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Waxman-Markey cost-benefit calculations
I haven't finished perusing the sources you all sent to me, but the debate is racing beyond where I started, so I will report in midstream. My current impressions are the following:
1. Whether you agree with them or not, there are reputable studies showing aggregate benefits from a significant cutback in carbon emissions.
2. Waxman-Markey makes only a very small dent in the overall climate problem.
3. If you carve up the aggregate benefits from #1 into parts, and calculate an average product for various climate change policies, maybe you can get positive net benefits from Waxman-Markey. But a true marginal analysis of the bill will not yield the same benefits. A true marginal analysis will yield benefits which are essentially zero in terms of improved climate.
4. You can argue that taxing carbon is better than taxing work and savings, but that doesn't establish the proposition that we should be stingy enough with permits to force a (costly) move to a green economy. Furthermore it is already the case that 85 percent of the permits (and they're not finished revising the bill) are being given away, so the revenue argument applies less and less.
5. The bill allows for "carbon offsets," which lowers the climate benefits even further and makes the bill even more unworkable. For the most parts these offsets are not verifiable.
6. Even this watered-down version of the bill may not pass.
7. Climate benefits require that other nations follow suit and that we take numerous further costly actions over time. I haven't seen a case that this is likely to happen and the ongoing evisceration of the bill suggests it won't. Standard public goods arguments -- beloved by environmentalists I might add -- suggest that such collective action won't be forthcoming.
8. Waxman-Markey defenders argue "we must do something," "this is a first step and a framework," "the people who oppose the bill are fraudsters," etc. but all that non-marginal analysis does little to address the key problem. Those arguments may make you feel better about affiliating with Waxman-Markey, and opposing its critics, but they are not geared toward solving the problem. Beware when non-marginal moralizing becomes so prevalent in the case for a piece of legislation.
9. If you now favor Waxman-Markey, what would have to happen to convince you that we are on the wrong track with this bill? Is passing a positive-cost, zero-benefit measure really a good means to pave the way for future policy improvements?
10. One alternative approach is to have a revenue-neutral carbon tax (or other measures) kick in, but only if we have first captured the "low-hanging fruit," namely preserving various forests, limiting indoor emissions in poor countries, and limiting meat-eating. That way the major costs come only if we first show that we are even a wee bit serious about addressing the problem.
11. I am not sure that #10 is the best way forward but at least it tries to come to grips with the risk of getting only costs and no benefits. The people who are hurling moral rhetoric at Waxman-Markey opponents should try to come up with better versions of #10 and offer very clear assessments of the likelihood of success.
Addendum: Here is a new related post.
Posted by Tyler Cowen on May 26, 2009 at 05:22 AM in Economics | Permalink
Comments
Your suggested solutions are much much harder to implement than cap and trade. Preserving the forests - good luck with than, since most of these forests are abroad in poor countries who cannot afford to lead by example (as opposed to developed countries like the US). Limiting indoor emissions in poor countries - ditto. Limiting meat-eating - you must be joking, that is a massive reduction in welfare with a much higher utility cost than your "costly move to a green economy"!
Posted by: Martin at May 26, 2009 5:59:03 AM
"Beware when non-marginal moralizing becomes so prevalent in the case for a piece of legislation."
That's funny, I feel the same way about free trade. Standard economic theory predicts that it has positive net benefits, but can often have negative private benefits. (For instance, a country may be better off by imposing a tax on imports when the incidence falls on foreign producers, or a tax on exports when the incidence falls on foreign consumers.) But for some reason economists don't push marginal analysis here. Instead it's all warnings about trade wars and retaliation.
Posted by: Alex F at May 26, 2009 6:04:23 AM
Tyler,
It seems clear that proponents of this and all other cap 'n trade/carbon tax proposals are working from a different objective function than you or anyone else who might try to calculate a marginal analysis of benefits. For example, under their objective function,
-limiting/regulating industry in and of itself is a benefit, measured with an independent positive term
-similarly, effects that involve new bureaucracies, more government jobs are considered positive terms
-there are also positive terms that measure winning a political battle over Republicans, signaling one's climate-friendliness to constituents, etc.
Under such an objective function, the position of proponents is perfectly consistent and makes total sense.
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Posted by: David Heigham at May 26, 2009 7:02:55 AM
Tyler--
This post is mis-labeled. It's not about cost-benefit calculations. It's about your distaste for the flavor of the (informal, unattributed) arguments of supporters of Waxman-Markey.
In #8, you lump together some ad hominem attacks ("fraudsters") with the valid "this is a first step and a framework" argument. Your only response to the argument that this is a first step is that it is a non-marginal analysis. I think it is asking too much of climatology and macroeconomics to demand that every step from the status quo to a beneficial end state be marginally profitable.
