Economist's View

"Obama as Climate Change Villain"

More unhappiness with Obama:

Obama as Climate Change Villain, by Jeffrey D. Sachs, Commentary, Project Syndicate: Two years of climate change negotiations have now ended in a farce in Copenhagen. ... Responsibility for this disaster reaches far and wide. Let us start with George W. Bush, who ignored climate change for the eight years of his presidency, wasting the world’s precious time. Then comes the United Nations, for managing the negotiating process so miserably during a two-year period. Then comes the European Union for pushing relentlessly for a single-minded vision of a global emissions-trading system, even when such a system would not fit the rest of the world.

Then comes the United States Senate, which has ignored climate change for 15 consecutive years since ratifying the UN Framework Convention on Climate Change. Finally, there is Obama, who effectively abandoned a systematic course of action under the UN framework, because it was proving nettlesome to US power and domestic politics.

Obama’s decision to declare a phony negotiating victory amounts to a declaration that rich countries will do what they want and must no longer listen to the “pesky” concerns of many smaller and poorer countries. Some will view this as pragmatic, reflecting the difficulty of getting agreement with 192 UN member states. But it is worse than that. International law, as complicated as it is, has been replaced by the insincere, inconsistent, and unconvincing word of a few powers, notably the US, which has never shown goodwill to the rest of the world on this issue, nor the ability or interest needed to take the lead on it.

From the standpoint of actual reduction of greenhouse-gas emissions, this agreement is unlikely to accomplish anything real. ... The reality is that the world will now wait to see if the US accomplishes any serious emissions reduction. Grave doubts are in order... Obama does not have the votes in the Senate, has not displayed any willingness to expend political capital to reach a Senate agreement, and may not even see a Senate vote on the issue in 2010...

The Copenhagen summit also fell short on financial help from rich countries to poor countries. Plenty of numbers were thrown around, but ... the big news was a commitment of $100 billion per year for the developing countries by 2020. ... Experience with financial aid for development teaches us that announcements about money a decade from now are mostly empty words. ...

One of the most notable features of the US-led document is that it doesn’t mention any intention to continue negotiations in 2010. This is almost surely deliberate..., in effect declaring that the US will ... not become further entangled in messy UN climate processes in 2010.

That stance might well reflect the upcoming 2010 mid-term Congressional elections... Obama does not want to be trapped in the middle of unpopular international negotiations when election season arrives. He may also feel that such negotiations would not achieve much. Right or wrong on that point, the intention seems to be to kill the negotiations. If so, Obama will prove to have been even more damaging to the international system of environmental law than George Bush was.

For me, the image that remains of Copenhagen is that of Obama appearing at a press conference to announce an agreement that only five countries had yet seen, and then rushing off to the airport to fly back to Washington, DC, to avoid a snowstorm... If ... the voluntary commitments of the US and others prove insufficient, it will have been Obama who single-handedly traded in international law for big-power politics on climate change.

Perhaps the UN will rally itself to get better organized. Perhaps Obama’s gambit will work, the US Senate will pass legislation, and other countries will do their part as well. Or perhaps we have just witnessed a serious step towards global ruin...

Update: See also: What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord, by Robert Stavins (wonkish, relatively positive assessment).

"Financing the Fight against Climate Change"

Climate talks are stalled. Developing countries want help paying for policies to reduce greenhouse emissions, but the amount they are asking for is more than developed countries are likely to agree to. Is there any way to end the impasse?:

Only Private Sector Can Meet Finance Demands of Developing Countries, by Robert Stavins: Things are getting hot here in Copenhagen. ... This afternoon, the main session of the talks was suspended, following protests led by African countries, which accused the industrialized countries of trying to wreck the existing Kyoto Protocol.  At the heart of the controversy is the “finance question,” as it’s called here, with the developing countries asking for more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050! ...

I maintain that it is inconceivable that the governments of the industrialized world, including the United States, will come up with sufficient foreign aid to satisfy the demands for financial transfers being made by the developing countries in Copenhagen.  However, governments can — through the right domestic and international policy arrangements — provide key incentives for the private sector to provide the needed finance through foreign direct investments.

For example, if the cap-and-trade systems which are emerging throughout the industrialized world as the favored domestic approach to reducing CO2 and other greenhouse gas emissions are linked together through the existing, common emission-reduction-credit system, namely the Clean Development Mechanism (CDM), then powerful incentives can be created for carbon-friendly private investment in the developing world.

Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential.  ... Such private finance stands a much greater chance than government aid of being efficiently employed, that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes.  So, all in all, the job can be done, and governments have an important role, but as facilitators, not providers, of finance.  This should be the focus of the discussion here in Copenhagen.

George Soros has an idea for "a special green fund serving the developing world":

Financing the Fight against Climate Change, by George Soros, Commentary, Project Syndicate: It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change. ...

The developed countries are reluctant to make additional financial commitments. They have just experienced a significant jump in their national debts... It looks like they will be able to cobble together a “fast-start” fund of $10 billion a year for the next few years... This is unlikely to satisfy the developing countries.

I believe that this amount could be at least doubled and assured for a longer time span. Developed countries’ governments are laboring under the misapprehension that funding must come from their national budgets. But that is not the case. They have the money already. It is lying idle in their reserve accounts at the International Monetary Fund. Spending it would not add to any country’s fiscal deficit. ...

In September 2009, the IMF distributed to its members $283 billion worth of Special Drawing Rights... Of the $283 billion..., more than $150 billion went to the 15 largest developed economies. These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves.

I propose that the developed countries – in addition to establishing a fast-start fund of $10 billion a year – band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world. ... I further propose that member countries agree to use the IMF's gold reserves to guarantee the interest payments and repayment of the principal. The IMF owns a lot of gold – more than 100 million ounces – and it is on the books at historical cost. ...

This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment. ... [D]eveloping countries ought to embrace my proposal. ... All that is lacking is the political will. The mere fact that tapping SDRs requires Congressional approval in the US ensures that nothing will happen without public pressure – including pressure from the developing countries. Yet it could make the difference between success and failure in Copenhagen.

I'll be surprised if this finds political support.

The financial crisis shows how difficult it is to move politicians to action before they can see a problem clearly. Economists can warn about delays in the recovery of employment far in advance and call for policy to offset it, but until the delayed recovery can be seen clearly in the employment data, political action is extremely unlikely. Unfortunately, by that time, it's generally too late to be of much to help. I expect climate change legislation will be the same. Nothing of real significance will happen until the the problem is undeniable, until the costs are large, clear, and evident, but by the time hockey stick hits politicians over the head, it may be too late.

[See also The US is on Board from Hillary Clinton.]

"Defining Success for Climate Negotiations in Copenhagen"

Robert Stavins gives his assessment what will constitute "real progress" in the Copenhagen climate talks:

Defining Success for Climate Negotiations in Copenhagen, by Robert Stavins: ...[T]he fact that the White House has decided to send the President to Copenhagen for the final day, where he will assemble with some 90 other world leaders, and participate in closing statements (not to mention photo opportunities), indicates that the Administration is relatively confident that the talks will not collapse in a logjam of disagreement between the industrialized world and the developing countries, but rather that there will be a successful outcome.

The key outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, not simply some notion of immediate, albeit highly visible triumph. ...

The gloom and doom predictions we’ve been hearing about the global climate negotiations taking place in Copenhagen this week and next are fundamentally misguided. The picture is much brighter than it might seem for ... coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012.

The best goal for the Copenhagen climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph. This is because of some basic scientific and economic realities.

First, the focus of scientists (and policy makers) is and should be on stabilizing concentrations at acceptable levels by 2050 and beyond, because it is the accumulated stock of greenhouse gas emissions — not the flow of emissions in any year — that are linked with climate consequences.

Second, the cost-effective path for stabilizing concentrations involves a gradual ramp-up in target severity, to avoid rendering large parts of the capital stock prematurely obsolete.

Third, long-term technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources.

Fourth, the creation of long-lasting international institutions is central to addressing this global challenge.

Paul Krugman: An Affordable Truth

Will the meeting in Copenhagen produce a meaningful agreement on greenhouse gas emissions?:

An Affordable Truth, by Paul Krugman, Commentary, NY Times: Maybe I’m naïve, but I’m feeling optimistic about the climate talks starting in Copenhagen on Monday. President Obama now plans to address the conference on its last day, which suggests that the White House expects real progress. It’s also encouraging to see developing countries — including China, the world’s largest emitter of carbon dioxide — agreeing, at least in principle, that they need to be part of the solution.

Of course, if things go well in Copenhagen, the usual suspects will go wild. We’ll hear cries that the whole notion of global warming is a hoax perpetrated by a vast scientific conspiracy... We’ll also, however, hear cries that climate-change policies will destroy jobs and growth.

The truth, however, is that cutting greenhouse gas emissions is affordable as well as essential. Serious studies say that we can achieve sharp reductions in emissions with only a small impact on the economy’s growth. And the depressed economy is no reason to wait — on the contrary, an agreement in Copenhagen would probably help the economy recover.

Why should you believe that cutting emissions is affordable? First, because financial incentives work.

Action on climate, if it happens, will take the form of “cap and trade”: businesses ... will ... be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that. ...

The truth is that conservatives who predict economic doom if we try to fight climate change are betraying their own principles. They claim to believe that capitalism is infinitely adaptable, that the magic of the marketplace can deal with any problem. But for some reason they insist that cap and trade — a system specifically designed to bring the power of market incentives to bear on environmental problems — can’t work.

Well, they’re wrong — again. For we’ve been here before.

The acid rain controversy of the 1980s was in many respects a dress rehearsal for today’s fight over climate change. Then as now, right-wing ideologues denied the science. Then as now, industry groups claimed that any attempt to limit emissions would inflict grievous economic harm.

But in 1990 the United States went ahead anyway with a cap-and-trade system for sulfur dioxide. And guess what. It worked, delivering a sharp reduction in pollution at lower-than-predicted cost.

Curbing greenhouse gases will be a much bigger and more complex task — but we’re likely to be surprised at how easy it is once we get started. ...

Still, should we be starting a project like this when the economy is depressed? Yes... — in fact, this is an especially good time to act, because the prospect of climate-change legislation could spur more investment spending.

Consider, for example, the case of investment in office buildings. Right now, with vacancy rates soaring and rents plunging, there’s not much reason to start new buildings. But suppose that a corporation that already owns buildings learns that over the next few years there will be growing incentives to make those buildings more energy-efficient. Then it might well decide to start the retrofitting now, when construction workers are easy to find and material prices are low.

The same logic would apply to many parts of the economy, so that climate change legislation would probably mean more investment over all. And more investment spending is exactly what the economy needs.

So let’s hope my optimism about Copenhagen is justified. A deal there would save the planet at a price we can easily afford — and it would actually help us in our current economic predicament.

"Enough Posturing Politics. Time to Let the Experts Lead"

Jeff Sachs says that in order to make progress on curtailing greenhouse gases, we need to get politicians out of the way and involve "scientists, engineers and ordinary citizens ... in a true discussion about our common future, and especially the tradeoffs, costs and choices":

Enough posturing politics. Time to let the experts lead, by Jeffrey Sachs, Commentary, CiF: We can only marvel at the disarray. Here we are, 17 years after the signing of the UN framework convention on climate change, two years after the decision in Bali to agree a new climate policy, one year after Barack Obama's election, and days out from the Copenhagen conference. Yet a real global strategy to avoid catastrophe remains elusive.

Yes, there is some progress. ... The mayhem, however, is at least as great. Greenhouse gas concentrations in the atmosphere continue to mount, and will do so for years or decades to come. The Wall Street Journal, America's biggest circulation paper, rails each day against climate science. Backroom deals in the US Congress with industrial lobbies threaten to eviscerate already watered-down proposals for limiting carbon emissions. A vote on the US legislation has been postponed till next spring at the earliest, and a similar bill has just been defeated in Australia.

The truth is that even if we reach a political agreement, we're not yet on track to achieve practical, significant and sustained progress... – we've somehow turned a life-and-death challenge into a scrum. After Copenhagen, which probably will be concluded with a patch-up accord, it will be vital to change paths from the one we've been on essentially since before Kyoto in 1997.

We've debated for years about who should control emissions, by how much, when, and according to binding or non-binding commitments. Yet we can't settle these issues without also getting into the details about the deployment of low-carbon technologies, social behaviors and the quantitative realities of energy systems, transport technologies, food production, water scarcity, and population trends. We will continue to go around in circles until we are much more systematic in bringing scientific and engineering realities to the table. Our negotiations need much greater grounding in our true options and their costs.

These issues are tough and complex. Each nation's plausible choices depend on what technologies will be available and when. ... We will need, in short, a lot more brainstorming than negotiation, at least until the world's plausible options and trade-offs come into view. When can low-carbon power plants truly be brought online? When will electric vehicles be ready for mass sales? Will carbon capture really work and if so, where? Which countries and regions ... have the right kind of geology to store carbon underground, and who is going to monitor it? Dare we advocate a massive revival of the nuclear power industry, in a world fraught with nuclear proliferation? During two years of lead-up to Copenhagen, the official negotiations never gave a place for such questions to be posed, much less answered. ...

