Monday, December 7, 2015

Why Is The Pigou Club So Out Of Synch With The Paris Climate Negotiaters?

Organized officially in 2006 by Greg Mankiw, the Pigou Club has never had more dominance among economists in terms of opinion.  A petition supporting a carbon tax was sent for the opening of the current Paris climate negotiations with 32 names on it, including three econ Nobelists: Kenneth Arrow, Thomas Schelling, and Joseph Stiglitz, all of whom I greatly respect. An even longer list of prominent economists (although without Arrow or Schelling) along with their individual arguments, as well as some climatologists such as James Hansen, is here. About the only prominent environmental economist not on the list is Harvard's Robert Stavins, who is attending the conference and supports a cap-and-trade proposal as do I. Why are we so alone among economists and even many activists, but why is it that cap-and-trade is far more likely to come out of Paris, if any specific proposal does?

The Pigou Club argues that a carbon tax is simpler and more efficient.  At times some of its members even claim that support from professional economists is "near unanimous."  Maybe, but it is not unanimous, and economists are likely to get left standing at the altar all alone when it comes down to it.  As it is, there are many nations that have some sort of carbon or energy tax, although none of these seem to apply to  all  fuels and none are coordinated in any way with any other nations.  Most focus largely on gasoline (and we have gas taxes in the US, but not focusing on carbon content) or  new cars.  It turns out that getting a coordinated carbon tax across national boundaries may be difficult to impossible, even without the apparently absolute opposition of the political elite in Washington (or at least its Republican component) to any new taxes of any sort (even revenue neutral ones), although the GOP at this time seems to be allergic to any climate proposals at all (I mean, their really smart leaders have figured out that all this global warming stuff is just a hoax, right?), and the Senate blocked Obama-supported Waxman-Markley in 2010, an attempted and much flawed cap-and-trade bill that managed to pass the still-Dem-dominated House (although some of the arguments given against it by GOPsters were that it would be "just  like a tax increase").  The supporters of a revenue neutral carbon tax also criticize the in-place from Kyoto European CO2 Trading System (ETS) as having experienced volatile prices, having been subject to "gaming" and theft, and a lot of sectors escaping from it, although a tax can also involve fraud and sectors getting out of it thanks to political pressure.

Tim Taylor here reviews arguments from a forthcoming Journal of Perpectives article by Richard Schmalensee and Robert Stavins discussing past efforts at cap and trade (originally known as "tradable emissons permits").  The largest and most successful such program was for SO2 trading done in the US after the Clean Air Act amendment of 1990, with even most proponents of carbon taxes recognizing that this one worked out pretty well.  But the argument is that we were lucky with that one, and that it is a much smaller deal than a global carbon trading system.  Schmalensee and Stavins also report on an earlier successful use of it for reducing lead in gasoline between refineries as well as some successful use of it for NOX emissions.  They recognize that the ETS has had problems, but some of those seem to have been due to a lack of information at the beginning of the system along with too many industries being exempt.  However, they note that China will be implementing a cap and trade system in 2017, and given that the Europeans adopted their system as part of the Kyoto Protocol under pressure from the US, these parties are really not at all interested in following a bunch of mostly US-based economists in replacing their ETS with a carbon tax, even though quite a few European countries have limited carbon taxes in place already.

However, none of this gets at why carbon taxes are simply not being seriously considered in Paris.  Maybe no agreement on a mechanism to meet the likely 2 degrees Celsius maximum increase target that is being bandied about much (with more endangered nations arguing for tightening that to just a 1.5 degree increase) will happen. But if one is, it will almost certainly be some version of cap-and-trade with subsidies for poor countries rather than a carbon tax (or its popular-with-activists variation, fee and dividend). The real reason is quite simple. If one is aiming for a specific targeted limit on temperature increase, then given current science that implies a specific quantitative emissions limit.  It is well known that a tax only stabilizes/guarantees the price.  It does not stabilize the quantity emitted.  To do that, one must impose a specific quantity limit, and it is also completely well known that a properly set-up cap-and-trade system will be the most cost effective way to achieve such a limit.  This is why cap-and-trade is on the table in Paris, but the carbon tax is not.

