Nordhaus Versus the Pope: Why Francis Is Right

The Yale climate economist William Nordhaus goes after Pope Francis in the current New York Review of Books on the question of how best to prevent global warming. But after landing a few solid punches, he collapses in a muddle all his own by obscuring the difference between carbon taxes and cap-and-trade.

Nordhaus zeroes in a number of passages in “On Care for Our Common Home,” the recent papal encyclical dealing with global warming, that, to his mind, show remarkable ignorance about the workings of modern economics. One passage calls on society “to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals,”while another takes aim at the profit motive:

The principle of the maximization of profits, frequently isolated from other considerations, reflects a misunderstanding of the very concept of the economy. As long as production is increased, little concern is given to whether it is the cost of future resources or the health of the environment; as long as the clearing of a forest increases production, no one calculates the losses entailed in the desertification of the land, the harm done to biodiversity or the increased pollution. In a word, businesses profit by calculating and paying only a fraction of the costs involved. ¶195.

To be sure, resource losses are chronically under-estimated. But Nordhaus maintains that the pope misses an important point, which is that the problem is not markets per se, but markets that are poorly designed and hence encourage the wrong kinds of activity.

Pope Francis addressing a joint session of Congress, Sept 24, 2015

Pope Francis addressing a joint session of Congress, Sept 24, 2015

“Markets can work miracles when they work properly,”Nordhaus writes, “but that power can be subverted and do the economic equivalent of the devil’s work when price signals are distorted.” The best way to correct such distortions is to see to it that social costs, or “externalities,” are incorporated in the price of a particular commodity or action. Only when economic actors are required to bear the full burden will they then find it profitable to seek out alternatives that are cheaper and cleaner. Otherwise, society finds itself in the strange position of subsidizing waste by allowing manufacturers to emit greenhouse gases and the like for free. As Nordhaus puts it:

Putting a low price on valuable environmental resources is a phenomenon that pervades modern society. Agricultural water is not scarce in California; it is underpriced. Flights are stacked up on runways because takeoffs and landings are underpriced. People wait for hours in traffic jams because road use is underpriced. People die premature deaths from small sulfur particles in the air because air pollution is underpriced. And the most perilous of all environmental problems, climate change, is taking place because virtually every country puts a price of zero on carbon dioxide emissions.

Nordhaus might have mentioned the entrenched political structures that foster such under-pricing in the first place. But let’s not quibble: his logic thus far is impeccable. He then goes off the rails, however, over a passage in the encyclical dealing with carbon-emission permits. According to the pope:

The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors. ¶171.

Although Francis is probably talking about cap-and-trade, Nordhaus is not so sure since “carbon credits” is not a term that practitioners usually employ with regard to the trade in carbon emissions. So he argues that “this part of the encyclical is clearly a critique of market-based environmental approaches”— all such approaches, that is — a category that in his view includes both cap-and-trade and carbon taxes.

This leads to a fatal error: defending both without delineating the differences between the two. Nordhaus has argued in favor of carbon taxes in the past, and he concedes in his NYR article that such an approach “is simpler and avoids any of the potential corruption, market volatility, and distributional issues that might arise with cap-and-trade systems.” But since carbon taxing also fiddles with markets, he concludes: “It is unfortunate that he [the pope] does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause.”

Wrong. Cap-and-trade clearly is a market-based solution because it creates new arenas for the buying and selling of emission permits, complete with futures markets and financial derivatives. But a carbon tax is not. Instead of creating new ways of buying and selling, taxing carbon is a form of direct behavior modification not unlike a traffic fine or a golf-course fee. Instead of encouraging speculation, it does the opposite by making it crystal clear that economic actors will have to pay a set premium for every unit of carbon dioxide they emit.

So while the pope may have gotten a good deal wrong, this is one thing he gets right. Not only does cap-and-trade promote speculation, but Francis is correct in pointing out that, in practice, it has done little to reduce emissions or encourage fundamental technological change. Setting a strict limit on greenhouse gases and then allowing investors to bid on emissions rights up to a certain level is music to the ears of neo-liberal economists for whom there can never be enough markets. But implementing such a program has proved a nightmare.