We have spent a lot of time debating the merits of tradable permits versus taxation but have failed to understand that operational policies must go far beyond either instrument. The future of nuclear power, for instance, depends not so much on tradable permits as on issues of safety, reliability, and risks of proliferation or terrorism. Similarly emissions trading may eventually spur the use of carbon capture and sequestration, but only after several such plants have been tried on the public expense, to investigate the real engineering and costs of possible technologies, and the real feasibility of safe, long-term storage in geological sites. The scale-up of solar and wind power will depend on land use choices, the future of the power grid, and the ability to store power.

The costs of these approaches can only be judged after more thorough testing and analysis. Thus the side payments that rich countries will have to make to poor ones to adopt such technologies can't yet be determined precisely. When the EU or any country announces their contribution to the poorer countries in Copenhagen, the number will be pulled out of the hat, and probably far too low. It's past time to do ... the real financial homework.

Perhaps it's no surprise we are stuck. Climate change is the most complicated issue the world has faced. Complex – but not hopeless. It's time to put the expertise at the front table, not to supplant public debate and discussion but finally to inform it. Copenhagen should be the end of negotiation by politicians with technical issues kept in the shadows or ignored. Let's get scientists, engineers and ordinary citizens involved in a true discussion about our common future, and especially the tradeoffs, costs and choices. Together we can prove that our world is still capable of reaching long-range agreements when our children's lives and wellbeing hang in the balance.

"Escaping the Fossil Fuel Trap"

Michael Spence says developed countries should pay the cost of reducing carbon emissions, including paying for abatement measures in developing countries:

Escaping the Fossil Fuel Trap, by Michael Spence, Project Syndicate: ...[The] use of fossil fuels, and hence higher CO2 emissions, seems to go hand in hand with growth. This is the central problem confronting the world as it seeks ... to combat climate change. Compared to the advanced countries, the developing world now has both low per capita incomes and low per capita levels of carbon emissions. Imposing severe restrictions on their emissions growth would impede their GDP growth and severely curtail their ability to climb out of poverty.

The developing world also has a serious fairness objection to paying for climate-change mitigation. The advanced countries are collectively responsible for much of the ... carbon in the atmosphere... As a consequence, the developing world’s representatives argue, the advanced countries should take responsibility for the problem.

But a simple shift of responsibility to the advanced countries by exempting developing countries from the mitigation process will not work. ... If developing countries are allowed to grow, and there is no corresponding mitigation of the growth in their carbon emissions, average per capita CO2 emissions around the world will nearly double in the next 50 years, to roughly four times the safe level... Advanced countries by themselves simply cannot ensure that safe global CO2 levels are reached. ...

So the world’s major challenge is to devise a strategy that encourages growth in the developing world, but on a path that approaches safe global carbon-emission levels by mid-century. ...

These considerations suggest that no emission-reduction targets should be imposed on developing countries until they approach per capita GDP levels comparable to those in advanced countries. ...[A]dvanced countries ... should be allowed to fulfill their obligations, at least in part, by paying to reduce emissions in developing countries (where such efforts may yield greater benefits). ...

The best way to implement this strategy is to use a “carbon credit trading system” in the advanced countries, with each advanced country receiving a certain amount of carbon credits to determine its permissible emission levels. If a country exceeds its level of emissions, it must buy additional credits from other countries... But an advanced country could also undertake mitigation efforts in the developing world and thus earn additional credits...

Such a system would trigger entrepreneurial searches for low-cost mitigation opportunities in developing countries, because rich countries would want to pay less by lowering emissions abroad. As a result, mitigation would become more efficient...

Conflict between advanced and developing countries over responsibility for mitigating carbon emissions should not be allowed to undermine prospects for a global agreement. A fair solution is as complex as the challenge of climate change itself, but it is certainly possible.

"Transgressing Planetary Boundaries"

Jeff Sachs says that if world population doesn't stabilize relatively soon, we're headed for trouble:

Transgressing Planetary Boundaries, by Jeff Sachs, Scientific American: We are eating ourselves out of house and home. ... The green revolution that made grain production soar gave humanity some breathing space, but the continuing rise in population and demand for meat production is exhausting that buffer. ...

Food production accounts for a third of all greenhouse gas emissions... Through the clearing of forestland, food production is also responsible for much of the loss of biodiversity. Chemical fertilizers cause massive depositions of nitrogen and phosphorus, which now destroy estuaries in hundreds of river systems and threaten ocean chemistry. Roughly 70 percent of worldwide water use goes to food production, which is implicated in groundwater depletion and ecologically destructive freshwater consumption from California to the Indo-Gangetic Plain to Central Asia to northern China.

The green revolution, in short, has not negated the dangerous side effects of a burgeoning human population, which are bound to increase as the population exceeds seven billion around 2012 and continues to grow as forecast toward nine billion by 2046. ...

It is not enough to produce more food; we must also simultaneously stabilize the global population and reduce the ecological consequences of food production—a triple challenge. A rapid voluntary reduction in fertility rates in the poor countries, brought about by more access to family planning, higher child survival and education for girls, could stabilize the population at around eight billion by 2050.

Payments to poor communities to resist deforestation could save species habitats. No-till farming and other methods can preserve soils and biodiversity. More efficient fertilizer use can reduce the transport of excessive nitrogen and phosphorus. Better irrigation and seed varieties can conserve water and reduce other ecological pressures. And a diet shifted away from eating beef would conserve ecosystems while improving human health.

Those changes will require a tremendous public-private effort that is yet to be mobilized. ... The window of opportunity to achieve sustainable development is closing.

Brad DeLong Celebrates His DMCA Takedown Notice

In the first year or so after I started doing this I had one or two discussions about the length of excerpts, and I've always complied with any request (though not without first trying to negotiate, which was more than successful in one case), but my only literal take down request was from the Reserve Bank of Australia. I still don't understand that one. (When I asked why, they said that if, say, a graph that was part of the post was found to be in error and they changed it, the error would persist on my site. I decided to comply even though it wasn't an official DMCA notice since if their quality was so bad that that was a significant worry, I didn't want their stuff on my site anyway):

In Celebration of a DMCA Takedown Notice: I Link to Elizabeth Kolbert on “SuperFreakonomics”, by Brad DeLong: Well, this is new. My first ever DMCA takedown notice--from HarperCollins, publisher of Levitt and Dubner's Superfreakonomics. While other publishers these days are happy to have sample chapters of their authors' works read and distributed on the internet, not so with HarperCollins.

One thing I can do in response is--tit-for-tat--to remove my praise of and link to E.M. Halliday's Understanding Thomas Jefferson: there are other better (albeit longer) Jefferson biographies published by firms that have not sent me DMCA notices: read them instead.

I urge everybody--authors and readers alike--to just say no to HarperCollins in the future.

A second thing I can do is to link to Elizabeth Kolbert's review of Superfreaknomics in the New Yorker:

“SuperFreakonomics” and climate change: Then, almost overnight, the crisis passed.... By 1912, autos in New York outnumbered horses, and in 1917 the city’s last horse-drawn streetcar made its final run. All the anxieties about a metropolis inundated by ordure had been misplaced.

This story—call it the Parable of Horseshit—has been told many times, with varying aims. The latest iteration is offered by Steven D. Levitt and Stephen J. Dubner, in their new book, “SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance”.... Levitt and Dubner tell the horseshit story as a prelude to discussing climate change: “Just as equine activity once threatened to stomp out civilization, there is now a fear that human activity will do the same.” As usual, they say, the anxiety is unwarranted. First, the global-warming threat has been exaggerated; there is uncertainty about how, exactly, the earth will respond to rising CO2 levels, and uncertainty has “a nasty way of making us conjure up the very worst possibilities.” Second, solutions are bound to present themselves: “Technological fixes are often far simpler, and therefore cheaper, than the doomsayers could have imagined.”

"Half of US Children -- and Most Black Children -- Will Use Food Stamps"

Following up on the post below this one on poverty, I hope we realize the importance of social insurance for children. Our social insurance programs for children are not as good as they should be, but what we do have does some good:

Half of US children -- and most black children -- will use food stamps, Cornell study reports, EurekAlert: Nearly half of American children – including 90 percent of black children and 90 percent of children who spend their childhoods in single-parent households – will eat meals paid for by food stamps at some point during childhood, reports a Cornell researcher.

Nearly one-quarter of U.S. children will live in homes that receive food stamps for five or more years. Food stamps are important indicators of poverty and risk of food insecurity, "two of the most detrimental economic conditions affecting a child's health," says Thomas A. Hirschl, Cornell professor of development sociology...

The study is based on an analysis of the Panel Study of Income Dynamics, a 32-year study of about 4,800 U.S. households...

"Children in poverty are significantly more likely to experience a range of health problems, including low birth weight, lead poisoning, asthma, mental health disorders, delayed immunization, dental problems and accidental death," write Hirschl and co-author Mark R. Rank of Washington University in St. Louis. "Poverty during childhood is also associated with a host of health, economic and social problems later in life."

It also adds some $22 billion per year in additional health care costs, the researchers report.

And the risk of living in homes using food stamps is far from equitably distributed: Ninety percent of children who live with single parents (compared with 37 percent who live in married and other two-parent households), 90 percent of black children (compared with 37 percent of white children) and 62 percent of those whose head of household did not graduate from high school (compared with 31 percent where the head has more than 12 years of school) "encounter spells of food stamp use," the authors find.

Putting those risk factors together, the researchers found that 97 percent of black children living in non-married households where the household head has less than 12 years of education will have received food stamps, compared with 21 percent of white children living in married households whose head of household has 12 or more years of education.

"The situation is likely bad for children," says Hirschl, "because families eligible for food stamps who participate tend to be worse off nutritionally than eligible families who don't participate." Only about 60 percent of families eligible for food stamps actually participate, he said, because of the stigma associated with government help. Although the sample used is representative of the U.S. populations, it does not reflect the immigrant population.

To pick up another theme in the posts today, this also shows the importance of providing jobs programs that employ low-income workers having trouble finding work due to the recession.

And isn't it nice that children likely go hungry due to the stigma associated with seeking help from the government? Who shall we thank for that?

"A Clunker of a Climate Policy"

Jeff Sachs says we need to be sure that climate control legislation is not captured by powerful special interest groups:

A Clunker of a Climate Policy, by Jeffrey D. Sachs, Commentary, Scientific American: The Cash for Clunkers program offers a cautionary tale for the future of climate change control. ... The broad principle of climate change mitigation is to reduce greenhouse gas emissions ... to target levels at the minimum net cost to society. There are many ways to reduce emissions: drive more efficient or electrically powered vehicles; produce electricity with renewable energy sources; capture CO₂ from power plants and store it geologically; restart the nuclear power sector; weatherproof homes... The list is long, with different time horizons, costs and uncertainties.

Clearly, not every method of reducing emissions makes equal sense. ...McKinsey & Company has recently published estimates of the abatement costs of various technologies. Highly efficient lighting, appliances and vehicles, along with better insulation and other technologies, can save more in energy costs during their lifetime than the upfront capital for installing them: they are better than free to society. Other options—notably, renewable energy sources, forest conservation programs and carbon capture and storage—tend to come in below $60 per ton of avoided CO₂ emissions.

Some carbon-reduction ideas are so expensive they should play no part in the policy mix. Yet because lobbyists overrun our legislative processes,... lots of terrible ideas will no doubt be advocated.

Let’s make a rough calculation of how much mitigation per dollar the Cash for Clunkers program really achieved. ...[calculations]... The net annual cost of the CO₂ reduction is therefore ... $141 per ton of CO₂. ... This crude calculation is subject to many refinements but shows that Cash for Clunkers represented a very high cost per ton of CO₂ avoided. Countless ways to reduce CO₂ emissions are less expensive than smashing up autos five years before their natural demise.

We will blunder badly and repeatedly in climate change control unless we put some transparent control systems in place. We should rely heavily on price signals rather than one-by-one subsidized programs, except for the subsidies needed to bring new technologies such as electric vehicles to the commercial phase. An economy-wide tax on each ton of CO₂ emissions, programmed to rise gradually over time at an appropriate social discount rate, would induce the marketplace to take actions that are less expensive per ton than the tax and to leave behind measures such as Cash for Clunkers or corn to ethanol. A carbon tax would be far more effective in this regard than the cumbersome cap-and-trade system proposed by the House of Representatives.

We’ll need to spend trillions of dollars over time to save the planet from climate change. All the more reason not to let lobbyists make a financial game out of this deadly serious effort.

