I want to thank Jim Manzi for taking the time to respond to my criticisms of his recent writing on warming policies here at Gristmill. Though I disagree with much of what he says, his thoughtful work on the subject has improved the debate. I want to use one more post here to rebut a few of his assessments.
Let me begin by expressing sharp disagreement with his argument that an effective, efficient, and binding carbon tax is an unlikely outcome given the many political actors involved. As has been made abundantly clear in recent weeks, the United States is one of the principal sources of resistance to binding international agreements, due primarily to a skeptical Republican leadership with strong ties to the energy industry. Domestically, it's also clear that the main opposition to a binding carbon regulatory scheme, either a carbon tax or cap-and-trade regime, is the Republican Party. These policies are not far-fetched -- an imperfect but improvable cap-and-trade plan somehow found its way to Congress this session -- but the GOP is committed to defeating such legislation, and not because of Jim's arguments but because they doubt the science of global warming.
This is why I wondered whether an emphasis on markets might be preferable as a conservative solution -- not because conservatism is good in and of itself, but because Republicans represent the primary obstacle to significant climate progress within the U.S. and globally. I can't claim to understand what makes the GOP tick ideologically, but I do know that solving these problems will require either the winning-over of conservative leaders or their total electoral defeat.
For many of Jim's later points, our disagreements are more matters of degree (though significant ones) than direction. Jim has clearly spent time and attention studying the impact of assessments of growth, mitigation costs, and discount rates on the desirability of different solutions. I don't want to dispute Jim's methodology; rather I would point out that these assessments are subject to considerable debate within the ranks of concerned academics. Just this week, economics Nobelist Kenneth Arrow wrote a column in the Taipei Times demonstrating that quite reasonable choices of growth and discount rates result in a clear conclusion in favor of substantial mitigation efforts.
As I mentioned in my first response to Jim, however, we both agree that some current action should be taken. Jim's opposition to a carbon tax rests upon the idea that such a tax would be insanely expensive. He presents this expense in three general ways:
- that it would be very difficult to undo a binding and aggressive carbon abatement regime;
- that it would be incredibly damaging to consumption and economic growth to adopt such a regime in the first place; and,
- that there are a host of economic externalities out there, so why should we spend so much time, money, and effort on this one.
I'll take each of these in turn.
I find point No. 1 a bit odd considering the time Jim spends detailing the list of people committed to fighting a carbon control plan. If there's so little a constituency for passing the tax in the first place, one assume it would be rather easy to rally them all behind repeal. Moreover, one needs to consider whether it will be easier to undo the tax or the warming.
At a broader level, however, this argument simply does not hold water. From the Bank of England-managed, gold-based financial system of the early 20th century to Bretton Woods II, the world has operated under a number of formal and informal financial agreements that functioned well for decades before dissipating as they became too costly, unworkable, or unnecessary. The record of international agreements in the last hundred years is mixed, but evidence indicates that functioning treaties can and are dispatched or modified when they outlive their usefulness. Within the United States, the past three decades also contain numerous examples of significant reductions in the tax burden; under President Bush alone the United States has cut taxes and abrogated international treaties multiple times. I don't see why we couldn't do it again in the future, particularly if the case for doing so were actually sound.
Next, Jim assumes that any effective carbon tax would be extremely damaging to economic growth and current consumption. One aspect of this point is Jim's contention that offsetting tax reductions will be imperfect or absent or distortionary. Personally, I believe Jim is guilty of seeing all the potential flaws in a carbon tax and none in the current tax code. Consider: he argues that a carbon tax would be regressive, requiring further tweaks to prevent damaging redistribution. Of course, those who suggest tax offsets often offer up the payroll tax as a ready candidate for compensating reductions, and the payroll tax is itself highly regressive. At worst, we'd maintain the current progressivity (or lack thereof) in the tax code.
