More broadly, Econospeak's post seems to suffer from a subtle version of a fallacy that Will Wilkinson pithily summarized:
In the real world, the mind works like this, and this can lead to all kinds of problems. And in an extremely unrealistic abstract model of government action, its agents can easily and objectively identify problems and act to effectively solve them. So, let’s have the ideal government solve the problems of nonideal cognition.It sounds stupid when you put it that way, doesn’t it? The trick is figuring out how to work with real minds, using real governments!
. . . so how are you going to do it? Most real government institutions are at least as kludgey and means-ends inconsistent as real minds are. “Silly, your sock won’t open that can of spinach! So try your pillow instead, because a model exists in which pillows are can-openers.”
In an ideal world, Econospeak says, cap-and-trade and carbon taxes may be functionally identical; the government will simply keep raising the price on the tax until it hits the carbon target. But in this vale of tears, where we have but the crumbly clay of humanity to work with, this doesn't function so well:
The real wonder here is that Mankiw could make such an elementary economics error as to suggest that taxes and cap-and-auction are “effectively” the same. In an uncertain world this is false. From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice. By controlling the number of permits we control our most important impact on the earth’s carbon budget, but allow prices to wander. By setting a tax we control the price but allow the amount of pollution to wander. That’s a big difference: you might say, given the gravity of what is at stake, that it’s the difference between ecological responsibility and irresponsibility.
See, the government can't be trusted to target the correct emissions level with a tax. That's why we should have the government target the correct emissions level with permits . . .
A more realistic model assumes that any American government will, to a virtual certainty, be more generous with either its tax or its credits than [Me + anyone to the left of Bill Clinton] would like. Under that scenario, a tax develops obvious benefits: it provides some mitigation even if permitting is excessively generous. Witness the recent debacle in Europe's greenhouse market where everyone issued too many permits and the price collapsed.
It's also politically and administratively more difficult to exempt special interest groups from carbon taxes than from cap-and-trade. Carbon taxes are also, obviously, much easier to levy on transportation than a cap and trade system, if for no other reason than that it obviates lengthy wrangling about fuel efficiency and which producer should buy the permits for the end-consumer.
His next point reinforces this sort of charming "Welcome to my alternate universe. Do you like what I've done with the fairy rings?" kind of naiveté about political debate that would be utterly delightful in an author of children's books, but is slightly worrying in someone talking about economic policy.
Both taxes and permits create the same problem. If one country takes stringent action of either sort and another doesn’t, producers in the less-green country get a competitive advantage. If you have a permit system, they don’t have to pay for the permits; if you have a tax system, they don’t have to pay the tax. What to do? There have been mumblings from Europe about a green tariff to offset these differences, which makes sense to me. This is a discussion we need to have no matter what system we put into place.Mankiw doesn’t seem to have paid attention to the global debate about climate equity. In the long run, there is no defensible argument against allotting each of the planet’s residents the same carbon “space”. In the short run, the rich countries start out with more because they can’t cut back to the sustainable level immediately without causing themselves and everyone else grave harm. But they also have an obligation to take action first and more aggressively since it is the accumulation of carbon in the atmosphere that causes the problem, and us industrialized types have been adding to this accumulation for a hundred years or more. Kyoto was a bumbling attempt to implement this ethical framework; hopefully we will do it better in the future.
The reason we need global action is that it is a global problem. Countries that fail to act free ride off of those that do. This points to the need for a stronger climate treaty, but no such treaty would try to tell countries what methods they should use, only what results they should be held to. So Mankiw’s discussion of taxes vs permits in the global context is confused and, in the end, irrelevant.
See how neatly the last paragraph paraphrases Mr Mankiw, all while giving off the impression that the author thinks they are disagreeing? More worryingly, see how Mr Dorman confuses a moral discussion with a policy one?
