Friday, June 19, 2015

Pope vs Prof: Which One Is Infallible?

Today’s New York Times has an article that claims that “leading economists” (paragraph four) and “environmental economists” (paragraph eight) are upset with Francis for the economic portion of his encyclical “Laudato Si”.  Their sole source for this is Harvard’s Robert Stavins, who is quoted as saying that the Pope “is out of step with the thinking and the work of informed policy analysts around the world, who recognize that we can do more, faster, and better with the use of market-based policy instruments...”  Later he compares the Pope’s line of thinking to a
small set of socialist Latin American countries that are opposed to the world economic order, fearful of free markets, and have been utterly dismissive and uncooperative in the international climate negotiations....
That’s quite a put-down.  Francis is one of these south-of-the-border pinkos, an enemy of freedom, and out of step with educated opinion.  That’s Stavins’ side of the story.

What’s the other side?  Well, as a matter of fact, the encyclical (paragraph 195) strongly endorses the polluter pays principle and argues that economic growth needs to be viewed as a means, not an end—which would not be regarded as blasphemy in the halls of today’s World Bank, among other places.  As for carbon trading, on this the Pope is right and Stavins is wrong: this is a misguided approach in theory (it fails the incentive compatibility test) and has proved disastrous in practice.

More generally, the two mechanisms that could form the basis of an effective climate strategy, a stiff carbon tax or a system of mandatory carbon permits, are vehicles of public control, not private initiative.  The one puts you in jail if you don’t pay the government-mandated tax on fossil fuels, the other if you extract fossil fuels without a permit.  They are market-using instruments but in themselves not market-based.  Either will rapidly increase the cost of energy and energy-intensive goods, which means that social justice requires that action on climate be coupled with substantial resource transfers from rich to poor.  The result will be less luxury consumption by the few so that the many can survive.

Come to think of it, the Pope would be a better choice to teach environmental economics.  Maybe they could switch jobs: how up is Stavins on the last two thousand years of Catholic doctrine?

6 comments: said...

Not so obvious that cap and trade is just a total disaster. It worked pretty well for SO2 in the US, until it did not. The carbon trading system in Europe has had a lot of problems, much of that due to not having full information about CO2 emissions when it got set up and then side swiped by the Great Recession. But the hard fact is that carbon taxes also have major problems; their supposed superiority is very far from a slam dunk, and mandatory permits, well, maybe maybe maybe. On this one, the pope may have overdone it a bit.

Sandwichman said...

Sounds like Stavins is stuck in his Kaldor-Hicks compensation criterion fantasy world. said...

Stavins made some silly remarks, but in terms of the policy debate, these things are barefly ideologically different. Currently Pigouvian taxes are faddish, but there are very serious technical issues in adopting them on a globally coherent basis. They basically do not exist, unless you want to count things like gasoline taxes, which nobody in the US seems to want to raise anymore. Those pushing them are comparing an ideal form from textbooks with the messy reality of the cap and trade systems out there, some of which have worked quite well, and others of which have not worked so well.

Let me get really precise. About a decade ago the Scandinavian countries decided that they would do what the pope and everybody and his jackass brother is now pushing: adopt a coherent cross-country carbon tax system. These were the best managed, least corrupt nations on the planet. They were unable to do it. The technical issues are really enormous, cross-border adjustments and all sorts of nonsense that quickly becomes massively political, much worse than the carbon market that Europe actually succeeded in setting up, or the SO2 market that the US actually set up (with declining emissions as a result with minimal economic disruption). I listen to all these people running around spouting the glories of carbon taxes and the awfulness of carbon markets, and, frankly, I do not think that the vast majority of them have the remotest idea of what they are talking about. They really know nothing about this. It is all slogans and b.s. Turning it into something ideological or theological is just the worst sort of nonsense and utter ridiculousness.

(Note: I may be biased, but I helped set up the first government run cap and trade system for BOD on the Fox River in Wisconsin back in the mid-70s when I was working for the Bureau of Water Quality in the Department of Natural Resources. It is still in place, and it works fine, you are welcome, Scott Walker not having shut it down yet.)