I must admit that I may be partly biased in favor of cap-and-trade having been peripherally involved in setting up the very first government-established such system ever in the world back in the mid-to-late 1970s in the state of  Wisconsin for  BOD emissions on the Fox River that flows into Green Bay, with that river having many BOD-intensive pulp and paper mills along it (Fort Howard Paper, Kimberly-Clark, etc.) who traded with municipal sewage treatment plants.  That plan is still in place and operative, last time I checked, if pretty low key these days (some of those mills have since closed, but not because they had arbitrary quantity emssions limits placed on them in the 70s)..

I also am aware that Copenhagen was a nearly total flop, aside from some agreements about improving information gathering (something very important as the problems with setting up the ETS show), this problem still a big deal in China where we have just learned that they have been burning 17% more coal than previously reported..  It will be hard enough to get any kind of serious agreement out of Paris.  This  is all the more reason to go for  something that is not only the most suited to achieving what is needed, a specific quantity emissions limit, but also the most acceptable to the diplomats and politicians in most of the nations that are engaging in these very difficult negotations.  Really, I am a bit amazed and even shocked that all these prominent and intelligent economists have not figured this one out.

Barkley Rosser

19 comments:

Thornton Hall said...

Economists giving us another example of the irrelevance of rationality.

Humans form most beliefs thru non-rational processes. In this case, the pressure that governs is to pick a plan that cannot be adopted. If any plan is adopted, it will cut against the interests and identity of the conservative tribe that most economists belong to. The rational claims about efficiency come later.

Peter Dorman said...

Barkley, as you know I largely agree with you on this: given the centrality of fossil fuels in modern economies and the immense complexity of forecasting future demand, it makes sense to nail down the quantity rather than the price. As for why the support for a tax, I have two thoughts.

1. Activists: they are comparing actual cap and trade systems, which are rather anemic, to ideal taxes. Somehow they don't seem to notice that actual tax codes, once the lobbyists finish with them, are pretty awful to contemplate.

2. Economists: the Pigou Club buys the whole welfare schtick, which sees the primary task as internalizing a social cost of carbon (which they think they can estimate) rather than limiting emissions to a ceiling determined on purely environmental grounds. If you believe in welfare economics and think it should govern policy, I guess this is where you have to go. Saying that the key policy paradigm of economics shouldn't be used to address the key policy problem of our era is beyond the pale for them. Not for me.

rosserjb@jmu.edu said...

Peter,

Glad to see that you basically agree with me. I totally agree that much of this involves comparing idealized textbook cases with flawed real world examples, particularly the troubled ETS in recent years, the only actual coordinated multinational system in place at all on this issue. I happen to know that some years ago the Scandinavian nations, probably the best run and most friendly with each other, attempted to put in place a coordinated carbon tax harmonized across national borders, but that they failed to do so. I know that Joe Stiglitz knows this, but I think he ie especially one focusing on the textbook examples because he is author of a textbook on Public Economics, and, of course, he has long supported a carbon tax, and most of us dislike changning our long-in-place public positinos.

Indeed, Thornton, I would agree that part of what is going on here is some herd mentality among econmomists. This is deeply entrenched, and it may even go back to the fact that Pigou was the first out the door with an analysis of externalities that involved taxation as the solution to pollution, dating way back to the 1920s. When the EPA was created along with passage of the most important Clean Air and Clean Water Acts in the early 1970s, a majority of econoimistts at the time supported Pigouvian taxes rather than the command and control quantity emissions standards that were actually passed. The development of tradable emissions permit schemes came out of that as it became recognized in the recessionary mid-70s one might avoid having businesses shut down and lay off workers if one allowed for trading these permits to meet the quantity limit so that those who could best afford to cut back did it. This was exactly what drove the adoption of that cap and trade system in Wisconisn for BOD on the Fox River.

Another aspect of this sentiment among economists is that when it comes to looking at prices versus quantities, there is a deeply rooted that "properly functioning markets" show stable prices, even though no such outcome is implied by microeconomic theory. As noted in this case, and agreed by Peter, quite aside from the politics of it in Paris, there may be really serious environmental reasons for focusing on an aggregate quantity limit to keep the warming in place, even if this ends up with market prices doing weird things as is the case with the ETS (which definitely needs some fixing).