Due to heavy lobbying by corporations and politicians, the EU’s Emissions Trading System, the largest carbon market in the world, exempts 55 percent of greenhouse gas emissions, according to the Greek economist Andriana Vlachou. Since the system leaves it to individual member states to estimate their emissions, over-reporting has been rife. Offsets, the practice of allowing member states to reap credits by sponsoring carbon-capture projects such as new forests, have been especially problematic. As the Carbon Tax Center’s James Handley has pointed out, estimating savings from such projects is difficult, while verifying that developers are telling the truth about the benefits is even worse. Volatility is another problem. After the EU allocated too many permits, prices plunged so low in 2013 that officials had to take 900 million permits off the market. Since trading is electronic, hackers have meanwhile made off with millions.

It’s the sort of system that only a free-market Chicago economist could love – and, given the opportunities for corruption, maybe an old-school Chicago politician as well. By comparison, a carbon tax is the essence of simplicity. Administrative costs, which involve little more than calculating the carbon content of a given fossil fuel and then levying a charge “upstream,” are minimal. So are enforcement costs. There are no offsets, no complicated negotiations to determine each nation’s emissions quota, no wrestling with entrenched political interests to determine which industries are covered and which are not. While Vlachou reports the EU’s cap-and-trade program weighs especially heavily on poor electricity users, such consequences can be easily mitigated in the case of a carbon tax by earmarking revenues for social programs, investment in poor neighborhoods, or reducing income taxes for lower earners.

Nordhaus is not the only one to blur the difference between a carbon tax and tax-and-trade. Cass R. Sunstein, the Harvard law professor and recent Obama operative, recently made the same blunder in a column defending not only markets but consumerism and economists in general, who, he assures us, are “excellent technicians” and “pretty decent moralists” as well. The pope is not the only one who finds this difficult to swallow. Suspicion of market-based solutions may not be so unjustified after all.


Last modified: September 28, 2015

Will Renewables Tip the U.S. into Taxing Carbon?

“Happy solar voters.” That was the picture caption for the smiling solar-powered family that led David Roberts’ post yesterday, “How inefficient climate policies can build support for efficient ones.”

Roberts, who blogged on energy and climate politics for Grist before moving over to Vox this year, counsels carbon-tax advocates to put “Green Industrial Policy” first. That way, solar and wind assemblers and installers and their happy consumers can develop into constituencies strong enough to prevail over the influence and inertia that will otherwise throttle carbon taxes.

Will this family support carbon tax legislation?

Will these smiles translate into carbon tax legislation?

Roberts’ post is of a piece with his long-standing disdain for carbon tax campaigners, and he lectures us here as well, insisting we “get over [our] obsession with carbon pricing.” But it also builds on a new article in Science (subscription required) by researchers at U-C Berkeley who surveyed worldwide progress, or lack thereof, in adopting carbon taxes or cap-and-trade permit schemes. “Of the 54 countries and subnational entities that adopted a carbon pricing scheme by 2013,” they report, “nearly two-thirds installed a Feed-in Tariff or Renewable Portfolio Standard before setting up the pricing scheme.”

That’s good to know, if a bit skeletal. The fact that FIT’s or RPS’s preceded the pricing measures doesn’t prove they had to, though they surely helped lay the foundations. Moreover, if advocates and policymakers chose to start with clean-energy subsidies, it might have been because they hoped positive incentives would be enough to move quickly from carbon fuels.

The more pertinent question, though, is whether the U.S. is now at the political take-off point where carbon-pricing can make it into policy. Wind turbines will account for 5 percent of U.S. electricity this year (and more than 15% in seven states last year), and solar-photovoltaic power is growing like gangbusters, thanks largely to Green Industrial Policy galore: state Renewable Portfolio Standards and federal production tax credits (for wind) and accelerated depreciation (for solar). Are the “demonstration” effect and jobs base from renewables strong enough to make the “winning coalition for climate policy” (that’s the Science article title) the U-C Berkeley authors are calling for?

Let’s hope so. Without a robust carbon tax, zillions of electrons in millions of backyard PV arrays are going to be consumed in-house instead of helping the grid back out fossil-fuel electricity. Without a carbon tax, gas-guzzlers and long commutes will keep “extreme” fossil fuels in business, along with their emissions. Granted, a carbon tax isn’t visually arresting like backyard panels. But the innovation and system changes it will catalyze will be at least as instrumental in getting us off carbon.

Photo: Shutterstock, via Vox.


