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