Environmental Economics

The recovering from surgery Barkley Rosser:

Organized officially in 2006 by Greg Mankiw, the Pigou Club has never had more dominance among economists in terms of opinion.  A petition supporting a carbon tax was sent for the opening of the current Paris climate negotiations with 32 names on it, including three econ Nobelists: Kenneth Arrow, Thomas Schelling, and Joseph Stiglitz, all of whom I greatly respect. An even longer list of prominent economists (although without Arrow or Schelling) along with their individual arguments, as well as some climatologists such as James Hansen, is here. About the only prominent environmental economist not on the list is Harvard's Robert Stavins, who is attending the conference and supports a cap-and-trade proposal as do I. Why are we so alone among economists and even many activists, but why is it that cap-and-trade is far more likely to come out of Paris, if any specific proposal does?

The Pigou Club argues that a carbon tax is simpler and more efficient.  At times some of its members even claim that support from professional economists is "near unanimous."  Maybe, but it is not unanimous, and economists are likely to get left standing at the altar all alone when it comes down to it.  As it is, there are many nations that have some sort of carbon or energy tax, although none of these seem to apply to  all  fuels and none are coordinated in any way with any other nations.  Most focus largely on gasoline (and we have gas taxes in the US, but not focusing on carbon content) or  new cars.  It turns out that getting a coordinated carbon tax across national boundaries may be difficult to impossible, even without the apparently absolute opposition of the political elite in Washington (or at least its Republican component) to any new taxes of any sort (even revenue neutral ones), although the GOP at this time seems to be allergic to any climate proposals at all (I mean, their really smart leaders have figured out that all this global warming stuff is just a hoax, right?), and the Senate blocked Obama-supported Waxman-Markley in 2010, an attempted and much flawed cap-and-trade bill that managed to pass the still-Dem-dominated House (although some of the arguments given against it by GOPsters were that it would be "just  like a tax increase").  The supporters of a revenue neutral carbon tax also criticize the in-place from Kyoto European CO2 Trading System (ETS) as having experienced volatile prices, having been subject to "gaming" and theft, and a lot of sectors escaping from it, although a tax can also involve fraud and sectors getting out of it thanks to political pressure.

Tim Taylor here reviews arguments from a forthcoming Journal of Perpectives article by Richard Schmalensee and Robert Stavins discussing past efforts at cap and trade (originally known as "tradable emissons permits"). The largest and most successful such program was for SO2 trading done in the US after the Clean Air Act amendment of 1990, with even most proponents of carbon taxes recognizing that this one worked out pretty well. But the argument is that we were lucky with that one, and that it is a much smaller deal than a global carbon trading system. Schmalensee and Stavins also report on an earlier successful use of it for reducing lead in gasoline between refineries as well as some successful use of it for NOX emissions. They recognize that the ETS has had problems, but some of those seem to have been due to a lack of information at the beginning of the system along with too many industries being exempt. However, they note that China will be implementing a cap and trade system in 2017, and given that the Europeans adopted their system as part of the Kyoto Protocol under pressure from the US, these parties are really not at all interested in following a bunch of mostly US-based economists in replacing their ETS with a carbon tax, even though quite a few European countries have limited carbon taxes in place already. 

However, none of this gets at why carbon taxes are simply not being seriously considered in Paris. Maybe no agreement on a mechanism to meet the likely 2 degrees Celsius maximum increase target that is being bandied about much (with more endangered nations arguing for tightening that to just a 1.5 degree increase) will happen. But if one is, it will almost certainly be some version of cap-and-trade with subsidies for poor countries rather than a carbon tax (or its popular-with-activists variation, fee and dividend). The real reason is quite simple. If one is aiming for a specific targeted limit on temperature increase, then given current science that implies a specific quantitative emissions limit. It is well known that a tax only stabilizes/guarantees the price. It does not stabilize the quantity emitted. To do that, one must impose a specific quantity limit, and it is also completely well known that a properly set-up cap-and-trade system will be the most cost effective way to achieve such a limit. This is why cap-and-trade is on the table in Paris, but the carbon tax is not. …

I also am aware that Copenhagen was a nearly total flop, aside from some agreements about improving information gathering (something very important as the problems with setting up the ETS show), this problem still a big deal in China where we have just learned that they have been burning 17% more coal than previously reported.. It will be hard enough to get any kind of serious agreement out of Paris. This is all the more reason to go for something that is not only the most suited to achieving what is needed, a specific quantity emissions limit, but also the most acceptable to the diplomats and politicians in most of the nations that are engaging in these very difficult negotations. Really, I am a bit amazed and even shocked that all these prominent and intelligent economists have not figured this one out.

via econospeak.blogspot.com