Is the Gulf of Mexico disaster a reason to pass climate legislation – or is that legislation largely irrelevant to curbing our oil use? A Greenwire article Tuesday quoted a number of economists arguing that the leading proposals in Congress wouldn’t do much to change our dependence on petroleum.

The only reasonable response is “yes, of course.” Climate proposals such as Kerry-Lieberman, Cantwell-Collins, or Waxman-Markey will have limited effects on oil consumption for two reasons: first, they are market mechanisms; second, they are weak market mechanisms.

To start with the good news, reducing carbon emissions from electric utilities is cheaper than reducing oil use. Any market mechanism is supposed to prompt us to do the cheapest things first; that’s the whole point. There are many ways to make electricity with lower carbon emissions than a coal plant; putting a price on carbon makes those alternatives cheaper relative to coal. There are also many ways to promote energy efficiency, incrementally reducing electricity use.

For most Americans, on the other hand, there is only one way to make transportation, and it runs on oil. In the short run, with all of us driving the cars we now own, there is very little chance to change our gasoline use. In the closing words of one of the best satirical videos about the oil spill, “BP: You’re not mad enough to not drive your car.” (more…)

Paul Krugman’s excellent article in the New York Times Magazine this weekend contrasts a slow, incremental approach to greenhouse gas mitigation (such as William Nordhaus’ “climate-policy ramp”) to more rapid measures better fitting the urgency suggested by the climate science literature. Krugman dubs the latter the “climate-policy big bang.”

Krugman has done a nice job of describing some of the major points of disagreement within the field of climate economics. Here’s his view:

[T]he policy-ramp prescriptions seem far too much like conducting a very risky experiment with the whole planet. Nordhaus’s preferred policy, for example, would stabilize the concentration of carbon dioxide in the atmosphere at a level about twice its preindustrial average. In his model, this would have only modest effects on global welfare; but how confident can we be of that? How sure are we that this kind of change in the environment would not lead to catastrophe? Not sure enough, I’d say, particularly because, as noted above, climate modelers have sharply raised their estimates of future warming in just the last couple of years.

Krugman concludes that the “nonnegligible probability of utter disaster” should guide our climate policy, and that this “argues for aggressive moves to curb emissions, soon.”

Anyone who has been reading this blog will know already that I feel that the evidence of both the climate science and climate economics literatures overwhelmingly supports a big-bang climate-policy approach. It’s nice to know that Paul Krugman is a supporter of these views, and it’s even nicer to have his clear and influential thoughts on this reach such a wide audience.

An Obama administration task force has recently proposed that $21 per ton is an appropriate “social cost of carbon.” (The social cost of carbon, or SCC, is an estimate of the damage caused – both today and in the future – by the release of an additional ton of carbon dioxide into the atmosphere; it’s a topic that I’ve discussed frequently in this blog (see here, here, and here). A bigger SCC means that the federal government is willing to do more to more to slow greenhouse gas emissions; conversely, a smaller SCC means that fewer emissions abatement measures will be considered “economical.”) In an Economics for Equity & Environment white paper, released today, Frank Ackerman and I discuss the very serious errors and omissions that have led to EPA, OMB and other agencies’ promotion of what is a very low SCC.

As our paper demonstrates, the calculation of the SCC is less science than alchemy. It is also – like much of cost-benefit analysis – a very strange way of making decisions. Cost-benefit analysis sounds like common sense: weigh the costs of an action against the benefits. A good policy will have net benefits; a bad policy, net costs. Simple.

Well, actually, no, not so simple. There are (at least) three big problems:

Problem #1: When it comes to the greenhouse gas emissions (and many other environmental issues) we can’t measure the costs and benefits with any accuracy. We’ve never filled the atmosphere with CO2 before. We’ve never tried to remove large quantities of CO2 from the atmosphere before. Some of the important consequences of climate change, such as the loss of human lives and risks of extinction of endangered species, simply don’t have meaningful prices (although economists have at times made up dollar values for them). And many of the costs of halting emissions and benefits of averting damages will occur well into the future. That’s a lot of uncertainty, which doesn’t tend to increase the accuracy of economic predictions.

Problem #2: Many of the costs and benefits will affect not us, but our great-grandchildren, and there is a fair amount of disagreement (a least among economists) about how to weigh these future impacts in the decisions we make today. Some (like me) say we should weigh all damages equally regardless of whether it is us or our descendants that suffer the costs. Others feel that future costs (and benefits) are worth far less than those that take place today.

Problem #3: While climate policy will benefit humanity as a whole, the costs of reducing emissions and the benefits of avoiding a climate catastrophe will impact different people differently. Most people will be net gainers from climate policy (more benefits than costs), but some will be net losers (more costs than benefits). This is true both across generations – future generations are the biggest net gainers from climate policy – and among the Earth’s population today. As a broad generalization, poorer people have more to gain from climate policy. The more one weighs the interests of the net losers compared with the net gainers, then, the less one will conclude that we should do to avert climate change.

