Climate 411

The case for strong climate policy is simple. A cap on carbon pollution is too.

Edward L. Glaeser makes the case for simplicity in addressing climate change. I couldn’t agree more with his premise. The basic economics are indeed simple. Climate change might be the largest market failure the world has ever seen. To correct it, put the right incentives in place: correct the fact that we currently treat the atmosphere as a free sewer for our global warming pollution. Problem solved.

The how and especially the politics are not quite as straight-forward. Glaeser bemoans that the proposed American Power Act has 987 pages and identifies three culprits: that the Act tries to do more than just put a price on carbon, that it uses a cap-and-trade system rather than a tax, and that the problem has an important international dimension. He is broadly right on one and three but not on two: the issue of a cap versus a tax.

A firm limit on global warming pollution does not make the law more complicated. It makes it better.

First, a cap sets a firm upper limit on pollution. Glaeser acknowledges as much by saying that “fixing the number of permits may actually be the right thing to do.” It is.

Second, it’s politics, stupid. There is a good reason why the U.S. tax code has 17,000 pages. Proposing a tax on paper is simple. Getting it through the political process is a different matter altogether. Most significantly, every tax credit, every exemption means an increase in pollution. That’s not the case with a cap. While politics does what politics does best—worry about the allocation of allowances—the upper pollution limit stands.

Third, and contrary to what is sometimes argued by tax advocates, a cap creates a more stable policy environment. Certainty is the sine qua non for energy policy.  While it is true that a cap and trade program can introduce short-term variability into the carbon price, that is unlikely to matter for investments in energy infrastructure.  What matters is certainty over the long run. Capital-intensive investment decisions take years if not decades to pay for themselves (think about a new electric power station).

A well designed cap—especially one with a price floor, which this Act would include—creates this kind of certainty, by guaranteeing that emissions must go down and, therefore, that emissions reductions will have value. A tax is easily revoked, altered, or put “on holiday.” A cap has durability. And even if it does have to be amended, market foresight will allow smooth transitions, much more so than a tax would.

Fourth is the international dimension, Glaeser’s last point. A cap makes international coordination easier. It also creates incentives for developing countries to cap their own emissions, in order to gain from selling allowances into a U.S. market and create win-win-win situations for themselves, U.S. companies and consumers, and the atmosphere.

All four of these reasons also appear in America’s Climate Choices, a terrific new study just released by the National Academy of Sciences. It provides the scientific closing argument for the debate unfolding in the Senate. The science is compelling, the urgency to act is clear, and the main solution is equally apparent: put a price on global warming pollution, ideally through a firm, declining cap on emissions.

Posted in Climate Change Legislation, Economics / Comments are closed

A low carbon economy: the gift that keeps on giving

A Practical Guide To A Prosperous, Low Carbon Europe is the latest McKinsey study to show how it is eminently affordable to achieve the transition to a low-carbon world. The headline on a post by Financial Times climate über-scribe Fiona Harvey puts it best: “Europe’s energy in 2050: Cutting CO2 by 80% no more expensive than business as usual.”

How is that possible?

Initial capital expenditures are higher for renewable energy but operational cost savings along the way make up the difference. It’s the gift that keeps on giving.

To be sure, there are some very clear obstacles. The old economists’ mantra applies here as well: if it’s so cheap, why aren’t we doing it already? Well, we ought to be. The obstacles are largely political, driven by vested interests. If you are just now building a new coal plant and haven’t put much thought into carbon capture and storage technology, you may be less inclined to cheer than your neighbor investing in wind and solar.

McKinsey isn’t saying that everyone wins in this new world. The ones who see the future and act accordingly do. Most importantly, society and the planet win as well.

Posted in Economics, News, Policy / Comments are closed

FT Economists’ Forum: My Response to Stiglitz and Stern

Gernot Wagner's profile This week, Joe Stiglitz and Nick Stern published an opinion piece in the Financial Times titled “Obama’s Chance to Lead the Green Recovery“. They call for a “stable, strong” price for carbon, but do not say how that price should be set. I just posted a response in the FT‘s Economists’ Forum. Here’s how it begins:

Joe Stiglitz and Nick Stern are exactly right to emphasize the role President Barack Obama can play in leading the green recovery. They are also right to calling for a “stable, strong carbon price.” But it matters how that price is set. In the United States in particular, the right environmental, political and economic answer is a cap-and-trade system.

Take a look at the whole conversation. I also provided some more detail on the greenness of economic stimuli over at the Environmental Economics blog. Spoiler alert: China’s trumps the United States’ package 2:1.

Posted in News / Read 1 Response

“Surprise — Economists Agree!”

If you care about the climate, climate economics, or how economists in general are portrayed in the media, read this piece from Slate: “Surprise—Economists Agree! A consensus is emerging about the costs of containing climate change. So why is no one writing that?”

Enter Eric Pooley: good thing someone is. Here’s a longer blog post about Pooley’s eminently readable academic paper on the same topic.

Originally posted on Environmental Economics. 

Posted in Economics / Comments are closed

Climate Policy Spurs Innovation

EDF has been saying for years that the best way to invent new, greener energy technology is to put a cap on carbon pollution. That approach worked to combat acid rain in the 1990s, and a new study provides the best evidence yet that it’s working for climate policy, too.

The study compared countries that ratified the Kyoto Protocol and ones that didn’t, and guess which group had more new green tech patents?

Chart comparing patents in countries that did and did not ratify the Kyoto Protocal.

I posted an overview of the findings, including a couple more charts and additional analysis I got from the authors, over at Environmental Economics.

Posted in Economics, Policy / Read 4 Responses

“He said, she said” Reporting Mangles Climate Economics Story

Gernot Wagner's profile What do you get when you give a respected journalist an academic fellowship? A new species entirely: a readable academic paper.

Eric Pooley, former managing editor of Fortune and a writer for Time magazine spent his fall semester at Harvard. The result is an eminently readable report on “How Much Would You Pay to Save the Planet? The American Press and the Economics of Climate Change.”

The conclusions are sobering. Most reporters treat the story as stenographers, engaging in “he said, she said” reporting, instead of serving as honest referees of the issues. As a result:

Read More »

Posted in Economics / Read 2 Responses