In this regard I note that among the prominent economists calling for a carbon tax, one of those not on the list publicly (I do not know what his actual position is) is Martin Weitzman, who has noted that due to nonlinearities in the complex global ecologic-economic system (something I have written about quite a bit), the likely probability distribution we are facing is not Gaussian normal but one with kurtosis or "fat tails." Accoring to his estimate, while a normal distribution implies that an uber catasstrophic outcome of a 12 degree C increase is utterly miniscule, less than one in a billion if the distribution is normal, it is nearly 1 percent with a more likely Pareto distribution. The danger of positive feedback effects, well known to many, is not properly accounted for when assuming normality.

I might note that another prominent environmental economist not on the peitition or out there calling for a carbon tax is Tom Tietenberg, author of the most widely used environmental textbook out there. I shall out him as having also been involved in that original cap and trade scheme frmo Wisconsin in the 70s (his PhD is from UW), and he played an important role in getting the fairly successful US tradable emissions permits schemes (cap and trade) going in the US that Schmalensee and Staving report on, the ones for lead in gasoline, SO2, and NOX.

rosserjb@jmu.edu said...

A lot of activists like fee and dividend, which many think is the same as the revenue neutral carbon tax. I also note that Elon Musk just gave a talk at the Sorbonne declaring the revenue-neutral carbon tax to be "the only" reasonable proposal out there. OTOH, deep in the Q&A he noted that China is adopting a "cap on trade" system as he called it and said that this was OK too, only to promptly forget this and continue with the carbon-tax-only argument.

Thornton Hall said...

What continues to amaze me is the number of academic fields that study policy, even "policy-making" without ever talking to politicians.

Thornton Hall said...

For example, a politician could explain to Joe Siglitz why he ended up supporting a policy also championed by the Krauthammer.

Myrtle Blackwood said...

Re: "If one is aiming for a specific targeted limit on temperature increase, then given current science that implies a specific quantitative emissions limit.... a tax ...does not stabilize the quantity emitted. To do that, one must impose a specific quantity limit, and it is also completely well known that a properly set-up cap-and-trade system will be the most cost effective way to achieve such a limit...."

I do not believe it is possible for governments to "impose a specific quantity limit" on emissions in society. Nor do I believe that such emissions can be measured in the first instance.

Looking at the unfolding economic history of the last 5 decades (or more) it seems also clear that 'market' dynamics have not proven to be particularly governable. Perhaps even less so than in the past as our contemporary world is now composed of big and very powerful global 'market' conglomerates who have very influential government connections.

Are governments capable of governing anymore?? Both 'cap and trade' and 'carbon taxes' both assume that genuine governance is possible. If it is, there seem to be better alternatives to limiting our CO2 emissions.

For instance, fines could be imposed almost immediately for the following:

* unnecessary burning off of rubbish and biomass and the clearing of forests (more global emissions come from the processes of deforestation than from cars on the road, so I'm told. The corporations involved in most of the world's loss of forests can be named);
* target those who drive to work with only one person in the vehicle (where public transport or other options exist).

Jobs that may be lost in the 'forest' and 'paper' industries could be found and funded by fines enforcement such as these.

Extra taxes could be imposed on energy-intense products such as big cars, air flights and drinks and food sold in glass or aluminium containers and also on products that are designed to be 'disposable' (paper nappies, tissues etc).

Cold drinks could be dispensed into reusable and/or returnable containers with a returnable deposit in their sale price. [It worked in the 1950s and 1960s. Why wouldn't it work again?]

An army of people could be employed in their local areas to implement strategies for greater energy efficiency and energy conservation in homes and in the workplace.

"Victory gardens" could be promoted for energy-saving forms of fresh local produce.

The solutions required to limit our greenhouse gas emissions don't appear to be difficult to find. I fear it is the powerful and vested interests that will resist these changes to the very end of our liveable planet.

rosserjb@jmu.edu said...

