Carbon Pricing Looks Expensive Only If You Ignore the Benefits
It seems the George C. Marshall Institute has come out with a study which shows that pricing carbon emissions would be costly to the economy. But one problem with the study, as Tony Kreindler points out, is that they forgot that run-amok climate change is costly too. This seems like an important point! If I added up the ruinous costs of auto ownership—thousands of dollars in up front costs, fuel costs, repairs, insurance, etc.—but forgot to mention that you get to drive your car around it would seem baffling that anyone buys one.
The same principle applies to carbon pricing. If there were no climate change, or if climate change wasn’t caused by carbon dioxide, or if rising global temperatures were totally harmless, then cap and trade would look like a terrible idea. It’s when you put the mild short-term decrease in the rate of GDP growth against the alarmingly catastrophic impact of doing nothing that cap and trade starts to look good.
I wouldn’t say you should think about this in a strict GDP cost-benefit framework. In part, this is because many of the harms of climate catastrophe would occur outside the United States and it’s just wrong, morally speaking, to ignore them. In part it’s for technical reasons related to the “broken windows” fallacy—destroying half the buildings in Miami would be a more disastrous loss of wealthy than a look at the growth impact would suggest. And in part it’s because the impact on world GDP doesn’t really properly capture the “cost” of whole nations being rendered uninhabitable. But even if you look at it in pretty narrow economic terms, the long-term costs of doing nothing are quite grave. It’s important to recognize that every year we do nothing, things get much worse. And the time frames on which these things are looked at are often inadequate. Kids born last year should be alive into the 2080s—barring ecological catastrophe, that is. Barack Obama’s grandchildren should be living well into the 22nd century.
47 Responses to “Carbon Pricing Looks Expensive Only If You Ignore the Benefits”
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March 10th, 2009 at 9:29 am
I wouldn’t say you should think about this in a strict GDP cost-benefit framework.
Yet the government will be forced to do exactly that, probably making up some virtually meaningless values for the benefits in the process because they have no choice
March 10th, 2009 at 9:35 am
What about the end of the first paragraph? Anybody can explain what the poet meant?
March 10th, 2009 at 9:43 am
Nice post, Matt. Thanks for addressing this stuff. It would be easy to ignore climate (and a lot of other things) and just focus on short-term economics. But bloggers, like Obama, should be able to walk and chew gum at the same time.
March 10th, 2009 at 9:43 am
Just to clarify my comment #2. Taking myself and the three princesses to dance class from North York, Ontario to Thornill, Ontario, a three mile trip, would set me back more than 20 dollars per trip because I straddle two different transit authorities. If I were to restrict muself to trips inside Toronto city limits (oops, first big whopper) it would be four tokens and four child tickets for a total of 13 dollars. Same trip with car, all things considered and amortized: 2 dollars.
Not to mention the huge time savings.
I would consider bicycles but Toronto in winter is no place for a minor to be biking. Just too dangerous.
Cars in North America, unless you leave in a limited number of dense and well-served areas, are much cheaper that any kind of transit, even before factoring in the fact that your time is worth something.
Which pretty much nullifies the point Matt was trying to make. Of course my car costs me a lot (I own instead of leasing, and insurance in Ontario is a killer, so I shell out 1K Canadian a month before even fueling it once). But so do a lot of things such as better housing, better schooling, better dental care (Canadian here, so medical is not a valid item).
March 10th, 2009 at 9:50 am
I wouldn’t say you should think about this in a strict GDP cost-benefit framework.
Tell that to the American public and your support for tackling climate change goes from 30% to around 10% (my rough estimate of the number of left-wing idealist left in America).
And with 44% of Americans who still don’t even believe climate change is man made, the GOP will own this issue. It is almost like progressive are trying to give Republicans votes.
March 10th, 2009 at 9:50 am
Shorter Matt: Externalities are important.
March 10th, 2009 at 9:52 am
Also, with respect to carbon in the form of light sweet crude oil, the the cost of religious lunatics flying planes into skyscrapers is pretty fuckin high too (in numerous ways). Something else to consider.
March 10th, 2009 at 9:54 am
“And with 44% of Americans who still don’t even believe climate change is man made, the GOP will own this issue. It is almost like progressive are trying to give Republicans votes.”
I fully support the 2012 Republican nominee running on a global warming denialist platform. Let’s have campaign debates on *that*, shall we, and see how much of that 44% is left.
Also, it’s really amusing that you’re bragging about the utter ignorance of the overwhelming majority of your party’s voters. “Don’t you dare do something sensible, this country is too stupid and will hate you for it!”