"The United States has Proved to be the Biggest Laggard in the World"

Jeff Sachs says "America has acted irresponsibly since signing the climate treaty in 1992":

King coal's climate policy: Will the US prove to be the world's last holdout?, by Jeffrey D. Sachs, Commentary, Project Syndicate: The United Nations Climate Change Treaty, signed in 1992, committed the world to “avoiding dangerous anthropogenic interference in the climate system.” Yet, since that time, greenhouse-gas emissions have continued to soar.

The United States has proved to be the biggest laggard in the world, refusing to sign the 1997 Kyoto Protocol or to adopt any effective domestic emissions controls. ... There are several reasons for US inaction – including ideology and scientific ignorance – but a lot comes down to one word: coal. No fewer than 25 states produce coal, which not only generates income, jobs, and tax revenue, but also provides a disproportionately large share of their energy. ...

Since addressing climate change is first and foremost directed at reduced emissions from coal – the most carbon-intensive of all fuels – America’s coal states are especially fearful about the economic implications of any controls (though the oil and automobile industries are not far behind). ...

Under the US Constitution, domestic legislation ... requires a simple majority in both the House of Representatives and the Senate... Getting 50 votes for a climate-change bill (with a tie vote broken by the vice president) is almost certain.

But opponents of legislation can threaten to filibuster..., which can be ended only if 60 senators support bringing the legislation to a vote. ... Securing 60 votes is a steep hill to climb. ...[O]ne analysis counts 50 likely Democratic “Yes” votes and 34 Republican “No” votes, leaving 16 votes still in play. Ten of the swing votes are Democrats, mainly from coal states; the other six are Republicans who conceivably could vote with the president and the Democratic majority.

Until recently, many believed that China and India would be the real holdouts in the global climate-change negotiations. Yet China has announced a set of major initiatives – in solar, wind, nuclear, and carbon-capture technologies – to reduce its economy’s greenhouse-gas intensity.

India, long feared to be a spoiler, has said that it is ready to adopt a significant national action plan... These actions put the US under growing pressure to act. With developing countries displaying their readiness to reach a global deal, could the US Senate really prove to be the world’s last great holdout?

Obama has tools at his command to bring the US into the global mainstream on climate change. First, he is negotiating side deals with holdout senators to cushion the economic impact on coal states and to increase US investments in the research and development, and eventually adoption, of clean-coal technologies.

Second, he can command the Environmental Protection Agency to impose administrative controls on coal plants and automobile producers... The administrative route might turn out to be even more important than the legislative route.

The politics of the US Senate should not obscure the larger point: America has acted irresponsibly since signing the climate treaty in 1992. It is the world’s largest and most powerful country, and the one most responsible for the climate change to this point, it has behaved without any sense of duty – to its own citizens, to the world, and to future generations.

Even coal-state senators should be ashamed. Sure, their states need some extra help, but narrow interests should not be permitted to endanger our planet’s future. It is time for the US to rejoin the global family.

Global Warming in SuperFreakonomics: A Reply to Critics

Stephen Dubner replies to critics. Paul Krugman replies briefly to Dubner in the process of a "broader analysis of what it all means."

"Superfreakonomics on Climate"

Paul Krugman:

Superfreakonomics on climate, part 1, by Paul Krugman: OK, I’m working my way through the climate chapter — and the first five pages, by themselves, are enough to discredit the whole thing. Why? Because they grossly misrepresent other peoples’ research, in both climate science and economics.

The chapter opens with the “global cooling” story — the claim that 30 years ago there was a scientific consensus that the planet was cooling, comparable to the current consensus that it’s warming.

Um, no. Real Climate has the takedown. What you had in the 70s was a few scientists advancing the cooling hypothesis, and a few popular media stories hyping their suggestions. To the extent that there was a consensus, it was that there wasn’t much evidence for anything, and more research was needed.

What you have today is a massive research program involving thousands of scientists and many peer-reviewed publications, with all major international bodies agreeing that man-made global warming is real. You can, if you insist, dismiss it all as a gigantic hoax or whatever — but it’s nothing like the isolated 70s speculations about cooling.

And then we come to a bit of economics. The book asks

Do the future benefits from cutting emissions outweigh the costs of doing so? Or are we better off waiting to cut emissions later — or even, perhaps, polluting at will and just learning to live in a hotter world?

The economist Martin Weitzman analyzed the best available climate models and concluded that the future holds a 5 percent chance of a terrible-case scenario ..

Yikes. I read Weitzman’s paper, and have corresponded with him on the subject — and it’s making exactly the opposite of the point they’re implying it makes. Weitzman’s argument is that uncertainty about the extent of global warming makes the case for drastic action stronger, not weaker. And here’s what he says about the timing of action:

The conventional economic advice of spending modestly on abatement now but gradually ramping up expenditures over time is an extreme lower bound on what is reasonable rather than a best estimate of what is reasonable.

Again, we’re not even getting into substance — just the basic issue of representing correctly what other people said.

Administrative note: I’m going to block comments here, because I know it will be overwhelmed.

Robert Waldmann defends the book (here too).

I haven't read the book, and can't, at least not yet.

Brad DeLong:

Correspondence on Global Warming and Superfreakonomics, by Brad DeLong: Steve Dubner writes:

Brad,

It is amazing to see how quickly and thoroughly Romm's extremely misleading attack has spread, to the point where even independent thinkers like you accept it on face value. His attack is full of deception and outright lies. He makes it sound as if we somehow twisted and abused Caldeira's research; nothing could be further from the truth. We will have to clear this up publicly, although as you suggest it will be hard to put out this fire no matter how wrongfully set. This is politics that's being played now, nothing else. Also: yes, Romm posted a PDF of the chapter on his website, which the publisher, in its routine effort to pull pirated copies of its copyrighted material off the web, asked him to take down. As far as I know, it was never on Amazon; there's been no censoring; we are talking about a book that hasn't yet been published (when it is, I assume Amazon will post the searchable pages, as is typical), but Romm has done a great job of getting people to believe that a book they haven't read is full of errors.

I reply:

Brad DeLong to Stephen

Re: "It is amazing to see how quickly and thoroughly Romm's extremely misleading attack has spread, to the point where even independent thinkers like you accept it on face value..."

As I said, I can't read your chapter--by your publisher's choice.

That's very bad for you: Romm's posting your chapter and a link to it is a way for him to establish credibility--"see for yourself"; your publisher's pulling it down is a way to diminish yours.

Over this weekend, people's views are gelling--Paul Krugman's, for example--while your voice isn't being heard, and once people's views are gelled, it takes a huge amount of evidence and the right kinds of psychological pressure to ungell them.

Thus, for example, I would love to believe in Myrhvold and in cheap geoengineering solutions. But I come from Berkeley, where Richard Muller is the dominant public-intellectual voice on geoengineering, and he is very knowledgeable and very skeptical. My second cousin Tom Kalil does solar panels and so forth for a living at OSTP. The reaction of the climate people I know to Myrhvold on solar panels, whom Romm says you quote:

"A lot of the things that people say would be good things probably aren’t,” Myrhvold says. As an example he points to solar power. “The problem with solar cells is that they’re black, because they are designed to absorb light from the sun. But only about 12% gets turned into electricity, and the rest is reradiated as heat — which contributed to global warming..."

is simply unprintable--that it's like claiming that curve balls curve because of photon pressure from the stadium lights.

So given what is flowing past my computer screen at the moment, it looks very much to me as though you were simply hornswoggled by Myrhvold and company, who have formed their own tight self-reinforcing intellectual community reinforcing each other's beliefs up there in Seattle. There is nothing I can see contradicting that interpretation, and a bunch of things from Romm and others confirming it.

The place where I would concentrate, if I were you, would be Stanford's Ken Caldeira. Romm claims:

"[Caldeira] writes me: 'If you talk all day, and somebody picks a half dozen quotes without providing context because they want to make a provocative and controversial chapter, there is not much you can do.' One sentence about Caldeira in particular is the exact opposite of what he believes (page 184): 'Yet his research tells him that carbon dioxide is not the right villain in this fight.' Levitt and Dubner didn’t run this quote by Caldeira, and when he saw a version from Myrhvold, he objected to it. But Levitt and Dubner apparently wanted to keep it very badly — it even makes the SuperFreakonomics Table of Contents in the Chapter Five summary “Is carbon dioxide the wrong villain?...”

If your principal experts truly do repudiate the interpretation you place on their work, that's very bad for you...

Comments are open.

Update: Steven Levitt:

The Rumors of Our Global-Warming Denial Are Greatly Exaggerated, by Steven D. Levitt: SuperFreakonomics isn’t even on sale yet, and the attacks on our chapter about global warming are already underway.

A prominent environmental blogger has attacked us. A well-known environmental-advocacy group pressured NPR into reading a statement critical of the book at the end of an interview I had given on Scott Simon’s Weekend Edition show. Even Paul Krugman and Brad DeLong got in on the action before they’d even read the book.

We are working on a thorough response to these critics, which we hope to post on the blog in the next day or two. The bottom line is that the foundation of these attacks is essentially fraudulent, as we’ll spell out in detail. In the meantime, let us just say the following.

Like those who are criticizing us, we believe that rising global temperatures are a man-made phenomenon and that global warming is an important issue to solve. Where we differ from the critics is in our view of the most effective solutions to this problem. Meaningfully reducing global carbon emissions has proven to be difficult, if not impossible. This isn’t likely to change, for the reasons we discuss in the book. Consequently, other approaches represent a more promising path to lowering the Earth’s temperature. , so obviously that’s not the case.

The statements being circulated create the false impression that our analysis of the global-warming crisis is ideological and unscientific. Nothing could be further from the truth.

I don't get the complaint in the very first sentence. They send the book out early to people hoping for reviews, then complain when people actually review the book? I realize it's not what they hoped for, but what's the complaint here? The people leading the attacks have read the book. If their reviews had been positive, would they still be telling people that the reviewers they chose to send the book to are liars who are not credibly reporting what's in it, and dismissing those who echo what the reviewers wrote? Putting this another way, if they people they chose to send the book to are writing unfavorable things, what would those they suspected would not like the book (and hence were not sent a copy) say?

Finally, it seems to me that they are misstating the objections ("The critics are implying that we dismiss any threats from global warming; but the entire point of our chapter is to discuss global-warming solutions"). The complaint isn't that they are global warming deniers, it's that they misstated the science associated with proposed solutions to the problem.

Update: While they are not global warming deniers, Mathew Yglesias says the book does make the claim that the climate change threat is being overstated by environmentalists, and that the book supports this view by inaccurately representing the views of the scientific community:

...Go here and read for yourself pages 184, 185, and the beginning of page 186 of Suprefreakonomics. The point, quite clearly, is to lead you to believe that “hard-charging environment activist and all-around peacenik” Ken Caldeira share the Levitt/Dubner view that (a) environmentalists are overstating the extent of the climate change problem, (b) curbing carbon dioxide emissions should not be our main tool in combatting climate change, and (c) that it’s useful to disparagingly analogize advocates of CO2 emissions curbs to those driven by religious faith rather than scientific expertise. Caldeira is called onto the floor to speak as a voice of sober-minded science against the misguided CO2-limiters. ... Of course it’s possible that ... Ken Caldeira is mistaken about some things. But it’s not possible that Levitt and Dubner are correctly representing the views of Caldeira or climate scientists in general...

Update: More from Paul Krugman. A snippet:

Levitt now says that the chapter wasn’t meant to lend credibility to global warming denial — but when you open your chapter by giving major play to the false claim that scientists used to predict global cooling, you have in effect taken the denier side. The only way I can reconcile what Levitt says now with that reality is that he and Dubner didn’t do their homework — not only that they didn’t check out the global cooling stuff, the stuff about solar panels, and all the other errors people have been pointing out, but that they didn’t even look into the debate sufficiently to realize what company they were placing themselves in.

And that’s not acceptable. This is a serious issue. We’re not talking about the ethics of sumo wrestling here; we’re talking, quite possibly, about the fate of civilization. It’s not a place to play snarky, contrarian games.

Update: And more from Brad DeLong: Six Questions for Levitt and Dubner.

Update: Stephen Dubner replies to critics. Paul Krugman replies briefly to Dubner in the process of a "broader analysis of what it all means."

"So Much Happening in Washington and So Little To Show for It"

Robert Reich is not pleased with the proposals from congress for health care reform, financial regulation, environmental legislation, and job creation, all of which come up far short of what is needed, and he says lobbyists are to blame:

So Much Happening in Washington and So Little To Show for It, So Far, by Robert Reich: The Senate Finance Committee is set to vote Tuesday on a healthcare bill that just got a seal of approval from the Congressional Budget Office and is very likely to garner the vote of Republican Senator Olympia Snowe -- a twofer that gives the bill preeminence over four other healthcare bills that have emerged from House and Senate committees... Unlike those bills, though, the Senate Finance bill won't it have a public insurance option to compete with private insurers. Nor does it allow Medicare to use its bargaining power to negotiate lower drug prices, or adequately subsidize millions of middle-class families who will be required to buy health insurance that will be hard for them to afford. In short, it's a great deal for private insurers and Big Pharma but not such a great deal for middle-class Americans.