Moreover, I don't think Jim has thought his numbers through. In his original American Scene post, he argued that an effective abatement program might cost "hundreds of billions of dollars in the U.S. alone," which sounds awfully large and dramatic. A number of independent budget analysts, however, have pegged the annual cost of the Bush tax cuts of 2001 and 2003 at between $250 and $400 billion per year. Clearly, the economy was not crippled in the years before those cuts, so even if no offsetting tax is adopted to balance out a carbon levy, the economy should not suffer all that much, if at all, from a carbon tax.
Finally, the nice thing about a carefully targeted consumption tax is that consumers can quickly and easily optimize their personal consumption to minimize the burden they face. I explained how this might work in my first response, and Jim didn't offer a response, but the main point is this: if you use current tax revenues (primarily generated from income) to fund research efforts, then consumers who seek to avoid the pain of taxation will undermine the primary tool you've chosen to fight warming -- the federal research revenue stream. If you use a carbon tax, the tax avoidance itself fights warming, while also incentivizing technology investment.
Two more quick points about the growth cost of a carbon tax. First, I wonder if Jim would rather spend hundreds of billions annually on a solution that works, or a few billions annually on a solution that does not. The point, after all, of setting aside a particular percentage of GDP for a warming solution is not that the money alone solves the problem; one must use that money effectively. This becomes important when one examines past experience with pollutant abatement, such as efforts to combat sulfur dioxide emissions (PDF) in the 1960s and 1970s. Not only did the 1970 New Source Performance Standard pollutant caps slow the growth in SO2 emissions, it also led to a substantial increase in innovations patented for SO2 control technologies. Before 1970, when federal research funding was available but no caps were in place, four or fewer SO2 control patents were filed each year. Thereafter, 26 or more patents were filed annually.
What's more, creating a market incentive for innovation delivers a competitive advantage to the most innovative firms. Government allocated research funding, by contrast, produces market winners that excel in using political influence. A carbon tax makes the marketplace fitter; research subsidies do the opposite.
Finally, Jim asks, why carbon? Why warming? What about all the other externalities out there? In making this point, Jim poses a number of criticisms that appear to apply just as strongly to his own favored solution (actually rather more strongly) than to mine. Assuming we're going to take some action, and Jim appears to believe we should, there will not be a perfect government response to the problem. This is why I prefer a carbon pricing system; it maximizes the extent to which consumers and firms have control over where to cut back and where to invest.
But let me add another point in this regard. Why is global warming special? On the one hand, it's not. We have addressed many externalities in the past, including a number related to energy and pollution. There's no reason why the presence of other such problems should justify foot-dragging on greenhouse-gas reduction. To the contrary, if a carbon tax encourages efficiency and renewable resource use, then it will also reduce the negative externalities posed by a host of other ills, from smog and ozone to automobile congestion.
On the other hand, global warming is special. There is a logical reason to privilege warming gases over other externalities -- because warming is a truly global externality. Previous air pollution battles have typically involved gases that affect just a small portion of the earth (like sulfur dioxide) or which involve a relatively small segment of the global economy (like chlorofluorocarbons). The externalities there were relatively easily managed because the number of negotiation participants was small and the stakes were lower.
Carbon isn't like that. The gas produced in one part of the world affects residents everywhere else, and carbon is produced from thousands of sources involved in hundreds of industries. It's vital that we find a solution that can efficiently and effectively reduce carbon output across all of those countries and sources -- that can encourage emission improvements across an incredibly wide range of activities at an acceptable cost.
So while there is undoubtedly a role for targeted government research funding to play, it's also vital that the costs and responsibilities of abatement are spread over as many people and as many individual consumption decisions as possible. Personally, I'm very glad that Jim is writing as he is; the first step in solving this problem is convincing influential Republican leaders that there is, in fact, a problem to solve. I trust that if that happens, there will be sufficient political consensus in Washington and in the international community to adopt binding carbon reduction measures. When that occurs, the governments that have embraced carbon pricing will find that they've chosen the most efficient and effective means to achieve the necessary goals.
New nukes? A fair shot, not a free ride
To unlock wind power, put a price on carbon
Comments
View as Flat
David Roberts Posted 3:32 am
17 Dec 2007
... the GOP is committed to defeating such legislation, and not because of Jim's arguments but because they doubt the science of global warming.