It isn't that morality has no place in politics; obviously, one does not make policy without some moral vision one is trying to fulfill (the Chait exception noted, as always). But bold moral propositions such as "everyone should get the same carbon allotment", even if they are true, are not really very helpful here. People in developing countries don't take up the same carbon space as people in western countries, and it's not clear that even they would be better of if we equalized the distribution. Their economies are less carbon efficient, which means they get less bang for each barrel of scarce resource they consume; they benefit quite a bit from western inventiveness; there are massive transaction costs to trading; and large numbers of them live in kleptocratic governments that would simply destroy the value represented by permit ownership, just as they have destroyed the value of foreign aid. Moreover, major governments like China are not trustworthy partners in such a cap; the (not unrealistic) political perception is that they would abide by it until they hit the cap, and then they would break the cap. That's a huge problem, since China would probably it the cap pretty quickly.
But also, even if this is the thoroughly and completely correct way to look at it, the American public isn't going to look at it this way; they're going to get angry at any plan which they see transferring economic growth from them to foriegners. Saying they oughtn't to look at it this way is likely to work just about as well as saying they oughtn't to smoke. And calling these considerations irrelevant is sheer silliness.
This just goes to show, the whole bureaucratic system of taxes v. cap and trade v. anything. It points out that the mechanisms for this wealth transfer are difficult for those in power (they want to be sure they are on the receiving end of the money pipeline, like Al Gore) to deal with. A typical government quality issue.
As to how to transfer that wealth? Well, Megan is correct, if the media and politicians can't disguise the issue well enough, the American public will be pissed to no end, when they realize the country is getting poorer, all because of blighted science (that no one against it is supposed to even talk about).
Excellent post. I have two comments:
First, you score one too many points for carbon taxes over cap-and-trade:
Carbon taxes are also, obviously, much easier to levy on transportation than a cap and trade system, if for no other reason than that it obviates lengthy wrangling about fuel efficiency and which producer should buy the permits for the end-consumer.
Most even moderately well-thought-out proposals for cap-and-trade regulate transportation emissions 'upstream' at the fuel level (e.g., refineries) based on carbon content. For example, this is the approach used in the Lieberman-McCain and Bingaman-Specter proposals. On this specific point, I think it is fair to declare the difference between taxes and cap-and-trade a wash.
Second, you should go much harder after Econospeak for making a very fundamental error. Quoting Econospeak:
From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice.
Econospeak summarizes Weitzman, but then comes to exactly the opposite conclusion that Weitzman originally did.
To (correctly) summarize Weitzman, the marginal benefit curve for reducing emissions is very shallow in the near-term (i.e., it makes little difference to the global atmosphere whether emissions are 27 GTCO2 or 26.9 GTCO2 next year). Meanwhile, the marginal cost curve for reductions is likely much steeper in the near-term (i.e., it makes a big difference to our economy whether we cut emissions by 1% or 2% next year -- costs rise exponentially with bigger cuts).
To put this in plain English, the important long-term issue for the environment is the total loading of CO2 (and other GHGs) into the atmosphere, because GHGs are stock pollutants. Year-to-year variability doesn't make any real difference to the environmental outcome. On the other hand, it can matter very much to the economy what the short-term allocation of permits is. Even annual weather variability can cause ~1% changes in CO2 emissions (weather was a big part of US CO2 emissions dropping 1.3% from 2005 to 2006), which can then lead to short-term spikes in permit prices.
Permit systems (mis)place a high value on near-term emissions certainty at the expense of costly short-term economic volatility. Permit systems can be designed to mitigate these problems, by incorporating banking and borrowing, or being equipped with a safety valve price that will sell additional permits once prices rise to a set level. (And of course financial market instruments would evolve to help manage volatility.) But these are all features that make permits -- a quantity-based instrument -- look more like a price-based instrument.
Unless you don't believe that demand curves slope downward, price-based instruments are the preferable long-term approach for addressing greenhouse gas externalities.
The extent to which a high-carbon-tax country is economically disadvantaged against low-carbon-tax countries is something that should really not be talked about without some data. It may be rather trivial. Gasoline has always been far more expensive in Japan and Germany than in the US. Yet Japan and Germany have sometimes grown faster than the US, sometimes slower, in ways which appear to have nothing to do with the price of oil. Oil-producing states like Venezuela give their citizens gas at less than market rates; this doesn't appear to have helped their growth rates much.