Myrtle,

It may well be that it is impossible to get a functioning multi-national quantity limit system, the European carbon trading system having many problems as noted by critics. But in the US we have seen successful such programs, the most famous being for sulfur dioxide emissions put in place after 1990. So, at the national level it can be done, and most environmental regs in the US are quantity limits although generally on specific emitters rather than on a total aggregate, which arises from the sum of all those specifically limited emitters (all of this depending on quality of enforcement.)

As it is, there certainly are many nations where governance is not good enough to enforce quantity limits at any level, but I think that the higher income mostly democratic nations are able to do it more or less.

Myrtle Blackwood said...

I am a great admirer of Barry Commoner's 5 laws of ecology (with a minor reservation):

1. Everything is connected to everything else. There is one ecosphere for all living organisms and what affects one, affects all.
2. Everything must go somewhere. There is no "waste" in nature and there is no "away" to which things can be thrown.
3. Nature knows best. Humankind has fashioned technology to improve upon nature, but such change in a natural system is, says Commoner, "likely to be detrimental to that system"
4. There is no such thing as a free lunch. Exploitation of nature will inevitably involve the conversion of resources from useful to useless forms.
5. If you don't put something in the environment it isn't there.

Human's are part of 'nature'. There is no great evidence that we are inherently entitled to protection (or are capable of protecting ourselves) from our own overpopulation and/or life-choice follies. And as Jared Diamond points out, it is yet another folly to fall into the trap of romanticising traditional ways of life when strong evidence points to the heavy burdens that were inherent in strategies such peoples were forced to employ, often for simple survival.

Give us this day our daily bread.
And forgive us our debts,
As we forgive our debtors.
And do not lead us into temptation...

Bruce Webb said...

What amazes me in re carbon reduction by cap and trade vs carbon tax is how much of all of it seems fully informed by (neo)(economic)liberal ideas that everything has to be governed by monetary incentives: the negative incentive of tax or the possible positive incentives built into cap and trade but all being build on a substtucture of Homo Oeconomicus, Adam Smith's "trade,barter and truck".

As opposed to an older tradition built around "Thou shalt not". Less poetically direct regulation and direct reduction in carbon output. The core of the Clean Water Act was "thou shalt not pour untreated industrial and household waste into 'navigable' waters". And much of te success of the Clean Air Act was put into place by direct regulation of tailpipe emissions and car mileage.

As in almost every aspect of the regulatory State the 'Reagan Revolution' really did change everything, in the last 35 years EVERYTHING had to be approached via magical markets right down to the most basic functions of government: public safety (private prisons), public education (private charters), and the fricking Post Office. Christ in Afghanistan and Iraq we extended that to external defense not limited to logistics and support but right to force protection.

Krugman said some whacky things in the 90s. From the perspective of this kinda traditional lefty. And to me that is because back then he was much more bound in the theoretical strictures that made economics 'scientific'. Not least adherence to such things as Says Law and Pareto Optimality. But flash forward and not Krugman or even a lot of heterodox economists have abandoned some aspects of their allegience to what Keynes (?) dubbed "long dead economists".

Maybe this is just a concession to political reality, a belief that if we are going to get any reduction in carbon that we have to work through political channels that no longer allow passage of the Good Ship Shalt Not. Well maybe that is right politically, but at least at EconoSpeak it would be nice if SOMEONE entertained the possibility of the Command Economy in relation to SOMETHING. You don't have to go all Commie about it, just some acknowledgement that not every, or even most aspects of the New Deal and Great Society were built on Neo-Lib Market lines.

Myrtle Blackwood said...

Bruce, I keep returning to Theordore Roszak's book entitled "Where the Wasteland Ends" (published in 1972). He's the only author I know who describes our collective sort of deadened reality.