I don't think that's quite right. I think the science thing was always a convenient proxy. They are committed to defeating the legislation because, 1) they are loathe to let Dems secure any victories, and 2) their corporate contributors stand to take a hit. That pretty much explains their opposition to, well, everything.
Also, on externalities: what's striking is not just that carbon emission is a negative externality that's inevitably attended by numerous other negative externalities, but that green energy is attended by so many external social benefits. Even if carbon was taken entirely out of the picture, shifting to renewable energy would still make sense for any number of reasons.
grist.org
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Sean Casten Posted 3:43 am
17 Dec 2007
This is, at a very general level what a cap & trade system accomplishes with a 100% auction (at least once the auction process is complete) since "losers" are exactly offset by "winners" as both are parties to any future transaction.
Thus, the political opposition to cap & trade - or other comparable GHG policy structures isn't justifiable on the basis that it will hurt the economy. It is only defensible if you are looking after the interests of those who would end up in the loser category. (And the auction vs. allocation debate is nothing more than a debate about whether or not we should keep some favored interests out of the loser category, to a level not otherwise justified by their GHG signature.)
Note also that this is one of the reasons why a cap & trade is preferable to a carbon tax, because even if they are both structured to have the same net cost impact on emitting parties, it makes the "winner" into the federal government. Yes, they can distribute the resulting tax revenue to other parties, but that is never going to be an efficient process - and nowhere near as efficient as a model where carbon sources and carbon sinks match up and agree on price external to legislative allocation/appropriation processes.
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GreyFlcn Posted 4:12 am
17 Dec 2007
Government has no idea what the tax would need to be to achieve the desired carbon emissions reduction. This would take an act of clairvoyance, or at least a long learning curve.
The Government wouldn't be that good at spending the money once they've gotten it. Which results in a deadweight loss to market efficiency.
A much higher opt-in rate from developing countries, since they would get to sell their offsets.
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But frankly, I am rather compelled by the tax mechanism which France was proposing.
In that it would impose a carbon tariff on countries which are in non-compliance.
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GreyFlcn Posted 4:16 am
17 Dec 2007
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kayser Posted 4:24 am
17 Dec 2007
One critical question I have about the Manzi analysis is whether measuring the impact on "consumption" leaves out too much important stuff. Put it this way: if global warming kills my uncle, the reason I care about it is NOT because aggregate consumption has been reduced. Are non-economic factors (like "the fact that I don't want people to die", "the fact that I don't want my house to flood", "the fact that I don't want to pick up and move inland", "my enjoyment of the outdoors", etc.) being accounted for in the Nordhaus analysis?
Weitzman pointed this out on page 18 of his Stern review-review:
More mundane examples of alternatives to CO2 mitigation from middle-of-the-probability-distribution mild warming might include accumulating air conditioners to counter high temperatures or erecting sea walls to keep the rising ocean out of coastal cities.
Such alternative investments compensate mostly for potential loss of "indoor" consumption and they tend to be a lot less expensive than wholesale abatement of greenhouse gases.
The real problem is in the tails and it mostly concerns "outdoor" consumption. If the definition of consumption is broadened (as it should be) to include non-market enjoyment of the natural environment --like habitats, ecosystems, and species -- then it is difficult to imagine what the compensating investments are for which we should now be saving more as an alternative that might substitute for holding down [temperature increase] directly.
With roughly 3% IPCC-4 probability, we will "consume" a terra incognita biosphere within a hundred years whose mass species extinctions, radical alterations of natural environments, and other extreme outdoor consequences of a different planet will have been triggered by a geologically-instantaneous temperature change that is significantly larger than what separates us now from past ice ages.
What he's saying is, OK, we might be able to fix some consumption-related problems by building big walls to keep out floods, or whatever. But what about the fact that "it just sucks if the environment changes"? There's not a terrific way to measure that economically, although we can think of a lot of reasons why it sucks (like we can't go hiking in the same places, or things like that). Does Jim/Nordhaus account for this?
