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Carbon tax splat
A few of you asked me for more commentary on this linked article. Will is on board but I think it is provocative but unconvincing. Here are a few points: oddly, the author doesn't mention the strongest argument against such a tax, namely that the Chinese and others may not follow suit. I don't worry much about one-time compliance costs if energy improvements bring a sounder long-run state of affairs; admittedly a big if. The side deals from a tax will be bad and I expect an inefficient version of whatever happens; that said this does not disfavor reform vs. the status quo since the status quo has very bad side deals too; whether those side deals get worse, or by how much, depends on how the counterfactual is specified. Under some scenarios the side deals in fact get better. Uncertainty alone does not favor inaction, rather it favors action as a kind of insurance policy against very bad outcomes. And uncertainty about long chains of causation most definitely does not, per se, favor reliance on market prices, rather it favors agnosticism about market vs. government. Waiting does seem very costly to me; read Six Degrees. I am far from convinced that the Nordhaus model is the best way to think about the costs of warming. The author of the post is at his best when arguing: "a tax is unlikely to work," at his weakest when arguing "this means the best course of action is no tax at all."
The bottom line is that the whole thing is likely to end very badly for at least one billion of the world's people, no matter what we do within the feasible set. In the meantime we can tell them they ought to get richer, and of course they should, but that's hardly a solution either.
Posted by Tyler Cowen on May 2, 2008 at 03:56 PM in Economics | Permalink
Comments
Waiting does seem very costly to me; read Six Degrees.
What would be very costly is rushing in to take hundreds of billions of dollars out of the gas tanks and mouths of the poor to prevent something that is probably not going to happen, and if it happened probably would be a net benefit. Once cannot base serious economics on the paranoid scenarios depicted in these books, which with extremely high probability are not going to happen. There are vast numbers of disaster scenarios with very low probabilities, and we would quickly bankrupt ourselves by trying to address even a significant fraction of them.
The costs of a carbon tax will be borne by the same people most suffering from high gas and food prices today, namely those in poverty and the lower middle class. For these and other reasons, the carbon tax is politically dead. It certainly won't fly in China or India, but it won't even fly in the U.S. Two out of three of our U.S. presidential candidates are now gaining big politically by proposing the at least temporary elimination of a carbon tax that we already have.
Fifteen years from now, when the supposed global cooling over the next decade will supposedly have ended, we will know far more about the climate, about whether the benefits of global warming outweigh its costs or vice versa, and about the technologies and institutions we need to reduce greenhouse gas emissions if that proves to be necessary.
Posted by: nick at May 2, 2008 4:33:36 PM
"the strongest argument against such a tax, namely that the Chinese and others may not follow suit."
Can you explain? Consider two cases: Suppose the Chinese do cut CO2. Does that make the marginal benefit of our cuts greater or less? Alternatively, suppose the Chinese do NOT cut CO2. Does THAT make the marginal benefit of our cuts greater or less. Since the marginal costs of AGW are likely increasing in CO2 levels, its seems that if anything, the benefits, and urgency, of us acting are greater if they do NOT cut.
Now, suppose the likelihood of Chinese action depends on our action. If we are global leader, then they are more likely to ignore the problem if we ignore it, and more likely to act, if only to prevent global shaming or even boycotts, if we do act. This further strengthens the case for us acting.
About the only way that taking into account Chinese actions would reduce our utility from acting is if we feel a great deal of spite or jealousy -- "why should we do the right thing if so and so doesn't do the right thing? I'd rather suffer." However, that can't be your reasoning, since it's too petty.
So I'm at a loss. Why is the possibility of China not acting "the strongest argument" for us not acting?
Posted by: a student of economics at May 2, 2008 5:28:25 PM
Surely, to the extent that relative prices of coal vs oil vs ethanol are already distorted, an overlaid gas tax won't solve the underlying problem?
Posted by: Chris at May 2, 2008 5:34:48 PM
Chris: It will solve the underlying problem, though eliminating the distortions of coal, oil, and ethanol would be good too.