You basically have two (or three) arguments:
1. If you divide carbon emissions efforts into small enough parts to be politically tenable, the error bars on the benefits of those small parts become too great to confidently argue for change.
2. Your criticisms of Waxman-Markey caused some commenters on your blog to make a weak defense using ad hominem attacks and "hurling moral outrage"--therefore the proponents have a weak case.
3. You imply that because proponents of the bill have not defined the terms under which they would surrender that there support for the bill is unconditional and independent of whether it will help our hurt the economy and the climate.
I think #1 is an unfair criticism. I think it is easy to find examples of #2 in any political debate--it's not an interesting argument for you to use. #3 is also unfair--it is not in the political interests of a movement to define to their opponents what they need to do to scuttle a piece of legislation.
Posted by: MostlyAPragamatist at May 26, 2009 7:03:55 AM
There are additional dynamic arguments in favor of doing something--anything:
1. To get a global agreement (and action from China, for instance) requires that the US act first, so this is a downpayment on other countries doing things so the benefits aren't just the US action, but also the rest of the world action that this allows;
2. View Waxman-Markey as setting up the administrative apparatus for capping and trading; in future years as more "bad news" comes in there will be more political will for a more aggressive cap and we'll also be able to auction everything.
Posted by: maybe at May 26, 2009 8:15:36 AM
Almost any measure taken to conserve carbon in the US at the moment will either have little global effect or will devastate the economy. That is not, IMO, a sufficient reason for not taking any measures.
Having a working cap and trade system that creates incentives to reduce carbon emissions, and more importantly to create more technologies more quickly that will reduce carbon emissions more cheaply, is a marginal net benefit. That the marginal net benefit will not be realized in noticeable overall global warming reduction does not eliminate this.
From a political economy perspective, a (fairly) straightforward cap and trade regime, instituted with little fuss or muss, will be a framework that can be expanded in the future. As the US ratchets up carbon controls, the question will be, instead of "shall we or shall we not pass this large, controversial bill?", "how much will we reduce carbon credits in each of the next few years?"
Politicians, seeing how low the marginal cost is (and, if credits are fully auctioned then refunded as tax credits, maybe even seeing net political benefits) will tend to signal green credentials by supporting such measures. This will be at the expense of other measures, but assuming the carbon credit system is not overly perverted with time and politics, that's probably a good thing. Measures that cause net harm, like requiring even more ethanol in fuel, will have a harder time being passed when there's a politically cheaper alternative, and a cap and trade system does, after all, have the same effect as some level of carbon tax, so a gradual ratcheting up of it will, if not stopped, end up reducing emissions significantly.
Successfully passing a cap and trade regime, especially if it ends up getting off on a better foot than Europe's, will also be a useful tool in international politics (especially, but not exclusively, international climate politics). But any feasible way that goes is far, far murkier.
Posted by: Russell Duhon at May 26, 2009 8:24:49 AM
I think of it this way, reducing carbon will not do much unless other nations join us, but other nations will not do anything until we have made a good faith effort to limit our carbon. The purpose of any carbon bill at this stage in the game is to signal that we are making a good faith effort.
Posted by: Michael Foody at May 26, 2009 8:42:03 AM
Reducing meat eating will create its own problems since humans are designed to consume a high protein paleo diet.
Posted by: Neal W. at May 26, 2009 8:49:46 AM
Is a carbon bill that does not actually reduce carbon emissions a reputable signal as a good faith effort?
Posted by: Cyrus at May 26, 2009 9:00:21 AM
Tyler,
W-M has lots of problems, and they seem to be getting worse, although many of the changes amount to reducing its negative
economic consequences (and thus increasing its political support). One still little mentioned is that different sectors
will have their own markets, which is clearly inefficient.
I agree with the critics of your point #10. While a revenue-neutral carbon tax may be doable (although is not sellable
internationally), the others are wildly unrealistic. Ain't gonna happen, no way, no how.
Others have pointed out that the first step argument is not so silly. Yes, other countries may well not engage in the
appropriate collective action response, but this is a high profile item and some may be willing to, with China clearly the
most important in the near future. What is clear is that if we do nothing, so will they, period. That will be that.
Finally, it is important to remind ourselves of the past successes of cap and trade. The reason the US pushed it at Kyoto
on the rest of the world was our success with SO2 cap and trade, then called "tradeaable emissions permits," which also fit
our more free market ideology, and which was originally inspired by Coasean arguments. The SO2 program has allowed for a
gradual tightening of the overall quantity cap, and indeed, emissions of SO2 have been declining steadily without serious
economic consequences. Yes, CO2 is much harder, but it is not impossible (and I do think the Heritage Foundation model of
what all this will cost is wildly overexaggerated). Nevertheless, W-M has turned into a real turkey.
