Tuesday, April 13, 2010

No, it won't be easy at all

One of the reactions to Paul Krugman's eco-econ piece last weekend that I've liked the most is from Stuart Staniford (via Kevin Drum.)
US trend economic growth in recent decades is about 3% a year. ... Now, if the economy is going to be a bit more than three times larger, but we are only going to emit 17% of the current level of carbon emissions, then the carbon intensity of the economy - that is the ratio of carbon emitted per dollar of goods and services created, is going to have to be only 5% of the current value.
That's his response to the idea that we'll be able to wring the carbon out of our economy easily by 2050. Needless to say, while I believe that a) this is probably doable and b) it's damn important that we try, I think Staniford does a service by pointing out how difficult it will in fact be.

Basically, we'd need to have efficiency grow twice as fast as it's ever done in American history, consistently, for decades, and the fastest growth in energy efficiency came during a series of recessions known as the 1970s. To say that this is going to be easily accomplished is stretching things, to say the least.

The other point I'd make is that the enormity of the task really makes a mockery of the standard policy prescriptions. If you think that the magical market fairy will make the kinds of dramatic carbon cuts that the situation requires so long as we put a carbon tax in, well, best of luck to you. It might have been sufficient 20 years ago, if then. These days anything short of some serious national efforts (including nationalizing certain industries, massive subsidies, and draconian rationing of things like cars) will probably fail.

That said, Kevin Drum's response to Staniford is a good one to keep in mind:
Well, look: three degrees of temperature increase is still better then five degrees. Six inches of sea rise is better than 12 inches. A hundred million dead is better than a billion dead. This stuff is worth doing even if it's not perfect. After all, what is?

4 comments:

Andre said...

The other point I'd make is that the enormity of the task really makes a mockery of the standard policy prescriptions. If you think that the magical market fairy will make the kinds of dramatic carbon cuts that the situation requires so long as we put a carbon tax in, well, best of luck to you.

I dunno. Wouldn't a steep enough tax/ tight enough cap do the job? E.g., you can ration access to cars through regulations, or you can just put a strict carbon tax or cap that raises the price of gasoline.

The overwhelming consensus of climate policy wonks/economists is that the most important step in facing this challenge is to put an effective price on carbon. Regulations tend to be complementary. In some cases they are preferred for political reasons (e.g., fuel economy regulations raise the price of cars but they don't get tagged with the dreaded "tax" label). But the first best choice is carbon pricing as it tends to be much easier to implement, more far-reaching, and tends to be less costly.

This recent commentin a thread I happened to be reading recently tracks my feelings pretty closely:

john said...

Well, I suppose I'd make two arguments.

1) A "steep enough" tax might do the job, but is politically impractical. (Steep enough from an ecological perspective would be north of $100/ton, methinks) The polls I've seen regularly show a greater public appetite for certain forms of regulation than for a broad, pervasive new tax. Economically inefficient, but more realistic. (This inverts the usual prescription: regulation first, carbon tax to catch what regulation misses.)

2) Modern corporations are surprisingly good at a) passing costs on to the end user while b) battling new competitors in to submission. Industries with large, entrenched incumbents (airline, telecoms, and *cough* energy) do this all the time. Regular, pervasive regulation is the way we deal with this. I think the same is likely going to be true if we did introduce a ecologically sufficient carbon tax -- we'll need to keep Big Carbon from strangling competition and simply forcing consumers to pay higher prices.

Andre said...

Oh, I was referring to your comment that a carbon tax wouldn't be effective, we need stuff like "nationalizing certain industries, massive subsidies, and draconian rationing of things like cars". Those options doesn't don't seem very palatable politically either. Regulations can also be more difficult to implement, require more detailed knowledge of private information and prescribing technical solutions.

I guess I'm just not aware of what regulations would make a significant difference without the same political risks as carbon pricing. A moratorium on tar sands or decommissioning coal fired generation immediately would be effective but strikes me as just as politically risky as cap and trade. What would we be talking about here? In any case, is the main argument for regulation vs. pricing one of political feasibility rather than efficacy?

I'm afraid I'm lost on (2). I thought the whole point of carbon pricing was to raise prices for carbon intensive products (internalizing the external costs). If electricity prices don't go up in response to a carbon tax on GHG emitting generation, consumers won't have incentives to cut down on usage and invest in more energy efficient appliances/homes/etc. In any event, if you raise the cost of inputs of a given product through for example a tax, a large chunk of the increased cost will be passed on to consumers depending on relative elasticity of supply and demand. This happens in a perfectly competitive market. Regulation wouldn't be all that dissimilar in that the costs of would be passed on to consumers too. If you ban CFGs, the cost of producing electricity will rise, and that cost increase will be passed on to consumers.

As for the issue of smaller competitors, wouldn't price mechanisms often be more beneficial for smaller them? Price mechanisms are often simpler from an administrative stand point. Large firms with dedicated government affairs shops are much better able to handle regulatory compliance issues. The fixed costs of regulatory compliance are also spread over a much larger revenue base for large firms vs. small firms.

john said...

Had a comment that went on way too long, and it's late. Will repost it tomorrow if I can make it intelligible.

For now, I'll say this:

"The overwhelming consensus of climate policy wonks/economists is that the most important step in facing this challenge is to put an effective price on carbon.... But the first best choice is carbon pricing as it tends to be much easier to implement, more far-reaching, and tends to be less costly."

I don't disagree at all that this is the consensus. The question is whether the consensus is correct.