Glenn Hubbard: Capitalism Against Climate Change

Glenn Hubbard comes out in favor of using tradable permits to control carbon emissions:

Capitalism Against Climate Change by R. Glenn Hubbard, Commentary, WSJ: The case for action to combat global climate change has grown increasingly compelling in recent years. Sadly the same cannot be said for specific proposals to address the problem. ... One recent ... proposal to balance a need for policy action with a mechanism for prudent economic risk management ...[is the] new recommendations by the National Commission on Energy Policy for an emissions trading program...

Good environmental policy relies on sound science. Some of the science surrounding climate change is clear. ... Other aspects of the science are more ambiguous... This means that estimates of the likely temperature and climate changes over the next century span a fairly wide range. The potential effects on people and ecosystems are even more uncertain.

Despite this uncertainty, most serious students of climate change believe that the likelihood of adverse climate change is sufficiently great to warrant action. But what action? ...

[N]ear-term actions should not impose greater risks than the problem they seek to address. ... If you smell smoke at home, it would be silly to do nothing until you actually see flames, but you also should not hose down the house after one whiff of what might be smoke.

For the global warming debate, uncertainty justifies neither inaction nor over-reaction. As the smoke analogy suggests, the United States should pursue a moderate policy that can be justified as we learn more about the threat of climate change and the costs of alternative responses.

The NCEP proposal meets this test of taking serious action while not imposing economic risks greater than the threat of climate change itself. ... It does this using ... tradable permits. In such a system, the use of coal, oil and natural gas will require permits in proportion to their CO2 emissions, typically sold along with the fuel -- so individuals need not deal with the permit market.  ... And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax, blunting adverse economic consequences. ...

Over time, we know that new investment and technology will reduce costs; we do not want to force overly expensive reductions now when cheaper opportunities are just around the corner. Furthermore, pushing too hard too quickly will simply encourage emissions and jobs to move to other countries who have not yet adopted similar policies.

This ... highlights that it is vital to develop global institutions for promoting and measuring emission reductions, institutions that prevent emissions from shifting overseas and encourage the lowest-cost abatement... Developing these international institutions is a tall order but it need not happen right away.

Under the NCEP approach, the conversation among nations would become broader and deeper over time, much like the 50-year effort for the General Agreement on Tariffs and Trade and the World Trade Organization. What is important in the short run is that domestic policies have a forward-looking design that encourages both efficiency and global cooperation. ... A serious response to climate change must begin by turning our emissions downward without betting the bank. ...

Looks like it's time for two former chairmen of the Council of Economic Advisers for the Bush administration, Glenn Hubbard and Greg Mankiw, to settle this tradable permit versus carbon taxes issue once and for all. I propose an Econoduel. Mankiw versus Hubbard, whiteboards only, any theory goes, and you cannot be saved by the end of period bell. We'll need a referee, so I'll suggest John Whitehead at Environmental Economics as he seems relatively unbiased - he doesn't think there's much difference between the tradable permits and carbon taxes and doesn't really care which one we put into place, as long as we do something. [Update: Please see John's follow-up on this.].

There are different ways to approach the "should we respond aggressively" question, but let me stay within the example given above. Should we soak the house at the first whiff of smoke? The answer given above is no, but it depends on how you set up the scenario. Suppose that once you smell smoke, if you don't respond with full force and soak the house immediately and there is a fire, it will spread rapidly and burn down all 25 houses in the neighborhood (picture houses in a heavily wooded, dry and windy canyon). Thus, at the first whiff of smoke you have two choices, soak one house and suffer the associated losses with certainty, or, do nothing and risk losing all 25 houses if there really is a fire. Now, add that your experts are telling you there's a darn good chance there is in fact a fire, what should you do? Be prudent and wait until you know for sure?

Now, Hubbard argues technology gives us a reason to wait. We can weave that into the story by adding in some chance that, even if we don't respond immediately, we still might find a way to save the other 24 houses. You smell smoke, the analysts say they're pretty sure it's fire, but if you don't act there's still some chance you'll discover a way to save the other houses. Now should you wait?

But I'm reinventing the wheel. This has been covered:

Risk, Uncertainty and Irreversibility, Decision Theory, and Global Warming, by Brad DeLong: Alex Tabarrok protests that you should not do expensive and irreversible things before you know what is going on. I think that there is an important distinction to be drawn in decision theory between (a) risk on the one hand, and (b) the interaction of uncertainty and irreversibility on the other.

In general, briefly: As a baseline, you should start out thinking that you should do what it would be best to do if your central-case forecast were to come true. And then:

1. Relative to that baseline, you should do more of things that reduce risks: a prudent portfolio should have some gold or silver in it (not much!) to guard against the potential inflationary collapse of fiat money systems and other political risks.
2. Relative to that baseline, you should do less of things that increase risk: invest less in risky enterprises, and dump less carbon dioxide and methane into the atmosphere.
3. You should delay doing expensive and irreversible things until you are confident that they are needed.
4. You should prevent processes that could cause irreversible or incredibly-expensive-to-repair damage until you are confident that their effects will be harmless.

The first two principles are the appropriate ones for dealing with risk. The last two principles are appropriate for dealing with the interaction of uncertainty and irreversibility.

Thus if congress were on the verge of banning open-carbon-cycle power generation and vehicle operation in 2010, I would think that that was a bad idea because of principle 3. But congress isn't. The uttermost limit of political feasibility over the next decade is a fifty-cents-a-gallon-equivalent tax on carbon emissions. And that seems well-covered by principle 2. ...

The discussion continues from there (Victor's example is similar to the one given above).

Finally, I can't let this statement from Hubbard pass without comment:

And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax...

Other ways to use these revenues come to mind.

Update: Greg responds to the WSJ editorial. Also, with regard to the Economatch, I should have made clear that politics counts in the scoring. Tyler Cowen [ID check]and Felix Salmon also comment.

Comments

[reason]

Isn't the title here a bit misleading. Cap and trade is a sort of regulation. Capitalism is not leading the fight, it is being dragged kicking and screaming along. There are plenty of deniers on the corporate payroll (along with Libertarians who find it ideologically inconvenient).