Posted by: Barkley Rosser at May 26, 2009 9:06:47 AM
The arguments in favor of the U.S. going first on carbon reductions almost eerily parallel the arguments for the U.S. going first on nuclear arms reductions, thirty years ago.
As Secretary of State Arthur Currie puts it in "The Final Option": "Aah, yes...universal disarmament: but the Western democracies first."
Posted by: David Hecht at May 26, 2009 9:09:26 AM
Here are some relatively low-hanging fruit.
(1) Coal mine fires (like in Centralia, PA) put enormous amounts of CO2 into the air, with no social advantage. Let's work on putting them out.
(2) Emerging countries like India and China need to stop subsidizing energy consumption.
(3) There is a strong case for a high gasoline excise tax in the US based on congestion arguments and national security arguments. That tax might be much higher than what global warming externalities would suggest.
(4) Is the focus of cap and trade on the demand side or supply side? If all it does is push up energy prices so we consume less, we have a lower standard of living. No wonder there is opposition! But on the supply side, higher fossil fuel prices should induce substitution into other energy sources. So what are they? The major alternative is nuclear power. No one can build or operate a nuke without government permission. So, has the Obama administration or Waxman argued for a fast-track procedure for approving nuke construction?
Anyone who thinks the US economy of 2050, with 400 million people, can be powered with wind turbines is tilting at windmills.
Posted by: B.B. at May 26, 2009 9:11:17 AM
What reputable studies show a benefit coming from taxing carbon and subsidizing alternative energy that cannot compete? Given the fact that the EU carbon trading schemes failed miserably why should we assume that Congress will do better?
Posted by: VangelV at May 26, 2009 9:23:59 AM
Could you elaborate on 8? Why does the non-marginal analysis not move us closer toward a solution? And is the analysis really "non-marginal"?
I'm skeptical that any of the various climate change props are net net welfare promoting when we pro/con the known knowns. But there seem to be some known unknowns - namely the technological exogenous shocks that will arise from pricing carbon - that initially incline me in favor of most any legislation that begins to price carbon emissions.
Posted by: jpmirabeau at May 26, 2009 10:23:39 AM
I have to post this and run, so I don't know if others have already covered the same points, but in any event I have a fairly detailed analysis of some of the issues at MasterResource today.
My takeaway messages:
(A) If done unilaterally, the environmental gains of W-M will be even less than Chip Knappenberger's (now infamous) analysis indicated, because of "leakage."
(B) If the world implemented the emission targets in W-M, standard cost/benefit analysis would show huge net losses. E.g. in Nordhaus' DICE model, the losses from imposing W-M on the world would be between $14 and $21 trillion. And to repeat, those are economic losses net of the benefits of avoided climate damage.
Posted by: Bob Murphy at May 26, 2009 11:09:15 AM
"To get a global agreement (and action from China, for instance) requires that the US act first, so this is a downpayment on other countries doing things so the benefits aren't just the US action, but also the rest of the world action that this allow."
maybe, you really haven't addressed Tyler's point. The entire rationale for why we need environmental legislation is that collective action on public goods won't happen absent legislation. But if you grant that, then there's no reason to expect that China will actually take action if we do. Take for example gas taxes-- do you believe that higher gas taxes in Europe and Japan have caused the US, Canada, Australia, Thailand, etc. to raise their gas taxes? Or do you believe that it's caused us to say, "Suckers, cheaper gasoline for us then?" (Since they limit their own use, it lowers our prices.)
If we limit CO2, we'll give industry a greater incentive to relocate to China. Why would increasing the potential flow of investment if they don't limit CO2 cause China to limit their CO2? (At least until they become significantly wealthier, on par with the rich nations.) The USA going first actually makes it more profitable for China to fail to limit its CO2 emissions.
"The reason the US pushed it at Kyoto on the rest of the world was our success with SO2 cap and trade, then called "tradeaable emissions permits," which also fit our more free market ideology, and which was originally inspired by Coasean arguments. The SO2 program has allowed for a gradual tightening of the overall quantity cap, and indeed, emissions of SO2 have been declining steadily without serious economic consequences."
Barkley, you admit that CO2 is "much tougher." But the "much tougher" is the entire point of Tyler's post-- with SO2, the negative effects of SO2 pollution are mostly (if not entirely) localized in the US, so collective action is much easier. Even if industry leaves the US and goes to China because of our SO2 regulation, the USA still gets the environmental benefits. With CO2, if industry goes to China, we still suffer all the environmental negatives because CO2 environmental effects are global.