March 10th, 2009 at 10:04 am
You are missing a key point: energy prices should drop when consumption goes down.
Granted, auctioning credits will increase taxes, but if demand drops so will the price if the actual commodity before taxes. It is not clear how much of the additional taxes will be offset by lower prices if you take demand from +3% per year to -1% per year. But, it will be substantial.
We’ve seen a few things in recent years that:
1) energy consumers have inelastic demand in the short run, but somewhat elastic over the long term (so, I may change my behavior the next time I buy a car — though it’s hard to make my current car more efficient).
2) gas prices dropped when either a) miles driven dropped slightly, or b) when it looked like the regulatory agency was back in business.
Regarding 2) — I’m honestly not sure which it was (or how much of each). But, if you claim the markets weren’t rigged under bush becuase the energy cops were out eating energy donuts, then the drop in prices were quite dramatic given the slight drop in miles driven.
March 10th, 2009 at 10:06 am
“around 10% (my rough estimate of the number of left-wing idealist left in America).”
From DTM’s really nice link:
34% of responders agree with the statement: “Life on earth will continue without major environmental disruptions only if we take additional, immediate, and drastic action concerning the environment.” 73% have made changes in their lifestyle in the past five years to help the environment.
As opposed to 23% who think global warming is an unproven theory.
So, what’s the fringe lunatic position again?
March 10th, 2009 at 10:11 am
The really tragic thing about the cost/benefit analysis is that it’s leading Dems to find a sweet spot of politically feasible reductions in CO2 emission. This sweet spot is inevitably well below what’s needed to prevent a completely irreversible (on timescales less than a millennium). Nothing serious happened to intervene in NOX/SOX emissions until people were walking around Mexico City and Athens in surgical masks. CFC bans weren’t feasible until the ozone layer was wiped out and people started getting skin cancer. Both those problems were reversible, but it’s simply impossible to remove CO2 from the atmosphere once it reaches a critical point. The IPCC 2050 guidelines where were we needed to be if we started reductions immediately, and we haven’t.
I appreciate that Obama campaigned on cap-and-trade and at least made that possible, but a domestic cap-and-trade program won’t make a dent in the problem (it won’t even offset increased consumption, let alone reduce emissions). It’s good that our country (and most of the world) is willing to sacrifice some growth to fix this problem. But it’s insane to make that sacrifice in the pursuit of an obviously insufficient remedy.
March 10th, 2009 at 10:12 am
thetenant,
What Matt is saying is that your car would seem like a terrible waste if you bought it and never drove it. The point is, you do drive it, and it is worth the cost to you.
Calling carbon pricing expensive without considering the benefits is like calling your car expensive without considering the use you get from it.
March 10th, 2009 at 10:12 am
Wups, “to prevent a completely irreversible increase in atmospheric CO2″
March 10th, 2009 at 10:16 am
Adam,
I am just pointing out the reality progressives face. Ignoring this overwhelming (see DTM’s link) and growing (44% up from 41%) ignorance doesn’t really make climate change legislation any easier.
And even if you are able to get through to the public better than Gore did it still doesn’t mean the progressive approach will win. When you add economic anxiety and the irrationality of unilateral action the GOP can easily take this issue.
It is going to be really hard for Obama to say “America lead by example” in 2012 when jobs and economic growth are shifting to carbon-tax free China.
March 10th, 2009 at 10:27 am
“growing (44% up from 41%) ignorance”
Really? Who’s the ignorant one? Surely you followed enough polls over the past year to know better than to call two polls, one with 41% and one with 44%, anything other than float within the margin of error. You can’t be that dishonest.
And you forgot to mention that fully half of your 44% believes in global warming. And that’s by far the best cherry-picked number you can pick from a very long set of poll questions that all show your favored position to be very much in the minority.
“It is going to be really hard for Obama to say “America lead by example” in 2012 when jobs and economic growth are shifting to carbon-tax free China.”
As it turns out, something very similar to this was polled. It turns out 81% agree that “As the world’s leading industrial country, the United States needs to set the lead when it comes to controlling greenhouse gases and pollution.”
So, you’re basically being a concern troll and saying that 30% of the country is going to change their minds and want to reverse the (already-implemented-by-then) cap-and-trade in 2012 when we’re coming out of the recession, because oh noes China!!! And that Democrats shouldn’t try to do anything because we might lose votes over it.
Right.