In short, cost-benefit analysis is complicated, and its results are open to a lot of interpretation. Regrettably, that is how the U.S. government makes decisions about environmental issues. In a cost-benefit analysis of emission reducing policies, the social cost of carbon is the benefit from each one-ton reduction in carbon emissions (it’s the damage that doesn’t happen, and thus, a benefit). A bigger SCC means a bigger benefit from reducing emissions, making it more likely that any particular carbon reduction policy will pass muster as delivering greater benefits than costs.

There is no way to truly measure the SCC. (Seriously, all climate damages throughout time reduced to one figure in today’s dollars? If you really have faith in such a figure, I have a bridge in Brooklyn that I’d like to sell you.) The Obama administration should consider looking at the problem of emissions abatement from an entirely different angle: For example, by how much do we need or want to reduce U.S. emissions, and what’s the cheapest way to do that? Alternatively, how much can we afford to devote to insuring ourselves against the danger of catastrophic climate change? Decisions made from starting points like these are far more likely than cost-benefit analysis to result in a climate policy that is both effective and economical.

This is very exciting news: The Senate’s new climate bill calls for the allocation of free carbon permits!

Now I realize this is controversial, but, personally, I can’t wait to receive mine. I couldn’t be more thrilled to have – in such a tangible form – control over my per capita right to pollute or not to pollute the atmosphere. I know it won’t be much – just one 300 millionth of the U.S. cap on emissions, but it still means a lot to me.

I’ll have to think carefully about how to use it. Naturally, I have a strong inclination to retire the permit (take it out of circulation); maybe I could make it into a nice papier maché art object to hand down to my grandchildren and great-grandchildren. A small souvenir of a good and important choice. I can only imagine that they’ll be grateful.

I suppose that power companies and other big greenhouse gas polluters will soon be knocking on my door wanting to buy my permit. Well, they better be willing to pay top dollar, because it’s going to take a lot (the true social cost of carbon?) to get me to part with it.

* Warning: This blog posting contains sarcasm. The Senate’s free carbon permits are not really for you and me; they’re for power companies. Stay tuned for more on this topic.

I understand that UN Secretary General Ban Ki-moon is having some trouble finding appropriately illustrious women to sit on the newly formed High-Level Advisory Group on Mobilizing Climate Change Resources. (Here’s an open letter from 138 women’s organizations asking the Secretary General to reconsider his appointment of a panel consisting of 19 men and no women; since then, France has replaced its appointee with a woman, French Economy Minister Christine Lagarde).

Since the panel is drawn primarily from current and former heads of state (four members) and high-level economic policy-makers in national governments or international institutions (10 members), I thought I would help the Secretary General out by identifying their female counterparts. A very small amount of Googling on my part turned up nine current female heads of state and more than 50 current female finance ministers, as well as a host of other current and former high-level female dignitaries.

Here are a few suggestions of other women (looking a little further than government officials) who would be assets to the new climate-change finance group:

Sunita Narain is the director of the India-based Centre for Science and Environment. Her research and writing on climate change have found a wide international audience and made a major impact on the way that climate equity issues are framed. Her work with Anil Agarwal on an equal per capita right to the atmosphere for every global citizen is essential reading for policymakers and climate economics students alike.

Dessima Williams is Grenada’s ambassador to the United Nations and the chair of the Alliance of Small Island States. AOSIS has helped to bring to the public view the disproportionate burden faced by small low-lying countries, where climate change-related sea-level rise is already causing enormous damage.

Elinor Ostrom is a Nobel laureate in economics, best known for her work on the institutions that guide the use and misuse of common resources, including our shared atmosphere.

Any other suggestions? I’d love to hear them (you can post a comment using the link above), and I’m sure the Secretary General would, too.

I mean, you don’t have to be a socialist, I guess, to believe in global warming. It’s just that almost everyone who does believe in global warming is a socialist.
– Glenn Beck (Jan. 12, 2009)

I’ve been a socialist ever since I was old enough to have serious political opinions, for over 25 years now. For that entire time, living in the United States, I had assumed I was a member of a small minority. So imagine my surprise to find out that the country is veritably crawling with socialists. Millions and millions of socialists. I appreciate the good news. It really makes my day. (Beck’s comment, by the way, is from early last year, but a friend just forwarded it to me today.)

Now, seriously: Glenn Beck is right about one thing. You don’t have to be a socialist to believe in anthropogenic, or human-caused, global warming. You just have to agree that:

1) Increased atmospheric concentrations of carbon dioxide and some other gases trap greater quantities of heat here on planet Earth (the so-called “greenhouse effect”). This leads to overall warming, as well as other, more complex, effects on climate. That’s not a tenet of socialism, but an idea proposed by climate scientists.
2) Combustion of fossil fuels (things like petroleum products and coal) and other activities undertaken on large scales in current industrial economies produce large quantities of carbon dioxide, contributing to climate change. That’s mostly chemistry. At least, my chemistry teacher taught me that when you burn hydrocarbons, the carbon combines with oxygen and forms carbon dioxide. Of course, he might have been a closet socialist.