[anne]

"And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax..."

Ah; but, this is the way in which Glenn Hubbard thinks or rather responds to supporters. Not that corporate taxes are a problem for corporations, which they are not. Not that corporate profits are not sensational, which they are. Not that this is a time of war, which it is.

[anne]

Suppose that there had been a push on vehicle efficiency over the last 20 years. We might, just might, have had a car, a lone car from Detroit that would have made Detroit really competitive with Tokyo. No such push would ever have come from a Glenn Hubbard.

I am, by the way, just listening to the head of NASA telling me on public radio, that we have global warming but who can say that global warming will not make things better for those who like, well, warming. I am not joking. This is our NASA.

[anne]

Capitalism, by the way, is a curious comical sort of system within which suggestions of use of alternate fuels is taken by the prime energy companies as a reason to invest less in energy research, exploration and development. So, what is needed in turn are subsidies to the prime companies for research, exploration and development. Not that profits to the prime energy companies are not astounding or have not been astounding for years, if we want investment there will need to be investment subsidies. Actually there will need to be more investment subsidies, since we already have prime energy company subsidies.

[anne]

Also, since I am complaining, has anyone bothered to notice that thanks to the Supreme Court we now have essentially no protection against discrimination in pay and benefits in the workplace? We have just lost a critically important civil rights law, and I wonder whether any of the capitalist minded economists about have even noticed or have they noticed and are pleased as grapefruits at the free market becoming, well, freer?

[anne]

What we could do is set up a sort of carbon trading system for trading, well, women. Company A can discriminate against women, and happily trade for discrimination rights with company B. Of course, company A can discriminate against women secretly and if the women fail to notice in the first few days of working for company A, well, too darned bad for the women.

So, why not a trading system in discrimination against, well, women?

[Charles Young]

Clicking on the link to John Whitehead above will bring up my exchange with him, in which I explain why I think he is wrong to say that there is not much difference between the two. The higher the proportion of taxes raised in a way that corrects, rather than creates, distortions, the greater is economic efficiency. This argues for a carbon tax rather than cap-and-trade.

[anne]

So the new tack against the idea that there really is global warming, is to suggest that we might really be happier if we all lived in Florida even if Florida were in Maine. Better, then, to make sure we do as little as possible to limit global warming or the supposed effects, because we might like the warming and effects. (No complaints, I am only paraphrasing the director of NASA. Remember, too, I have also been forbidden by the government to mention polar bears, because evidently the bears might not like living in Florida in Alaska all that much.)

Back, then, to carbon trading and so as not to make the trading a problem, we can have a corporate tax reduction to cover the cost of the trading. (I know my markets.)

[anne]

Ah, by the way, should a carbon tax, a stiff carbon tax, be passed just in time to insure that Democrats lose, and lose decisively, the coming election? Should Democrats be pushing to increase the price of gasoline to, say, $5 a gallon, just before the coming election? Suppose we just let George Bush and Republicans push for a carbon tax, while Democrats take another tack.

[anne]

After the carbon tax raises the price of gasoline to, say, $7 dollars a gallon, we can get around to taxing women instead of just trading them in lieu of the trouble of workplace discrimination. Tax me, Charles.

[anne]

While it is possible that Americans might agree to increased taxes for health care insurance, the idea of increased taxes, stiff taxes, on gasoline for the sake of polar bears will insure another destructive Republican Congress. (I did not mention polar bears as such, just as metaphor.) Of course, we could leave Iraq immediately and use the $15 billion a month saved there for all sorts of conservation and efficiency purposes.

Carbon taxes? Leave that to Repuiblicans. Duh.

[anne]

There we have the head of NASA telling us again, we really do not know whether the climate yeaterday, today or tomorrow was is or will be the best of all possible climates. So, let's wait and find out while we travel to Mars. Me, I am all up for Mars.

[cb]

Most of the arguments on carbon tax vs trade are based on consideration of global warming alone.
Missing from these arguments are several equally critical points.

1) Regardless of the warming effects on the planet, the increased CO2 levels are lowering the pH in ocean, this has the potential to be the most damaging effect on the ecosystem and our food supply.

2) The world faces increased competition for fossil fuels, as billions of people, in formerly third world countries enter the first and second world economy. Establishing an economy predicated on cheap energy is very short sighted. It effects the type of cities roads, buildings and transportation that are constructed. The price of energy should better reflect it critical long term importance to the economy.

3) Fossil fuels are a limited resource that requires millions of year to form. Burning all the oil/gas/coal now is ridiculously short sighted. Exxon has forcast that nonOpec oil production is predicted to decline in the next decade. It is a matter of national security that we maintain a long term development plan for our diminishing US fossil reserves. The current US policy appear to be extract the fuel as fast as humanly possible without regard for the future. Natural gas and oil are incredibly valuable chemical commodities, that are not easily and cheaply substituted.

4) Oil money is directly tied to terrorist funding, it supports some of the most despicable governments on the planet.

[bakho]

After Love Canal, there was a lot of pressure on chemical companies to reduce toxic waste. This was not done with tradeable permits. It was done by increasing the costs of waste disposal by placing requirements on containment that turned out to be expensive. Interestingly, many companies started waste reduction programs that in some cases led to new processess that saved substantial money even without the waste cost considerations.

One of the big winners of the ban on CFCs due to the ozone hole was DuPont which had patents on many of the chemicals used to replace those that were banned. Environmental regulations don't have to be detrimental to the economy. They can expand growth in some areas even as some enterprises are discontinued.

Once effort is directed to a problem, solutions are often found that produce results that go beyond those anticipated. While carbon trading can direct investment in the most effective current technology, does carbon trading diminish effort from being directed onto developing new solutions?

[robertdfeinman]

Several countries, especially in Africa, have already decided that efforts to limit GHG emissions will be too little, too late.

They recently completed a conference on amelioration of the effects. I'm sure others will follow. The Stern report in the UK is also being ignored by the corporatists in the US.

For some places like Bangladesh and various Pacific Islands there are no solutions even if they start working on fixes now. Their lands are just going to end up under water.