March 10th, 2009 at 10:29 am
DTM,
Oh, I think anything is still better than nothing, but when you’re dealing with a window of one to three decades during which you need to affect an unprecedented shift in global energy consumption and generation to fix the problem, some effort to communicate the urgency would be appreciated. How long ago was An Inconvenient Truth? That’s still the most persuasive argument around, and that’s sort of pathetic.
There’s also the problem that these things are being sold as the solution when they aren’t a significant fraction of it. No one on the left was pointing out that even if McCain built 50 nuclear plants by 2030, that would only offset a small fraction of electricity consumption. I understand starting with a part of the solution, but no one’s even proposing a solution that’s remotely close to the right scale.
The most current example I can think of is Clinton’s trip to China. She offered increased cooperation on clean coal. Now obviously there’s a danger in being too confrontational with China on this, and China’s doing some laudible things, but that’s incredibly weak. For starters, whether or not you think carbon capture is possible, it’s vastly more expensive per amount of emissions reduction than a billion other things that could be done. Even nuclear power’s a better way to go. Having that be our starting point in dealing with China on emissions is simply stupid.
March 10th, 2009 at 10:31 am
Done correctly, it costs nothing.
The whole point of something like this is to make a company pay for the external costs it causes everyone else. These things are still being paid for, it’s just a question of who pays for it.
Of course, it won’t be done correctly because it likely can’t be done correctly. But hey, it’s an attempt.
March 10th, 2009 at 10:35 am
Here is the poll that should make progressives skeptical.
DTM,
That question is so vague almost any reasonable person would answer yes.
A better question and the one the GOP will be asking the democrat’s base (i.e. the working poor) in 2010/12:
“Do you support climate change legislation that may not reduce global CO2 emissions but will raise the cost of energy intensive production here in the US?”
And all the GOP has to do then is give them a believable and easily understandable example:
“Steel produced in the US costs an extra 28$ per ton of CO2 emissions compared to steel produced in China. What would you buy?”
March 10th, 2009 at 10:48 am
Above at 10:35 I am referring to specific climate change legislation that will raise taxes on globally competitive goods like steel, cars, etc. Obviously taxing heating costs or electricity will raise prices and reduce CO2 emissions my problem is the global trade implications of a unilateral carbon tax on exports (and goods we could potentially import). And I think the GOP can really jump on this aspect better than anything else.
March 10th, 2009 at 11:19 am
What may make the situation worse is that at least at the beginning, global warming improves many measures of well-being. (I’m a progressive liberal who is also a climate warming skeptic. I have yet to determine if I am the only one such… but it means I can get hate mail from both sides, which is always a joy.) Increases in CO2 will improve agriculture over the next few decades, according to the IPCC. Warmer nights in winter (and almost all observed warming has actually occurred in the Northern Hemisphere winter nights) will reduce deaths far more than heat will increase them. So cap and trade will face a fight. It is nonetheless a sound approach to a progressive energy policy–as Kevin Drum over at Mother Jones has patiently explained on a number of occasions. But it will hurt, and provide ammunition for the GOP.
March 10th, 2009 at 11:20 am
mr. gekko… while not defending a cap and trade system nor suggesting that the usa is fully comparable to any other nation it is striking that the countries with the most aggressive and costly carbon tax systems, Sweden and Denmark, have both exhibited GDP growth equal to or exceeding ours. Sweden is able to invest in alternate energy generation schemes in mainland China.
With luck out of the Senate hearings we can get a more honest cost analysis for cap and trade and I think that honest estimate will amount to a tax increase on each of us of 1 to 2% of our gross income.
March 10th, 2009 at 12:03 pm
And here’s the answer the Republicans will get: “Get the hell of my porch, you scumbag con man. Everything you’ve told me for the past 30 years is a lie. Where are the WMDs, asshole? Where’s Osama? I can barely make my mortgage since I got laid off and had to make temp work. Why would I listen to anything you have to say? I hope your dog bites you.”
March 10th, 2009 at 12:16 pm
Problem with Yglesias’s argument, as Gekko has hinted at, is that (1) the harms of climate change are not fully clear or certain; and (2) it’s not clear that the contemplated US action to cut GHG emissions would have an appreciable effect on expected harm.
It’s kind of like a policy of invading Iraq to forestall possible terrorist attack upon the homeland. Yes, I recognize that the analogy is imperfect in many ways, but there you go.
March 10th, 2009 at 12:57 pm
duBois, there is ample statistical evidence about the frequency, regularity, etc. of all the harms you identify, as well as the likely decrease in expected harm from vaccination/seatbelts/birth control/etc. I submit that the evidence around climate change is much fuzzier. There’s only been one bout of an anthropogenic GHG emissions spike in recorded history. And there’s never been a collective global effort to reduce GHG emissions, so we don’t know what will happen. The best we can do is rely on models.