The notion that carbon taxes automatically disadvantage an economy is predicated on the idea that no growth is possible without fossil fuels; but that's not true. Once the price of fossil fuels gets to the point where large-scale changes in the energy generating industry occur (huge shifts to nuclear and alternative fuels, and electric cars), oil just becomes one other non-indispensable good which happens to be more expensive in one country than in another. At that point, the fact that the US has higher gas taxes than China no more implies lower growth than the fact that Sweden has higher vodka taxes.
I have a feeling I am about to hear something about 'deadweight loss'.
brooksfoe,
Two things:
(1) Changing energy sources is not a trivial matter. There are immediate losses because installed capital must now be replaced, in addition to the additional burden of the new tax.
(2) The new tax in one country does not change the fact that fossil fuels have cost advantages over other forms of energy production.
With either of these, the countries with the lower taxes on fossil fuels will have a built-in, additional cost advantage in production. The relative magnitude of the effect will depend on the energy efficiency of the two countries.
And I have completely ignored the fact that if country A uses less fossil fuels, it causes the immediate costs for country B to go down due to lower demand for those fuels.
Of course changing energy sources is not a trivial matter. But it is going to happen, whether or not you impose high carbon taxes. I'm sitting here in Vietnam, an oil exporting country that has just announced its intention to build three nuclear reactors by 2025. And it's not because they want bombs. It's because they have 8+% GDP growth, double-digit growth in electricity demand, and there is simply no other way to get the energy they need. Big changes in energy supply like that are stochastic: they abruptly shift the relative difficulty of using non-carbon fuels over carbon fuels. Once there is a massive installed nuclear capacity, an x% increase in the tax on coal has a much lower impact on competitiveness.
And so your 2:
(2) The new tax in one country does not change the fact that fossil fuels have cost advantages over other forms of energy production.
is wrong. It presumes that the energy infrastructures in the two countries are identical. But a country with a vast installed base of electric central heating in its housing doesn't much care about changes in the price of home heating oil. Fossil fuels don't just naturally have cost advantages; they have cost advantages, given a certain infrastructure and supply.
Brooksfoe,
Are you suggesting that if I all of the sudden paid 1600 a year in gas, instead of 1000 a year in gas, it would not affect me economically? If the truck that delivers food to the store now pays 3000 to fill up its tanks instead of 2000, do you think their delivery costs would not go up?
Would the supermarket just say, oh well, I'll pay the extra fee? Would I just say, oh well, I'll pay more for gas and food, and lumber, and electricity, etc etc.?
Clearly I'd have less to spend on other economic activities, rather than just getting the same thing I got last year, but now I used more resources and have less available to do other things.
When you spread that across the economy it has to have an effect.
Inversely, are you suggesting if Germany suddenly got rid of all their gas taxes that their economy aand their citizenry would not benefit? (ps - pollution/smog is as bad in germany as I've ever seen it in the US)
Brooksfoe,
No, fossil fuels have a cost advantage over every other fuel available at the moment. It is why coal, gas, and oil are used to generate so much of the world's energy, including electricity. This may change in the future if the fuels become more scarce, or more even more highly demanded (see oil), but is a fact of economic life. It is, in fact, the reason that the cost must be raised in order to stop the level of CO2 in the atmosphere from increasing.
Inversely, are you suggesting if Germany suddenly got rid of all their gas taxes that their economy aand their citizenry would not benefit?
In the long run, they probably would not benefit. Germany and Japan have the world's highest ratio of per capita GDP to BTUs, in large measure because high fuel prices over many years have led them to make infrastructural improvements to energy efficiency. Since Germany produces no oil, a drop in gas taxes would mean that citizens might start using more of a commodity which Germany doesn't produce, so that revenues which used to accrue to the national government to be spent on the needs of the German public would instead be going to Saudi Arabia. The loss of revenue would hurt Germans without cars, obviously; decisions to drive rather than take the train would also hurt public transit, worsen traffic and the already-poor smog problem, and so forth.
