Workin' My Last Good Nerve
Robert Samuelson's oped in today's WaPo is workin' my last good nerve.
The basic argument is that a cap-and-trade carbon tax is anti-growth, and he cites lots of numbers to make it sound terribly expensive and painful. But what Samuelson fails to do, and this is far too common in this work, is to consider the benefits side of the equation.
When assessing environmental policies, if you fail to consider the economic costs of doing nothing, everything sounds horribly expensive and distortionary. That is, you can claim, as does Samuelson, that the cost of the tax on industry or households amounts to $X, and since you neglect to factor in any of the environmental benefits of X's impact, X ends up looking awfully problematic.
For example, Samuelson points out that, according to the Congressional Budget Office, a 15% cut in carbon emissions would cost the average household $1,300 per year. But check out the note on the bottom of CBO's table 1: "These numbers do not reflect any of the benefits from reducing climate change."
That is a very important caveat, and one Samuelson should not have overlooked. It's not his fault that the value of such benefits are omitted, but he absolutely should tell the reader about the omission. And unless he thinks global warming is costless, he should point out that any estimates of costs that omit such benefits are absolutely biased upwards.
In my view, assessing the costs of doing nothing (or too little) is a critical piece of under-developed research in the field of environmental economics. The British economist Nicholas Stern did the most comprehensive study on the costs of ignoring global warming and found them to potentially quite staggering, analogous to those of a major recession if not depression. Critics argued that Stern's loss estimates were too high because he overestimated the extent of damage from climate change, and he did not discount the future at all (arguing, in essence, that a dollar saved today is worth no more than an inflation-adjusted dollar many years hence; since a dollar today can be invested and earn a return over time, this is arguably an indefensible assumption).
That last point is a fair one, but Samuelson goes to the other extreme, ignoring future costs from today's perspective. For the record, I agree with his last paragraph. We should seek cost effective ways of taxing harmful emissions, and a straightforward carbon tax is likely better in this regard than cap-and-trade. But to ignore the costs of doing nothing is to introduce an unacceptable bias into a critical debate.
Arguments, such as those of Samuelson, are pure lunacy and should be met with nothing but derision. Even if growth were retarded by effective anti-carbon measures what is the downside compared to the catastrophe that we know will occur if we delay action? All anyone has to do is pay attention to the weather daily and you know that we have already put horrific forces in motion. Any delay in fully addressing global warming/climate change is tantamount to criminal given the knowledge we already have regarding the impact of poisoning the atmosphere.
June 2, 2008 3:40 PM | Reply | Permalink
Samuelson talks nonsense. Yes, it's possible a straight ahead Carbon Tax - or "Green Fee" - would be simpler. Maybe.
And he ignores benefits - as you rightly point out. But he also completely ignores technological change, whereas anybody working in the industry knows how many new technologies are now - finally - within the "competitive cost" bracket. Hmmmm, lemme see, wind.... plug-in hybrids and hybrids.... heat pumps.... etc.
He's using stone age economics. Nice if all we got are stones. But since we have brains, not so useful. Say goodnight Robert.
Save your nerve Jared. We need fully working nervous systems and forebrains if we're gonna walk through these next years. Shame about Samuelson.
June 2, 2008 4:20 PM | Reply | Permalink
Samuelson talks nonsense. Yes, it's possible a straight ahead Carbon Tax - or "Green Fee" - would be simpler. Maybe.
And he ignores benefits - as you rightly point out. But he also completely ignores technological change, whereas anybody working in the industry knows how many new technologies are now - finally - within the "competitive cost" bracket. Hmmmm, lemme see, wind.... plug-in hybrids and hybrids.... heat pumps.... etc.
He's using stone age economics. Nice if all we got are stones. But since we have brains, not so useful. Say goodnight Robert.
Save your nerve Jared. We need fully working nervous systems and forebrains if we're gonna walk through these next years. Shame about Samuelson.
June 2, 2008 4:27 PM | Reply | Permalink
I'll go for a Green Fee.
Better yet, if the carbon tax or cap/trade revenues are applied to incentives for conversion away from fossil energy, the costs become a wise investment, not exactly a cost. Once we own the means of production, that is, solar and related energy systems, we are free of the dead-certain increasing costs of using oil.
Then there's the weather. How long will it take for a low-lying area, like the Indian delta, to yield up people with a major grudge? If we are not seen as trying really hard to change our energy system we will face renewed, and likely more inventive terrorism.
The spread of home and small business computers has been revolutionary--so will the spread of decentralized power production and storage.
June 2, 2008 5:02 PM | Reply | Permalink
You're much too kind to Samuelson.
The entire point of a carbon tax is to shift costs from the public to the carbon emitter. This is a classic example of the economic principle of forcing a polluter to internalize a cost that is is imposing on the public. Internalizing costs is an antidote to the polluting firm's increasing its profits by making the public bear a cost that the polluter ought to be paying.
