Krugman on incentivizing a green economy

Paul Krugman, pretty much the only progressive counterpart to the conservative mainstream media who has a national bully pulpit, just wrote a long analysis of the politics, economics, and ecology of climate change. Like any pragmatic person, Krugman realizes that humans have negatively affected the global ecosystem, and this matters because, ala Taleb, we will really have no idea how negatively the planet will respond since the environment is a non-linear system.  (Pascal’s Wager here: “You might think that this uncertainty weakens the case for action, but it actually strengthens it. As Harvard’s Martin Weitzman has argued in several influential papers, if there is a significant chance of utter catastrophe, that chance — rather than what is most likely to happen — should dominate cost-benefit calculations. And utter catastrophe does look like a realistic possibility, even if it is not the most likely outcome.” ) All we know is that global warming isn’t going to turn the planet into a Garden of Eden or even increase our crop yields.

The entire article is quite expansive and worth reading, especially his analysis of how politics will distort any solution implemented.  The natural solution is elementary:

My initial reaction, which I suspect most economists would share, is that the very scale and complexity of the situation requires a market-based solution, whether cap and trade or an emissions tax. After all, greenhouse gases are a direct or indirect byproduct of almost everything produced in a modern economy, from the houses we live in to the cars we drive. Reducing emissions of those gases will require getting people to change their behavior in many different ways, some of them impossible to identify until we have a much better grasp of green technology. So can we really make meaningful progress by telling people specifically what will or will not be permitted? Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts.

The House’s Waxman-Markley bill, however, pursues a second-best, though still good, alternative, cap and trade.  Krugman:

What about the case for an emissions tax rather than cap and trade? There’s no question that a straightforward tax would have many advantages over legislation like Waxman-Markey, which is full of exceptions and special situations. But that’s not really a useful comparison: of course an idealized emissions tax looks better than a cap-and-trade system that has already passed the House with all its attendant compromises. The question is whether the emissions tax that could actually be put in place is better than cap and trade. There is no reason to believe that it would be — indeed, there is no reason to believe that a broad-based emissions tax would make it through Congress.

He then spends the rest of the article explaining how either solution would have negligible impacts on the American and global economy, especially in comparison to the fat tail of environmental shocks.  My favorite part of the essay (though irrelevant to this blog’s purpose) echoes a point I made on my previous blog, namely that Republicans obviously don’t believe in the free market because they don’t like market solutions when it goes against their sugar daddy’s interest:

This reaction — this extreme pessimism about the economy’s ability to live with cap and trade — is very much at odds with typical conservative rhetoric. After all, modern conservatives express a deep, almost mystical confidence in the effectiveness of market incentives — Ronald Reagan liked to talk about the “magic of the marketplace.” They believe that the capitalist system can deal with all kinds of limitations, that technology, say, can easily overcome any constraints on growth posed by limited reserves of oil or other natural resources. And yet now they submit that this same private sector is utterly incapable of coping with a limit on overall emissions, even though such a cap would, from the private sector’s point of view, operate very much like a limited supply of a resource, like land. Why don’t they believe that the dynamism of capitalism will spur it to find ways to make do in a world of reduced carbon emissions? Why do they think the marketplace loses its magic as soon as market incentives are invoked in favor of conservation?

Clearly, conservatives abandon all faith in the ability of markets to cope with climate-change policy because they don’t want government intervention. Their stated pessimism about the cost of climate policy is essentially a political ploy rather than a reasoned economic judgment. The giveaway is the strong tendency of conservative opponents of cap and trade to argue in bad faith. That Heritage Foundation broadside accuses the Congressional Budget Office of making elementary logical errors, but if you actually read the office’s report, it’s clear that the foundation is willfully misreading it. Conservative politicians have been even more shameless. The National Republican Congressional Committee, for example, issued multiple press releases specifically citing a study fromM.I.T. as the basis for a claim that cap and trade would cost $3,100 per household, despite repeated attempts by the study’s authors to get out the word that the actual number was only about a quarter as much.

We’re all socialists now!

Related articles by Zemanta

• Adding a Price to Blunt Energy Waste (dotearth.blogs.nytimes.com)
• Steven Cohen: The Real Climate Choice Before Congress: Cap and Trade or Command and Control? (huffingtonpost.com)
• Another Path to Cap-and-Trade (baselinescenario.com)