to the public"

While you're correct, I have big problems with "pay now, rebate later" programs simply because of the lag and inefficiencies that arise from reissuing money to people. I am for a simple system that doesn't use regressive taxation to accomplish a goal of reduced Co2 emissions. I think this is Martin Feldstein's idea of Tradable Gasoline Rights.

Feldstein has gotten a lot of crap over the years for this idea but I really think it's phenomenal. If you want to read more about it you should visit
(my blog)

and I have a piece discussing the pros and cons. If you've never heard of TGR then visit the WSJ to see Feldstein's piece on it.

Brenda Rosser said...

So, having discovered that the free market doesn't work the solution to climate change is the creation of a free market in carbon permits.

It sounds like a load of nonsense. But, hey! I'm prepared to be persuaded. How can I earn carbon credits for the 70 year old forest we've let grow for the last 25 years? How can I (an ordinary householder) get my share of this pie? Free market and all....

Why not trade permits in sexual abuse. If current perpetrators are handed free permits and can then trade their permits to others who feel compelled to abuse others. Well, why not?

Brenda Rosser said...

"“We can barely afford what we have now,”....The house, built in 1953, has central air-conditioning to ward off the heat and humidity of Mississippi River summers, a double-door refrigerator, a washer and dryer, six televisions, three computers and an iron (“We iron all the time,”..."

Perhaps it's because I don't live in America, but this woman sounds like a spoilt brat. I mean 'central air-conditioning' and 'a double-door refrigerator' and 'a dryer' and 'six televisions'!

What is wrong with this reporter that he/she doesn't bother to ask key questions like: does your house have insulation in the ceiling and insulated shutters on your windows? If not, why not? Is there a pergola covered in deciduous vines to keep the hot summer sun away from the building. If not, why not? Is there a ceiling (or other) rack installed to hang washing inside to take advantage of the living room heat? If not why not?

Clearly the New York Times is underplaying the options available to people whilst massively understating (or not stating at all) the whopping and permanent financial and other costs of climate change.

Deary me. She can't live without her clothes dryer but can risk famine and flood on an unprecedented scale at her back door some time real soon.

Martin Luther King, Jr: We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history there is such a thing as being too late… We may cry out desperately for time to pause in her passage, but time is deaf to every plea and rushes on. Over the bleached bones and jumbled residue of numerous civilizations are written the pathetic words: "Too late."

Newsprint is produced from deforested land, btw.

Peter Dorman said...


Don't get hung up on the "trade" part of cap and trade. Carbon permits are simply permits: you would need to have one to pull carbon out of the lithosphere. The basic idea is to require permits and then cap them at a certain amount, just as we would do with hunting or fishing to protect wildlife populations. The only role for trading in a well-designed plan would be to allow for the possibility that someone might buy a permit, change their mind, and sell the permit to someone else. There shouldn't be much of this going on.

(Note that I am leaving out the idea of creating a market in offsets. This is a big no-no, for reasons I have made in several earlier posts.)