Last modified: September 21, 2015

What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes

It’s rare that critiques of carbon taxing are as quantitative as the post last month by David Goldstein on the Natural Resource Defense Council’s Searchlight blog.

Goldstein qualifies as a genuine energy-efficiency hero, in my book. He has spearheaded NRDC’s pioneering analyses of appliance engineering, manufacture and marketing since the 1970s and guided the council’s strategic interventions in utility governance and energy standard-setting in California and at the federal level. This in-the-trenches work has slashed power consumption and carbon emissions from refrigerators, air conditioners, light bulbs and building envelopes in all 50 states. Goldstein’s 2002 MacArthur Foundation “genius award” was richly deserved. (The Washington DC-based American Council for an Energy-Efficient Economy, ACEEE, merits a shout-out as well.)

Befitting his analytical bent, Goldstein’s critique sticks to the high road. No self-fulfilling taunts about carbon taxers’ naivete or the tax’s political infeasibility. His post does drag out a straw man, though, insisting up-front that “carbon emissions fees alone cannot solve the climate problem” — a position held by few carbon tax advocates. (We ourselves “recommend carbon taxes in addition to energy–efficiency standards.”) His criticism sharpens at the end: “In summary, carbon pollution fees, as a stand-alone policy, are incapable of doing much to solve the climate problem.”

Goldstein has certainly thrown down the gauntlet. He has four main arguments, which I’ll treat in order. Some math is involved, but it’s central to the issue.

Argument #1: Carbon Taxes Must Raise U.S. Energy Prices 44-Fold to Meet Our Carbon Targets

Let’s start with an assertion by Goldstein that is startling but accurate — mathematically:

If we wanted energy demand to drop by 85 percent [the minimum required for the U.S. to meet IPCC temperature-rise targets] due to price, the math behind elasticities shows that we would require a price increase of 44 times. This is an impossibility condition. (emphasis added)

Price-elasticity is how economists denote the extent to which a rise in price causes demand or usage of a good or service to diminish. Assuming, as Goldstein does for argument’s sake (and as we do in modeling carbon taxes), that the price-elasticities of the various forms in which energy is used in the U.S. have an average value of minus 0.5, then a doubling of energy prices, whether effected through a carbon tax or market fluctuations, will cause energy use over time to shrink by 29 percent. (See sidebar for calculations.) With two doublings in price, the shrinkage would be 50 percent.

Elasticity math. You can do it.

Elasticity math. You can do it.

Note that the second doubling in price produces less of a decrease in usage than the first, reflecting the famed Law of Diminishing Returns. Indeed, three doublings, increasing the price 8-fold, would only bring about an overall 65 percent drop in usage. To hit the 85 percent reduction target requires a 44-fold energy-price rise. Goldstein’s math is spot-on.

But not the use to which it is put. While an 85 percent reduction in energy use would indeed cure the United States’ carbon obligations (not to mention protect and conserve air, water and land), it far exceeds what’s required, thanks to the ongoing and parallel reduction in the carbon intensity of energy supply. This decarbonization of supply is prominent in energy and climate discourse, and has been evident in the electricity sector over the past decade. Measured as pounds of CO2 emitted per kWh generated, the emission rate for all electricity generated in the U.S. last year was 16 percent less than the rate in 2005. For that we can thank increased generation from lower-carbon natural gas and zero-carbon wind. (Solar electric generation, though growing very fast, started from a tiny base and wasn’t a notable factor in the decarbonization to date.) Energy efficiency has helped as well by reducing the need to fire up high-carbon coal plants.

A carbon emissions tax, which by its nature favors wind and solar over gas, and gas over coal, will help sustain and accelerate this encouraging supply-side trend. [Read more…]


Last modified: September 25, 2015

Feeling the Heat: A Carbon Tax Gains Grassroots Momentum in Washington State

Seattle on the summer solstice. Crowds line Fremont Avenue in anticipation of the annual parade of naked bicyclists. Carbon Washington co-director Kyle Murphy is giving a pep talk to a group of volunteers that includes idealistic college students, veteran environmentalists, and former Seattle Mayor Mike McGinn.

“You’re simply offering them the opportunity to participate in the democratic process. You don’t need to persuade anyone, just give them a chance to say yes.”

Seattle, June 2015: Petitioning for Carbon Washington.

