Sunday, September 21, 2014

Why Paul Krugman Is Wrong about the Cost of Climate Protection, and Why it Matters

Who’s right, those who think that economic growth can’t coexist with protection of the climate, or Paul Krugman who says “saving the planet would be cheap and maybe even come free”?  Alas, neither, but for different reasons.

I’m completely on Krugman’s side when it comes to debunking the degrowthers.  I’ve already written on this before; here I’ll just say that this view, prominent in parts of the Left, is based on a misunderstanding of what economic growth means.  Those who cling to this belief could benefit from reading either Krugman’s introductory textbook or mine.  This is an issue we agree on.

But can it be true that carbon policy practically pays for itself?  Have renewable sources of energy come down so far in cost and availability, and are the co-benefits of mitigating climate change so large, that staying under 2º is virtually a freebie?  Krugman cites two recent studies, one from The Global Commission on the Economy and Climate, the other by a team of researchers at the IMF, that say yes.

Let’s take them one at a time.  The GCEC, a blue ribbon panel under the leadership of political and business leaders as well as economists, comes to its conclusion by estimating the cost of a set of investments that they believe will achieve an emissions level in 2030 consistent with a longer run 2º path.  It’s not possible to fully evaluate their claims, since their report is based on technical papers that haven’t been made public yet, but even a quick reading reveals a number of telltale elisions and misconceptions.

The first and most important is that they don’t model a program to keep expected global temperature increases within 2º, not even over the next 15 years (which take us to 2030).  This would depend on staying within our carbon budget, and cumulative carbon emissions are measured by the area under the annual emissions curve, not by the emissions at some point in time, like 2030.  Thus the program being costed is not the same as the one the IPCC says we need to be on.  Since the putative GCEC mitigation impacts are the result of a large and gradually developing investment program, they are backloaded—meaning that their pathway to 2030 greatly over-accumulates greenhouse gases during the interim.  (For a somewhat fuller explanation, see this.)

Second, like most in the this-will-be-cheap crowd, they get a lot of their climate mitigation from forest and agricultural policies that sequester carbon in trees and soils.  It’s funny: everyone seems to think this is a great idea but forest ecologists, who have pointed out for years that the true sequestration benefits of forests depend on changes in the steady-state forest cover, which is absolutely unknown, and that both forest and soil carbon sinks will be altered by climate change itself.  I’ve written about this too.  Add to these observations new evidence concerning the impact of forest cover on the earth’s albedo and the greenhouse effects stemming from the interaction between forest-generated volatile organic compounds and atmospheric fossil fuel emissions, and the case for reforestation as climate mitigation collapses.  More forest and healthier soils are great, but to forestall catastrophic climate change you’ve got to keep fossil fuels in the ground.

Third, this report puts a lot of stress on the co-benefits of reduced fossil fuel use.  That’s excellent in itself and important to broadcast, but they take it a step further.  Using monetary measures of the value of lives saved due to reduced pollution, they turn this into an “economic” benefit which they then deduct from the economic costs of measures to cut fuel use.  Now, it happens I wrote a book some time back about the problems with the methods used to produce these numbers, and nothing has transpired since to cause me to change my views.  In addition, however, it is misleading to treat the costs economists attach to premature deaths that are said to reflect our diminished utility from risk as equivalent to real, honest to god money.  No money will actually change hands because you don’t like to breathe polluted air.  No one will be able to pay bills with it, purchase assets with it or do any of the other things people do with the stuff we call money.  When you make claims about the economic impacts of policy—its effect on jobs and economic growth—it’s a distinction you want to take note of.  Again: the health benefits of burning less carbon are real, and we need to spread the word, but converting everything to dollars is misleading and actually stifles the message.

Finally, costing a carbon mitigation program on the basis of the cost of additional investments is suspect.  For one thing, it appears to assume that each extra BTU of renewable energy means one less BTU of fossil fuel, but that is an improbable upper limit.  The truth is, the only way we’ll keep carbon in the ground is either by taxing it or requiring permits to extract it; cranking out renewables by themselves, virtuous as it is, doesn’t do the job.  In fact, it is unlikely that the timetable that results from going on a carbon diet—if it adheres to a meaningful budget constraint—will match the timetable of expanded renewable supply; we’ll have to cut back on the first faster than we can fill in with the second.  So what gives?  That’s precisely where the conflict between economic convenience and the climate imperative lies.  But it’s worse than that.  The most disruptive cost of dramatically and quickly reducing our use of fossil fuels is its effect on a wide range of existing capital assets, not only fossil fuels but investments that begin to pay a negative return when energy costs shoot up.  The question is whether the world economy is better prepared for the effects of a price crunch of this sort today than it was in the 1970s when OPEC set off a massive shock.  Yes, we are all more efficient today, but we are far less efficient compared to where we need to be to deal with climate change than we were pre-OPEC compared to where we needed to be to cope with subsequent oil price volatility.  And the OPEC squeeze was a one-off, where the screws of carbon policy, if they’re applied correctly, will tighten and tighten for decades.  As far as I can tell, GCEC assumes that no existing investments, except for a small amount in the energy extraction sector, will need to be written down or off.  Good luck with that.

Now on to the IMF.  Guess what?  They do the same thing with co-benefits.  Yes, it’s important to note that burning less coal in particular (and particulate) will be wonderful for our lungs and the bodies that house them.  Unfortunately, the researchers also take the step of monetizing these benefits using the same dubious value of life numbers, and then treating them as if they could be deducted from the financial costs of higher fuel prices.  No: health is not fungible the way money is fungible.  Sorry.