Peter Dorman said...

Barkley, maybe I wasn't clear enough in the post, so let me try a bit more.

1. Trading carbon credits has been disastrous, but not cap and trade in general. For mechanism design reasons the SO2 system has worked well. The reason is that this is an exchange between regulated entities for portions of their cap. Carbon credits are "free form"; they can be sold to almost any public or private entity that promises some action that reduces carbon emissions relative to what they would be under an alternative scenario. This is where the incentive compatibility problem comes in. In practice, carbon credits have to a large extent offset rather than redistributed carbon caps.

2. The second problem with these credits, and the one that probably rankles Francis, is that, in practice, they have placed ostensible carbon mitigation above every other consideration for projects that generate the credits. Whole populations are displaced, local pollution problems are intensified, etc., and it's all good because some valuable credits are involved. If you already had strong social and environmental protection in poor countries this would not be a problem, but in the real world it is.

3. I am not making a case for the superiority of carbon taxes over quotas, and in fact I think the opposite is true. In a world of certainty, and abstracting from their political characteristics, they are identical in their outcomes. (OK, quotas handle nonconvexities better.) In a world of uncertainty quotas prioritize climate goals over economic goals, which is fine with me. Also, the politics of quotas are more tractable, because the discourse is about carbon concentrations, not how much people will have to pay. But given where things are at right now, I strongly support either approach if it is scaled to the urgency of the problem.

4. A system of carbon credit trading is not a necessary component of a quota. On the contrary, it functions as a relaxation of the quota. You can be a big supporter of carbon caps, like me, and a big opponent of carbon credits -- just like you can be a supporter of carbon taxes and an opponent of tax credits. (I like a progressive income tax but think the US system of a gazillion credits and exemptions and loopholes is horrendous.)

5. The polluter pays principle, which Francis endorses, and which should win him the support of economists everywhere, applies equally to carbon taxes or permits (quotas). A tax embodies this principle directly. A quota embodies it if the permits are auctioned off rather than given away.

6. I looked through the encyclical quickly and didn't see anything in it that an informed and reasonably progressive economist should recoil against. If there are passages I missed that should be called out, of course, I hope others with more interest in the Church than I have will bring them to our attention. said...


I have not read the encyclical, so I do not know what it says. If it is carbon credits that it criticizes rather than tradeable emissions permits, then fine, I am in more agreement.

I also even think that pollution is sin and a moral issue, although focusing on that too much can lead to problems. After all, pretty much everything becomes bad if there is too much of it, even things that are profoundly necessary, such as water. We absolutely need CO2, but clearly too much of it is causing serious problems. Some of this is just boring old neoclassical economics, diminishing returns with those able to get into negative territory beyond some point (flooding!).

It is a funny thing that back in the early 70s when the main US environmental laws were passed, most professional economists were pushing for a Pigouvian tax solution, but the political opposition carried this moral overtone, that taxation would allow sinners to pay for their sin, pollution, Puritan America. That view is still out there, and sometimes I have to argue against students I have in environmental economics who think that "all pollution is bad." Umm, sometimes we need some of it, and sometimes the activities that generate pollution are themselves worthwhile. Darned old economics and tradeoffs and all that boring stuff. So much fun to thump Bibles or encyclicals and damn the sinners to hell.

BTW, while everybody runs around declaring that the "polluter must pay" principle is just so obviously moral, well, not so fast. Poor people are more likely to drive more polluting junker cars whereas richer ones are likely to drive those nice clean Teslas, with many other such examples out there. While globally for the warming problem the polluters are largely the rich and the victims of global warming are largely the poor, there are plenty of cases where it is the other way around. Do we really want to always make the polluter pay, especially when the polluter is poor and the pollutee is rich?

Peter Dorman said...

Short answer to your last question: yes. Here I can see no alternative to the mainstream solution -- to put the burden on the polluter but also provide a transfer to offset the increased inequality. That's the reasoning by "worker superfund" proposals too.

Incidentally, the polluter pays principle is only first-round; after that the costs get passed on and the ultimate incidence changes. But as we like to say in environmental econ, that's a feature, not a bug.