If we look at how the HIV epidemic was handled at the beginning (when it might have been controlled) as well as how it is being dealt with now, we can expect that the responses to climate change will also be inadequate.

[anne]

Nice argument, Bakho.

Remember, federal spending on climate change research programs means spending on energy research. We spent a mere $3 billion on energy research in 2006, with far less than $1 billion of that on alternative energy research, as compared to $7.7 billion on energy research in 1979. But, worry not, thanks to climate warming loving NASA, we are going to Mars, and I am a Mars sort of woman.

[anne]

Also, is there a reference on the ph of oceans being lowered by carbon emissions?

I still like my idea of a parallel to carbon trading in trading women, now that wage and benefit discrimination is back in vogue. A woman tax is too controversial, too Republican, so let's just trade 'em.

[Lee A. Arnold]

They old denialists are moving, on several different fronts, from "sound science means no action necessary" to "sound science means corporate pork."

We all predicted that, very precisely.

How about: "Smokescreens are carbon emissions, too!"

[Monty]

Ann I appreciate your passion but If I understand you correctly you are stating that the Republicans are for a world Social Carbon Tax? Carbon offsets area scam as is this whole global warming musician tour.
1) My point is why the heck are we going to produce tons of emissions flying and driving around the world use countless Kilowatts of power to raise awareness for what the tour promoters are doing
2) Can you say Oxy-morons.
3)It ain't the Republicans promoting this kinda stuff not are they promoting a world Socialist Oversight on Carbon Tax.
4)This whole Carbon Offset/Tax debate is missing the obvious point and solution.It is so basic I want to h-url (sorry tech joke)
5)You ARE CORRECT! buying offsets is just allowing Corporations to not comply with EPA standards. Which is the same as allowing them to not comply with Discrimination laws. We have a system and now no accountability. The people who win are the carbon offset traders. See "Financial Times"
//www.ft.com/indepth/carbontrading Although this is one report I believe I can find more data to back this problem.
5)The obvious beginning point in a solution that is multi faceted would be to take your offset dollars and "green up" apply them to "GREENING UP" (yes I am making up terms, just want to fit into the green movement) Sorry Sarcasm. "GREENING UP" Facilities, distribution and all points FROM MANUFACTURING TO END USER. I am talking simple stuff photovoltaic panels and wind turbines. It is just a step 1 of so many that will help the issue.
6) to play the devils advocate "if there is even an issue" My question for the Gore congregation is who was taking temps 900 years ago?

[anne]

Oh dear, the only things Republicans in the Administration and Congress are doing are everything to deny there is global warming and failing that to deny it matters and failing that to make sure nothing substantive will be done ever never. Beyond that when I catch the word "socialist" I am done reading. Devil's advocating, you know. Duh.

Like finding the nutty Republican presidential candidate explaining in the New York Times why he raised his hand when asked "who does not believe in evolution?" I am done reading just then.

[chuck roast]

I hate cap-and-trade!

With that said, the blundering European experience on tradable emissions would probably not be repeated in the US. The Euros let industry do the emissions inventory and set the cap. Industry overstated emissions and the cap was set too high. The obvious result – worthless tradable emission tonnage. Well – duh!

In the US, emissions inventories are well understood and reasonably calibrated thanks to years of Clean Air Act requirements. (Don’t get me started on the Clear Skies “initiative”) Most large urban areas have CO, NOX, VOC and PM inventories well established in compliance with the CAA and their non-attainment or maintenance of attainment status. The inventories cover four areas: 1.) mobile on road sources – cars, trucks, buses (maybe 30-40% of all emissions); 2.) mobile off-road sources – construction equipment, lawn mowers, boats, etc. (a very large source of VOCs and PM); 3.) area sources – open burning, stoves, airports, agriculture (general non-point); and the tradable part, 4.) stationary sources – oil refineries, power plants, generators, boilers, etc.
Stationary sources are permitted and inventoried under Title V of the CAA for NOX, SOX, CO, VOCs and PM. It’s easy to figure source liability, or should I say source asset? Anyway, given an existing reasonably accurate inventory, the US market should be able to establish a price-per-ton-of-emissions that would precipitate the implementation of more efficient capital equipment – at least at the margins. The corporations holding/owning these liabilities/assets will, it’s my understanding, be given the right to trade these assets/liabilities.

OK, here’s my problem(s):
• The filthy old coal plants in the 4-corners in New Mexico will be able to buy credits from clean areas or efficient implementers that allow them to continue to abuse everybody in the neighborhood – localized emissions can be unaffected (the Coasean solution)
• If the swells have their way, the 4-corners plants will be able to buy emissions credits from areas that already have clean air, thus preventing further emissions in the selling area (Africa, maybe) and allowing the buyers continue to emit (again Coasean)
• Unless these markets are closely monitored (do you suppose the SCC is interested?) the probability for corruption is high (knowledge asymmetry)
• The very elites that have earned hundreds of billions with unaddressed externalities can now make additional billions by marginally addressing their social costs (hey, it’s a great country!) (questions of distribution and equity)
• Large portions of national emissions, area, on-road and off-road sources go unaddressed and continue to emit high levels of hydrocarbons (extreme market ineffiency)

It’s my understanding that we arrive at a Pareto-optimal solution if the parties can costlessly negotiate where property right are assigned unambiguously. That would be a carbon-tax. No?
• The filthy old coal plants will reduce emissions or pay – similarly, the guy driving alone to work. One-hundred percent of hydrocarbon emissions are attacked.
• No cumbersome inventory or regulation is necessary and corruption is minimized
• There is distributional equity – those who emit the most, pay the most (a progressive tax) – and rebates can be assigned to the poor and those most at economic risk
• If the tax is relatively elastic, all people in all locales with emissions will benefit, not to mention the polar bears.
• A carbon tax can be calibrated to have the desired economic, environmental and social effect – a cap-and-trade solution cannot attain these goals

And it does what Bush has been trying to do for 6 years – it gets rid of New Source Review. What a fabulous outcome!