Seattle, June 2015: Petitioning for Carbon Washington.

I’m helping Carbon Washington (CW) collect signatures for Measure I-732, which would put a carbon tax on the state ballot in 2016. In general, people want to participate. Almost no one turns me down. I pass out multiple signature sheets as parade-goers fumble for pens. I’m talking to eight people at once, even while competing with the naked bikers for attention. A record-breaking drought is setting the stage for a long wildfire season, and climate change is already on everyone’s mind. In a single afternoon we collect more than 1,500 signatures.

The appeal of CW’s proposal is rooted in its overarching simplicity. Polluters pay, everyone else benefits. The measure would put a price on carbon emissions, forcing fossil fuel companies to internalize some of the social and environmental externalities of their business. The tax starts at $15 per ton of CO2, rises to $25 in year two, and then increases at 3.5% plus inflation annually. This long and steady increase will drive down CO2 emissions in the state.

Emissions would fall more if Washington's power wasn't nearly all hydro. (Source: CTAM model)

Emissions would fall more if Washington’s power wasn’t nearly all hydro. (Source: CTAM model)

The tax is revenue neutral to appeal to conservatives. It uses the expected $1.7 billion in annual revenue to overhaul Washington State’s notoriously regressive tax code. Most of the money goes to lower the state sales tax from 6.5% to 5.5%. The 3.5% annual increase in the carbon tax is designed to carefully offset the rising value of the sales tax reduction, so that the measure stays revenue-neutral for 40 years. Another $200 million a year is used to fund the Working Families Rebate – an extension of the federal Earned Income Tax Credit. These two pieces make I-732 the state’s most progressive tax legislation since groceries were exempted from sales taxes in 1977.

The third element of CW’s plan takes $200M to eliminate the state’s Business & Occupation tax on manufacturers. The intent is to make the state’s businesses more competitive and cushion any job losses due to the tax. The average manufacturer will pay in carbon taxes close to what it will gain from the elimination of the B&O tax. Unlike the B&O tax, however, carbon taxes do not increase as the business grows – as long as it can grow without increasing its carbon emissions.

Still, Carbon Washington faces high hurdles. A ballot initiative requires 246,372 signatures – 8% of the votes cast for governor in the most recent election. Since up to one-quarter of signatures fail the verification process, CW is aiming for 315,000. Successful initiatives, like a Michael Bloomberg-financed gun-control measure that passed in 2014, have needed to raise around a million dollars to reach that threshold. Carbon Washington is hoping to rely on an extensive volunteer network to do it for less than half the price. Still, more funding and volunteers are needed.

Measure I-732 steers revenues to households and manufacturers.

Measure I-732 steers revenues to households and manufacturers.

Assuming CW succeeds, it’ll have to defend its proposal on the ballot against the inevitable onslaught of Koch-funded interest groups. Some other environmental groups are skeptical that Washingtonians will vote for a proposal that openly uses the dreaded ‘T’ word. Climate Solutions, a regional organization, threw its weight behind Governor Jay Inslee’s cap-and-trade proposal. Despite attempts to appeal to Republicans, including a carve-out for the state’s only coal plant, that proposal failed to gain traction in the legislature. Climate Solutions isn’t backing CW’s proposal, afraid to lose what will surely be a big fight.

Yet if the conversations I had were any indication, Washingtonians are receptive. They have an example to their north, in British Columbia, of a successful and popular carbon tax, so oil industry scare tactics may prove less effective with voters. In polls, support varies between 30% and 60%, depending on how the issue is framed. Victory will be determined by whether enough voters can be educated about the proposal. By talking to voters and collecting signatures one at a time, Carbon Washington is getting a head start.


Last modified: July 16, 2015

Who’s “Out of Step” on Climate — Pope Francis or Harvard Expert?

New York Times climate reporter Coral Davenport writes today that Pope Francis’s warning against cap-and-trade as a tool to address the climate crisis creates a “paradox”:

[W]here Francis’ environmental and economic agendas meet, he leaves something of a paradox. . . While urging swift action to curb the burning of fossil fuels that have powered economies since the Industrial Revolution, he also condemns the trading of carbon-emission credits, saying it merely creates new forms of financial speculation and does not bring about “radical change.” But carbon trading is the policy most widely adopted by governments to combat climate change, and it has been endorsed by leading economists as a way to cut carbon pollution while sustaining economic growth.