To see why, look at it through another lens: currently, we have lots of different tax exemptions and subsidies for saving (lower tax rates on capital gains, IRAs, etc.) that decrease the relative price of saving, causing a pro-saving, anti-consumption distortion. But increasing the tax rate on both savings and consumption (otherwise known as income) will still reduce labor supply, despite the fact that there is a pro-saving incentive due to government policy.
Likewise, taxing carbon will reduce demand for coal, oil, and ethanol, despite the fact that the price of each is distorted relative to the others.
Posted by: brian at May 2, 2008 6:29:49 PM
However, note that the effect of a carbon tax will affect the price of coal, oil, and ethanol differently for a number of reasons. Most importantly, coal gives off much more carbon than oil (per unit of energy that can be squeezed out of them), so a carbon tax will (for example) decrease the price of oil relative to coal, despite the fact that oil is more expensive than it was before This theoretically means that a carbon tax could increase the demand for oil, but empirical evidence suggests that this is not what will actually happen.
Posted by: brian at May 2, 2008 6:39:10 PM
studentofeconomics: as explained, a carbon tax or similar costs would cause carbon-intensive industry to move offshore to China and India, resulting in little net reduction in CO2. Indeed, it might cause an increase in industrial CO2 emissions vs. no carbon tax at all if India and China produce the same goods the U.S. and Europe used to produce but with less CO2 efficiency. There is little benefit to CO2 levels by reducing CO2 in only part of the globe, but great industrial disruption and a great increase in poverty levels would ensue.
the marginal costs of AGW are likely increasing in CO2 level
This sounds like sheer speculation. What is your source?
Posted by: nick at May 2, 2008 6:57:59 PM
I never expected to see the day that Tyler Cowan recommends a panicked screed of environmentalist scare-mongering.
I have carefully studied every IPCC report, and the model forecasts they document are nothing like the amazon.com summaries of this book. Indeed, to anyone who has endured the deluge of breathlessly alarmist articles that now pours forth from newspaper and magazine presses, the IPCC forecasts look remarkably mild. 100-year sea-rise levels of about a foot. Food production shifted but net levels approximately unchanged. The most frightening scenarios either not reliably forecastable (e.g. wars over water), having no clear impact on people (e.g. species loss), or totally ruled out (e.g. the thermohaline collapse touted by Al Gore's movie).
Nordhaus's DICE model can indeed be criticized. So can the similiar model used in the Stern report. So can the many different models used by all the economists who have signed on to the Copenhagen consensus that the reduction of CO2 emissions is among the least efficient interventions, in cost/benefit terms, that anyone has proposed for the betterment of humanity. But at least all those people have tried to do real quantitative analysis instead of just mouthing some claptrap about uncertainty demanding action, because what he read in some guy's book was really, really scary. And all their models have shown that the CO2 problem, while real, is somewhere between tiny (e.g. justifying a 9c/gal tax on gas) and fairly small (e.g. justifying a 90c/gal tax on gax).
Posted by: David Wright at May 2, 2008 8:04:42 PM
"Mark Lynas, a journalist, campaigner, and broadcast commentator..."
And how much credibility should one afford someone with those credentials talking about future events with a high degree of uncertainty?
Posted by: M. Hodak at May 2, 2008 8:06:22 PM
The bottom line is that the whole thing is likely to end very badly for at least one billion of the world's people, no matter what we do within the feasible set. In the meantime we can tell them they ought to get richer, and of course they should, but that's hardly a solution either.
Tyler, what do you mean by this? If people are richer they can install more air conditioners, build sea wall defenses, pave better roads and build more ambulances and hospitals, and even come up with ways to shoot aerosols into the stratosphere to buy another decade if the alarmist scenarios are correct.
So I'm really at a loss what you mean by that last sentence. What does something have to be in order to qualify as a "solution" in your book? Whatever your criteria, surely a new tax imposed by people in DC doesn't fit the bill?