[Monty]

Ann I appreciate your passion but If I understand you correctly you are stating that the Republicans are for a world Social Carbon Tax? Carbon offsets area scam as is this whole global warming musician tour.
1) My point is why the heck are we going to produce tons of emissions flying and driving around the world use countless Kilowatts of power to raise awareness for what the tour promoters are doing
2) Can you say Oxy-morons.
3)It ain't the Republicans promoting this kinda stuff not are they promoting a world Socialist Oversight on Carbon Tax.
4)This whole Carbon Offset/Tax debate is missing the obvious point and solution.It is so basic I want to h-url (sorry tech joke)
5)You ARE CORRECT! buying offsets is just allowing Corporations to not comply with EPA standards. Which is the same as allowing them to not comply with Discrimination laws. We have a system and now no accountability. The people who win are the carbon offset traders. See "Financial Times"
//www.ft.com/indepth/carbontrading Although this is one report I believe I can find more data to back this problem.
5)The obvious beginning point in a solution that is multi faceted would be to take your offset dollars and "green up" apply them to "GREENING UP" (yes I am making up terms, just want to fit into the green movement) Sorry Sarcasm. "GREENING UP" Facilities, distribution and all points FROM MANUFACTURING TO END USER. I am talking simple stuff photovoltaic panels and wind turbines. It is just a step 1 of so many that will help the issue.
6) to play the devils advocate "if there is even an issue" My question for the Gore congregation is who was taking temps 900 years ago?

[anne]

Nice argument to think through carefully. Also, carbon is not the only pollutant. Mercury for instance is important, and mercury is not subject to a trading market because mercury does not disperse even through the atmosphere. I could easily agree to a pollution or carbon tax, but such a tax system must be made voter acceptable. Much to think through, again.

[anne]

Thank you for the argument, Chuck; my response was to you.

[jamzo]

oh!

there is a serious problem!

global warming!

oh! that's serious!

let's figure out how to monetize it!

[John Whitehead]

In reply to Charles Young, here is my reasoning behind the efficiency equivalence between a carbon tax and carbon cap-and-trade.

Charles always seems to assume that a carbon tax must necessarily lead to reductions in distortionary taxes and permits are given away with cap-and-trade. Not so! And it doesn't matter for the correction of the primary problem: correction of the negative externality.

[Charles Young]

...and John always seems to assume that as much revenue would be raised from selling permits, and that having a larger proportion of revenue from Pigovian (non-distorting) taxes does not lead to greater efficiency. Not so, in both cases!

[anne]

Ah, there we have the clinching argument from Charles. I was worried about how a carbon tax might be justified to voters, especially by democrats since Republicans surely will not be pushing any carbon taxes and I do not wish to have Democrats lose the Congress again over a tex increase.

Charles, however, was not talking about taxes but about "Pigovians." Pigovians changes everything for me, since I was raised in a home filled with furry little Pigovians. I am all for Pigovians. There is the answer. Sweet furry Pigovians. "Here little Pigovians."

[kharris]

anne,

Beg to differ on equal pay protection. If you can prove your employer practiced pay discrimination at your expense for 17 years, you can actually recoup the pay differential for the final 6 months of that period. If you can find a lawyer who sees enough room in that differential over 6 months for both you and the lawyer to find the effort worthwhile.

So you see, life in Allito-world is fair, after all.

[anne]

K Harris is a genius, at least my genius. Notice how precisely K Harris summed how thoroughly civil rights work place discrimination legislation has been undone by the Supreme Court.

[anne]

http://www.nytimes.com/2007/05/31/opinion/31thu1.html?ex=1338264000&en=ab203c4cc58bf627&ei=5090&partner=rssuserland&emc=rss

May 31, 2007

Injustice 5, Justice 4

The Supreme Court struck a blow for discrimination this week by stripping a key civil rights law of much of its potency. The majority opinion, by Justice Samuel Alito, forced an unreasonable reading on the law, and tossed aside longstanding precedents to rule in favor of an Alabama employer that had underpaid a female employee for years. The ruling is the latest indication that a court that once proudly stood up for the disadvantaged is increasingly protective of the powerful.

Lilly Ledbetter, a supervisor at the Goodyear Tire & Rubber Company in Gadsden, Ala., sued her employer for paying her less than its male supervisors. At first, her salary was in line with the men's, but she got smaller raises, which created a significant pay gap. Late in her career, Ms. Ledbetter filed a complaint with the Equal Employment Opportunity Commission. A jury found that Goodyear violated her rights under Title VII of the Civil Rights Act of 1964.

Goodyear argued that she filed her complaint too late and, by a 5-4 margin, the Supreme Court agreed. Title VII requires employees to file within 180 days of "the alleged unlawful employment practice." The court calculated the deadline from the day Ms. Ledbetter received her last discriminatory raise. Bizarrely, the majority insisted it did not matter that Goodyear was still paying her far less than her male counterparts when she filed her complaint.

In dissent, Justice Ruth Bader Ginsburg noted that there were strong precedents supporting Ms. Ledbetter. The Supreme Court ruled in a similar race discrimination case that each paycheck calculated on the basis of past discrimination is unlawful under Title VII. The courts of appeals have overwhelmingly agreed. So did the E.E.O.C., the agency charged with enforcing Title VII.

In addition to interpreting the statute unreasonably and ignoring the relevant precedents, the majority blinded itself to the realities of the workplace....

[Monty]

Sorry about the double post.

I agree with the offset as being junk Somebody needs to follow the paper trail and I mean money paper trail because i still don't trust it. Who governs the Exchange the The United Nations! What a corrupt pile that organization is. Now we are going to have that same organization control an global tax from the wealthier countries to support the poorer. I cannot believe anybody would propose Global Socialism as a answer to any issue locally or Globally!!!!

Reference http://www.ft.com/cms/s/e551d88e-0d44-11dc-937a-000b5df10621.html

When the H--- has Socialism ever solved anything!!!!
You cannot solve the worlds problems buy taxing the rich and giving to the poor. The US has already pledged $182 Million what more do you want.

What if us Evil Rich Countries used that money to solve our own Climate Change Issues. Yes Accountability for OUR issues and to OUR citizens. We are paying the bill! shouldn't WE decide how OUR money is allocated.