With due respect to Davenport as well as Robert Stavins, the Harvard climate economist whose concerns figure prominently in her story, there is no paradox. Francis’s encyclical, On Care For Our Common Home, doesn’t muddy the climate change debate because a carbon tax, not cap-and-trade, is economists’ preferred policy tool for curbing carbon pollution. Francis-cap-tradeFrancis criticizes emissions trading on three grounds: First, trading carbon allowances allows traders to profit from the climate crisis — indeed, it’s designed to do that. Second, “offsets” that are virtually hard-wired into cap-and-trade shift the burden of pollution to developing countries. Third, cap-and-trade with offsets absolves the wealthy of responsibility to rein in their carbon-intensive lifestyles. In Francis’s own words:

The strategy of buying and selling carbon credits can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors. [171]

What, then, does Francis demand? That societies internalize the costs of pollution, especially climate pollution:

[O]nly when the economic and social costs of using up shared environmental resources are recognized with transparency and fully borne by those who incur them, not by other peoples or future generations, can those actions be considered ethical. [195]

A reference in that passage attributes Francis’s calls for polluters to pay “the economic and social costs” they incur to his predecessor, Pope Benedict. (Both pontiffs presumably intended “impose” rather than “incur,” i.e., for costs to be borne by those who impose them, but no matter.) Those resources surely include clean air. The new encyclical thus aligns the Catholic Church with the century-old “Pigovian” tradition of economists urging policies to internalize costs. Francis-carbon4-taxNevertheless, in an email quoted by Davenport, Stavins brands Francis as “out of step with … informed policy analysts around the world,” in effect labeling the Pope as economically-illiterate and naïve:

“I respect what the pope says about the need for action, but this is out of step with the thinking and the work of informed policy analysts around the world, who recognize that we can do more, faster, and better with the use of market-based policy instruments — carbon taxes and/or cap-and-trade systems,” Robert N. Stavins, the director of the environmental economics program at Harvard, said in an email.

That Stavins is the lone environmental economist quoted in Davenport’s piece did not deter her from claiming that “environmental economists criticized the encyclical’s condemnation of carbon trading, seeing it as part of a radical critique of market economies.” Hardly. The Pope, like legions of environmental activists and economists worldwide, has seen the shams of emissions trading and carbon “speculation” for what they are. [Read more…]


Last modified: June 27, 2015

Earth Institute Chief Trashes the Carbon Tax

Steven Cohen, executive director of Columbia University’s prestigious Earth Institute, recently weighed in on the carbon-tax debate in the Huffington Post. The results are breathtaking – and not in a good way.

Cohen’s June 8 screed, “A Carbon Tax Is Not Feasible or Practical,” was a riposte to a New York Times editorial two days earlier endorsing a carbon tax as “one of the best policies available” to address global warming. The Times is wrong, says Cohen, as he proceeds to lay out a multi-count indictment. Among his anti-CT arguments are the following:

1. Carbon taxes are politically infeasible: Given the system’s deep hostility to tax hikes, “the space between the carbon tax as a policy idea and the reality of American politics is too vast to overcome. For better or worse, here in America we are in a period of tax policy paralysis that is unlikely to be surmounted anytime soon.”

2. Carbon taxes are unfair: They “cause people on the lower end of the economic ladder to pay a higher portion of their income on energy,” while corrective measures aimed at redistributing the costs “are far from simple to implement, might stigmatize recipients, and would become easy and obvious political targets.”

3. Contrary to The Times, carbon taxes are unequal to the problem of climate change because they would founder on the shoals of international politics: “China and India would need to go along, and given the urgency of their energy and development needs, it is difficult to imagine that they would agree to such a measure.”

4. Carbon taxes are anti-urban: “I sometimes think the push for a carbon tax comes out of an early 20th century environmentalist mindset that scolds people for consumption and living in evil, immoral cities.”

5. Finally, carbon taxes are unnecessary since tax breaks can be just as easily used to encourage alternative energy development: “Why waste time and effort on an infeasible policy that will never happen? Why not devote time and effort to building a real partnership between the public and private sector to create a sustainable economy?”