Meanwhile, the House Banking Committee is quietly circulating a draft set of reforms of financial markets... Barney Frank, who heads the Committee, is a thoughtful progressive. But the draft has gaping loopholes that will let most financial firms escape -- such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of "risk management," which is the very thing they all claim they're doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is ... resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is "too big to fail."

At the same time, environmental legislation is now slinking its way through Congress..., but the bills are, frankly, far short of what's needed. ...

And what's happening on the job's front? Nothing except a blip of interest in tax credits to small businesses that create new jobs. That's not a bad move (I suggested it myself), but it's rather like bailing out the ocean with a teacup. If that's all there is, we're headed toward two years of double-digit unemployment. No one on the Hill or in the Administration is yet willing to say openly and clearly that the stimulus plan must be larger, and continued through 2010 and 2011.

My friends in the Administration and on the Hill repeatedly tell me "don't make the perfect the enemy of the better," or words to that effect. Politics is the art of the possible, blah blah blah. True. But in each of these areas -- healthcare, financial regulation, environment, and jobs -- the "better" is really not that much better. Forget perfect; anything that offered real reform would suffice for now. But in every case, what should be the centerpieces of reform are being left out.

Why? Congress is overwhelmed with corporate and Wall Street lobbyists (far too many of whom are former Democratic office holders). The White House is trying best it can to push ... in the right direction but there's too much going on, too many arenas where private interests are framing the debate and stifling major reform, and too many friends of friends and relations of relations who are making tons of money working for the other side. The public doesn't know what's going on because the national media would rather report on the sexual escapades of famous people... And progressives -- that is, progressive organizations in our nation's capital -- have been remarkably and consistently outgunned, outmaneuvered, or just plain ineffectual. This is largely due to the fact that they're sitting in Washington rather than organizing and mobilizing the rest of the country.

And I haven't even brought up Afghanistan.

Paul Krugman: Cassandras of Climate

Why aren't people getting hot under the collar about climate change?:

Cassandras of Climate, by Paul Krugman, Commentary, NY Times: Every once in a while I feel despair over the fate of the planet. If you’ve been following climate science, you know what I mean: the sense that we’re hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it.

And here’s the thing: I’m not engaging in hyperbole. These days, dire warnings aren’t the delusional raving of cranks. They’re what come out of the most widely respected climate models... The prognosis for the planet has gotten much, much worse in just the last few years.

What’s driving this new pessimism? Partly it’s the fact that some predicted changes, like a decline in Arctic Sea ice, are happening much faster than expected. Partly it’s growing evidence that feedback loops amplifying the effects of man-made greenhouse gas emissions are stronger than previously realized. For example,... global warming will cause the tundra to thaw, releasing carbon dioxide, which will cause even more warming, but new research shows far more carbon dioxide locked in the permafrost than previously thought, which means a much bigger feedback effect.

The result of all this is that climate scientists have, en masse, become Cassandras — gifted with the ability to prophesy future disasters, but cursed with the inability to get anyone to believe them.

And we’re not just talking about disasters in the distant future... The really big rise in global temperature probably won’t take place until the second half of this century, but there will be plenty of damage long before then.

For example, one 2007 paper in the journal Science ... reports “a broad consensus among climate models” that a permanent drought, bringing Dust Bowl-type conditions, “will become the new climatology of the American Southwest within a time frame of years to decades.” ...

In a rational world, then, the looming climate disaster would be our dominant political and policy concern. But it manifestly isn’t. Why not?

Part of the answer is that it’s hard to keep peoples’ attention focused. Weather fluctuates..., any year with record heat is normally followed by a number of cooler years...

But the larger reason we’re ignoring climate change is that Al Gore was right: This truth is just too inconvenient. Responding to climate change with the vigor that the threat deserves would not, contrary to legend, be devastating for the economy as a whole. But it would shuffle the economic deck, hurting some powerful vested interests even as it created new economic opportunities. And the industries of the past have armies of lobbyists in place...; the industries of the future don’t.

Nor is it just a matter of vested interests. It’s also a matter of vested ideas. For three decades the dominant political ideology in America has extolled private enterprise and denigrated government, but climate change ... can only be addressed through government action. And rather than concede the limits of their philosophy, many on the right have chosen to deny that the problem exists.

So here we are, with the greatest challenge facing mankind on the back burner, at best, as a policy issue. I’m not, by the way, saying that the Obama administration was wrong to push health care first. It was necessary to show voters a tangible achievement before next November. But climate change legislation had better be next.

And as I pointed out in my last column, we can afford to do this..., economic modelers have been reaching consensus ... that the costs of emission control are lower than many feared.

So the time for action is now. O.K., strictly speaking it’s long past. But better late than never.

Paul Krugman: It’s Easy Being Green

The Waxman-Markey cap-and-trade climate bill won't destroy economic growth:

It’s Easy Being Green, by Paul Krugman:, Commentary, NY Times: So, have you enjoyed the debate over health care reform? Have you been impressed by the civility of the discussion and the intellectual honesty of reform opponents? If so, you’ll love the next big debate: the fight over climate change.

The House has already passed a fairly strong cap-and-trade climate bill, the Waxman-Markey act, which if it becomes law would eventually lead to sharp reductions in greenhouse gas emissions. But on climate change, as on health care, the sticking point will be the Senate. And the usual suspects are doing their best to prevent action.

Some of them still claim that there’s no such thing as global warming, or at least that the evidence isn’t yet conclusive. But that argument is wearing thin — as thin as the Arctic pack ice... So the main argument against climate action probably won’t be the claim that global warming is a myth. It will, instead, be the argument that doing anything to limit global warming would destroy the economy. ...

It’s important, then, to understand that claims of immense economic damage from climate legislation are as bogus, in their own way, as climate-change denial. Saving the planet won’t come free (although the early stages of conservation actually might). But it won’t cost all that much either.

How do we know this? First, the evidence suggests that we’re wasting a lot of energy right now...— a phenomenon known ... as the “energy-efficiency gap.” The existence of this gap suggests that policies promoting energy conservation could, up to a point, actually make consumers richer.

Second, the best available economic analyses suggest that even deep cuts in greenhouse gas emissions would impose only modest costs on the average family. Earlier this month, the Congressional Budget Office released an analysis of the effects of Waxman-Markey, concluding that in 2020 the bill would cost the average family only $160 a year, or ... roughly the cost of a postage stamp a day.

By 2050, when the emissions limit would be much tighter, the burden would rise... But the budget office also predicts ... that G.D.P. per person will rise by about 80 percent. The cost of climate protection would barely make a dent in that growth. And all of this, of course, ignores the benefits of limiting global warming.

So where do the apocalyptic warnings about the cost of climate-change policy come from?

Are the opponents of cap-and-trade relying on different studies that reach fundamentally different conclusions? No, not really. ... Instead, the campaign against saving the planet rests mainly on lies.

Thus, last week Glenn Beck — who seems to be challenging Rush Limbaugh for the role of de facto leader of the G.O.P. — informed his audience of a “buried” Obama administration study showing that Waxman-Markey would actually cost the average family $1,787 per year. Needless to say, no such study exists.

But we shouldn’t be too hard on Mr. Beck. Similar — and similarly false — claims about the cost of Waxman-Markey have been circulated by many supposed experts.

A year ago I would have been shocked by this behavior. But as we’ve already seen in the health care debate, the polarization of our political discourse has forced self-proclaimed “centrists” to choose sides — and many of them have apparently decided that partisan opposition to President Obama trumps any concerns about intellectual honesty.

So here’s the bottom line: The claim that climate legislation will kill the economy deserves the same disdain as the claim that global warming is a hoax. The truth about the economics of climate change is that it’s relatively easy being green.

[See also Can Countries Cut Carbon Emissions Without Hurting Economic Growth? by Robert Stavins.]

Fed Watch: Even With Growth, A Long, Hard Road

Tim Duy looks forward to the Federal Open Market Committee rate setting meeting later this week:

Even With Growth, A Long, Hard Road, by Tim Duy: The economic backdrop behind this week's FOMC meeting is almost startlingly refreshing. The recession likely ended at some point during the summer, an occasion effectively confirmed this week by the highest authority in the land, Federal Reserve Chairman Ben Bernanke. For those still in denial, industrial production posted its second consecutive gain, and there is little doubt that GDP will post a significant positive reading for the third quarter. Finally, in a seemingly impossible development, the retail sales report suggested that consumers eagerly converged onto the nation's shopping establishments in August. The economic summary paragraph in the upcoming FOMC statement will certainly identify the positive economic developments since their last gathering. But will improving conditions be sufficient to prod the FOMC to adopt language that points in the direction of tighter policy? Almost certainly not. The exit from the recession is clearly much too tenuous - and much too dependent on fiscal and monetary life support - to allow the risk of premature policy withdrawal. Moreover, even if economy activity were on a self-sustaining upward trend, the hole we are climbing out of is so deep that it could literally be years before resources are sufficiently utilized as to allow for significant policy reversal.

Let's start off with the good news. The stabilization of consumer spending that we saw begin earlier this year is supporting an inventory correction story. Firms are no longer chasing spending plans down, which alone gives some boost to final output. Moreover, some restocking is likely occurring; anecdotally, I hear from firms that are surprised to learn that their suppliers are running low on inventories despite weak final sales. Restocking is also a consequence of the "Cash for Clunkers" program, as auto firms look to rebuild depleted inventories. And, the August retail sales report points to sales gains across a wide range of retail stores. All in all, the inventory cycle looks to be making a pretty clear turn, offering support to activity:

In addition, the strength of fiscal stimulus is coming to bear on the economy. And one cannot discount the additional boost delivered by the first time homebuyers credit, which helped support a bottom into the new housing market this summer. Adding everything together, it is not difficult to see why forecasters are looking for growth in the range of 3 to 4% this quarter. Not surprisingly, industrial production numbers are turning:

The Response to Climate Change "Can Be Gradual—and Affordable"

When the topic of climate change legislation comes up, Republicans predictably respond with "but what about small business?," though the concerns generally extend to big business as well. Again and again we hear that any attempt to reduce carbon emissions will significantly reduce economic growth. For example, tomorrow's Wall Street Journal asks "Can Countries Cut Carbon Emissions Without Hurting Economic Growth?"

Taking the no we can't side of the debate, a side I disagree with, is Steven Hayward of the American Enterprise Institute. Taking the yes we can side is Robert Stavins of Harvard (see here too). He argues, persuasively in my opinion, that objections to climate change legislation based upon what it will do to business, small or large, and what it will do to the economic growth rate suffer from "basic errors":

Yes: The Transition Can Be Gradual—and Affordable, by Robert Stavins, WSJ [podcast of debate]: ...Critics argue that the legislation passed earlier this year by the U.S. House of Representatives—to cut U.S. emissions 80% below 2005 levels by 2050—will mean big, disruptive changes to our infrastructure and untold economic damage. But they make a couple of basic errors. For one thing, they seem to think we'd have to replace the entire infrastructure quickly, paying trillions of dollars to shift to cleaner power. They also seem to assume that we have to choose between much more expensive energy and no energy at all.

The move to greener power doesn't have to be completed immediately, and it doesn't have to be painful. ... How would this work? One way is via a combination of national and multinational cap-and-trade systems. ... The effect would be to send price signals through the market—making use of less carbon-intensive fuels more cost-competitive, providing incentives for energy efficiency and stimulating climate-friendly technological change, such as methods of capturing and storing carbon.

More Efficient

True, in the short term changing the energy mix will come at some cost, but this will hardly stop economic growth. ... Consider this: From 1990 to 2007, while world emissions rose 38%, world economic growth soared 75%—emissions per unit of economic activity fell by more than 20%.

Critics argue we can't possibly increase efficiency enough to hit the 80% goal. In a very limited sense, that's true. Efficiency improvements alone ... won't get us where we need to go by 2050. But this plan doesn't rely solely on boosting efficiency. It brings together a host of other changes,... What's more, making gradual changes means we don't have to scrap still-productive power plants...

[click here for larger version]

As for how much this will cost, the best economic analyses—including studies from the U.S. Congressional Budget Office and the U.S. Energy Information Administration—say such a policy in the U.S. would cost considerably less than 1% of gross domestic product per year in the long term, or up to $175 per household in 2020. (That's the cost of one postage stamp per household per day.)

In the end, we would be delaying 2050's expected economic output by no more than a few months. And bear in mind that previous environmental actions, such as attacking smog-forming air pollution and cutting acid rain, have consistently turned out to be much cheaper than predicted.

Critics ... challenge the price estimates the experts have set out. ... In particular, they say, developing nations won't sign onto plans for curbing emissions, for fear of losing their economic momentum. Indeed, we do need a sensible international arrangement in place..., and the economic pain will be much greater if we don't set up an international carbon market. But it can be done. ...