I know that is a strange policy to some of the higher learning population. However increasing taxes, inflation, negative trade balances and lowering our GDP is not the answer. Expanding technology, production and our economy is the answer. Let the money from the carbon offsets purchase US technology and then implement that technology into the 3rd world countries via US companies! Anything else is not in America's best interest and why are not looking out for our Country first, our Allies second, and so on.

[anne]

Well, it's that kind of a day between worrying about whether I can go strapless on Mars to not mentioning polar bears or worrying about men being judicially held to be "worth" more.

I am completely and forever against "socialism." I do not care for Robin Hood, and have always refused to wear green. The only way we are ever going to stop global warming is to wait for the poor to pay for the rich to stop, well, warming them, warming the poor that is.

"Here little Pigovians."

[roast]

I agree with Charles Young that a carbon-tax is the correct Pigouvian solution to the greenhouse gas problem. John Whitehead seems to be saying that there are to practical problems with administration: 1.) finding the optimal taxing level, and 2.) finding the political will. I believe that the optimal taxing level can be worked out, and more importantly, the tax falls on all sources of internal combustion. The only escapees are area sources like open burning, and wood stoves – and they are easy to get at through permitting.

Of course we will never find the political will as long as the golfers own all of the organs of information not to mention the capital goods. There is just too much money to made by the elites with a cap-and-trade – profits on pollution and profits on cleaning-up – what’s not to like. Nevertheless, technically, a cap-and-trade system only addresses stationary sources of greenhouse gas emissions, while 60-70% of the other hydrocarbon emissions go unscathed. So, tell me, how is there “little difference between a carbon-tax and cap-and-trade?

Doubtless, when the railroads (are there just three of them now?) realize that there are large dollars to be had in the emissions market, they will find a way post their “savings” and reap the rewards. Similarly, the airline industry. Finally, let me point out that Haab’s new SUV has around $400 in emissions curbing equipment on it, and the auto industry fought every dollar of it – can you say we are not better off for the $400?

Anyway, my academic question is, what would be the preferred solution: 1.) a comparatively simple user tax that can be levied on 100% of the hydrocarbon users, or a distinctly opaque cap-and-trade system that includes only 30%-40% of all market participants?

[Monty]

Anne
The supreme courts job is to interpret and decide cases based upon the law. The article referenced was from a journalist who's opinion was incorporated into the article. Justice Ginsberg is not the best example of a justice upholding the law. Your issue justice Alito seems to be that he ruled on the case according to the current set of laws and time-lines required to file discrimination lawsuit. If the law is not in the best interest of the American minorities then work to amend the law not complain about the justices for upholding the current precedent. The system is not perfect however we hold the power to improve the system.

[roast]

It's like I'm talking to myself here.

Anyway, let me add that methane is a much larger contributor to geeenhouse gas accumulation than CO2. Most of it comes from the agricultural sector, and area source - do we cap-and-trade cows - or does it make more sense to permit them?

[John Whitehead]

Roast,

Here is a comment to Charles over at www.env-econ.net:Charles,

According to the EIA, the transportation sector accounts for about 33% of US carbon emissions. Electricity generation (i.e., coal) accounts for about 40% of US carbon emissions.

My simple-minded twin policies, a higher gas tax and cap-and-trade for electric power plants would handle almost three-fourths of the problem.

Drivers are familiar with gas taxes, power plants are familiar with cap-and-trade. It ought to be do-able and a good start. .
As I've said over and over and Charles and Roast seem to miss, I don't have a problem with advocates of a tax on 100% of carbon sources, I just think there is a very low chance that it will ever happen. I give cap-and-trade on power plants a 45% chance of happening anytime soon and an increase in the gas tax about the same chance as a tax on 100% of carbon sources.

So, where does that leave me ... I'm hoping we can get behind cap-and-trade. It will raise less government revenue than a carbon tax, sorry Charles, but expected value of carbon abatement is much, much higher. That's what I'm after. I guess I'm stuck with distortionary income and capital taxes and a big budget deficit.

[baileyman]

"Glenn Hubbard comes out in favor of using tradable permits to control carbon emissions"

Well, of course he does.

[Michael Cain]

chuck roast, in favor of the carbon tax: "There is distributional equity – those who emit the most, pay the most (a progressive tax) – and rebates can be assigned to the poor and those most at economic risk"

I see no reasonable definition under which a flat carbon tax can accurately be described as progressive. While it is possible to define a progressive carbon tax (ie, the tax rate increases with the amount consumed), it's hard to implement at the individual level. Among other problems, poor households spend much more of their income on energy than the median household (studies estimate about 15% of income for energy for a household at the poverty level, about 5% for one at the median) so poor households can still end up spending more of their income on the carbon tax than a median household, even if the tax rate is mildly progressive.

The poor also have fewer opportunities to change their energy use. Fewer own their own living space and are at freedom to make efficiency improvements; fewer have the option of purchasing a new, fuel-efficient vehicle; given the problems of "one month's rent in advance, one month's rent for a security deposit," it is more difficult for the poor to relocate closer to work. It may be more difficult to downsize as well; the median household may downsize from 2,000 square feet of space to 1,500; what's the practical downsize from a 600 square foot apartment?

I believe we'll eventually see some form of carbon tax, and that some fraction of the poor will be well and truly screwed by it.

[anne]

I thought I was perfectly clear; alas I find not. I like Pigovians, the furrier the better and am convinced they are fine Republican answers to global warming. Capitalist Me, however, I still prefer to wait till the poor are warm enough to pay the rich for coolness.

While women, we of the minority women persuasion, know well what Republican law entails, entailing as it does always working for less than men because men are, well, men. We women of the minority persuasion are ever so hopeful that Republican law pushed far enough will take us to a time before Martin Luther King, as which time we can pass real civil rights laws.

Where are my Pigovians?

[Charles Young]

John is switching back and forth between claiming that cap-and-trade and carbon are economically equivalent, and claiming (as in his most recent post) that cap-and-trade is to be favored because it is the only politically acceptable route.

I think the former claim must now be abandoned, in the light of the discussions. If John will accept this, we can turn to discussing the political realities - or leave it to those who are better informed about politics.