NYT-CohenCareful readers will notice that the first two items are variations on a theme, which is to say the futility of relying on the U.S. political system to pass a well-crafted carbon-tax plan that discourages fossil fuels without burdening workers and the poor. The same can be said for number three, which is about the inability of a beggar-thy-neighbor international system to institute significant reform. Whether the fault lies with Washington, Beijing, or New Delhi, Cohen argues, the point remains that politicians of all nationalities are too selfish and shortsighted to deal intelligently with a carbon tax, so it’s best to forget the whole thing.

Charges four and five are different, so let’s tackle those first. [Read more…]


Last modified: September 15, 2015

Don’t Anchor a Carbon Tax to the Social Cost of Carbon

Editor’s note: Yesterday the world’s most influential newspaper finally did what CTC and other carbon tax proponents have sought for years: publish a ringing endorsement of a U.S. carbon tax. With its editorial, The Case for a Carbon Tax, the New York Times joins the growing community of opinion leaders, policy experts and, yes, elected officials who not only recognize the power of carbon taxes to quickly and equitably reduce emissions but also sense the emergence of a political critical mass that can enact fees into law. This heartening development signals that it’s not too soon to focus on the design of a U.S. carbon tax, especially its magnitude and rate of increase, as CTC senior policy analyst James Handley does in this post.

Which is the more effective way to set a tax on carbon pollution?

A. Start aggressively, then raise the rate slowly (“sprint”).

B. Start modestly, then raise the rate briskly and predictably (“marathon”).

You probably guessed that if the goal is to instill incentives that will bring about big emission reductions fast enough to avoid runaway global warming, the answer is B, the marathon. Yet a leading U.S. Senate advocate of legislative action on climate seems to be starting off like a sprinter, perhaps because his legislation is pegged to estimates of the Social Cost of Carbon that don’t account for the possibility that climate change will turn out to be catastrophically costly.

More on that senator in a moment — after this tutorial:

The Social Cost of Carbon (SCC) is a construct to quantify in monetary terms the damage caused by each additional ton of CO2 added to the atmosphere. While the SCC may sound arcane or academic, estimating its magnitude has real world implications: governments are pegging climate-related regulatory decisions to SCC estimates. A low SCC can make all but the lowest-cost clean-energy policies pencil out as expensive; higher estimates justify more rapid and aggressive measures, since moving too slowly to reduce emissions shows up as a mistake whose costs accumulate at a frightening pace.

Ice Shelf on eastern edge of Edgeoya, Norway. Waterfall. (20090812) (Strcorarius parasiticus)

Ice Shelf Melting in Eastern Norway (Paul Hoogeveen, Flickr)

Calculating the damage from a ton of CO2 turns on a host of assumptions that span wide ranges. Not surprisingly, estimates of the SCC reported in the peer-reviewed economics literature range from as little as $10 per ton of CO2 to over $400. A profoundly important modeling choice is how heavily to weigh the risks of climate-induced catastrophes. High-risk climate scenarios with nearly infinite costs, such as rapid release of methane from arctic permafrost or sudden sliding of vast ice masses into the ocean, “misbehave” in the equations used for conventional cost-benefit analysis, leading some modelers to omit them altogether.

One widely-used model assumes that economic growth rates will not be affected by climate change, thereby predicting that half of the world’s economic activity would continue after a whopping 18 degrees C of global warming. Other models dilute the high-risk scenarios by assigning them arbitrarily low probabilities that suppress their impact when their costs are averaged in with low-risk scenarios. A further problem in estimating the SCC is the bias toward high “discount rates” that telescope future impacts down to seemingly manageable proportions.

Amidst fraught debate and widely-divergent estimates, the Interagency Working Group has settled on $42 per ton of CO2 as the “official” U.S. government social cost of carbon. While that’s an improvement over past practice that omitted climate costs entirely — tacitly, an SCC equal to zero — the $42 figure grossly understates the large-scale global risks that dominate concern over global warming and climate change. [Read more…]


Last modified: June 28, 2015

Book Review: “Climate Shock”

Rachael Sotos is a political theorist and adjunct professor with a background in philosophy, classics and environmental studies.