Weitzman further makes the point that these "outdoor" enjoyments are fairly uncorrelated with "indoor" enjoyments like consuming stuff. So, borrowing from finance the idea that you want your assets spread out among uncorrelated things, it might make sense to spend some extra money to make sure you don't get whomped on non-monetary enjoyments like "having fun outdoors." In other words, not only should we count the "outdoor" costs, we may want to count them extra because they will be so big they will make the "outdoors" more scarce and valuable to us. In other words, you don't know what you've got till it's gone:
So, with the benefit of hindsight, let us now ask: Is there any economic rationale by which greenhouse-warming damages are as much uncorrelated as they are correlated with aggregate economic activity? The answer, when you think about it, is yes. No one has ever tried to argue that the effects of global warming will be evenly spread among regions of the world or sectors of the economy.
The parts of an economy likely to be most impacted by global warming involve its "outdoor" aspects (broadly defined) like agriculture, coastal recreational areas, and natural landscapes (including the existence value of ecosystems, species, and so forth). Climate-affected "outdoor" activities may be differently impacted by greenhouse warming than "indoor" economic activities constituting the bulk of the economy, which are largely going to be dominated by the unknown future growth rate of labor-augmenting technological progress.
Instances of changes in "outdoor" activities under global warming include what happens to tropical agriculture, losing significant parts of Bangladesh (or Florida) to rising sea levels, the "consumption" of an altered natural world that is a direct argument in the utility function, and so forth. These kinds of changes, which include the existence value of natural environments, are presumably not highly correlated with technological progress in computing power, furniture making, or better pharmaceuticals a century from now.
The relevant share of the "outdoor" subset of the economy in investment-beta calculations might be disproportionately large because it is disproportionately-largely impacted by greenhouse warming. Furthermore, it might plausibly be argued that the high income elasticity of environmental awareness will make for a high existence value of unaltered natural habitats when per-capita incomes have increased ten-fold over the course of a century or more.
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Jim Manzi Posted 2:35 pm
17 Dec 2007
Thanks for the, as always, thoughtful comments. I feel like we've taken this about as far as we can in this format, so rather than doing another post, I thought I'd give my quick reaction to a few of your points, and then make one general comment.
First, the quick reactions.
I do think that a carbon tax is very unlikely to be passed in the foreseeable future in the US. That said, I think that a cap-and-trade system is quite possible. All of the serious legislative proposals and presidential platforms that support mandatory limits take the cap-and-trade route. I think this is for the obvious political reason that it hides the cost. As you know, I oppose both approaches.
By the way, Republicans have given Democrats, in effect, a free pass on this issue by being so clueless. Similarly, the US has given the same kind of free pass to Europe which has been able to make speeches, pass "binding" caps, and pretty much proceed on the same emissions path as if they had done nothing. You might be surprised at the willingness of Democrats to really bite the bullet on this in a crunch when they know they will be held accountable by voters. The 95-0 Senate reaction to Kyoto-like treaties is some indication of this. I think that something approaching "total electoral defeat" may well be in the offing for conservatives in 2008, so we may get to see this tested experimentally.
You disputed my view that passing a carbon tax would have regrets because eliminating it would be very difficult. Your logic was that we have done things like this in the past:
"From the Bank of England-managed, gold-based financial system of the early 20th century to Bretton Woods II, the world has operated under a number of formal and informal financial agreements that functioned well for decades before dissipating as they became too costly, unworkable, or unnecessary. The record of international agreements in the last hundred years is mixed, but evidence indicates that functioning treaties can and are dispatched or modified when they outlive their usefulness. Within the United States, the past three decades also contain numerous examples of significant reductions in the tax burden; under President Bush alone the United States has cut taxes and abrogated international treaties multiple times."
The problem is that you haven't provided an example of a major class of taxation that has been entirely eliminated. (Obviously, when evaluating examples beyond your list, this begs the question of what is a "class" of tax.). I do agree that we can't say with certainty that we couldn't, in theory, pull back out of a carbon tax. I'll just restate my view that I think it would be very hard, and that I think history supports my view on this.