Road to Cooperation

For instance, the U.S. and China have been involved in intense talks about climate policy. If the two nations come together in a bilateral agreement—a real possibility—they would have much more leverage to persuade other major nations to join. From there, developing nations could be brought on board by giving them targets that reduce emissions without stifling growth. Advanced nations might agree to more-severe emissions cuts and allow developing nations to make gradual cuts in the early decades as they rise toward the world's average per-capita emissions. With the right incentives, developing countries can and will move onto less carbon-intensive growth paths.

The longer we put off serious action, the more aggressive our future efforts will need to be... For every year of delay before moving to a sustainable emissions path, the global cost of taking necessary actions increases by hundreds of billions of dollars. ... [A]cting sooner ... will lower the ultimate costs of achieving the target, because there will be more time allowed for gradual transition—which is what keeps costs down. Perhaps most important, the costs of failing to take action—the damages of climate change—would be substantially greater. ...

"The Essential Pillars of a New Climate Pact"

Sheila Olmstead and Robert Stavins argue that three essential elements must be present in the successor to the 1997 Kyoto Protocol:

The essential pillars of a new climate pact, by Sheila M. Olmstead and Robert N. Stavins, Commentary, Boston Globe: The climate change summit at the United Nations on Tuesday is aimed to build momentum for ... a successor to the 1997 Kyoto Protocol, which expires in 2012. To be successful, any feasible successor agreement must contain three essential elements: meaningful involvement by a broad set of key industrialized and developing nations; an emphasis on an extended time path of emissions targets; and ... policy approaches that work through the market, rather than against it.

Consider the need for broad participation. Industrialized countries have emitted most of the ... man-made carbon dioxide in our atmosphere, so shouldn’t they reduce emissions before developing countries are asked to contribute? While this seems to make sense, here are four reasons why the new climate agreement must engage all major emitting countries - both industrialized and developing.

First, emissions from developing countries are significant and growing rapidly. ... Second, developing countries provide the best opportunities for low-cost emissions reduction... Third,... industrialized countries may not commit to significant emissions reductions without developing country participation. Fourth, if developing countries are excluded, up to one-third of carbon emissions reductions ... may migrate to non-participating economies through international trade, reducing environmental gains...

The second pillar of a successful post-2012 climate policy is an emphasis on the long run..., and major technological change is needed to bring down the costs of reducing CO2 emissions. The economically efficient solution will involve firm but moderate short-term targets to avoid rendering large parts of the capital stock prematurely obsolete, and flexible but more stringent long-term targets.

Third, a post-2012 global climate policy must work through the market rather than against it. ... One market-based approach, known as cap-and-trade, is emerging as the preferred approach ... among industrialized countries. ...

Cap-and-trade systems can be linked directly, which requires harmonization, or indirectly by linking with a common emissions-reduction credit system; indeed, this is what appears to be emerging... Kyoto’s Clean Development Mechanism allows parties in wealthy countries to purchase emissions-reduction credits in developing countries by investing in emissions-reduction projects. These credits can be used to meet emissions commitments...

A new international climate agreement missing any of these three pillars may be too costly, and provide too little benefit, to represent a meaningful attempt to address the threat of global climate change.

"The Recession's Racial Divide"

Race and the recession:

The Recession’s Racial Divide, by Barbara Ehrenreich and Dedrick Muhammad, Commentary, NY Times: What do you get when you combine the worst economic downturn since the Depression with the first black president? A surge of white racial resentment, loosely disguised as a populist revolt. An article on the Fox News Web site has put forth the theory that health reform is a stealth version of reparations for slavery: whites will foot the bill and, by some undisclosed mechanism, blacks will get all the care. President Obama, in such fantasies, is a dictator and, in one image circulated among the anti-tax, anti-health reform “tea parties,” he is depicted as a befeathered African witch doctor with little tusks coming out of his nostrils. When you’re going down, as the white middle class has been doing for several years now, it’s all too easy to imagine that it’s because someone else is climbing up over your back.

Despite the sense of white grievance, though, blacks are the ones who are taking the brunt of the recession, with disproportionately high levels of foreclosures and unemployment. And they weren’t doing so well to begin with. ... In fact, you could say that for African-Americans the recession is over. It occurred from 2000 to 2007, as black employment decreased by 2.4 percent and incomes declined by 2.9 percent. During those seven years, one-third of black children lived in poverty, and black unemployment — even among college graduates — consistently ran at about twice the level of white unemployment. That was the black recession. What’s happening now is more like a depression. ...

Racial asymmetry was stamped on this recession from the beginning. ... People of all races got sucked into subprime and adjustable-rate mortgages, but even high-income blacks were almost twice as likely to end up with subprime home-purchase loans as low-income whites — even when they qualified for prime mortgages, even when they offered down payments. ...

Mortgage lenders like Countrywide and Wells Fargo sought out minority homebuyers for the heartbreakingly simple reason that, for decades, blacks had been denied mortgages on racial grounds, and were thus a ready-made market for the gonzo mortgage products of the mid-’00s. Banks replaced the old racist practice of redlining with “reverse redlining” — intensive marketing aimed at black neighborhoods in the name of extending home ownership to the historically excluded. Countrywide, which prided itself on being a dream factory for previously disadvantaged homebuyers, rolled out commercials showing canny black women talking their husbands into signing mortgages.

At Wells Fargo, Elizabeth Jacobson, a former loan officer at the company, recently revealed — in an affidavit in a lawsuit by the City of Baltimore — that salesmen were encouraged to try to persuade black preachers to hold “wealth-building seminars” in their churches. For every loan that resulted from these seminars, whether to buy a new home or refinance one, Wells Fargo promised to donate $350 to the customer’s favorite charity, usually the church. ...

But you didn’t need a dodgy mortgage to be wiped out by the subprime crisis and ensuing recession. Black unemployment is now at 15.1 percent, compared with 8.9 percent for whites. In New York City, black unemployment has been rising four times as fast as that of whites. By 2010, according to Lawrence Mishel of the Economic Policy Institute, 40 percent of African-Americans nationwide will have endured patches of unemployment or underemployment.

One result is that blacks are being hit by a second wave of foreclosures caused by unemployment. ... So despite the right-wing perception of black power grabs, this recession is on track to leave blacks even more economically disadvantaged than they were. Does a black president who is inclined toward bipartisanship dare address this destruction of the black middle class? Probably not. But if Americans of all races don’t get some economic relief soon, the pain will only increase and with it, perversely, the unfounded sense of white racial grievance.

Solving the Free Rider Problem using fMRI Measurements

If we hook up a randomly chosen set of people to magnetic neural imaging machines to see if they are truthfully revealing their valuation of public goods, we can improve our ability to provide these services, but the intrusiveness of the solution seems problematic, at least to me. Does this bother you, or does it seem like a good idea to move in this direction? [Update: Cheap Talk has good comments on the research]:

Caltech scientists develop novel use of neurotechnology to solve classic social problem, EurekAlert: Economists and neuroscientists from the California Institute of Technology (Caltech) have shown that they can use information obtained through functional magnetic resonance imaging (fMRI) measurements of whole-brain activity to create feasible, efficient, and fair solutions to one of the stickiest dilemmas in economics, the public goods free-rider problem—long thought to be unsolvable.

This is one of the first-ever applications of neurotechnology to real-life economic problems, the researchers note. "We have shown that by applying tools from neuroscience to the public-goods problem, we can get solutions that are significantly better than those that can be obtained without brain data," says Antonio Rangel, associate professor of economics at Caltech and the paper's principal investigator.

The paper describing their work was published today in the online edition of the journal Science, called Science Express.

Examples of public goods range from healthcare, education, and national defense to the weight room or heated pool that your condominium board decides to purchase. But how does the government or your condo board decide which public goods to spend its limited resources on? And how do these powers decide the best way to share the costs?

"What is the Future of Coal?"

Robert Stavins says there are considerable uncertainties regarding the future of coal:

What is the Future of U.S. Coal?, by Robert Stavins: ...At the center of much political attention in the United States is “the future of coal”... CO₂ emissions from coal consumption accounted for 30 percent of U.S. greenhouse gas emissions in 2005, and nearly all resulted from coal’s use in generating electricity. According to EIA forecasts, the vast majority of coal demand over the coming decades will be from existing power plants, with currently existing plants still accounting for two-thirds of total demand in 2030. Therefore, while much attention has been given to how climate policy and technological advances may affect new power plants, over the next two decades a policy that affects both existing and new coal-fired power plants would have far greater impacts than a policy that affects only new plants.

Potential climate policies can be grouped into four major categories: standards, subsidies or credit-based programs, carbon taxes, and cap-and-trade (like Waxman-Markey). The cost of retrofitting existing plants to meet CO₂ emission standards would likely be so high that standards could be imposed only on new plants..., standards would be unlikely to affect operations of existing plants. In fact, by increasing the cost of new plants, such standards can encourage generators to extend the life of existing plants. Hence, new source standards hold little promise in this domain.

Likewise, while subsidies or credit-based programs ... may displace some new coal-fired generation with other types of generation, they will have little, if any, effect on the operation of existing coal-fired power plants. And carbon taxes are opposed by the regulated community because of the additional costs they would place on private industry, and are opposed by environmentalists because of the political challenges.

This leaves cap-and-trade. Such a system would cover both new and existing emission sources, and could have a more pervasive effect on coal use than standards, subsidies, or credit-based programs. For this and other reasons, most policy attention in the United States has been focused on potential cap-and-trade systems.

Coal combustion generates the most CO₂ emissions per unit of energy. As a result, a cap-and-trade system’s effect on the cost of coal use would be significantly greater than its effect on the cost of gasoline or natural gas consumption. For example, a $100 per ton of CO₂ allowance price would increase the average cost of electricity generation from coal-fired power plants by about 400%, the average cost of electricity generation from natural gas plants by about 100%, and gasoline prices by about $1.00 per gallon.

The competitiveness of conventional coal-fired electricity generation relative to other technologies diminishes as the stringency of an emissions cap increases. Therefore, much attention is being given to opportunities to employ carbon-capture-and-storage (or CCS) technologies, which would separate carbon dioxide from other stack gases, liquify it, and store it underground for long periods of time.

Three important caveats about CCS should be considered. First, it is likely that CCS will be economically practical only for new plants, and only when CO₂ allowance prices exceed $100 per ton of CO₂ for early adopters (cost estimates have increased over the past few years, as technological and institutional challenges have become clearer). Second, there is significant uncertainty about the cost of CCS, because it has not yet been commercially demonstrated. And third, CCS significantly reduces, but does not eliminate, CO₂ emissions from coal-fired generation.

In light of the growing momentum toward a mandatory U.S. climate policy, the anticipated impacts of such policies on coal use are an important issue. But the remaining uncertainties are great. Impacts of a climate policy on coal use will depend upon the type of climate policy employed, the stringency of the policy, the future price of natural gas, the future cost and penetration of nuclear and renewable technologies, and the cost of coal-fired generation with carbon capture and storage technologies. ...

"An Echo Chamber of Boom and Bust"

Robert Shiller says the global recovery in economic confidence is being driven by a social epidemic, the contagion of ideas, and huge feedback loops:

An Echo Chamber of Boom and Bust, by Robert Shiller, Commentary, NY Times: The global signs of a recovery in economic confidence seem puzzling.

It is a large and diverse world, after all, so why should confidence have rebounded so quickly in so many places? ... Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms. For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views. These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order. ...

"When Carbon is Priced, Who Ultimately Pays?"

Who pays the costs of a cap and trade system for carbon emissions? This analysis of who pays based upon the legislation passed by the House in June suggests that "the distributional consequences have been addressed fairly effectively," and that "Strong opposition to the legislation will probably be based more on ideological grounds than distributional concerns":

When carbon is priced, who ultimately pays?, by Corbett Grainger and Charles Kolstad, Vox EU: Climate change legislation is winding its way through the US Congress. In June (2009), the House passed complex legislation involving, among other things, a cap and trade system for carbon emissions in the US. The legislation passed by the slimmest of majorities – 219 to 212 with 3 not voting. Although most Republicans opposed the legislation, a significant number of Democrats, primarily those from coal-rich or rural districts, also voted no. Politics is local, even for global warming.

The Senate will consider similar legislation in September, and its passage is likely to be even more difficult. Several issues are at the core of the opposition:

1. The competitive effect on industry. Will higher costs cause US industry to lose market share to foreign producers? In order to win over skeptics, legislators mandated import tariffs on goods from countries without climate legislation (such as China). President Obama has subsequently condemned such mandatory trade barriers.
2. The burden of increased energy prices on lower-income individuals. The poor often drive older cars, commute further to work, and in other respects consume goods and services differently than wealthier members of society. Furthermore, to the extent that energy is a necessity, one would expect price increases to hit the poor particularly hard. In other words, carbon regulation may be regressive.
3. The burden of higher prices for consumers in states heavily reliant on coal-based electricity. Coal has the largest carbon emissions per unit of heat energy of any of the fossil fuels (by a wide margin) and thus will be hit hard by any legislation.