Climate Shock: The Economic Consequences of a Hotter Planet, is both a tidy summation of the state of the art in climate economics and a powerful call for action. For all the uncertainties and challenges, “the overall policy framework needed for addressing climate change is clear and has been for decades,” state co-authors Gernot Wagner and Martin L. Weitzman (p. 23). “Carbon dioxide is the problem. Pricing it properly is the solution.”(38)

climate shock coverWagner, a senior economist at the Environmental Defense Fund, and Weitzman, a celebrated economist at Harvard, are an intriguing blend of young and elder, and realist and idealist. They exhort economists and climate advocates to get past the “epic debates” between taxes and cap-and-trade and, while consensus builds toward carbon pricing, to engage in the work required for “second -, third-, and fourth-best solutions”(26): electricity grid reform, stronger CAFE standards, and strategic application of subsidies and U.S. EPA regulations. “At the very least,” they say, “these regulations could provide a real bargaining chip when it comes to U.S. Congress considering comprehensive climate policy and a direct price on carbon down the line.”(19).

Flying their Pigovian colors from Preface to Epilogue, the authors are emphatic and unambiguous; “Putting a proper price on carbon isn’t a question of if, it’s a question of when.(xi) Our best hope is “a high enough price on carbon to reflect its true cost to society.”(152)

Unfortunately, the bracing clarity of Climate Shock appears to have been lost on some reviewers. Earlier this month, NY Times columnist Joe Nocera misconstrued Wagner and Weitzman’s extensive discussion of geo-engineering as surrender to the political obstacles to carbon pricing. On Nocera’s reading, insofar as “a carbon tax on the worst emitters has gotten nowhere,” it’s time for Plan B: “chemo for the planet.” Au contraire, Wagner and Weitzman do not delve into geo-engineering scenarios like sulfates dispersal in lieu of ambitious policies to reduce emissions. Rather, they insist, “the specter of geo-engineering should be a clarion call for action. Decisive, and soon.”(29)

If Nocera reconfigured Wagner and Weitzman to suit his own techno-utopian ends, Yale Nobel economist Robert J. Shiller, also in the Times, willfully invested Climate Shock with libertarian designs. Directly contravening the thoughtful and informative discussion of social change presented in Climate Shock (and previously thematized in Wagner’s 2011 But Will the Planet Notice?), Shiller proposed idealistically-motivated incrementalism as a way around Kyoto’s failure “to impose strict taxes on carbon emissions.”

According to Shiller, Wagner and Weitzman “say that we should be asking people to save our climate by taking many small, individual actions.” Climate Shock actually says the opposite: “the numbers don’t add up. They’ll only begin to add up when environmentalists use their collective political powers to move the policy needle in the right direction, toward a price on carbon.”(40) (See also CTC director Charles Komanoff’s recent takedown of Shiller’s piece in regard to both facts and theory.)

Shiller’s misreading is doubly unfortunate because, as Wagner and Weitzman point out, the imperative to seriously engage policy must be directed toward average citizens, “those in the middle of the political spectrum,” as well as those already conversant with climate economics.(136) Certainly we should all do what we can to encourage virtuous cycles of ethical engagement and political participation – “Recycling well leads to better environmental policies, which allow for a more environmentally enlightened citizenry; a more enlightened citizenry, in turn, leads to more people recycling well.”(132)

"Climate Shock" authors Martin Weitzman (left) and Gernot Wagner.

“Climate Shock” authors Martin Weitzman (left) and Gernot Wagner.

Indeed. But, as Wagner and Weitzman are right to remind: in a greenwashed world seemingly structured to distract and misinform the average person, the most virtuous deeds can dead end. In the practical economics of everyday life, single actions sometimes crowd out other forms of engagement: “when people substitute single, individual actions – like recycling – for larger policy actions – like voting.”(133) Pigovians from start to finish, Wagner and Weitzman are emphatic: “if you have to make a choice between recycling and voting for a price on carbon, choose voting.”(137)

Yet another review, this one by Yale economist William D. Nordhaus in the current New York Review of Books, is notable on several grounds, not least of which is Nordhaus’s outsized reputation as a pioneering climate economist and modeler. Respectful in tone, Nordhaus engages of Climate Shock’s discussions of geo-engineering, the economics of uncertainty and the pitfalls of negotiating climate treaties. Strangely, however, Nordhaus takes up Weitzman’s path-breaking analyses of catastrophic risk without acknowledging any critiques of his own perennially optimistic approach.
[Read more…]


Last modified: May 29, 2015

Harvard Economist Charts Escape From Kyoto

[T]he quantity-based Kyoto-type approach [to UN climate negotiations] has pretty much broken down, leaving the world with a highly non-optimal patchwork of sporadic regional volunteerism that does not address centrally how to correct the critical externality of global warming.  — Harvard economist Martin Weitzman.

