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…)

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.

Wait a second, the free carbon permits aren’t going to be given away on an equal per capita basis? Let me get this straight: The plan is to give free permits to pollute to the largest historical polluters? Why? Because otherwise, these most polluting industries will fight to block the climate legislation. Is this how all policy is made? We can’t pass a health bill that doesn’t include a giveaway to insurers? Would an anti-smoking measure have a little something in it for tobacco companies? A gun law with a present for the gun manufacturers? Well, probably this is how all policy is made.

Still, the purpose of climate legislation isn’t to make power companies happy, nor is it to guarantee them a continued stream of profits. Capitalism creates and destroys: There’s no guarantee that what made a profit today will make a profit tomorrow, and there is no obligation on the part of the voting public to shore up business models that are damaging to the public good. The purpose of climate legislation should be twofold, 1) to reduce greenhouse gas emissions, and 2) to do so in a way that promotes equity.

Yes, assuming a particular overall cap on carbon, giving the permits away instead of selling them should end up with the same reduction in emissions. (To get this result, the permits would have to be fungible – that is, after they are given away or bought from the government, they can then be sold again to the highest bidder; this leads to the efficient market solution that neo-classical economists are always yammering about. The companies that can reduce their carbon emissions most cheaply will do so and sell the permits they do not need to companies for whom it would cost more to reduce emissions.)

But here’s what would be different: If the government sells the permits, that revenue can go to reduce taxes, or support green jobs, or send a dividend check to every citizen. If the government gives away the permits to private companies, the value of the right to pollute the atmosphere (which, as I’ve mentioned, belongs to every global citizen on an equal per capita basis) ends up going to the same malefactors that have been getting this windfall for decades.

Personally, I don’t think that having made a profit in the past gives you some sort of “God-given” right to make a profit in the future, whether the public likes your product (or your way of doing business) or not. And I don’t think that U.S. environmental regulations need to be business-friendly in order to be the right thing for our society to do.

The value of a clean, low-carbon-dioxide atmosphere is enormous, and it belongs to all of us, equally. I’d like to think that my Senators (this means you, John Kerry and Scott Brown) won’t be intimidated into giving it away.

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.

My colleague Frank Ackerman, head of the Climate Economics Group here at SEI-U.S., has an excellent guest post today on TripleCrisis about how important it is that the EPA not under-price carbon. (Check out my posting from yesterday on the same topic: The lower their chosen price on carbon, the less pollution control seems justified.)

Here’s an excerpt of his argument:

Every $1 per ton of CO2 is about a penny per gallon of gasoline, so $5 per ton would be a trivial price incentive of 5 cents a gallon. At $50 per ton, or 50 cents a gallon, you’d start to notice. An increase of $500 per ton, or $5 per gallon, would put us in the realm of gas prices in many European countries where people buy smaller cars and use public transportation a lot more than we do.

$500, though, isn’t in the running. In the September proposal, EPA offered a range of values from $5 to $56. It sounds to me like the high end was included to mollify critics, while the low end is what EPA’s economists prefer.

Read the full post here. To learn more about the “social cost of carbon,” what’s wrong with the EPA’s approach, and how it’s likely to shape EPA motor vehicle regulations, read Frank’s critique of proposed EPA regulation here.