Posted by: Bob Murphy at May 2, 2008 10:09:37 PM
Hmmm...
This could lead to decreasing trade deficits.
The countries representing the billion Tyler refers to are unlikely to go along with any expensive increase on resourses. If the US shifts tax to energy, the poor will be hit the hardest being that they are net consumers. This means less imports and little change in exports.
Posted by: aaron at May 3, 2008 10:35:11 AM
(of course, the assumption is that we would tax imports for the energy used outside the US as well.)
Posted by: aaron at May 3, 2008 10:37:01 AM
And, I consider this statement fantastically weak: "Waiting does seem very costly to me; read Six Degrees."
Didn't read the book, but saw the National Geographic film. I laughed often.
I've probably linked this before, but here's a little post on why broad agressive action is probably a bad idea.
I think research, development, and focusing on adaptability for sensitive regions is a far more safe investment.
Posted by: aaron at May 3, 2008 10:46:01 AM
"Consider two cases: Suppose the Chinese do cut CO2. Does that make the marginal benefit of our cuts greater or less? Alternatively, suppose the Chinese do NOT cut CO2. Does THAT make the marginal benefit of our cuts greater or less. Since the marginal costs of AGW are likely increasing in CO2 levels, its seems that if anything, the benefits, and urgency, of us acting are greater if they do NOT cut."
This is oversimplified, assume cutting GHGs is a good idea, our cuts are actually more meaningful if others cut as well. The greenhouse affect from additional emissions decreases as concentrations increase, so as concentrations increase the marginal benefit of addtional decreases would decrease.
Of course, this adds to the argument that our cuts could influence others to cut.
Posted by: aaron at May 3, 2008 10:57:31 AM
Tyler:
You say that "oddly, the author doesn't mention the strongest argument against such a tax, namely that the Chinese and others may not follow suit."
I agree that this is a huge deal, and in the articles that I link to in the post I go into this in some detail. This post was a response that was requested of me to the specific point made in the TNR blog, namely "OK, there are all these problems, but if there is some external cost, can the optimal tax possibly be zero"?
You say that: "Waiting does seem very costly to me; read Six Degrees."
This strikes me as pretty weak. Instead you could read the UN IPCC 4AR. They have integrated the peer-reviewed research and made estimates for central tendency and believed probability distribution of future warming and costs under various well-specified emissions scenarios. UN IPCC estimates are that (1) the costs of a 4C increase in temperature are 1 - 5% of global GDP, and (2) that we wouldn't reach 4C of warming until deep into the 22nd century, even under aggressive emissions scenarios. Given that average global per capita consumption is estimated to rise form something like $6,600 per year today to something like $40,000 per year within a century, I think this means that the central tendency of waiting is that our great-grandchildren will only be 5.7X as rich as us, instead of 6X as rich as us. If you do the expected value calculations, you get essentially the same answer. That's a lot of money, but is not exactly Manhattan as an underwater theme park. Advocates of rapid emissions abatement have relied on rhetoric about "biblical devastation", but have rarely confronted costs and benefits.
You say that "I am far from convinced that the Nordhaus model is the best way to think about the costs of warming."
I agree that projections of the economy hundreds of years from now are inherently speculative (as does Nordhaus). Normally, what people mean when they make statements like this is that they believe that (1) the discount rate should be lower a la Stern, and/or (2) that we need to think about the fat-tailed distribution of risk (or, really, uncertainty) a la Weitzman. I've addressed both of these concerns in very long posts referenced in the post. In the end, I think you have to do some pretty fancy footwork to get me to pay a large amount of money today to get per capita consumption 100 years from now to be $40,000 per year instead of $38,000 per year.
You say that "The side deals from a tax will be bad and I expect an inefficient version of whatever happens; that said this does not disfavor reform vs. the status quo since the status quo has very bad side deals too; whether those side deals get worse, or by how much, depends on how the counterfactual is specified."