To either one of you: Do you believe that CO2 (or SO2, for that matter) could be dealt with by entirely US state-level actions, and that if one state raised taxes/capped CO2, then others would follow? SO2 action at the state level was difficult because acid rain doesn't respect state boundaries, but the US is large enough that the effects of SO2 mostly stays within the country, so countrywide regulation was sufficient, even if some of the public benefits accrued to other countries.
Posted by: John Thacker at May 26, 2009 11:43:10 AM
Whenever I think about the climate change debate, It doesn't come down just to economics. It comes back also to the idea that we may be doing irreversible damage to sources of natural beauty. For example, ocean acidification seems likely to massively wipe out the world's coral reefs. If you have scuba dived before, you should recognize this as a painful development.
Logically I know there must be some price at which I am willing to let the reefs die off. But when I think of the compensating benefits of charging down our current path -- more coal plants, roads, cheaper energy, faster economic development -- I oddly cannot get very excited about them.
Of course at some level it is quite selfish of me (living in the U.S.) to prioritize non-human life over economic and human development. But even still I can't shake the feeling that to go down our current path would be to destroy something unique and beautiful about our world, something that makes life worth living. If preserving it means lower aggregate prosperity, I am willing to consider that tradeoff.
In part I believe that the USA and other rich nations could do much to mitigate the economic impact of renewable-energy adjustments, by subsidizing development in poor nations. This would shift the economic impact to the richer nations. It is certainly irrational in at least one sense, but I believe that rich nations are well off enough to accept this tradeoff.
The second thing to mention is that I believe the ethics of population growth are very unclear. In particular, if 1 billion fewer people are born because of policies that seek to limit population growth, it is unclear to me how large of a moral harm this is. But 1 billion fewer people would have a large effect on environmental footprint. Does this mean that population growth policy should be a part of the conversation?
Posted by: mk at May 26, 2009 11:50:38 AM
China will not be persuaded if we pass W-M. The only thing that will persuade them would be passing such a bill AND passing the sort of tariffs that Krugman proposed.
Passing W-M now would probably make politically passing tariffs much easier.
Posted by: John Thacker at May 26, 2009 11:54:18 AM
Good points. Regarding point number seven, though, it is not necessarily true that climate benefits require other countries to enact caps. Of course, that would be one way to achieve progress. But we could achieve major reductions in carbon emissions if our caps (and the R&D that the revenues will fund) lead to breakthrough clean energy innovations (cheap solar; carbon sequestration technologies; etc.) that the U.S. could then export to the rest of the world.
Posted by: dave at May 26, 2009 11:59:03 AM
You're forgetting about the double-dividend literature.
Posted by: CG at May 26, 2009 12:29:58 PM
The proper approach would be to let climate adaptations (and/or)mitigations emerge from market activity. All else is at best costly, ineffective interventionism and at worst totalitarian obliteration of individual rights to life and property.
The science is woefully inadequate and unable to suggest anything for policy other than more study. The current policy focus on CO2 is grossly misplaced other than as the lever to reverse the engine of progress by throttling down the general availability of energy and by exerting government control of what is left.
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Posted by: Albert at May 26, 2009 2:37:33 PM
Passing even weak legislation establishes a precedent that weakens the argument that reform will drive [insert industry here] out of business. Congressional decision-making, such as it is, has never been terribly evidence-based, and for Republicans, never less so than this past decade. My general sense is that thoroughly good legislation, written for maximum benefit in accord with good data, is flat-out impossible with the current Senate.
Your points are mostly well-argued, and if there were a policy debate involved, they would be a welcome contribution. Unfortunately, you do what you can with the incompetent ideologues that you, and so there is no policy debate based on facts: there is only Obama trying to reassure the schizophrenic conservative lunatics raving on their respective streetcorners.
Posted by: Chris D at May 26, 2009 2:39:03 PM
For a professor at George Mason, I find it stunning that you would fail to mention Coase. If the political reality is that the utilities/power companies currently have a right to pollute then establishing that property right and making it tradeable should be sufficient to achieve the optimal outcome. If we need to buy the permits back from them then so be it. Also, I would think you'd like the C/T framework for zeroing in on the lowest MARGINAL cost reductions rather than taxing carbon flatly. And does not C/T offer a mechanism for preserving those low-hanging fruit like various forests? I strongly suspect that were a carbon tax on the table you would be in fact making these points in an attack on it and that you're basically not interested in curbing it CO2.
Posted by: Chris at May 26, 2009 3:17:45 PM