What really bothers Beck, however, is the idea that government intervention is needed to deal with climate change. “Almost everybody who says, ‘I’ve got a plan to fix it,’ ” he insists, “is a socialist.” (For right-wing bloviators like Beck, virtually any form of government intervention is synonymous with “socialism.”)

Well, to believe that government intervention is appropriate, it helps to think these two additional things:

1) There are substantial harms from climate change. These could include sea-level rise (flooding coastal areas), increased frequency of “extreme weather events” (like hurricanes), the disruption of existing ecosystems (even a modest-looking change in average temperature can make a region uninhabitable for existing flora and fauna), etc. This actually involves political values. Like the idea that people living in coastal areas will be harmed by rising sea levels or more category 5 hurricanes, and that we should care about that.
2) Unregulated markets will not yield desirable results, in general, if people act purely out of self-interest and if their activities have effects, positive or negative, on “third parties” (people who were not party to a particular market transaction). Therefore, government intervention is necessary to change the incentives under which people make decisions.

In economics, such a third-party effect is called a “spillover” or “externality,” and you can read about it in any standard introductory microeconomics textbook. Let’s take the case of a negative externality. Two parties are engaged in a market exchange. One produces and sells a certain good. The other buys and consumes the good. But instead of this exchange (and the associated processes of production and consumption) affecting only them, it inflicts some harm on a third party. (Pollution is the classic example.) This third party is in no position to demand payment from the guilty parties as compensation for the harm. Since those who inflicted this harm do not have to pay for the privilege, they will not take it into account in deciding how much of the good to produce and consume. As a result, more than the optimal quantity is produced. The market result is, in the words of mainstream “neoclassical” economics, “inefficient.”

Virtually every mainstream economics text presents at least one government response to this problem: A tax equal to the amount of the harm inflicted on third parties will provide just the right amount of disincentive to produce the good. But don’t take my word for it. Here’s what the conservative economist Gregory Mankiw writes in his Principles of Economics (2008): This kind of tax “gives buyers and sellers in the market an incentive to take into account the external [third-party] effects of their actions.” Instead of producing too much of that good, “producers would produce the socially optimum quantity.” As a result, this policy “raises the overall economic well-being” (Mankiw, p. 207). A “carbon tax” is exactly the kind of tax described here. It is meant to make people take into account the harm to third parties of emitting carbon dioxide.

So, in this kind of case, neoclassical economics provides all the ammunition necessary to justify some form of government intervention (though this does not mean the climate policies mainstream economists generally support are equal to the task). I guess that makes Greg Mankiw, and just about every other mainstream economist who has ever written an intro textbook, a socialist – rather than the “free market” fanatics and apologists for capitalism I always took them for.

Has anybody told them yet?

Alejandro Reuss teaches at Bunker Hill Community College in Boston. He is a long-time collective member and former editor of Dollars & Sense magazine.

The deeper the understanding that scientists gain about climate change, the more “feedback” processes they uncover. In other words, the more they realize how climate change leads to yet more climate change. This is one of the biggest areas of uncertainty in projecting future climate impacts. Average and best-case-scenario damage estimates are well understood, but hidden feedback processes can mean surprisingly high and difficult-to-estimate worst-case scenarios. Here’s one example:

Within a few decades, climate change will have rendered the Arctic unrecognizable to anyone who had seen it in centuries past. Arctic ice and snow are melting as temperatures rise. Without these vast white (and highly reflective) expanses, global warming will occur at a much faster rate. (This is called the “albedo effect”: The sun’s rays bounce off of snow and ice, but are absorbed by the newly exposed dark ground.)

Permafrost – land “permanently” frozen solid before climate change – is thawing, too, and it releases methane, a very powerful greenhouse gas, into the atmosphere as it softens. New research reveals that the permafrost surface under the Arctic ocean is already thawing and releasing methane – a factor unaccounted for in current models of projected future climate change.

Last week, the Pew Trusts released a study led by economist Eban Goodstein that estimates the global cost of this additional warming from the melting Arctic at $2.4 trillion to $24 trillion, total, by 2050. (Note that one of the reasons for this wide range of forecasts is the wide range of social cost of carbon estimates used in the study: $13 to $798 per ton. For more on this see my critique of the EPA’s much-lower range.) According to Goodstein’s calculations, today’s Arctic warming is equivalent in effect to two-fifths of U.S. greenhouse gas emissions; by 2100, this will have doubled to four-fifths of today’s U.S. emissions.

Tomorrow I head to Ottawa to share my findings so far on the economics of climate change in Canada with other researchers also working on this topic. The “frozen North” is a new area of study for me, and my research on Canada’s coastal zones is already proving fascinating. It will be the topic of many future blog postings.

A recent posting on the blog offers a helpful explanation of the relative importance of methane emissions.


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