Friday, April 22, 2016

What Does Krugman Really Think We Should Do To Reduce Carbon Emissions?

Paul Krugman has written what I find to be one of his most confusing posts ever on "101 Boosterism" (or for extended comments on an exceprt see Mark Thoma's link).  I agree with his main point, which follows up on a post by Noah Smith, that while Econ 101 often provides useful insights about the world and policy, it can often be misleading because it is not always right, or not as strongly right as many think to the point that for policy purposes it should be ignored.  Krugman initially discusses international trade, which I am not going to comment on here, but then shifts to global climate policy with respect to carbon, which I shall, and which is where I think he gets confusing.

His target is carbon pricing, which he thinks is good in theory, 101 theory at least, but not necessarily so good in practice in terms of combating global warming.  His example of successful carbon pricing is the US  SO2 pricing policy that he accurately describes as having successfully helped reduce acid rain in the US.  This was a cap and trade (or "tradeable permits" policy, to use older terminology) program, which has in recent years gotten somewhat messed up.  He does not comment directly on Pigovian taxation of carbon emissions, although presumably this would also be in his  firing line as a carbon pricing strategy, even though such "prices" are not derived from markets but simply imposed by governments.  His general skepticism is that people do not respond sufficiently to  carbon pricing signals to really reduce emissions, and he may be right about that.

Instead he proposes that we go after shutting down the use of coal.  But that is where he goes all  vague.  Is this supposed  to be a ban on new coal-fired  plants, which are not being built anyway in the US at least due to the much lower  prices for natural gas  ones, or is he proposing actively shutting down currently operating coal-fired power plants, something  that is  very unlikely to be implemented and could be very expensive and disruptive if done too suddenly?  I do not know, although maybe it does not matter.  Coal continues to be the leading source of electricity in the US, and its use continues to expand abroad, especially in the important nations of China and India, despite some commitments to get off it, especially by China as part  of the Paris agreement.  Coal has many other ills and is a more general pollutant than just as a source of  CO2, but it really is unclear what Krugman thinks we should do or at what level: US or global, with, as I have noted, coal probably over as an expanding source of energy in the US simply due to the price signals in the energy market in comparison with natural gas.

What he also does not address is the much more  perfervid fight now between those advocating Pigovian carbon taxes (or maybe the fee and dividend variation) versus those advocating cap and trade.  The former has become very fashionable to the point that many are claiming that nearly all economists favor it with some politicians even turning it into a lame litmus test of whether somebody has progressive views about the issue.  Are you or are you not for pricing carbon by putting a tax on emissions, and if not, why not, you dastardly climate-hating swine?  I find this attitude highly annoying as well as poorly informed.

While it is probably true that more economists favor taxing carbon emissions than the currently unfashionable cap and trade, the opinion probably is reversed if  one looks at environmental economists who have studied this more in depth.  There certainly are some prominent economists involved  in the global warming issue who support the taxation approach, notably Stiglitz and Nordhaus, both of whom always have.  But many others more specialized in the field while less known to the public favor cap and trade, such as Robert Stavins and Tom Tietenberg, with Krugman's position on this unclear, despite  his shoutout for the US  SO2 cap and trade program.

The hard  fact is that cap and trade is by far more in place around the world and is more encouraged by the new Paris agreement, substantially because it is the successor to the Kyoto Protocol, which definitely favored cap and trade, with Europe adopting the policy as a result.  There are nations and sub-national regions that have implemented carbon taxes successfully, and this is allowed by the Paris agreement for nations to  do in pursuit of achieving agreed on goals.  But it must be noted that such taxes are indeed arbitrary in their levels and uncertain in their impacts for the very reasons Krugman has put forward: we do not  know how much people will respond and reduce emissions by in response to them.