Meanwhile, a huge source of the economic benefit they ascribe to carbon levies is the opportunity they offer to cut income and business taxes.  Their general equilibrium models tell us that we’ll get trillions of dollars of economic growth from this.  Of course, since the models assume that all economies would be perfectly efficient in the absence of income and similar taxes and suffer lamentably as a result, they generate large gains from tax cuts.  In the real world, however, the weight of evidence does not support the proposition that countries with lower taxes, ceteris paribus, perform better economically.  (And the very use of ceteris paribus here is questionable, since the determinants of political and economic outcomes are many and intricately interconnected.)  In short, the IMF’s economic benefit from taxing carbon and cutting taxes on everything else is the product of an ideology that reasonable people—like Paul Krugman—would no doubt reject if it were put to them directly.

My apologies for piling on so much detail, but (1) it’s not nearly as much as these questions really need, and (2) that’s where the devil is.

So what does it all mean?  And do arguments like mine just end up playing into the propaganda of the Koch brothers and other climate villains?  Wouldn’t it be better just to say that protecting the climate will be cheap and leave it at that, whether or not it’s true?

Believe me, I truly wish we could get climate protection on the cheap.  It would so much easier that way, and to be honest, I don’t want to pay the price any more than anyone else does.  Every time I fly somewhere in a plane or hop in my car to get to a distant trailhead, I think about what I might have to give up if the world gets serious about minimizing the risk of a climate catastrophe.  And if I turn out to be wrong—if it can be shown that my analysis is based on poor information or faulty thinking, and the costs we will all have to pay are minimal—I will gladly, happily admit to error.

If I’m right, though, there are two reasons for not downplaying the true costs of keeping carbon in the ground.  One is that we will miss the opportunity to anticipate and manage economic disruption, thereby making it that more disruptive.  There is a small army of smart, talented economists wasting their time trying to calculate a specious “social cost of carbon”, and we would all be a lot better off if they could switch to making realistic forecasts of where carbon budget constraints will likely pinch, so we can plan ahead.  Over the next several decades, the need to proactively adapt to climate policy will be as great as the need to adapt to climate impacts.

The other cost is political.  If Krugman is right, once we get past the denialists the coast is clear.  Since policy will be cheap, maybe even a net contributor to profits and growth, opposition will melt away.  Businesses will be happy, workers will be happy, and the only question will be, why did it take us all so long to get happy?  If I’m right, getting past denialism is just the beginning.  As rapid fuel price increases loom, businesses will mobilize to stop them, or at least to try to game the policies so that other people have to pay but not them.  Workers, facing the threat of dislocation, will join these demands, as those in the coal sector have already done—coal currently being on the front lines of policy.  We will need a permanent, massive mobilization of forces fighting on behalf of the common interest.  That’s a challenging political forecast, but if a substantial portion of private wealth is vulnerable to writedown if climate policy gets real, there’s no other way to do it.

POSTSCRIPT: For those who think I'm exaggerating, that I'm just a doom and gloomer looking for an issue, please explain the bipartisan support in Congress for and Obama's signature of the 2012 European Union Emissions Trading Scheme Prohibition Act.  The EU ETS is widely acknowledged to be too weak to have a measurable impact on fossil fuel use, but it's way too strong for business interests in the US.  I guess they hadn't read the studies showing how taxing carbon practically pays for itself.


Sandwichman said...

Long answer to "this view, prominent in parts of the Left, is based on a misunderstanding of what economic growth means."

Sandwichman said...

"I guess they hadn't read the studies showing how taxing carbon practically pays for itself."

Even assuming that taxing carbon "practically pays for itself," that is not the decisive issue. The issue is whether in paying for itself it pays the people who currently hold power. "Technical" studies have a habit of ignoring WHO benefits and WHO pays. Those are purportedly "normative" questions that presumably must be left to the allegedly democratic process. Well, technical studies that ignore the normative contexts are, in my view, defective both normatively and positively.

Peter Dorman said...

Glad you brought that up. If carbon policy is expensive for one sector of the economy but not overall, it must mean that there are other sectors that benefit. You'd expect that this would lead to political divisions as the different interests would battle it out. But there was no division on the anti-EU-ETS bill. No economic interests could be found to oppose this attempt to squash even the paltriest carbon tax.

Sandwichman said...

The standard explanation when the costs (benefits) are widely dispersed but the benefits (costs) are concentrated is that there is a free rider problem for taking on the transaction costs of opposition. Sounds reasonable to me.

Peter Dorman said...

True, and that pertains to the co-benefits portion of the calculation (if you believe the monetization stuff). But they also claim that there are lots of investments that become profitable at moderate levels of carbon pricing, and presumably those gains would be concentrated.

The thing that needs to be be explained is why, although we see individual, conscience-driven businessmen pushing for climate protection, we don't see any strong-arming by corporate interests to offset the muscle being applied against protection. From a political economy standpoint, this is what it's all about. said...

Recent studies are now showing that deforestation in the tropics might actually lead to cooling. The trees there absorb more in heat energy from the sun than they offset with their oxygen emissions. It is only in colder latitudes that the usual story holds.

More broadly, while Peter makes good points about some of the supposed gains, much of this clearly depends on how rapidly the costs for the alternative energy sources come down, and on this I think things are very unclear.

Peter Dorman said...

Thanks, Barkley. I agree completely that the error bars are very wide on any prediction of future energy costs. We could luck out, and of course I hope we do.

One way to think about my approach compared to the ones cited by Krugman is that would begin with a carbon constraint like the IPCC's and then figure out what the range of costs look like for meeting it. The GCEC and IMF studies begin with actions to foster renewable energy, increase efficiency or (gulp) grow forests and then ask how close this gets us to a carbon budget. The thing is, they give us precise cost numbers but no corresponding precision about cumulative emissions. In the end, 2 degrees is simply not a constraint for them.