Squaring the Circle
April 17th, 2009Posted by: Roger Pielke, Jr.
Recent Congressional testimony from Robert Greenstein, of the non-profit Center on Budget and Policy Priorities, in support of cap and trade illustrates how problematic the approach is, by accurately describing how it is supposed to work (here in PDF):
Fighting global warming requires policies that significantly restrict greenhouse gas emissions. The most cost-effective ways to do that are to tax emissions directly or to put in place a “cap-and-trade” system. Either one will significantly raise the price of fossil-fuel energy products — from home energy and gasoline to food and other goods and services with significant energy inputs. Those higher prices create incentives for energy efficiency and the development and increased use of clean energy sources. But they will also put a squeeze on consumers’ budgets, and low- and moderate income consumers will feel the squeeze most acutely.
Fortunately, climate change policies can be designed in a way that preserves the incentives from higher prices to change the way that we produce and consume energy, while also offsetting the effect on consumer budgets of those higher prices. Well-designed climate policies will generate substantial revenue that can be used to offset the impact of higher prices on the budgets of the most vulnerable households, to cushion the impact substantially for many other households, and to meet other legitimate needs such as expanded research on alternative energy sources.
Congressman Henry Waxman (D-CA) also sees increasing the costs of energy as the key motivation for cap and trade (h/t MS):
If we raise the price of energy, which will happen if we’re reducing the amount of carbon emissions, and industries have to figure out how to live in a carbon-constrained environment, they are going to have to figure it out because it’s in their profitable interest to figure it out.
Mr. Waxman might want to stick to the flawed economics:
We’re seeing the reality of a lot of the North Pole starting to evaporate, and we could get to a tipping point. Because if it evaporates to a certain point – they have lanes now where ships can go that couldn’t ever sail through before. And if it gets to a point where it evaporates too much, there’s a lot of tundra that’s being held down by that ice cap.
April 17th, 2009 at 6:53 am
Ah yes, the best way to discredit Representative Waxman is to simply quote him. But don’t worry; he will be kicked out of office long before the North Pole evaporates.
April 17th, 2009 at 6:57 am
But if the North Pole is evaporating and the tundra isn’t being held down, then Congress can expand the pipes of the Internet up there and we’ll all benefit!
Sorry Roger, couldn’t resist.
April 17th, 2009 at 7:01 am
Well, I meant tubes. I must be forgetting my Alaskan technical lingo.
As with Stevens, Mr. Waxman’s comment illustrates what happens when elected officials get off script and summarize staff briefings in their own words.
April 17th, 2009 at 8:35 am
It is mind-boggling to watch these “brilliant” Congressmen explain how they plan to ruin my standard of living, while trying to make me happy about it! The same guys who sign $700+ billion bills without even reading them. Has the USA gone completely insane, or is it just me?
April 17th, 2009 at 9:01 am
Are you arguing that the economics are flawed because there isn’t actually a profit incentive, because people won’t accept the economic implications, or because the system will break down for other reasons?
April 17th, 2009 at 10:06 am
The economics of pricing carbon is fundementally flawed because giving rebates to the majority of consumers undercuts the price incentive. But not giving those rebates undercuts the political will.
This plays out at the international level where developing countries are asking for a free ride while developed countries adopt draconian policies. A mass migration of industry to developing countries and an increase in total emissions is the inevitable consequence of such policies.
I realize that people concerned about CO2 emissions are desperately looking for anything that sounds like a solution but wanting a solution does not magically make one appear. People have wanted a ‘cure for cancer’ for 50 years but we are still a long way from finding one.
This political discussion would be a lot more useful if people were realistic and acknowedged that migitation policies will most likely fail and we need to plan for that failure.
April 17th, 2009 at 10:22 am
Isn’t the problem mainly that advocates want to do too much at once? Would it be possible to enact a carbon tax if it were kept small? Perhaps popular sentiment would allow for a gradual increase if real effects of global warming (as opposed to hypothesized future effects) became obvious. It seems to me that Roger suggested something like this (a small carbon tax with the revenue targeted at energy research) when he was imagining being the climate czar… Revenue could perhaps also go toward adaptation measures, but political resistence probably increases if the revenue is used for non-related things.
April 17th, 2009 at 2:57 pm
“The economics of pricing carbon is fundementally flawed because giving rebates to the majority of consumers undercuts the price incentive. But not giving those rebates undercuts the political will.”
Roger made a similar argument recently ( http://sciencepolicy.colorado.edu/prometheus/climate-revenue-in-the-budget-4999 ) but later cited economists who criticed Obama, partly on grounds that the incentive argument is all wet ( http://sciencepolicy.colorado.edu/prometheus/obama-on-cap-and-trade-climate-impacts-and-chicken-little-5054 ).
Economists may drink a little too much of the equilibrium kool-aid from time to time, but unless you posit allocation mechanisms that no one is proposing, the profit motive works:
“If you give permits away for free or sell them, either way, allowances will be priced and the system will work,” Stavins said in an interview. “There may be sound arguments that the administration wishes to make for auctioning allowances, but the functioning of the price mechanism and the environmental performance of the system is not one of them.”
http://www.nytimes.com/cwire/2009/03/13/13climatewire-obama-erred-on-key-capandtrade-features-econ-10134.html
April 17th, 2009 at 3:48 pm
Mike
The ‘consensus’ is that if we wait until the sky is actually falling, it will be too late to do anything about it. In order to forstall dramatic effect, you need dramatic action, and you need it now. Dramatic costs are needed to effect dramatic changes, so there is no time for a gradual change in popular sentiment.
Of course, if you don’t accept the apocalyptic consensus, then you’re a denier, aren’t you?
April 17th, 2009 at 7:38 pm
Jon: I understand that, but the point of this post and others is that the politics doesn’t seem to be working that way. So what would work? A small carbon tax with the revenue targeted at energy research would be preferable to a political stalemate. Though I don’t know if even a small carbon tax could pass…
April 18th, 2009 at 1:02 pm
Well, if Waxman would have only talked to the Wicked Witch of the West, (fill in the blank), he would have realized it’s melting!