This is where cap and trade has an advantage.  It sets a quantity limit, the cap, and in most nations where it is in place, it has followed a policy that was originally just a quantity limit, which I would think many should favor regarding global carbon emissions.  Set an emissions limit so  that we know what the emissions will be.  However, it moves beyond that to establish a system that if properly managed will achieve the most cost effective way of achieving that emissions limit.  I am somewhat mystified why so many think that this is an awful policy as compared to taxes whose emissions impact is not known, and which become very complicated to implement if someone wants to have a coherent policy of this across national boundaries (something rarely mentioned by the advocates of this, but a very real complication).

In any case, I do not know where Krugman stands on this, and maybe he himself does not either.  But I certainly think there  needs to be more pushback against this mindless current fad for carbon taxation.  Some say it can be sold if it is done in a revenue neutral way as was done recently in BC.  But in the US the GOP is simply not going to pass anything that is a tax, with their rejection of Obama's effort to establish a cap and trade system for carbon being based on the claim that it was "really" a tax in disguise.  I find it amazing that practical people like Joe Stiglitz do not recognize this hard reality.

Barkley Rosser


Lord said...

I take from him that neither is likely here, thus the emphasis on regulating coal out of existence as the likely fallback.

Peter Dorman said...

This is one of those topics on which Krugman needs to be psychoanalyzed, not parsed in the normal, empirical/theoretical way. It may be that he has bought into the "movement" obsession with carbon taxes as the incarnation of virtue and caps as the incarnation of vice. Could be, I don't know. But I think the main idea lying behind his piece is that he has bought into the political strategy that says, advances in renewables have made climate change mitigation so cheap as to be a no-brainer. This is the official position, to the extent there is one, of the mainstream act-on-climate-change crowd. It has all sorts of nice properties: minimal economic disruption, lots of opportunities for green jobs, alliance-building with labor and minorities, etc. This is now the party line of the centrist position on climate policy, just as you can find the activist left party line in Naomi Klein. (I just heard a talk tonight by a leading Seattle climate activist and it was all Klein, Klein, Klein although the K-word never came up.) What you are suggesting, Barkley, is that there's no there there. I agree with you, as you know. The fossil fuel reduction timeline to meet the IPCC's target of giving us a 2/3 chance to limit global warming to two degrees is much, much faster than any plausible ramp-up-renewables timeline. It's simple arithmetic, the kind that Krugman likes to trot out in other situations. But he has bought into the tribal consensus, and all other considerations have to adjust accordingly.

Lord said...

I take from him that neither is likely here, thus the emphasis on regulating coal out of existence as the likely fallback.

ProGrowthLiberal said...

Equally annoying is this story that Greg Mankiw is all giddy about:

Sure I'm glad that British Columbia passed a carbon tax. But these Pigou members are implying the only right way to do this is the carbon tax route which is revenue neutral. After all tax cuts for the rich are the main virtue per this crowd. said...

Lord and Peter,
While Krugman did not say so, I think you have both hit on what he may be thinking about. Given that even if Bernie were to be the prez and the Dems take both houses of Congress, probably the GOP would have more than 40 seats in the Senate, putting the new prez in an even weaker position to push anything through over a Senate filibuster than Obama faced when he got his Rube Goldberg-full-of-loopholes cap and trade proposal through the House, only to be blocked in the Senate. And, again, it is just fantasy that the GOP will accept any overt tax increase, even if it is officially revenue neutral; with this beyond fantasy into total delusion, certainly in the near future at least.

So indeed PK may be thinking fully of this problem, that the US Congress is simply not going to pass anything to combat global warming at all in the next several years. This pushes things back to what Obama has been trying to do, use regulations, some through EPA, and assuming support of the SCOTUS (which hopefully will be there if a Dem gets the WB) to increase regs that make it harder for the coal industry to operate. This does in fact look doable. Of course this is not the argument that PK offered, instead using this as alaternative to more market-based ones that the public might not respond to in the appropriate Econ 101 way.

BTW, to everybody, Happy Earth Day, and I am glad to see the Paris agreement being signed today, even if it certainly needs to be extended and strengthened, and so on. But at least we are back to getting most of the world (aside from major oil exporters) on board with cooperating on this for the first time since Kyoto, and we really need this.