Allowing a polluter to externalize costs distorts the market because when the polluter avoids paying a real cost, this artificially reduces the price of the goods or services that create carbon omissions, and encourages higher consumption of pollution-emitting goods and services than would be consumed if the price reflected the true cost of producing those goods and services.
This is Economics 102. Samuelson knows it's seriously misleading to look at the magnitude of a cost that is being internalized without looking at the magnitude of the cost that is being paid by the general public as long as the firm is allowed to impose that cost on the public (i.e., to externalize the cost). His op-ed is nothing but propaganda in favor of polluters, and it is unworthy of any reputable economist.
June 2, 2008 5:27 PM | Reply | Permalink
There is an aspect to this along the lines of how many angels can dance on the head of a pin. Economists are simply not qualified to discuss the costs and benefits because there is, potentially, an almost infinite downside. In some ways moderate emission cuts could, conceivably, be worse than none at all in that it could allow us to pass a tipping point adiabatically - i.e., without the sense of panic that might be needed actually to do something.
What is needed (at least) is what was proposed lately by climate researchers. Massive investment in computational resources and research to improve climate models and models of the effects of climate change. Massively increased space-based monitoring. Make it multinational by offering fellowships to researchers from 3rd world countries so that they can take their findings back home. Make it massively interdisciplinary - including economists but also philosophers and artists who could translate the findings on an emotional as well as a technical level to the global public. In a nutsehll do more or less what would be done if a large asteroid were on a collision course with Earth and would impact in 30 years.
The costs of doing this would pale besides the cost of the Iraq war. And, even if not, the results would be highly useful and might even help international relations.
Of course, I doubt that any of the 3 candidates for president would initiate something like this - as they will be to busy signing bills to buy more fighters.
June 2, 2008 5:45 PM | Reply | Permalink
Of course he ignores all benefits. That's because there are none: we certainly would not want to have fewer heart attacks due to particulates in the air, for instance. Why, that would mean decreased economic activity in hospitals and ambulance services!
(should I include the link to the dictionary definition of sarcasm and/or satire this time?)
June 2, 2008 8:32 PM | Reply | Permalink
We sure could spend the next few years lauching more satellites and bringing on line more brains and supercomputers to better model and monitor what's going on. But the jury is in and we need action now. Not tomorrow!
If people around the world understood which huge areas of population and agriculture would be the first to go under the sea, it shouldn't be too hard to get the peoples and with them their governments of Brazil, Bangladesh, India, Pakistan, China, Vietnam and countless smaller countries on board the idea of limiting carbon dioxide and other global warming emissions. Noone has really taken a lead on this.
They are going to require help, and that means money. Hell, we've just started down the road of pissing $3 trillion of hard earned taxpayers future earnings down the drain of death and destruction.
If the US economy was to grow a little less quickly that would be part of the solution. We use about 1.5 times more energy per $ GDP than most advanced nations so there's plenty of room for improvement/efficiency. Along with the unforseeable technological improvements and the incentives to change lifestyle priorities, the targets are perfectly achievable with no dire effects.
The point about a cap-and-trade is to provide an economic environment that allows the markets to adjust without any bone-jarring crashes and changes of direction.
Since the 60s industry have not only had to stop using the ground and water around them as a free dumping ground, they have also payed out billions in correcting problems and damages caused. Similarly we now need the same remediation for the air. And who's going to pay for all the dykes and seawalls, enforced migration and lost farm incomes that come?
Whichever way you cut it, Samuelson's op-ed was a lot of unedited opinion and not much about economics.
June 3, 2008 2:55 AM | Reply | Permalink
nothere,
I agree that the jury is in, in general. And I am not suggesting delay so that future research can be done to establish that there is a problem.
The great unknown - and on ethat is notbeing sufficiently addressed - is how big the problem is and what specifically must be done to address the multiple facets of the issue. Simply decreasing emissions is not enough.
The problem cannot be solved by economists arguing hypotheticals when there is a huge absence of data and knowledge about what to do. For example, here is a paragraph from an article in Nature a couple of weeks ago. (Nature 453, 257 (15 May 2008) )
When politicians tout their latest plan they - whether it be tax and cap - or whatever, they are ignoring the real possibility that (i) the problems may be much worse than they seem (we don't know for sure) and (ii) that proposed solutions may not be effective. There is also the issue of getting China and India on board since cutting emissions in the US and Europe is only a partial fix.
I would like to see Al Gore weigh on this - that is the issue needs to move on from whether a problem exists to putting considerable effort and money into figuring out how to solve it. Current proposals are not much more than palliatives
June 3, 2008 5:39 AM | Reply | Permalink
Have you ever noticed that it's always those proselytizing about the free market who oppose efforts to impose those assumptions that free market economics is based upon (in this case, minimal externalities)?
June 3, 2008 5:57 AM | Reply | Permalink
Reading that WaPo column, one has to wonder about Samuelson's faith in markets. Are they only useful when the right people win?
June 3, 2008 7:24 AM | Reply | Permalink