[anne]

There is a lesson to be learned about Republicans, how scarily predictable they are. Whether predictable about fighting every environmental initiative since the days of Rachel Carson, to fighting civil rights legislation, especially civil rights for us women of the minority women persuasion. Democrats really do need to recover enough sense to understand as Franklin Roosevelt understood how the game of politics is played.

[John Whitehead]

Charles,

Huh?

I've decided you have a background on the debate team.

I say something has long odds and you say that I say something else.

And, if you have ever noticed, you always need to get the last word.

I think what I've been saying is very clear:

1. The efficiency aspects of the two policies are similar
2. Cap-and-trade seems to have a better chance so I'm all for it.

If you and the carbon tax advocates can get a bill in congress that has a reasonable chance of passing then I'll let up. My guess is if Mankiw can't do it as CEA chair then it can't happen anytime soon.

Until then ... I'll let you get the last word, make sure you distort mine, and Anne can make fun of your Pigouvian some more.

Thanks Mark!

[Green Marketeer]

Re: GHG emisssions from the transportation sector

US motorists drive so much because the price of driving does not accurately reflect many costs, including insurance, infrastructure, pollution, congestion and parking. Most other countries compensate for this underpricing with heavy gas taxes. Because US taxpayers are unlikely to elect (or re-elect) politicians who would impose such taxes, another means must be found to bring the price of driving more in line with actual marginal operating costs. Aaron Edlin of UC Berkeley proposed per-mile auto insurance as a politically viable alternative to increased gas taxes. It is more likely to be acceptable to the electorate because a majority of drivers (those who drive less than the mean) would pay less for auto insurance, and because any driver who reduced his VMT would be able to pocket the insurance savings. Per-mile insurance would not cost the consumer anything, but rather would acutally put money in people's pockets.

Similarly, employee parking cash out (requiring employers who offer "free" or subsidized employee parking to also offer the cash equivalent to employees who use alternative commute modes) allows those commuters who choose to walk, bike, carpool or ride transit to pocket the parking cost savings that occur. Where this has been implemented, up to 30% of employees have voluntarily opted for the cash payment and alternative work commute.

Per-mile auto insurance and employee parking cash-out both represent "free lunches" because their adoption would not cost the consumer anything, but would actually increase consumer welfare. They work by reducing the rampant inefficiency of transportation sector pricing.

[roast]

John Whitehead:

First you say that there isn't an appreciable difference between the two methods. Now you say that there is a difference, and one, a carbon tax, can attack 33% of the sources, and the second, the C&T, can attack 40% of the sources. So, like, end of problem. Clearly, we are making progress.

I'm a simple BA slob from State U. so I don't get all the nuances that PHD guys get. So, I'm a real buggah' for Occam's Razor. Charles Young will tell you that the simple Pigouvian solution is less about "revenue" than it is about internalizing the externality. The carbon tax does that with seeming simple efficiency and attacks not 73% of the problem (with two systems), but 90% of the problem (with one simple system).

You may be correct with the nation-wide emissions distrubution. I haven't checked it out in a while.
In my old neighborhood - a medium sized city - the 1999 inventory was as follows for CO ( a reasonable surrogate for CO2):
On road mobile source - 67%
Off road mobile - 11%
Area source - 21% (mostly residential woodburning)
Stationary (major sources) - 1%

I'm reminded of the on-going hetrodox/orthodox/homodox (ya' gotta' love Gintis) discussion. When even nodox guys like me can figure out the simple solution, then the dox guys should rethink things. By the way, I'm curious if have any concern for of distortionary effects on income from 30 years of low capital taxes. This might tell us how "relatively unbiased" you are.

Michael Caine:
We used to have exactly these discussions when we talked about buying "clunker" cars and taking them off the road because they had by far the greatest emissions. We were cognizant of the fact that driving up the cost of clunkers in order to marginally improve air quality was not a good equity trade-off.

With a C&T the big wheels share the spoils and there is no cash for equity considerations. With the Pareto-optimal solution of a carbon-tax, revenue derived from all users can partially or fully off-set the punishment of the marketplace typically inflicted on those who can afford it the least.

[Monty]

Read my Lips... No new taxes! Sorry couldn't resist increase taxes has the reverse effect on the economy. Maybe not one industry but the snowball effect on taxing all sources of pollutants is scary

In reference to Roasts... I agree tax the dairy farmers... then we can start taxing the Mexican Food Restaurants for increasing Methane... Sorry I crack my self up.

Mr. Young after Reading your article and reviewing your graphs you are a brilliant man. My biggest concern is Cap and Trade still will produce limited to no accountability for Co2 emissions. The EPA is already efficient at creating a system of "0" accountability. As far as taxation I feel we might all be able to agree that no matter which party is in control increasing the size of the government must be approached with extreme caution.The new proposed Carbon tax, industry tax, SUV tax, ... will fund the increase of highly inefficient entities controlled by politicians. That is scary. Funding developing technologies I believe must still be at the top of the list of priorities. in reference to the The Global Cooling craze of the 70's in which the earth was to be covered by Glaziers and we were to run out of oil by the year 2000. The "Doomsdayers" forgot 1 simple aspect of the equation. Technology!

Anne Detroit is hurting itself by not implementing technologies that will help it become competitive with it's higher mpg counterparts. However there focus on competitive pricing is understandable givin' their current burden of high production costs associated with labor. Detroit is getting pummeled by cheap oversees labor and Foreign competitors that are not saddled with the high labor and union contracts. I am not advocating a house cleaning or dropping their commitment to retirees that is not morally nor economically acceptable. However givin the current situation It is understandable from a shareholder responsibility. I do not envy the big deals at either of the "Big 3" The point of that dissertation is that the after market parts industry does offer the same technologies and they are available. The concern then is why does the consumer not flock to the parts store to increase efficiencies and reduce emissions? I believe two things Cost, Convenience. If the consumer is not willing to pay for it should it be forced on them? This is not a political question it is a consumer issue. I don't want to pay my utility company more money for wind energy, but you damn well better believe as soon as i find the right windmill it is going on my house. Why I hate paying utility companies rates that are at times go up based upon arbitrary reasoning. I prefer to be self sustaining. It is a cost benefit issue and not a moral earth hugging, political issue for me. Its all economics

[John Whitehead]

Roast:

Sorry to appear to be going back and forth. There is theory and then there is implementation.