Finally, every country in the world is going to hit an infrastructure-investment wall when peak oil is reached and fossil fuel prices, with or without taxes, start to take off. (We may be there already.) Germany, by heavily taxing gasoline and thus jump-starting more efficient energy use, has helped prepare the way for this inevitable transition. The US has not; this is the time to start. I am not sure what Megan envisions all those rural Americans doing once gasoline hits $30 a gallon. It would be my instinct that they should start building charging stations for electric cars now, to ease the transition, and that a gas tax (offset by EITC credits for revenue neutrality) would help them do so.
And we'll charge our electric cars using energy from what? It may sound nice, to say a mix of energy from solar, nuclear, wind, thermal, coal, etc, those "Green" choices just listed by me aren't even close to pratical.
As far as Germany goes, for some reason people get the strange idea no one drives there. The autobahn is famous for a reason. There are lots of cars. The figures I could find put cars at 505 per 1000 in germany in 1999, and 776 per 1000 in the US in 2001.
So clearly we have more cars, but Germany still has a LOT of cars. If you think Germany's economy would not benefit from 40,000,000 people all of the sudden having an extra $1000 in their pockets not just this year, but every year, I don't know what to say...
You may like to debate about what could or should be based on those Arabs getting the money instead of the social programs in Germany, but I don't think there is a question about what's best for the economy.
brooksfoe wrote: I'm sitting here in Vietnam, an oil exporting country that has just announced its intention to build three nuclear reactors by 2025. And it's not because they want bombs. It's because they have 8+% GDP growth, double-digit growth in electricity demand, and there is simply no other way to get the energy they need.
You inadvertently supplied the answer with the anecdote. If Vietnam were prepared to exploit its coal reserves for power generation, and were able to obtain the construction supplies from China, they could have several thousand MW of new coal-fired plants up within ten years. However, when you have 85 million people occupying a relatively limited land area and extensive problems with pollution already, plus a working relationship with the French and a social-political environment where NIMBYism is limited in scope and impact, nuclear is quite easy and sensible to bring online.
This has few comparatives to the present US market, however. If the Powder River basin or several existing coal-fired plants were destroyed in some monumental catastrophe, then yes, it might be possible to get a couple nuclear plants brought online rather quickly -- people who find themselves without power for an extended period tend to realize that a large, concrete cooling towers occupying some portion of the horizon sightline are not the worst of their troubles in this world. But barring that...
Are there any plans for the infrastructure to be replaced with 100% of the revenue of this proposed gas tax of yours? I have seen nothing of the sort. What will happen if your plan is followed, as will happen in Germany, is we'll pay a lot of money, hurt the economy, still be tied to the same fuel source and then later on when the infrastructure has to be replaced/upgraded we'll loose even more money and still have to find a way to pay for the permanent social programs and other spending by our elite class of rulers that like to promise we can have our cake and eat it to so they can stay in power.
Government can not make things better by taking more money from individuals. We take a lot already. Other countries take more. Real change has to start with individuals making personal sacrafices, not just having less money appear in their bank accounts every paycheck. The problem is you don't elected by arguing for personal change based on your own free agency.
I work from home, in a house that was built 70 years ago, and drive 100 miles a week on a busy week at best. I grow my own garden that supplies nearly a years worth of vegetables for myself and my family. (canning/freezin). We buy locally produced meat 80% of the time. Except for chicken, it's way too difficult to grow a chicken that tastes as good as store bought.
Anyway I don't say that to pay myself on the back, as much to point out that I have made personal choices that happen to be better for the environment. I didn't make them for that reason, but still, I don't see very many concerned people out there making changes in their lives OTHER than suggesting that if you just take a few extra bucks from them when they top off at the gas station everything will be better. It won't. It will continue to get worse as long as you think just a few more bucks out of everyone's paycheck will bring us all to happy land. Change yourself, encourage change in your community. That will make a difference if you are truly after making things better.