On a personal note, I was in Madison, Wisconsin, as I think Peter might have been as well, when the first Earth Day happened, initially organized by the late senator from Wisconsin, Gaylord Nelson. An irony is that at the time many harder leftied reviled this as a right wing plot to distract people from the fact that it was the centennial of Lenin's birth, not to mention distracting people from demonstrating against the Vietnam War and the evils of capitalism, and so on.

ProGrowthLiberal said...

Happy Earth Day! In New York City, we were told to avoid the 40's on the East Side as it is busy near the UN with the signing of the Paris agreements. Which is another good reason to stay in Brooklyn and just let this historic day occur. Besides, I'm recovering from a Brooklyn block party thrown by Spike Lee in honor of Prince.

Thornton Hall said...

The thesis that Krugman is defending is logically indefensible, a common cause of incoherence.

The thesis:

His point [Noah's]is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.
My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.

Krugman's task is to describe the system or method by which a policy maker should decide when it is appropriate to consult the stopped clock that is economics. The answer is, clearly, consult the stopped clock when that's what time it is. Consult the truth of gains from trade when that is a true and significant thing to consult.

He's saying, then, with respect to climate change policy that now is not the time on the clock. Is this correct? The clock can't tell you. So he's telling you.

The odds are with him, given that the hands are pointing to a thought experiment (that he calls true but not obvious) and, not, say, the world.

Peter Dorman said...

Yes, I was in Madison too, and of course, being who I was at the time, I thought anything that came from Democratic Party politicians or other non-radicals had to be a sell-out of one sort or another. I didn't think it was a conspiracy or that it had an ulterior motive (much less knowing or caring about Lenin's centennial!), just that it had to be more of the same old.

My view of the world is a lot less binary these days.

Incidentally, Gaylord Nelson is the only big time politician I met in those years who struck me as a decent human being. We once chatted while everyone else in the room was watching a football game on TV. said...

Yes, I met Gaylord also. He did not vote against the Gulf of Tonkin resolution, but not long after it turned against the Vietnam War when there were still only a handful of members of Congress questioning it. He was among those who lost office in the Reagan sweep of 1980. There is now a state park named for him at the north end of Lake Mendota. He died quite a few years ago, I forget when exactly, but I agree with your view of him, a genuinely decent guy and a real Wisconsin progressive.

Myrtle Blackwood said...

In Tasmania the climate has changed so quickly that the hydro-electric energy infrastructure is failing rapidly. In India 20 of its 29 states are in drought and water trucks are scrambling to provide drinking water to 330 million people. The Guardian reports this week that "The global temperature in March has shattered a century-long record and by the greatest margin yet seen for any month." The manager of the Oxford University Geoengineering Programme and others are warning that "The economic models that are used to inform climate policy currently contain an unhealthy dose of wishful thinking. Technologies that remove carbon dioxide from the air are assumed in the models that avoid dangerous climate change – but such technologies do not yet exist and it is unclear whether they could be deployed at a meaningful scale. "

Carbon taxes and cap and trade won't go anywhere near addressing the climate emergency we now face. In Tasmania the government simply didn't have time to discuss such theoretical topics. Money (many millions of dollars) was simply employed to hire a large bank of enormous diesel generators. The funds could have been spent installing solar panels on household roofs but instead the new diesel generators are spewing out the equivalent of an extra 155,000 cars on the road.

A technological and lifestyle revolution may be disruptive and create many economic losers, but the bottom line will always be survival.

Myrtle Blackwood said...

There’s a time when the operation of the machine becomes so odious, makes you so sick at heart, that you can’t take part, you can’t even passively take part, and you’ve got to put your bodies upon the gears and upon the wheels, upon the levers, upon all the apparatus, and you’ve got to make it stop! —Mario Savio, Berkeley Free Speech Movement

To gain what is worth having, it may be necessary to lose everything else. —Bernadette Devlin, Irish activist and politician