"Why haven't the vast army of specialised scientific knowledge experts saved us from the avalanche of serious problems we face? [Answer:] our expertise has simply not been properly co-ordinated. It has been practised in too narrow, disorganised, and myopic a way....The new panacea is the 'systems approach'...the attempt to solve social problems by ganging up more and more experts of more and more kinds until every last 'parameter' of the situation has been blanketed with technical competence and nothing has been left to amateurish improvisation....The wrong message is that the ills that plague urban industrial society are not the result of a radically distorted relationship between human beings and the environment but a result of wrongly applied science...the key to the kingdom [we're told] is mastery over the artificial environment...with a steady eye on the growth rate and the balance of payments...."

Carbon credits will show up as a healthy maintenance of industrial profit and trading these credits will also solve the Balance of Payments. The parameters of thought are deadly.

rosserjb@jmu.edu said...

Bruce,

The supposed morality of "Thou shalt not" lay at the base of the main Clean Air and Clean Water Acts back in the early 70s. At the time most professional economists favored Pigouvian taxes, but they were dismissed because that amounted to "letting people pay to sin." Of course, with exception of a couple of pollutants (especially lead eventually and also DDT), most of those laws were not really "Thou shalt not," but were specific quantity limits, recognizing that in fact it is impossible to completely eliminate some of them. A leading example put in place back then and still in place unchanged today (well, some minor modifications) are the emissions limits for Suspended Solids and Biochemical Oxygen Demand (BOD) from municipal sewage, set at 30 parts per million. This is "Thou Shalt Just This Much," not "Thou Shalt Not," and it is simply a hard fact that it is impossible to get either of those to zero.

I bring up the BOD one in particular because I think it is worth going a bit more into that ancient cap and trade system set up in Wisconsin for BOD emissions that I was peripherally involved with in the 70s after those laws were put in place. It got down to the fact that some of those pulp and paper mills along the Fox River when faces with the legally mandated quantity emissions limits for BOD (pulp and paper mills emit really large amounts of BOD), they were threatening to shut down. Now this was a somewhat recessionary period, and folks here can complain about "protecting their profits," but the more salient political issue was protecting the jobs of the workers in those plants who would lose them if those mills shut down. It was trying to achieve the overall "Thou Shalt Just This Much" while minimizing job loss that led to the realization that tradable emissions permit scheme (the original name for cap and trade) might achieve that, and indeed the mills were allowed to trad such permits with municipal sewage treatment plants.

Frankly, I do not see much use in overly moralizing this. Regarding pollution Pogo famously said "We have met the enemy, and he is us." Regarding the ultimate source of those suspended solids and BOD in municipal sewage, it is our own bodily wastes. We are inevitabley sinners. And we also emit CO2 every time we exhale, although admittedly not all that much. That it may not be worth doing anything about certain sources of pollution I have long presented students with the possibility that we could require everybody to wear chlorophyll masks over their mouths to stop their CO2 from entering the atmosphere. What? You have not heard Earth First calling for this? The obvious reason is that the cost of doing so is simply far in excess of the benefit from doing so, although it leaves us all immorally exhaling CO2 and contributing to global warming.

Myrtle Blackwood said...

Re: "... It was trying to achieve the overall "Thou Shalt Just This Much" while minimizing job loss that led to the realization that tradable emissions permit scheme (the original name for cap and trade) ...Frankly, I do not see much use in overly moralizing this..."We have met the enemy, and he is us."

Barkley, the biblical reference I have used above were more meant to point to one of the social functions of religion - to point to a way of living that avoids or limits strife.

What is the real nature of this 'path dependence' that has led to the eviction of humans from 'the land'? That has instead led to the mass demand for 'jobs' to provide a steady income stream to purchase items instead of largely making them for use directly?? To purchase and purchase and purchase, mostly for pure pleasure and/or to find an outlet for one's psychological frustrations?

I have not asserted that there is a prospect of completely eliminating greenhouse gases. Rather, to directly employ tactics that we all know will reduce these emissions immediately. All of us, now.

Myrtle Blackwood said...

"...Those who feel - as I do - that culture based on single vision is dehumanizing, must sooner or later confront the question; why, then, did people enter so narrow a trap, and do so with a determination that still encourages them to make themselves at home in their captivity?....[we have turned[ science ...into a rarefied body of evolving intellectual contructs only by a ruthless simplification of the historical record...[scientists] have done it by what they have said and left unsaid; by what they have affirmed and failed to affirm; by what they have assumed and implied and denied..."
Theordore Roszak

Myrtle Blackwood said...

