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

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…]


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Cap-and-Trade Post-Mortems Overlook Fatal Flaw of “Hide the Price”

Two new autopsies of the failed 2008-10 effort to pass comprehensive climate legislation are deservedly generating buzz: the commentary includes posts in Grist by David Roberts (3 posts), Bill McKibben, Eric Pooley, and Joe Romm, in Time by Michael Grunwald and a Washington Post interview by Brad Plumer.

Hiding The Price Allowed Heritage Foundation To Exaggerate the Cost of Cap & Trade

The heftier of the two reports, weighing in at 145 pages, is by Harvard Poli Sci Professor Theda Skocpol. Her exhaustive but riveting narrative, “Countering Extremism, Engaging Americans in the Fight against Global Warming,” is a pointed rebuke to complaints by Big Green leaders like EDF’s Fred Krupp and NRDC’s Dan Lashof that President Obama’s decision to tee up health care reform first spelled doom for cap-and-trade legislation.

Skocpol contrasts the extensive grassroots network built to educate the public and support health care reform with green groups’ obsessive insider-dealing to win backing for cap-and-trade from fossil fuel interests. She cites a May 2009 Rasmussen poll conducted on the eve of the House vote on the 1400-page Waxman-Markey cap-and-trade bill showing that more than three-quarters of respondents had no idea what cap-and-trade meant. [Skocpol, p 53].

Skocpol concludes that:

[G]lobal warming reformers must mobilize broad, popularly rooted support for carbon-capping measures that have something concrete to offer not just to big corporate players, but also to ordinary American citizens and to local and state groups. Another legislative effort based on insider bargains and pay-offs is not likely to be successful – given conservative capacities to mobilize grassroots opposition, plus the level of distrust that most Americans now have about complex insider bargains in Washington DC. [p 113]

The other post-mortem, “The Too Polite Revolution, Why the Recent Campaign to Pass Comprehensive Climate Legislation in the United States Failed,” is by journalists Petra Bartosiewicz and Marissa Miley. Their report offers juicy details from the months of heated back-room negotiations by the Big Green-led US Climate Action Partnership (USCAP) to win support from the polluters whose emissions would be “capped” by Waxman-Markey. Like Skocpol, who relied heavily on Bartosiewicz and Miley’s interviews and research, they urge greens who want effective climate policy to start by building, or tapping into, a strong grassroots movement.

Both reports applaud legislation proposed in 2009 by Senators Cantwell (D-WA) and Collins (R-ME) to “cap” U.S. CO2 emissions by requiring polluters to bid on a declining supply of pollution allowances. But unlike Waxman-Markey’s attempt to pay off polluters, Cantwell-Collins would initially return 75% of auction revenue to households in the form of pro rata monthly “dividend” payments. (The fraction of revenue returned to households would decline as the “cap” tightened.) Skocpol concludes that, in contrast to cap-and-trade, “Citizens could understand and trust this policy.” [p 125]

Skocpol acknowledges the overwhelming preference of economists for an even more transparent and straightforward approach: a straight tax on carbon pollution. Yet she nevertheless dismisses efforts to include a carbon tax in fiscal and tax reform as the “latest quixotic DC quest for an insider bargain on climate change.” [p 113] She points out that, immediately following Obama’s re-election, the entire House GOP leadership signed the “no climate tax pledge” of the Koch brothers-backed Americans for Prosperity. She concedes that a carbon tax might find its way into fiscal or tax reform legislation; but citing Congress’ failure in 1993 to enact a “BTU tax” (which broke down in squabbling over exemptions), she concludes that a carbon tax would pass only if:

a lot of moderate Congressional Democrats got exceptions for their favorite regional fossil-fuel industries and were convinced that revenues from this tax are vital to reducing the deficit without eliminating or squeezing other federal programs they want to preserve… [I]f a carbon tax happens this way, it will look corrupt and not be very understandable to most ordinary American citizens – and so it will be easily ridiculed and demonized by rightwing advocates and media figures who have already demonstrated their ability to rouse populist opposition and stoke public fears about complex, opaque insider measures. [p 112]

At this point, you may be tempted to tear up Skocpol’s paper in frustration. We certainly were. In dismissing prospects for building a carbon tax into comprehensive tax reform, Skocpol has rejected the possibility that a transparent, understandable proposal can spark the public education and movement-building that she herself forcefully advocates. In contrast to the opacity and complexity of cap-and-trade – a policy practically built for back-room dealing – a simple, transparent economy-wide tax on carbon pollution can be explained as a way to offset fossil fuels’ artificial advantage over energy efficiency and renewable energy. Moreover, if the alternative to a carbon tax is higher taxes on productive activity such as work and investment, might not the public, and even some Republicans, be supportive?

Skocpol is also critical of efforts (by NRDC and others) to bypass Congress via EPA regulation of greenhouse gases. While we at the Carbon Tax Center have pointed out the limited effectiveness of such regulatory steps, she points out that they also face substantial political obstacles:

Some anti-global warming reformers fantasize that the second Obama administration can act freely through the EPA without worrying about Congress or national popular support… Even bold regulatory steps by the EPA – such as using its authority under the Clean Air Act to crack down on existing coal-fired electric-generating plants – are likely to be blocked or undercut as long as GOP radicals have major leverage in Congress.

Where do these bleak diagnoses leave us? Still reeling from Hurricane Sandy, the not-too-distant memory of Hurricane Katrina, 332 consecutive months of above-average global temperatures, and a worldwide pattern of chaotic, extreme weather, voters seem to be refocusing on global warming. President Obama placed climate high on his inaugural agenda, but within days press secretary Jay Carney repeated his post-election disclaimer: the Administration has no intention of proposing a carbon tax. The Sierra Club and are organizing (yet another) climate demonstration in Washington DC on February 17 to demand Obama disapprove the Keystone XL pipeline. Yet they don’t demand a tax on carbon pollution but instead resort to the fuzzy euphemism for cap-and-trade, “put a price on carbon.”

Both Skocpol’s and Bartosiewicz & Miley’s post-mortems conclude that cap-and-trade was killed by a collision with intransigent Republicans, abetted by the folly of Big Green’s attempt to buy off polluters. They call for a broad movement to support a cap on greenhouse gas emissions and suggest it could be built on distribution of auction revenue to the public via a “dividend.” But their autopsies overlook another insidious poison: the duplicity inherent in advocating an emissions “cap” while denying that unless revenue return is included in the legislation, cap-and-trade is a hidden, volatile and regressive tax collected and securitized by Wall Street traders.

The real lesson of the Waxman-Markey debacle is that cutting deals with polluters while hiding the price doesn’t work. How about, instead, a genuine public education and organizing effort with a full-throated call from the environmental community for a substantial, briskly-rising tax on carbon pollution, with no exemptions?



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