But if people want to demagogue the issue, and find excuses as to why they should take more from those around them, but all means go ahead doing what you're doing.
Are there any plans for the infrastructure to be replaced with 100% of the revenue of this proposed gas tax of yours? I have seen nothing of the sort. What will happen if your plan is followed, as will happen in Germany, is we'll pay a lot of money, hurt the economy, still be tied to the same fuel source and then later on when the infrastructure has to be replaced/upgraded we'll loose even more money and still have to find a way to pay for the permanent social programs and other spending by our elite class of rulers that like to promise we can have our cake and eat it to so they can stay in power.
Government can not make things better by taking more money from individuals. We take a lot already. Other countries take more. Real change has to start with individuals making personal sacrafices, not just having less money appear in their bank accounts every paycheck. The problem is you don't elected by arguing for personal change based on your own free agency.
I work from home, in a house that was built 70 years ago, and drive 100 miles a week on a busy week at best. I grow my own garden that supplies nearly a years worth of vegetables for myself and my family. (canning/freezin). We buy locally produced meat 80% of the time. Except for chicken, it's way too difficult to grow a chicken that tastes as good as store bought.
Anyway I don't say that to pay myself on the back, as much to point out that I have made personal choices that happen to be better for the environment. I didn't make them for that reason, but still, I don't see very many concerned people out there making changes in their lives OTHER than suggesting that if you just take a few extra bucks from them when they top off at the gas station everything will be better. It won't. It will continue to get worse as long as you think just a few more bucks out of everyone's paycheck will bring us all to happy land. Change yourself, encourage change in your community. That will make a difference if you are truly after making things better.
But if people want to demagogue the issue, and find excuses as to why they should take more from those around them, but all means go ahead doing what you're doing.
sheesh, double post and frequent mis-types...oops!
So tell me. What is the ideal Earth temperature? What is the ideal rise?
What if land use and not CO2 is the climate driver?
If the Northern Hemisphere is warming and the Southern Hemisphere is cooling what should be done?
Suppose the climate scientists are cooking the books to keep the grant money flowing?
How do you plan to bring China in? India?
America and China produce about the same level of CO2 as America today. China's rate of CO2 growth is much faster than America's. If China doubles its CO2 output should America reduce its carbon footprint to zero? Suppose China quadruples its CO2 output? Then what?
CO2 is not a pollutant.
It is plant food. The more in the atmosphere the better plants do, including requiring less water.
I never understood why environmentalists don't take plant welfare into account? Plants are not part of the biosphere? They hate trees?
Having just joined the EconoSpeak gang, I clicked on your link to my colleague's post. I was directed there - but to something Will wrote. Please correct your link. Incidentally, I learned about this post from reading Greg endorse something Art Laffer wrote? Oh joy, Greg Mankiw sees the cocktail napkin man as his new guru.
The cap-and-trade is rather like the USSR five -year economic plan. It's a huge social engineering scheme that's supposed to be run by government. These things don't work. There is no way to make them work. You can't measure carbon emissions very well, you can't enforce the caps, you can't prevent the carbon quotas from turning into a gigantic source of government corruption and favoritism.
It's a very impractical scheme, and the EU failure so far the only possible outcome. This blind fate of some people in command-and-control schemes is amazing.
Fuel taxes, on the other hand, are practical, they already exist, and is relatively easy to increase and collect. But high fuel taxes exist in Europe and Japan for more than 50 years, they produced little carbon reduction, they won't achieve more in the US.
And let's be clear: there is nothing, absolutely nothing that can be done to stop, or significantly reduce CO2 emissions.
CO2 emissions will go down when enough nuclear power plants replace the coal plants. If the process of licensing and building nuclear power plants starts tomorrow (big if), it will take maybe another forty or fifty years to get enough plants on-line to make a difference.
In the real world, Americans will never support a punitive tax increase 'for the good of the world' when everyone else in the world will almost certainly be cheating. Especially since, as the richest and most technologically advanced country in the world, Americans are the most likely to be able to adapt to any profound changes to global climate anyway.