Note, I am in favor of reducing GHG emissions, but I fear an un-nuanced approach. Obviously, I know that only a panicky approach (shark attacks!!) will rouse the public’s attention.
March 10th, 2009 at 2:18 pm
duBois,
Even your rebuttal gives Mr. Gekko too much credit.
The analogue of his argument is that it is unclear if ANYONE will get measles, get into a car accident, have a house fire, or get fat.
It’s a straight-out denialist argument.
March 10th, 2009 at 2:43 pm
joe from Lowell Says:
March 10th, 2009 at 2:18 pm
duBois,
Even your rebuttal gives Mr. Gekko too much credit.
The analogue of his argument is that it is unclear if ANYONE will get measles, get into a car accident, have a house fire, or get fat.
It’s a straight-out denialist argument.
=============================================================
Not really “denialist” but more tangible vs intangible. People see traffic accidents, sick people, fat people every day and see house fires on the evening news. It’s very real to them.
The rate of change in climate change is both gradual and erratic and as someone pointed out upthread, not necessarily negative in the short run. It’s not bad having more nice days in winter. The long term harm is theoretical. It’s easy to frame the argument as ” you’re telling me my utility bill has to double to save some polar bears?”
Compounding this is the fact that some environmental players (Paul Ehrlich for example) have been so wrong so often there’s a credibility problem. The 40% of the general public that are AGW skeptics have been conditioned to it by the media. Everyone remembers being told for years coffee was bad for you and now they’re told its good for you. You can come up with any number of similar examples. Lots of people are just waiting to be told it was all a big mistake – just like coffee or red wine.
March 10th, 2009 at 4:52 pm
Campesino & joe from Lowell,
What?? For the record I have never denied climate change or in anyway said we shouldn’t do anything to stop it. I am just against the progressive approach of saying unilateral action is better than nothing which is a false dichotomy let alone probably untrue.
March 10th, 2009 at 6:54 pm
In Australia, now;
Australians have for the last thirty years been increasing in life expectancy at the rate of four months a year (if we could get three times better than that, we’d live forever). If that rate of increase holds up, every girl born since 1998 and every boy born since 2002 will have a 50% chance of living to be 100.
March 10th, 2009 at 8:59 pm
Yes, gentlemen, if we pretend there’s no such thing as global warming, it doesn’t make sense to spend any money to prevent it.
If that’s the point you have to make, consider it made.
March 10th, 2009 at 11:49 pm
This is why disappearing ice and drowning polar bears are effective images.
Compared to images of starving children, not so much. International trade has lifted millions of families in the developing world out of abject poverty. If we put a price on carbon, making everything more expensive, how many workers in the third world will lose their jobs?
March 11th, 2009 at 1:27 am
DTM,
Yah that gordon above was not me.
My slam dunk plan for climate change is quite simple actually.
1) The West should petition the WTO to allow strictly controlled carbon tax tariffs on imports. This prevents energy intensive exports from replacing domestically produced goods that cannot compete and further reduces C02. (and I say this as someone who understands and supports free trade)
2) Use our promise to make CO2 reductions (some domestic cap and trade scheme) as leverage to convince the BRIC they must do the same. Take retaliatory action against nations who act as freeriders. This multilateral agreement (the replacement for Kyoto) does not mean the BRIC will have the same price of carbon as we do, but they will pay the highest price the West can force on them.
Basically, it is a multilateral agreement formed as soon as this December which works in US interests (unlike Kyoto). To make it politically feasible the Democrats need to convince Republicans to take the lead. Without Republican support and without dropping the Kyoto-style per capita emissions garbage no politician (democrat or republican) is going to want to touch it. Even if you do pass a unilateral bill it will be ineffectual because a real unilateral bill is not political viable. It wouldn’t become a third rail and Republicans would eventually win an election over dropping it.
March 11th, 2009 at 1:00 pm
If we don’t put a price on carbon, in one way or another, we can’t do anything about manmade climate change.
Utter nonsense. There are lots of other things we could do about manmade climate change.
And by far the worst hit by the effects of manmade climate change will be poor people in various developing countries.
You don’t know that. Nor do you know the magnitude of the harm, if any, of climate change on people in developing countries. Real images of real harm to such people caused by pricing carbon are likely to be more effective than made-up images of speculative harm at some indefinite time in the future from climate change.
March 23rd, 2009 at 12:10 am
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