Sure it does, if you're practical. We don't get to start at Year Zero of the Revolution. It's way more difficult to undo existing deals that avoid new ones. If you were really fancy, you might call this an asymmetry.
You end with "The bottom line is that the whole thing is likely to end very badly for at least one billion of the world's people, no matter what we do within the feasible set. In the meantime we can tell them they ought to get richer, and of course they should, but that's hardly a solution either."
This strikes me as pure rhetoric. "The whole thing is (right now) actually very bad for at least one billion of the world's poorest people" because they're so poor that they get dysentery from drinking the same water they crap in and can't get enough nutritious food. Somebody on a high horse might say that actions that slow down global economic growth aren't so hot for them either.
Posted by: Jim Manzi at May 3, 2008 2:07:28 PM
Manzi's argument seems to be that any benefit from a carbon tax (or any other approach to reducing CO2 emissions) isn't worth the associated reduction in growth, especially in developing countries. This seems to be the crux of the "do nothing now" crowd's argument once you get past discussions over appropriate discount rates, the impact of carbon taxes vs cap and trade, etc.
The thing is, oil prices have gone up by at least $80/barrel over the last decade. At 85 million barrels/day, that adds up to about $2.5 trillion per year (approximately 5% of world GDP). That's how much MORE the world is paying for oil compared to 10 years ago, a period during which China and India have been knocking off 10% and 8% annual GDP growth respectively.
It seems unconvincing that people are so sanguine about the impact of increasing oil prices (or the Iraq war) on growth yet wetting their beds over the poverty inducing effects of reducing CO2 emissions. Consider that $2.5 trillion number again. Just imagine that Americans paid an extra $10000 for every new car so that it was a hybrid (with an average mileage of 40 mpg). The US has about 250 million cars so figure 10% turn over every year. That'll cost an extra $250 billion a year. That's not far from the cost of the Iraq war (and there would be huge savings in oil consumption). The US could spend another 250 billion building 100 new nuclear power plants per year. In ten years, automobile fleet mileage would have doubled and CO2 emissions slashed,
That's just one back of the envelope example. Also, spending the money on clean technology seems much more positive (economically, morally and geopolitically) than shipping it to the gulf where it transforms itself into mile high skyscrapers, or to Russia or Venezuela or Nigeria where it gets into unsavory hands.
Now I'm no economist so maybe I'm missing something glaringly obvious that renders my argument idiotic. And the concern that the "do nothing" crowd has for the poor of the world is truly touching. But I still don't get why reducing CO2 emissions is so hard. Not when we're paying trillions per year on oil.
Posted by: ramster at May 3, 2008 5:10:42 PM
At risk of pointing out the elephant in the room: Isn't the international community capable of collectively agreeing to tariff the goods of whatever country doesn't "do its part"? And wouldn't this be pretty effective against such export-dependent countries as India and China?
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That said, let's go over my argument about the inconsistency of carbon tax justifications:
Once you say "we should tax negative externalities", that logically obligates you to subtract off positive externalities in determining the debt owed. The externality would be, well, the entire consumer surplus from petroleum products, which no one pays for and is thus not internalized, and counts for a huge amount of economic growth, which gets thrown on to people in the form of new technologies and choices that they didn't have to pay a dime for. I personally would estimate that this itself wipes out the negative externality.
Whatever value you assign to the negative oil externality, must be net of this positive externality. So now, take that unpaid externality. What are the current taxes on oil? Subtract that. Then you have the remaining oil tax that should be assessed. But it's almost certainly a lot less than environmentalists claim it should be -- and thanks to Jim_Manzi for pointing out that the negative side is pretty small as well.
Posted by: Person at May 4, 2008 12:46:30 AM
I think that it's disturbing how even though winter is over and we consume less home-heating oil, the price of oil still climbs, now to about $130 a barrel. You don't even need to worry about global warming, just being able to drive to work is reason enough to start developing alternative fuels.
-Ted
my political forum
Posted by: ted at May 9, 2008 2:24:16 PM