Which is simpler: negotiating one price, or 190 emissions caps?

The Kyoto Protocol is broken. What can replace it? Professor Weitzman, considered one of the world’s most influential economists, proposes a game change: Instead of squabbling over the quantity of fossil fuels each nation may burn, negotiate a single carbon price all can adhere to.

Weitzman is best known for modelling the economics of catastrophic climate change. In a ground-breaking 2009 paper, he demonstrated that conventional cost-benefit analysis under-weights the risk of catastrophic scenarios. In two new papers, he scrutinizes the Kyoto Protocol’s quantity-based structure through the lens of game theory. He calls Kyoto’s attempt to set and divvy up a global emissions cap “the ultimate… top-down worldwide treaty.” That’s not a compliment. Observing that Kyoto hasn’t come close to its goal of “an internationally harmonized binding system of emissions caps,” Weitzman shows why: the Kyoto framework induces each nation to game the system by attempting to maximize the efforts required of others while minimizing its own.

Weitzman lays out three criteria for an effective global emissions reduction system:

1. It should induce cost-effective emissions reductions.

2. It should allow negotiators to focus on negotiating one central and highly salient parameter.

3. It should align negotiators’ incentives toward internalizing climate costs.

On the first criterion, Weitzman points out that while a carbon tax is more easily administered and more transparent than a cap-and-trade system, a carbon cap or a tax can both achieve cost-effective emissions reductions.

On the second, Weitzman builds on Nobel-laureate Thomas Schelling’s pioneering game theory analysis establishing the importance of a clear focal point in negotiations. Kyoto’s quantity-based approach assigning different binding emissions quotas to each nation has no focal point. In contrast, a price-based negotiation offers a single focal point for all parties.

And building on the seminal work of Ronald Coase, Weitzman stresses the importance of minimizing transactions costs. Coase showed that parties that might otherwise negotiate an agreement can be deterred by the high costs of getting to yes. Weitzman points out that any quantity-based structure such as Kyoto necessarily multiplies transaction costs: “It is easier to negotiate one price than n quantities — especially when the one price can be interpreted as ‘fair’ in terms of equality of effort,” he writes.

The bulk of Weitzman’s analysis focuses on his third and most important criterion: the need to negotiate a structure that counteracts parties’ national self-interests and aligns their incentives toward reducing emissions. [Read more…]


Last modified: May 27, 2015

A Carbon Tax Can Carry Earth Day’s Legacy

In 1970 I was teaching math in a New York City suburb. On Earth Day I stood at a highway off-ramp with members of the high school ecology club. One of their signs read, “The Earth is a Closed Garage.” Another said, “Make Polluters Pay.”

There’s been some progress since then. Breathing New York’s air, once equated to smoking two packs of cigarettes a day, is many times safer. Wind turbines now provide five percent of the nation’s power, and electricity produced with solar cells rose ten-fold in the past three years. Driving has flatlined nationwide over the past decade, partly because Americans are strapped but also because the intoxication with cars is wearing off.

That’s great news for the environment, but it’s not nearly enough for climate. CO2 levels are still rising inexorably. Ditto global temperatures, polar ice melting and extreme weather. Emissions need to be cut radically even as seven-and-a-half billion people strive for prosperity.

For that to happen, prices of fossil fuels have to reflect the climate costs of carbon pollution. The way to do this, of course, is with carbon taxes:

To demystify carbon taxes and showcase their appeal, we’re rolling out the Carbon Tax Center’s first video. It explains how a carbon tax will transform investment, re-shape consumption and sharply reduce carbon emissions. As the video shows, no other policy can match its reach or simplicity. No other policy can be replicated globally, from China to Chile to Chad.

A carbon tax is no mere “technical fix.” It’s both a symbol and a means for us to respect nature and each other.

The central messages on Earth Day 1970 were to abide by nature’s limits and make polluters pay. On this Earth Day, let’s spread the word about a carbon tax. Let’s educate and organize so that the U.S. and other nations make taxing carbon the central policy to combat catastrophic climate change and sustain the Earth we love.


Last modified: April 22, 2015