You next said that the tax burden that this would impose wouldn't be as big a deal as I indicated, saying:
"A number of independent budget analysts, however, have pegged the annual cost of the Bush tax cuts of 2001 and 2003 at between $250 and $400 billion per year. Clearly, the economy was not crippled in the years before those cuts, so even if no offsetting tax is adopted to balance out a carbon levy, the economy should not suffer all that much, if at all, from a carbon tax."
But this seems to me like the baldest kind of free lunch argument. By this logic, I can have any program I want, spend $100 billion per year of taxes on it and not worry about the cost.
All that said, I don't think the root of our disagreement is about technical tax policy matters - it's about the basic scale of the problem that we are trying to address.
The broader point that I wanted to end with is the following. If we believe the UN IPCC, then we expect the economic impact of global warming to be ~3% of GDP over 100 years from now. If I knew that the climate predictions that underlay that assessment were correct, I would support no significant action, because I think that it's ludicrous on its face to imagine that we can manage the climate and economy 100 years from now with that kind of precision. I would support no tax, no emissions restrictions....nothing. I am comfortable defending that position analytically, morally and politically.
It's the risk of catastrophic impacts that leads me to support action. I see the role of government research around AGW as supporting improved prediction, mitigation and adaptation to reduce the probability and severity of such a low-odds disaster scenario.
Right now, many of those who support emissions restrictions are muddying, not clarifying, the distinction between the expected case for the impact of AGW and the unlikely (though possible) disaster cases. This creates a tactical political advantage, for now. Analogously, many of those who oppose emissions restrictions successfully muddied in the public mind what was known and unknown about the underlying science, which created a political advantage for a while.
If you sell emissions restrictions on the platform of "or else New York will be underwater", eventually you will have opponents with a much bigger bullhorn than I have who will take you to the mat on this, and you'll lose. I believe that in the long run good policy becomes good politics. Hopefully, you will be smarter about this reality than conservatives have been on the issue, because ultimately we all live on one earth and having "sides" on this issue doesn't make a lot of sense to me.
Once again, thanks for a very productive discussion. I feel that I've learned a lot from it.
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Jim Manzi Posted 2:40 pm
17 Dec 2007
I agree that not everything in life that matters can be measured by money (and made this point in my original article).
My key point in considering the economic impacts was that the numerical scale of the expected problem that the IPCC projects is much smaller than a lot of the rhetoric might lead you to believe.
I'm working on a long article right now on the Weitzman paper (though it focuses on some of the more technical mathematical points in the paper, so I don't know if it will go to some of your specific points).
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GreyFlcn Posted 5:14 pm
17 Dec 2007
A dynamic tax/rebate program for car purchases based on estimated CO2/mile.
(i.e. A car Feebate program.)
Been quite a few countries which have been rather successful with it.
Lots of good reasons to like it:
It get more rapid behavior change for a lower cost, relative to a tax on fuel.
It's revenue neutral
No deadweight loss.
It's dynamic (i.e. Self correcting)
It encourages progressive car companies to continue moving forward (continuous incremental rewards for innovation)
It puts the money in the hands of consumers, and it also puts the choices in the hands of vehicle manufacturers.
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kayser Posted 12:23 am
18 Dec 2007
the thickened tail which you seem to be getting ready to write about,
the potential for bias in pulling so heavily from one study, albeit creditable (Nordhaus),
the fact that a carbon tax should have less deadweight loss than an income tax (your response to "HCG" on the Am Scene site was interesting but did not dispute his point). In fact, it seems reasonable to say that all conservatives should support a revenue neutral USA carbon tax even if they don't think the environmental savings justify it. I will concede that many proposals direct the revenue to things other than income tax relief.)
Anyways, those objections or sticking-points aside, I agree that your argument, focusing on the monetary impacts, is an important attempted contribution. But since you do not try to account for the existence-value of species, habitats, climate, etc. (not to mention human lives, if indeed those are not being counted), I would say that your conclusion "I oppose a carbon tax" is premature. Especially since at least Weitzman seems to believe that non-monetary losses are one of the main justifications for abatement.
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