Measuring the burden of a carbon price

It is important to distinguish between a tax’s statutory incidence (i.e., who writes the check to the government) and its ultimate burden (who ends up paying the cost of the tax). A cap-and-trade system is not a tax in the normal sense, but it does induce a tax-like carbon price change. Raising the price of carbon increases the costs of doing business, and those costs may be passed on to consumers, workers, or owners.

The Size of the Bush Tax Cuts vs. the Cost of Health Care Reform

Via Economix:

Trillion Dollar Health Reform, $3 Trillion in Tax Cuts, by Howard Gleckman, Tax Policy Center: It is interesting, and perhaps worth noting, that while political opposition seems to be hardening against the $1 trillion, ten-year cost of the early versions of health reform, barely a peep of concern has been raised about the $3 trillion price tag for President Obama’s plan to extend most of the Bush-era tax cuts.

The message seems pretty clear: The President, congressional Democrats, and nearly all Republicans are fine with busting the budget to cut taxes for nearly everyone, notwithstanding a cumulative deficit over the next decade of $9 trillion. They are, by contrast, unwilling to spend one-third as much to provide medical insurance for those who cannot afford it. I’ve always felt that health reform is as much an ethical choice as an economic one. We appear to be making ours.

Yes, priorities. Tax cuts for the wealthy come before health care for the uninsured.

Stavins: Waxman-Markey is Not a Massive Corporate Give-Away

This is a follow-up to the recent discussion between Brad DeLong and Greg Mankiw on the effects of giving away rather than auctioning carbon permits under a cap and trade system (see, e.g., here, here, here, and here). Mankiw begins with the premise that:

Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

But is it correct to classify the program as "giving most of them away to powerful special interests"? Here's Harvard's Robert Stavins who knows a thing or two about this topic. He notes that "it is remarkable (and unfortunate) how misleading so much of the coverage has been of the issues and the numbers surrounding the proposed allowance allocation." He also says that "we should be honest that the legislation, for all its flaws, is by no means the 'massive corporate give-away' that it has been labeled.  On the contrary, 80% of the value of allowances accrue to consumers and public purposes":

The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey, by Robert Stavins: ...Now, let’s go back to the hand-wringing in the press and blogosphere about the so-called massive political “give-away” of allowances.  Perhaps unintentionally, there has been some misleading press coverage, suggesting that up to 75% or 80% of the allowances are given away to private industry as a windfall over the life of the program, 2012-2050 (in contrast with the 100% auction originally favored by President Obama).

Given the nature of the allowance allocation in the Waxman-Markey legislation, the best way to assess its implications is not as “free allocation” versus “auction,” but rather in terms of who is the ultimate beneficiary of each element of the allocation and auction, that is, how the value of the allowances is allocated.  On closer inspection, it turns out that many of the elements of the apparently free allocation accrue to consumers and public purposes, not private industry.

"A Missed Opportunity on Climate Change"

In discussing proposed climate change legislation below, Greg Mankiw says:

To those who view climate change as an impending catastrophe and the distorting effects of the tax system as a mere annoyance, an imperfect bill is better than none at all. To those not fully convinced of the enormity of global warming but deeply worried about the adverse effects of high current and prospective tax rates, the bill is a step in the wrong direction.

He then goes on to say "As for me, I hope the president refuses to sign a bill that fails to auction most of the allowances..., sometimes good is not good enough" which, given his categorization of those supporting and opposing the bill, I interpret to mean that he is more worried about distortions from taxes than he is about global warming:

A Missed Opportunity on Climate Change, by N. Gregory Mankiw, Commentary, NY Times: During the presidential campaign of 2008, Barack Obama distinguished himself on the economics of climate change, speaking far more sensibly about the issue than most of his rivals. Unfortunately, now that he is president, Mr. Obama may sign a climate bill that falls far short of his aspirations. Indeed, the legislation making its way to his desk could well be worse than nothing at all. ...

The textbook solution for dealing with negative externalities is to use the tax system to align private incentives with social costs and benefits. ... A carbon tax is the remedy for climate change that wins overwhelming support among economists and policy wonks.

When he was still a candidate, Mr. Obama did not exactly endorse a carbon tax. He wanted to be elected... What Mr. Obama proposed was a cap-and-trade system for carbon, with all the allowances sold at auction. ... Such a system is tantamount to a carbon tax. The auction price of an emission right is effectively a tax on carbon. ...

So far, so good. The problem occurred as this sensible idea made the trip from the campaign trail through the legislative process. Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

"Reality Pricks Corn Ethanol's Bubble"

Does corn ethanol have a future? Let's hope not:

Reality Pricks Corn Ethanol's Bubble, by Doug Struck, Miller-McCune: ...Corn-based ethanol was seen as such an ideal solution for our transportation fuel that Congress leaped to write it into law. In ... 2007, Congress mandated a fivefold increase in biofuels — 42 percent of it from corn — in 15 years.

An industry quickly sprang up: Nearly 200 ethanol refineries have been built..., and an estimated 70 percent of gas sold in the United States contains at least some ethanol.

But as its limitations became clearer, the long-term future of corn ethanol has been clipped. Investors have concluded the industry can only be a niche player, engineers question the practicality of the fuel, scientists doubt its usefulness in reducing global warming, and the federal government is seeking to stop the industry's growth. ...

[T]he first real splash of cold water on ethanol fever came from the market. Last summer, the price of corn peaked above $6 a bushel, and many ethanol producers were locked into high-priced contracts for their raw material. Then the price of gasoline plummeted..., and suddenly ethanol refiners found themselves struggling to break even. As the deepening recession cut off business credit, the industry plunged into wholesale bankruptcies. ...

Even as the survivors in the industry slowly begin to emerge from last year's squeeze — gasoline prices are inching up and their input costs have eased — ethanol faces a limitation from the "blend wall," a federal rule that limits ethanol to 10 percent of gasoline.

The alcohol in ethanol burns hot and is tough on gaskets, hoses and the computers of modern cars, a danger that prompted the 10 percent limit. That rule effectively caps ethanol production... Ethanol producers are lobbying Congress hard to increase the blend wall, but automotive engineers are raising red flags. ... Congress watchers say, at best, the ethanol industry will get a slight increase in the blend wall. ...

To add to its problems, the ... EPA has proposed a rule to enforce a congressional provision in the 2007 Energy Bill, largely ignored under the Bush administration, requiring any new biofuel to be at least 20 percent lower in greenhouse gas emissions than the gasoline it replaces. The rule requires that a new fuel, including ethanol, must account for all of its far-flung carbon impact, including that of forests cut down in distant lands by farmers replacing lost food crops.

It is a startlingly bold rule ... and the industry is crying foul. ... The administration has offered corn ethanol refiners ... a grandfather clause that will exempt the existing refiners from the rule... But new corn ethanol production ... would not pass the greenhouse gas test, according to EPA calculations. ... The EPA is following a path pioneered by California that reflects accumulating research that finds corn-based ethanol is unlikely to reduce greenhouse gases. ...

The ethanol industry complains the research counting indirect costs assumes too direct a link from U.S. corn growers to land cleared by farmers in, say, Africa. ... In a bow to that argument, the administration is setting up a scientific panel to review the question..., prompting head-shaking among environmentalists. ...

But cold-eyed Wall Street already has pronounced its verdict. While the administration's grandfather clause will prop up the value of the existing ethanol plants, financiers are not putting money into any further growth of the industry.

"I think what this does is really sets a defined end to the corn era," said Sander Cohan, transportation fuels analyst at Energy Security Analysis Inc., near Boston. "There's going to be a very active market in controlling and owning the plants that are grandfathered in. Those plants are going to have an enormous premium. But you can't build any more of these old corn ethanol plants."

The ethanol industry isn't giving up:

Ethanol producers have ... regrouped and are striking back by taking a page from the EPA’s playbook.

The EPA, charged by the U.S. Congress with calculating carbon pollution from fuels, maintains that the ethanol industry is responsible for more than just the emissions generated from producing ethanol and burning it in vehicles.

Ethanolcould have another environmental impact. That is, by taking corn out of the global food supply, ethanol producers are indirectly inducing people in other places, such as the Amazon rainforest, to clear forests to plant more crops to replace the lost corn. ...

Now the ethanol industry is saying oil-based gasoline has its own indirect effects in places like Canada’s oil sands, where oil companies burn through massive amounts of energy to extract and refine gunky oil.

In a recent report, the Renewable Fuels Association, ethanol’s main industry trade group, argues that the corn-based fuel’s environmental credentials should be measured against gasoline made with that kind of oil, not with the lighter and more easily refined crude grades, which are becoming scarcer. That comparison makes ethanol look a lot greener. ...

The issue is far from settled—the EPA is waiting for public comment before making its final determination...

Corn ethanol provides an excuse to avoid conservation.

"Surprising Comparative Properties of Monetary Models"

I need to read this paper:

Surprising Comparative Properties of Monetary Models: Results from a New Data Base, by John B. Taylor and Volker Wieland, May 2009 [open link]: Abstract: In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.

"Carbon Sequestration from Forestry and Agriculture"

Michael Roberts responds to Rob Stavins post on the potential benefits from sequestering carbon:

Carbon sequestration from forestry and agriculture, Greed, Green, and Grains: Rob Stavins writes about curbing potential climate change by sequestering carbon rather than, or in addition to, reducing emissions from fossil fuel consumption. Stavins focuses mainly on preserving and increasing forest coverage. There are two good reasons for this focus: (1) deforestation is responsible for about 20% of CO2 emissions worldwide and (2) preventing deforestation and planting new forests appear to be low-cost ways of reducing total emissions.

Within the Waxman-Markey bill, CO2 emissions can be offset from agriculture and forestry activities. I'm not convinced much sequestration gains are to be had from agriculture. But farmer interests smell an opportunity, and with 80 years of rent-seeking under their collective belts, they are quite good at capitalizing on them. Under the bill (at least some versions of it) USDA will run the offset program, not EPA. That's probably essential given political constraints.

Some environmentalists smell a rat in the offset provision. They seem to see offsets as a loophole to avoid actual emissions reductions. There may be some truth to this.

My view is a little different (see earlier post). The problem is that by restricting emissions from carbon-based fuels and ultimately increasing the price of energy, there will be increased demand for other resources, including those from agriculture and forestry. Instead of using oil and gas people will use wood and ethanol. If carbon emissions from wood and ethanol are not counted they will be under-priced in a cap-and-trade world. Besides wood and ethanol, there are surely a zillion other indirect market implications we are unlikely to imagine.

So, in the end, we must at least try to count all the carbon. Otherwise we'll be squeezing a balloon--reducing emissions in one part of the global economy just to have them pop out somewhere else. It's not much different from having cap-and-trade in the U.S. and then buying Chinese goods produced using their uncapped carbon emissions. Eventually, we'll need to get China, India, and the rest of the developing world on board. Everyone knows this. But not everyone seems to recognize that we need to count all the carbon.

An offset policy doesn't capture these indirect effects. Even a painfully complicated offset policy that attempts to trace market impacts far and wide to make sure they are "additive." Even if there are no offsets, energy price changes will shift demand for all kinds of resources, from firewood to ethanol, all which affect the carbon balance.

I don't think many are yet willing to seriously consider the difficulty of this problem. It almost surely won't get into the first bill. But sooner or later we'll see fewer emission reductions than we expected. Maybe then we'll start counting all the carbon. Hopefully it won't be too late.

Reliable and transparent measurement of carbon emissions and sequestrations from forestry and agriculture will be key. While current [proposed] offset policies may do little in the way of actually influencing the carbon balance, they will spur research and debate about measurement issues. That's a good first step.

In comments to this post, Richard Serlin adds:

A fascinating and potentially very powerful idea for ramping this up greatly is genetically engineered super carbon eating trees. The best short article I've been able to find so far on this is a recent New York Times guest column by science journalist Oliver Morton.

Should Carbon be Sequestered?

Robert Stavins explains why he believes that biological carbon sequestration should be part of U.S. climate policy:

What Role for U.S. Carbon Sequestration?, by Robert Stavins: With the development of climate legislation proceeding in the U.S. Senate, a key question is whether the United States can cost-effectively reduce a significant share of its contributions to increased atmospheric CO₂ concentrations through forest-based carbon sequestration.  Should biological carbon sequestration be part of the domestic portfolio of compliance activities?

Thomas Schelling on Climate Change

Conor Clarke interviews Thomas Schelling on the implementation of climate change policy (the excerpts run across several questions):

An Interview With Thomas Schelling, Part Two, by Conor Clarke: This is the second part of my interview with Nobel Prize-winning economist Thomas Schelling. Part one is here. In this part we talk very generally about climate change...

