Wednesday, April 14, 2010

A Possible Pigovian Solution

Tip of the hat to my buddy Matt for this link (here) to a Krugman article that explains the economics of climate change. It's somewhat long (10 pages), but it is thorough, and written so that even a Econ 101 dunce like me can understand it.

Some of my favorite quotes from the essay:

"If you choose to drive a hybrid car or buy a house with a small carbon footprint, all you
are doing is freeing up emissions permits for someone else, which means that you have done
nothing to reduce the threat of climate change. ...But altruism cannot effectively deal
with climate change."

"The bottom line, then, is that while climate change may be a vastly bigger problem than
acid rain, the logic of how to respond to it is much the same. What we need are market
incentives for reducing greenhouse-gas emissions — along with some direct controls over
coal use — and cap and trade is a reasonable way to create those incentives."

"Just as there is a rough consensus among climate modelers about the likely trajectory of
temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough
consensus among economic modelers about the costs of action. That general opinion may be
summed up as follows: Restricting emissions would slow economic growth — but not by much."

The Congressional Budget Office, relying on a survey of models, has concluded that Waxman-Markey “would reduce the projected average annual rate of growth of gross domestic
product between 2010 and 2050 by 0.03 to 0.09 percentage points.”

"The truth is that there is no credible research suggesting that taking strong action on climate change is beyond the economy’s capacity. Even if you do not fully trust the models — and you shouldn’t — history and logic both suggest that the models are overestimating, not underestimating, the costs of climate action."

"...the economic analysis will be ready. We know how to limit greenhouse-gas emissions. We
have a good sense of the costs — and they’re manageable. All we need now is the political will."


  1. The linchpin of cap and trade is the cap part. He who sets the cap determines whether this market-based approach actually reduces CO2 emissions. And in a way, it's a single point of failure that polluters and their representatives in Congress and the executive will readily exploit.

    You know me: I'm usually suspicious of the market fundamentalism that's dominated this country's polity for years.

  2. Yeah, the doling out of credits is the problem. E.g. maybe you can decommission an obsolete power plant or keep it alive only in the barest letter (but not spirit) of the law in order to continue to get the CO2 allotment for it which you can sell off at a profit. Or, better yet, you own a chunk of land and you decide to convince some local officials to designate it a landfill, even if you don't really use it, because then you get a CO2 allotment you can trade. The commodities trading group at your friendly investment bank will help you out.

    Being able to sell the ability to emit CO2 doesn't limit CO2, it gives you incentives to be gifted the CO2 emissions in the first place. It's only meaningful, as Joe says, if the cap is real, enforced, and grows smaller overall.

    My fundamental rule is that if investment banks are licking their chops for the scheme to be put in place, it's a really bad trade for the public.

  3. "The commodities trading group at your friendly investment bank will help you out." - Golden Ballsacks has an entire division set up, to do exactly that - research and trade carbon credits. =(


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