Cap-and-trade seems relatively easy to implement in the electric utility sector. I think it might work there.

Cap-and-trade seems very difficult to implement in the transportation sector with millions of drivers. I think a fuel tax might work there.

I repeat: "If you and the carbon tax advocates can get a bill in congress that has a reasonable chance of passing then I'll let up. My guess is if Mankiw can't do it as CEA chair then it can't happen anytime soon."

Mark T. is the one who called me "relatively unbiased." As soon as I say it, you can be sure that I'm biased somehow. By the way, all of my income comes from the electric utility industry ... Ha!

[Holly W.]

Glenn Hubbard worries about "imposing economic risks greater than the threat of climate change itself." However, on May 4 of this year, The Economist featured a web-only story which asserts that tackling climate change is "a bargain" because it's estimated to cost about 0.1% of global GDP:
www.economist.com/world/international/displaystory.cfm?story_id=9135283

[anne]

Thanks, Holly.

John Whitehead is at the least simply being fair. There was never a chance of Greg Mankiw getting a carbon tax proposal from the Administration. This is after all a Republican Administration. Similarly Democrats are not about to have us paying $7 a gallon for gas just in time for an election.

Remember who is governor of California, and how he became governor of California? Have you heard California's governor asking for $7 gasoline recently? Who is the guy, anyway?

"Hasta la vista, Baby."

[mk]

Some people are saying that carbon tax is preferable because it allows you to decrease other distortionary taxes (income taxes, etc).

But presumably there's a subtlety here, right? A carbon tax could easily be distortionary if we pick the wrong tax rate. How do we know we are picking the right tax rate?

(Of course the flip side is how do we pick the "right" emissions level under cap-and-trade. Equally difficult to answer, I think.)

Secondly, we also increase utility by giving carbon tax revenues to the specific people who are damaged by carbon emissions (this could be people who have health problems due to pollution, or people who have to turn their A/C on more due to warming effects, or coastal people who have to pay more for flood insurance, or just everyone in America because they have lower emotional well-being when we pollute a lot). How do we know that reducing the tax rates of non-Pigouvian taxes is preferable to earmarking carbon tax revenues for damaged parties?

[RoySV]

Glenn Hubbard is such a brilliant man! We should do enough but not too much. Wow Republicans are so smart. And reasoning by analogy to a house with smoky smell. Well that's very handy too, means all the actual reams of scientific data can be ignored and minimized while all the happy ape responders invent curlicues of how smokey it might or might not be. Idiocy. Didn't hear a mention of the Stern report which is actually grownup.

This is not a serious discussion - it is log jam of meaning less words intended to neutralize any effective action by means of distraction, obfuscation, misdirection and mental masturbation. Gaaaak

Our MSM discussion of climate change response is of no higher quality than the MSM discussion of the runup to the Iraq invasion - basically both appear to be criminally arrogant and incompetent blunders unfolding before our eyes. NASA says we have at most 10 years to cut emissions dramatically. Hello! that means we need to start yesterday! There are plenty of signs (many related to melting ice) that the current mainstream scientific consensus *underestimates* the rate of change and the risk to current economic and human arrangements. All the while people rich enough to own several mountain top resorts are preaching caution. The chances are slipping away folks. Don't let us be suckered.

Is there no economist (aside from the lonely Krugman) brave enough to denounce this rhetorical fraud?

[ki]

MK: "by giving carbon tax revenues to the specific people who are damaged by carbon emissions (this could be people who have health problems due to pollution, or people who have to turn their A/C on more due to warming effects"

I know that I am perhaps being too picky, but wouldn't financing people's use of their ACs cause more pollution and energy waste? I think one of the main reasons why people think they are so necessary these days is because they spend so much time inside, online or in front of the TV instead of going to a lake or pool. I am being hypocritical because sometimes I am also one of those people who sit inside too much, but my point is that we should not use tax revenues from pollution to fund more pollution.

[anne]

Interesting comments, but please remember that the head of NASA, even while the President is supposedly getting serious about climate change, has just planned to seriously cut back Earth study in favor of Mars study. Evidently the head of NASA is thinking in a few years we can all move. I am setting aside Mandarin and studying Martian Cantonese. Right now, California is doing a lot more than is being done nationally on climate change.

[2slugbaits]

"And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax... "

Glenn Hubbard really stepped on it here. This is one of the dumbest ideas yet. Yes, yes, I understand the theory behind it, but it is completely naive and we have lots of realworld experience to knock it down. It's a law of nature that whenever one new tax is used to offset another tax, you can bet your bottom dollar that the government will warp the original intent of the tax (usually to discourage some externality) and set the tax to a revenue maximizing rate. Think cigarette taxes offsetting property taxes, fuel taxes offsetting general revenue taxes to pay for highway troopers, lotteries to pay for school taxes, etc. In fact, just today public radio had a story about lax enforcement of bans of tobacco sales to minors. In my own state there was a recent hike in the tax and a suspiciosly coincidental drop in enforcement. Gee....could it be that the state has a vested interest in actually increasing demand for the very thing that it is supposed to discourage on the grounds of negative externalities? And state's have become similarly addicted to lottery receipts as a vehicle for offsetting other taxes. It's so bad that one state just got rapped for using the fight song of the state university as part of an advertising campaign for lottery tickets! So why should we think that using greenhouse gas receipts to offset the corporate income tax would be any different? Why shouldn't we expect the government to actually adopt policies that stimulate energy use in order to increase revenues? Stupid on the face of it.

[James Killus]

Just to pick on a point that hasn't been addressed, arguing that future "technology" will somehow address a situation with such effectiveness that one need not take action now is an honest argument only if one also advocates substantial expenditures on the R&D necessary for that technology.

The alternatives to honest argument are various forms of deception, including self-deception of the sort that argues that "technology" somehow springs full blown from the brow of Capitalism, so long as Zeus er, I mean Capitalism is propitiated properly i.e. so long as political patronage and pork go to the "right" people.