...It's not obvious that averting global climate change is in the rational self-interest of anyone ... alive today. The serious consequences probably won't occur until 2080 or 2100 or thereafter..., [and] those consequences are going to be distributed in a radically uneven way. The northwest of the United States might actually benefit. So how does a negotiation process work? How does a generation today negotiate on behalf of future generations? And how do we negotiate when the costs are distributed so unevenly?

Well I do think that one of the difficulties is that most of the beneficiaries aren't yet born. More than that: Most of the beneficiaries will be born in ... the developing world. By 2080 or 2100 five-sixths of the population, at least, will be in places like China, India, Indonesia, Africa and so forth. And what I don't know is whether Americans are really willing to understand that and do anything for the benefit of the unborn Chinese.

It's a tough sell. And probably you have to find ways to exaggerate the threat. And you can in fact find ways to make the threat serious. I think there's a significant likelihood of a kind of a runaway release of carbon and methane ... that will create a huge multiplier effect, and it could become very serious. ...

If I were to come clean to the American public I would say that, except for a very low probability of a very bad result -- which is the disintegration of the West Antarctic ice sheet, which would put Washington DC under water -- we are probably going to outgrow any vulnerability we have to climate change. ... You know, very little of the US economy is susceptible to climate. All of agriculture is less than 3% of our gross product. Forestry may be endangered. Fisheries may be endangered. But recreation might actually benefit!

So if we can double our GDP in the next 70 or 80 years,... -- even if we lose 10% of our GDP from climate change -- we're still ahead so much that the effect of climate change wouldn't be noticed. But it would be pretty disastrous in a lot of the less developed parts of the world. And that's why I think it's crucially important not to demand anything of China, India and so forth that will significantly impede their economic progress. ...

[I]f the developed countries ... are really serious, they'll tell India and China and Brazil, "we're going to provide enormous assistance to help reduce your dependence on fossil fuels. And we don't expect you to pay for it yourselves. We will pay for it because we're rich and you're not." ...

But while people talk about this..., nobody that I know of is thinking about how in the world you organize so that the rich countries can agree what you do with the poor. You need to know who divides the money, and who the monitors is. We're going to need a whole new set of institutions...

It's very hard to get Americans to engage in what they think will be suffering not just for the polar bears but for the poor around the world who will indeed suffer if they can't outgrow their vulnerability to climate change. ...

I think you have to realize that most people have very strong moral feelings. I think in a lot of cases they're misdirected. I wish moral feelings about a two-month old fetus were attached to hungry children in Africa. But I think people have very strong moral feelings. In fact, I'm always amazed by the number of people who at least pretend they're worried about the polar bears.

And one thing that I think ought to help but doesn't is that -- and my impression is that maybe this is slightly changing -- the organized churches in America don't take seriously preserving the heritage that God gave us. ... I get no impression that Protestants and Catholics are sermonizing on the importance of preserving the bounty of the earth, the richness of the species, or preserving the planet as we would like to know it. ... I think the churches don't realize that they could have a potent effect in not letting so much of gods legacy -- in terms of flora and fauna -- be destroyed by climate change.

But I tend to be rather pessimistic. I sometimes wish that we could have, over the next five or ten years, a lot of horrid things happening -- you know, like tornadoes in the Midwest and so forth -- that would get people very concerned about climate change. But I don't think that's going to happen.

Exaggerating the threat won't help. When people find out that you are doing that -- and they will at some point -- you lose credibility and end up further behind than when you started. Also, though this is a bit picky -- this qualification is often omitted to simplify the discussion -- the costs are not fully captured by the loss of GDP. If, for example, some species become extinct due to climate change, that is only included in the costs to the extent that it lowers the output of goods and services. But our concerns are broader than that. Finally, I don't think we should, even just sometimes, wish that horrid things would happen to people no matter how much good might come of it. There are better ways to get there.

"Boiling the Frog"

What are we waiting for?:

Boiling the Frog, by Paul Krugman, Commentary, NY Times: Is America on its way to becoming a boiled frog?

I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time. ...

I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which ... it’s very hard to get people to do what it takes to head off a catastrophe foretold. ...

Start with economics: ...Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”...

Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.

To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.

This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.

Still, the boiled-frog problem on the economy is nothing compared with the problem of ... climate change. ... At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it... How to head off that catastrophe should be the dominant policy issue of our time.

But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. ... Unfortunately, if we wait to act until the climate crisis is ... obvious, catastrophe will already have become inevitable.

And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.

What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable...

After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.

And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?

I don’t know the answer. And that’s why I keep thinking about boiling frogs.

"Is Benefit-Cost Analysis Helpful for Environmental Regulation?"

 Robert Stavins notes that:

With an exceptionally talented group of thinkers - including scientists, lawyers, and economists - now in key environmental and energy policy positions at the White House, the Environmental Protection Agency, the Department of Energy, and the Department of the Treasury, this question about the usefulness of benefit-cost analysis is of particular importance

Here's his (balanced) discussion. Points four, five, and eight struck me as particularly noteworthy:

Is Benefit-Cost Analysis Helpful for Environmental Regulation?, by Robert Stavins: ...[Does] economic analysis - in particular, the comparison of the benefits and costs of proposed policies - play ... a truly useful role in Washington, or is it little more than a distraction of attention from more important perspectives on public policy, or - worst of all - is it counter-productive, even antithetical, to the development, assessment, and implementation of sound policy in the environmental, resource, and energy realms. ...

For many years, there have been calls from some quarters for greater reliance on the use of economic analysis in the development and evaluation of environmental regulations. As I have noted in previous posts on this blog, most economists would argue that economic efficiency — measured as the difference between benefits and costs — ought to be one of the key criteria for evaluating proposed regulations. ... Because society has limited resources to spend on regulation, such analysis can help illuminate the trade-offs involved in making different kinds of social investments. In this sense, it would seem irresponsible not to conduct such analyses, since they can inform decisions about how scarce resources can be put to the greatest social good.

In principle, benefit-cost analysis can also help answer questions of how much regulation is enough. From an efficiency standpoint, the answer to this question is simple — regulate until the incremental benefits from regulation are just offset by the incremental costs. In practice, however, the problem is much more difficult, in large part because of inherent problems in measuring marginal benefits and costs. In addition, concerns about fairness and process may be very important economic and non-economic factors. Regulatory policies inevitably involve winners and losers, even when aggregate benefits exceed aggregate costs.

Over the years, policy makers have sent mixed signals regarding the use of benefit-cost analysis in policy evaluation. Congress has passed several statutes to protect health, safety, and the environment that effectively preclude the consideration of benefits and costs in the development of certain regulations, even though other statutes actually require the use of benefit-cost analysis. At the same time, Presidents Carter, Reagan, Bush, Clinton, and Bush all put in place formal processes for reviewing economic implications of major environmental, health, and safety regulations. Apparently the Executive Branch, charged with designing and implementing regulations, has seen a greater need than the Congress to develop a yardstick against which regulatory proposals can be assessed. Benefit-cost analysis has been the yardstick of choice.

It was in this context that ten years ago a group of economists from across the political spectrum jointly authored an article in Science magazine, asking whether there is role for benefit-cost analysis in environmental, health, and safety regulation. That diverse group consisted of Kenneth Arrow, Maureen Cropper, George Eads, Robert Hahn, Lester Lave, Roger Noll, Paul Portney, Milton Russell, Richard Schmalensee, Kerry Smith, and myself. That article and its findings are particularly timely, with President Obama considering putting in place a new Executive Order on Regulatory Review.

In the article, we suggested that benefit-cost analysis has a potentially important role to play in helping inform regulatory decision making, though it should not be the sole basis for such decision making. We offered eight principles.

First, benefit-cost analysis can be useful for comparing the favorable and unfavorable effects of policies, because it can help decision makers better understand the implications of decisions by identifying and, where appropriate, quantifying the favorable and unfavorable consequences of a proposed policy change. But, in some cases, there is too much uncertainty to use benefit-cost analysis to conclude that the benefits of a decision will exceed or fall short of its costs.

Second, decision makers should not be precluded from considering the economic costs and benefits of different policies in the development of regulations. Removing statutory prohibitions on the balancing of benefits and costs can help promote more efficient and effective regulation.

Third, benefit-cost analysis should be required for all major regulatory decisions. The scale of a benefit-cost analysis should depend on both the stakes involved and the likelihood that the resulting information will affect the ultimate decision.

Fourth, although agencies should be required to conduct benefit-cost analyses for major decisions,... those agencies should not be bound by strict benefit-cost tests. Factors other than aggregate economic benefits and costs may be important.

Fifth, benefits and costs of proposed policies should be quantified wherever possible. But not all impacts can be quantified, let alone monetized. Therefore, care should be taken to assure that quantitative factors do not dominate important qualitative factors in decision making. ...

Sixth, the more external review that regulatory analyses receive, the better...

Seventh, a consistent set of economic assumptions should be used in calculating benefits and costs. Key variables include the social discount rate, the value of reducing risks of premature death and accidents, and the values associated with other improvements in health.

Eighth, while benefit-cost analysis focuses primarily on the overall relationship between benefits and costs, a good analysis will also identify important distributional consequences for important subgroups of the population.

From these eight principles, we concluded that benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving the natural environment, health, and safety. Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible public policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and hence the outcome of policy analysis.

If properly done, benefit-cost analysis can be of great help...

links for 2009-07-07

• Kinship and conflict - voxeu.org
• Banks Planning "Harry and Louise" Ads - The Stash
• Robert Shiller answers critics of housing "wealth effect" - Peter Coy
• CFTC Floats Rules Aimed at Speculation - washingtonpost.com
• Chinese Currency Used for Some Foreign Payments - NYTimes.com
• Automakers’ Swift Cases in Bankruptcy Shock Experts - NYTimes.com
• New research explores how -- and why -- music affects our brain - SciAm
• How to think about a jobless recovery - Free exchange
• Trade policy and the crisis - voxeu.org
• Physical reality of string theory demonstrated - EurekAlert
• "Internet Asperger's Syndrome" and "Austistic economics" - Language Log
• Stimulus is working, but may not be enough - EPI
• Ezra Klein - links
• The Stash - links
• Matthew Yglesias - links
• New Deal 2.0 - links
• Free Exchange - links
• Brad DeLong - links
• Paul Kedrosky - links
• Credit Writedowns - links
• Abnormal Returns - links
• Marginal Revolution - links
• Chris Martenson - links
• The Big Picture - links
• FT Alphaville - links
• naked capitalism - links
• Credit Writedowns - links

"Half of the World's Emissions Came from Just 700 Million People"

I'm on the run at the moment and have only given this a quick scan, hopefully the comments can take it up in more detail, but here is, according to the hype, the solution to all our global warming problems [Scientific American comments on the proposal here.]:

New Princeton method may help allocate carbon emissions responsibility among nations, EurekAlert: Just months before world leaders are scheduled to meet to devise a new international treaty on climate change, a research team led by Princeton University scientists has developed a new way of dividing responsibility for carbon emissions among countries.

The approach is so fair, according to its creators, that they are hoping it will win the support of both developed and developing nations, whose leaders have been at odds for years over perceived inequalities in previous proposals.

The method is outlined in a paper, titled "Sharing Global CO2 Emissions Among 1 Billion High Emitters," published online in this week's Proceedings of the National Academy of Sciences. According to the authors, the approach uses a new fairness principle based on the "common but differentiated responsibilities" of individuals, rather than nations.

"Our proposal moves beyond per capita considerations to identify the world's high-emitting individuals, who are present in all countries," the team says in the introduction. The authors include Stephen Pacala ... and Robert Socolow... Pacala and Socolow's concept of "stabilization wedges," a strategy that proposed concrete ways to prevent global emissions of greenhouse gases from rising for the next five decades, was featured in "An Inconvenient Truth," former Vice President Al Gore's 2006 film about climate change. The concept has given the climate change policy community a common unit for discussing how to reduce emissions and for allowing a comparison of different carbon-cutting strategies.

"The Next Great Global Industry"

Thomas Friedman says the race to develop clean-power technologies is on, and if we lose it we won't be able to afford health care reform:

Can I Clean Your Clock?, by Thomas Friedman, Commentary, NY Times: Over the past decade, whenever I went to China and engaged Chinese on their pollution and energy problems, inevitably some young Chinese would say: “Hey, you Americans got to grow dirty for 150 years, using cheap coal and oil. Now it is our turn.”

It’s a hard argument to refute. Eventually, I decided that the only way to respond was...: “You’re right. It’s your turn. Grow as dirty as you want. Take your time. Because I think America just needs five years to invent all the  you Chinese are going to need as you choke to death on pollution. Then we’re going to come over here and sell them all to you, and we are going to clean your clock ... in the next great global industry: clean power technologies...”