Economist Elena Panaritis has a few suggestions for fixing the ailing Greek economy: She suggests the following:
Create a Friendly and Attractive Investment Environment
Formalize the informal sector (reducing transactions costs – secure property rights) The Transfers of EU created the common problems of Dutch Disease
THUS WE MUST BUILD AN ECONOMIC MODEL FOR A LARGER ECONOMY – larger number of transactions and volume of transactions ...

I did a search for "Elena Panaritis" and "climate change". Nothing came up that links her with any discussion on the need and ways to limit greenhouse gases.

rosserjb@jmu.edu said...

Myrtle,

I have probably overstated my amoral argument. I think that it is perfectly appropriate for individual behavior and helping to support moving more broadly to a sustainable green-oriented economy. In this regard I welcome the environmental emphasis of Pope Francis, even if I have some issues with some details of his encyclical on the matter.

However, when it comes to organizations I think overemphasizing a moralistic approach may not be so useful, and economic evaluation may be more so. Again, it is fine to say that a strict quantity limit is morally superior to such a limit combined with a cap and trade system, but I see nothing moral about unnecessarily laying off workers. Do we really want to say that workers in places that generate pollution are immoral? Most facilities involved in any sort of material production generate at least some amounts of pollution of some sort.

BTW, there does seem to be a Paris Agreement, agreed to by 196 nations. It apparently sets various nice sounding goals without imposing any particular policy tool as preferred for nations to achieve these nice sounding goals.

Myrtle Blackwood said...

Re: " I see nothing moral about unnecessarily laying off workers..."

The really good thing about abrupt climate change is that we won't need to lay off workers. Already England's having trouble marshalling the labour resources to save it's homes and infrastructure along its Northern coast.

"Mrs Truss said: “After seeing first-hand the impact of the flooding in the north of England, it is clear that the growing threat from more extreme weather events means we must reassure ourselves, and those communities at risk, that our defences, our modelling and our future plans are robust.” Ministers bow to anger over flood defences
Whitehall to announce major review of Britain’s plans for coping with “worst case” floods
By Tim Ross and Patrick Sawer
12:01AM GMT 13 Dec 2015
http://www.telegraph.co.uk/news/weather/12047796/Ministers-bow-to-anger-over-flood-defences.html

Myrtle Blackwood said...

Re: "...a Paris Agreement, agreed to by 196 nations.... sets various nice sounding goals without imposing any particular policy tool as preferred for nations to achieve these nice sounding goals..."

The usual reason for arriving at dire social predicaments, in the first instance, is 'institutional failure'. The Paris Agreement continues to favour money over life.

Domestic capacity to sustain real beneficial production has declined alarmingly thanks to the design and nature of the global economic/financial system. Now climate change accelerates this trend as huge armies of workers will be put to work to create flood barriers etc. GDP is currently measuring a decrease rather than an increase, in our collective well-being.

Bruce Webb said...

"This is "Thou Shalt Just This Much," not "Thou Shalt Not," and it is simply a hard fact that it is impossible to get either of those to zero."

Jesus wasn't a Jainist. Accepting a philosophy of "Thou Shalt Not Kill" does not entail taking unlimited care that you never step on an ant or adopt a macrobiotic diet on the basis the killing green plants is murder.

We all live in the realm of the possible. Which doesn't mean stated moral absolutes are meaningless in themselves just because nobody not named St. Francis can live up to them. (Even Gandhi wasn't Gandhi when it comes down to it.)

That Rules are Made to Be Broken is not (properly read) an appeal to anarchism. Just a concession to reality. That BOD wasn't set to zero has little more import than that the first regulations of vehicle gas mileage were not set to 150 mpg. We all work in the land of the possible.

And this from a guy that actually tries not to step on ants. I don't obsess on it, and I don't try to justify it on religious grounds, I just recognize that 99% of the ant species out there are doing valuable work for the environment. That said black ants in my house and fire ants anywhere are open game. Because I am not a nut. (About that anyway).