[anne]

http://delong.typepad.com/sdj/2007/05/bushs_new_clima.html

George at Brad DeLong's website has nicely resolved a problem that bothered me through the day. Why should we be bothered when we are told "who is to say this is the best possible world in terms of warming? We have been warmer and colder before, so why not again?

The answer is that we do not live millions or thousands or hundreds of years ago, but now. We as living creatures and social creatures are acclimated to the climate we have now, whether by genetics or sociology. We are not adapted over the course of millions or thousands or hundreds of years to another climate. So, we must protect the climate we have.

I love George's answer....

[gordon]

Anne, here's a big kiss from Down Under; I haven't laughed so much at a blog comment for ages.

But you still haven't taken trading far enough. Why not set up a permit trading system for any sort of crime? Many crimes are punishable by fines, so if I haven’t committed a fineable offence recently, I could sell my “offence permit” to somebody who wants to commit such a crime. He/she effectively pays the fine in advance.

And of course it could be taken even further; if I haven’t murdered anybody recently, I could sell my unused murder permits to a professional assassin. If the number of permits issued were slightly below the number of murders committed last year, the crime rate would still fall. We would need to get the Institute of Criminology to calculate a sustainable murder rate in order to fix our cap, of course.

[anne]

Heck, we barely understand our modern ecology. Ecology begins with Charles Darwin and that from only 1859, but ecology was not taken seriously until Ernst Mayr began work in the 1930s or really until Rachel Carson exploded the field for us. Ecology is an infant field, and we need treasure the ecology which we have though we surely have not done so.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=7323&exhibition=7&ee_lang=eng&u=244224,6

Cerulean Warbler
Doodletown, New York.

Lovely, Gordon :)

[bakho]

Anne- Great idea on AA credits. "I'll trade you one smarmy white male exec for 3 women secretaries and a cleaning lady". How quickly the lowest common denominator is reached.

My answer to the climate question is that we have made numerous "improvements" (or infrastructure) to take advanatage of the climate that we have. Changes in climate make the infrastructure we have less useful or even useless. Useless in the case of islands and countries that would go under water, but "less useful" in many other cases. Here in the MIdwest, the entire agricultural landscape is underlaid by a series of tiles and ditches aimed at draining excess water for agricultural purposes. Changes in rainfall could make those improvements counterproductive. If the plains became drier, agriculture might no longer profit and the farms and infrastructure abandoned.

Grain processing and Ethanol plants are located near where crops are grown to reduce transportation costs. If cotton moves north, then the cotton processing and marketing infrastrcture will move also. Abandoning infrastructure in one area and replacing it elsewhere comes with an economic cost. Yes there is a natural cycle of replacement costs, but more climate change could be more rapid than the cycle.

BTW- most ecologists consider Alexander von Humboldt (late 18th to early 19th century) to be the father of ecology. Henry Chandler Cowles received his PhD from UChicago in the late 1800s and developed his theory of succesional ecology on the Indiana Sand dunes along the southern shore of Lake Michigan. His ecology textbook was written in the early 1900s. It is my understanding that much of early ecology was developed by botanists and the zoologists expanded on their work at a later time.

Studies of environmental contamination were facilitated by the emergence of modern analytical chemistry in the late 1950s and its early application to monitoring environmental chemicals. Rachael Carson widely publicized the emerging findings and brought the issue of environmental contamination into public focus. Although some people consider "ecology" and environmental contamination to be synonomous, environmental contamination is only a small subset of the science of ecology.

[gordon]

bakho says: "If cotton moves north, then the cotton processing and marketing infrastrcture will move also."

Regarding cotton, Oxfam briefing paper #30 notes that: "America’s only clear comparative advantage in cotton production is in the use of subsidies. More efficient producers in developing countries are losing out because of American subsidies. Costs of production for one pound of cotton are three times higher in the US than in Burkina Faso. Other major producers – such as Brazil – also have far lower production costs. Yet the US has expanded production in the midst of the price slump. Other countries have suffered as a result of both lower prices for exports and loss of world market share.

The scale of government support to America’s 25,000 cotton farmers is staggering, reflecting the political influence of corporate farm lobbies in key states. Every acre of cotton farmland in the US attracts a subsidy of $230, or around five times the transfer for cereals. In 2001/02 farmers reaped a bumper harvest of subsidies amounting to $3.9bn – double the level in 1992. This increase in subsidies is a breach of the ‘Peace Clause’ in the WTO Agreement on Agriculture, opening the door to the Brazilian complaint."

Maybe the cotton processing and marketing infrastructure, dependent on subsidies as it is, should be quietly abandoned, not moved anywhere.

[anne]

Gordon, thank you for reminding us to look to Oxfam on agricultural trade issues. I will look to the position papers this evening.

"America’s only clear comparative advantage in cotton production is in the use of subsidies. More efficient producers in developing countries are losing out because of American subsidies."

I imagine this passage can be repeated for crop after crop for Europe and Japan as well. Then there is animal husbandry.

[bakho]

Government subsidies make red states red?

My point is that climate change will shift ag infrastructure. Where cotton growing would be most profitable after climate change is unpredictable. Comparative advantage could shift among countries and infrastructure in some parts of the world would be abandoned. The dust bowl created a lot of dislocation and abandoning of infrastructure.

In the oil shortage world, biomaterials like cotton should become more important and subsidies less necessary.

[Eco-onomics.com]

Why don't you all quit thinking so much and just buy a solar panel? Raising taxes has solved what? Oh yea nothing!

Have a great day!

MC

[victoria]

please i need answers for a term paper i am writing. the question is play the devil's advocate. the demands and complaints of developing countries. i will be grateful if my request is granted.thanks victoria a friend in need.

[reason]

Anne
Similarly Democrats are not about to have us paying $7 a gallon for gas just in time for an election.

Anne, how would Gore approach this issue? There IS a way to frame this. The $7 a gallon tax would be phased in (and you could argue that because of peak oil the price will increase ANYWAY) and the proceeds of the tax will be destributed evenly as a rebate on payroll taxes. It is a WINNER for the democrats.

[reason]

By the way, it is very interesting how some topics bring out the incoherent. It is amazing how many people have never heard of the free rider problem.