Whenever you frame it that way, Chinese are quizzical at first, and then they totally get it:... E.T. — energy technologies that produce clean power and energy efficiency — is going to be the next great global industry, and China needs to be on board. Well, China has gotten on board — big-time. Now I am worried that China will, dare I say, “clean our clock” in E.T.

Yes, you might think that China is only interested in polluting its way to prosperity. That was once true, but it isn’t anymore. China is increasingly finding that it has to go green out of necessity because in too many places, its people can’t breathe, fish, swim, drive or even see because of pollution and climate change. Well, there is one thing we know about necessity: it is the mother of invention.

And that is what China is doing, innovating more and more energy efficiency and clean power systems. And when China starts to do that in a big way — when it starts to develop solar, wind, batteries, nuclear and energy efficiency technologies on its low-cost platform — watch out. ...

“China is moving,” says Hal Harvey, the chief executive of ClimateWorks, which shares clean energy ideas around the world. “...Sustainable technologies in solar, wind, electric vehicles, nuclear and other innovations will drive the future global economy. We can either invest in policies to build U.S. leadership in these new industries and jobs today, or we can continue with business as usual and buy windmills from Europe, batteries from Japan and solar panels from Asia.” ...

This is a major reason I favor the climate/energy bill passed by the House. If we do not impose on ourselves the necessity to drive innovation in clean-technology ... we will be laggards in the next great global industry.

And this is why I disagree with President Obama when he signals that he has to focus on extending health care and put the energy/climate bill — now in the Senate — on the backburner.

Health care and the energy/climate bill go together. We need both now. Imagine how poor we would be today if U.S. firms did not dominate the top 10 Internet companies. Well, if we don’t dominate the top 10 E.T. rankings, there is no way we are going to be able to afford decent health care for every American. No way.

I don't want to underplay the necessity of developing technology that will help to reduce greenhouse gases, and competition between countries and between firms ought to help with that development, but is that true? Is domination of the E.T industry the only way we can afford "decent health care for every American"? Other countries manage to provide decent health care for every one of their citizens, and they don't seem to need to dominate the major industries in the world to do it.

Climate Change Legislation and Protectionism

Martin Feldstein opposes border adjustments related to cap-and-trade:

Will Cap-and-Trade Incite Protectionism?, by Martin Feldstein, Commentary, Project Syndicate: There is a serious danger that the international adoption of cap-and-trade legislation to limit carbon-dioxide emissions will trigger a new round of protectionist measures. ... 150 countries are scheduled to meet in Copenhagen in December to discuss ways to reduce CO2 emissions.

Governments have ... focused on a cap-and-trade system as a way of increasing the cost of CO2-intensive products... The cap-and-trade system ... imposes a carbon tax without having to admit that it is really a tax.

A cap-and-trade system can cause serious risks to international trade. Even if every country has a cap-and-trade system and all aim at the same relative reduction in national CO2 emissions, the resulting permit prices will differ because of national differences in initial CO2 levels and in domestic production characteristics. Because the price of the CO2 permits in a country is reflected in the prices of its products, the cap-and-trade system affects its international competitiveness.

When the permit prices become large enough to have a significant effect on CO2 emissions, there will be political pressure to introduce tariffs on imports that offset the advantage of countries with low permit prices. Such offsetting tariffs would have to differ among products ... and among countries (being higher for countries with low permit prices). Such a system of complex differential tariffs is just the kind of protectionism that governments have been working to eliminate since the start of the GATT process more than 50 years ago.

Worse still, cap-and-trade systems in practice do not rely solely on auctions to distribute the emissions permits. ... Such complexities make it impossible to compare the impact of CO2 policies among countries, which in turn would invite those who want to protect domestic jobs to argue for higher tariff levels.

There is no easy answer to this problem. But before rushing to impose tariffs, it is important to remember that cap-and-trade policies would not be the only government source of differences in competitiveness. Better roads, ports, and even schools all contribute to a country’s competitiveness. No one attempts to use tariffs to balance those government-created differences in competitiveness, and there should be no such attempts if a cap-and-trade system is introduced.

If an international agreement to impose a cap-and-trade scheme is adopted in Copenhagen, the countries there should agree as well that there will be no attempt to introduce offsetting tariffs that would ultimately threaten our global system of free trade.

Paul Krugman on what to do if other countries refuse to participate:

Climate, trade, Obama, by Paul Krugman: I think the president has this wrong:

President Obama on Sunday praised the energy bill passed by the House late last week as an “extraordinary first step,” but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution. ...

The truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade. The way to think about it is in terms of a well-established theory — the theory of non-economic objectives in trade policy — that owes its origins to Jagdish Bhagwati, who certainly can’t be accused of being a protectionist. The essential idea is that if you have a non-economic objective, such as self-sufficiency in food production, you should choose policy instruments to align incentives with that objective; in normal circumstances this leads to consumer or producer intervention, rarely to tariffs.

But in this case the non-economic objective is to reduce greenhouse gas emissions, never mind their source. If you only impose restrictions on greenhouse gas emissions from domestic sources, you give consumers no incentive to avoid purchasing products that cause emissions in other countries; as a result, you have an inefficient outcome even from a world point of view. So border adjustments here are entirely legitimate in terms of basic economics.

And they’re also probably OK under trade law. The WTO has looked at the issue, and suggests that carbon tariffs may be viewed the same way as border adjustments associated with value-added taxes. ... Because it’s essentially a tax on consumers, it’s legal, and also economically efficient, to collect it on imported goods as well as domestic production; it’s a matter of leveling the playing field, not protectionism.

And the same would be true of carbon tariffs.

What’s happening here, I think, is that people are relying on what Paul Samuelson called an economic “shibboleth” — they’re relying on some slogan rather than thinking through the underlying economics. In this case the shibboleth is “free trade good, protection bad”, when what the economics really says is that incentives should reflect the marginal cost of greenhouse gases in all goods, wherever produced — which in this case happens to imply border adjustments.

___________________________________________________________

Update: On the effects of climate change legislation, this is from a July 4 post at the CBO Director's blog:

Estimated U.S. Emissions under the House-passed Bill

Paul Krugman: Betraying the Planet

Are the arguments against the need to act to prevent climate change based upon a morally defensible position grounded in science, or, given the predicted consequences of inaction, a morally indefensible position based upon ideology and political interests?:

Betraying the Planet, by Paul Krugman, Commentary, NY Times: So the House passed the Waxman-Markey climate-change bill. In political terms, it was a remarkable achievement.

But 212 representatives voted no. A handful of these no votes came from representatives who considered the bill too weak, but most rejected the bill because they rejected the whole notion that we have to do something about greenhouse gases.

And as I watched the deniers make their arguments, I couldn’t help thinking that I was watching a form of treason — treason against the planet.

To fully appreciate the irresponsibility and immorality of climate-change denial, you need to know about the grim turn taken by the latest climate research.

The ... planet is changing faster than even pessimists expected: ice caps are shrinking, arid zones spreading, at a terrifying rate. And according to a number of recent studies, catastrophe — a rise in temperature so large as to be almost unthinkable — can no longer be considered a mere possibility. It is, instead, the most likely outcome if we continue along our present course.

Thus researchers at M.I.T., who were previously predicting a temperature rise of a little more than 4 degrees by the end of this century, are now predicting a rise of more than 9 degrees. ...

Temperature increases on the scale predicted by ... researchers ... would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century..., Illinois may have the climate of East Texas, and ... deadly heat waves ... may become annual or biannual events.

In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?

Well, sometimes even the most authoritative analyses get things wrong. And if dissenting opinion-makers and politicians ... had carefully studied the issue, consulted with experts and concluded that the overwhelming scientific consensus was misguided — they could at least claim to be acting responsibly.

But if you watched the debate..., you didn’t see people who’ve thought hard about a crucial issue, and are trying to do the right thing. What you saw, instead, were people who ... don’t like the political and policy implications of climate change, so they’ve decided not to believe in it — and they’ll grab any argument, no matter how disreputable, that feeds their denial.

Indeed, if there was a defining moment in Friday’s debate, it was the declaration by Representative Paul Broun of Georgia that climate change is nothing but a “hoax” ... “perpetrated out of the scientific community.” ... Mr. Broun’s declaration was met with a round of applause from his Republican colleagues.

Given this contempt for hard science, I’m almost reluctant to mention the deniers’ dishonesty on matters economic. But in addition to rejecting climate science, the opponents of the climate bill made a point of misrepresenting ... studies of the bill’s economic impact, which all suggest that the cost will be relatively low.

Still, is it fair to call climate denial a form of treason? Isn’t it politics as usual?

Yes, it is — and that’s why it’s unforgivable.

Do you remember ... when Bush administration officials claimed that terrorism posed an “existential threat” to America,... [so] normal rules no longer applied? That was hyperbole — but the existential threat from climate change is all too real.

Yet the deniers are choosing, willfully, to ignore that threat, placing future generations of Americans in grave danger, simply because it’s in their political interest to pretend that there’s nothing to worry about. If that’s not betrayal, I don’t know what is.

Climate Plans and Carbon Markets

Jeffrey Sachs says markets alone are not enough to solve the climate change problem, we also need strategic direction from "detailed and coherent" government plans:

Still Needed: A Climate Plan, by Jeffrey Sachs, Scientific American: There is a myth in America that markets, not plans, are the key to success. Markets will supposedly decide our climate future on their own once we institute cap-and-trade legislation to put a market price on carbon emissions. But this is silly: both markets and planning are essential in any successful large-scale undertaking, whether public or private. We need a detailed yet adaptable road map for action that goes far beyond cap and trade. ...

The administration’s climate negotiator has called cap and trade "the centerpiece" of the domestic climate program. A moment’s reflection shows why that cannot be right. Cap and trade will have little effect, for example, on whether the U.S. revives its nuclear power industry, as it should to meet climate objectives. A renaissance for nuclear will depend on regulations, public attitudes, liability laws, and both administration leadership and public education much more than on cap and trade, which would play at most a supporting role.

"Benefit-Cost Analysis is No Help"

How much should we spend to prevent global warming?

Pindyck vs. Weitzman, Greed, Green and Grains: I spent last weekend at an excellent NBER Conference, Climate Change: Past and Present..., a highlight was a fantastic exchange between two proverbial giants on the Big Climate Change Question.

I'm paraphrasing arguments from memory here... And apologies in advance if this seems too technical.

Robert Pindyck went first. He presented a more-or-less standard representative agent macro model of the world economy and built in a lot of assumptions about various kinds of uncertainty surrounding the effect of warming on output. His model had welfare as a function of output and output growth as a function of temperature change. Importantly, it seems, he assumed temperature change could not affect utility in any manner other than output—a seemingly strong assumption in my book (we all study state-dependent utility, no?). He emphasized many assumptions that were generous toward those most worried about cataclysmic consequences of global warming. And in anticipation of Weitzman, he used probability distribution functions of uncertainties with “fat tails.” Pindyck concluded that society’s willingness to pay to prevent or severely limit global warming could be no more than about 2.5 percent of world income, and likely much, much less.

While Pindyck did use some relatively “green” assumptions that might favor a large number, it was also clear the deck was stacked. One key assumption: it makes no difference whether or not the world ends with certainty in 400 years. I had a hard time with that one. Stephen Salant, one of the discussants, had a hard time with it too. He noted that changing this assumption alone could increase willingness to pay to 99 percent of income. ...

Feldstein Hates Cap and Trade

Marty Feldstein doesn't like the cap and trade legislation:

Cap-and-Trade: All Cost, No Benefit, by Martin Feldstein, Commentary, Washington Post: The Obama administration and congressional Democrats have proposed a major cap-and-trade system aimed at reducing carbon dioxide emissions. ... But... The proposed legislation would have a trivially small effect on global warming while imposing substantial costs on all American households. And to get political support in key states, the legislation would abandon the auctioning of permits in favor of giving permits to selected corporations.

The leading legislative proposal, the Waxman-Markey bill that was recently passed out of the House Energy and Commerce Committee, would reduce allowable CO2 emissions to 83 percent of the 2005 level by 2020, then gradually decrease the amount further. ...

A Lump of Coal for Obama

More disappointment with the new leader:

Obama walks a fine line over mining, by Tom Hamburger and Peter Wallsten, LA Times: With the election of President Obama, environmentalists had expected to see the end of the "Appalachian apocalypse," their name for exposing coal deposits by blowing the tops off whole mountains.

But in recent weeks, the administration has quietly made a decision to open the way for at least two dozen more mountaintop removals. ... The list included some controversial mountaintop mines. ...

The administration's decision ... sheds on relations between the mining industry and the Obama White House,... environmentalists ... say they feel betrayed...

The issue is politically sensitive because environmentalists were an active force behind Obama's election, and the president's standing is tenuous among Democratic voters in coal states. ... Moreover,... halting mountaintop mining could eliminate jobs and put upward pressure on energy prices in a time of economic hardship.

Coal advocates have solicited help from officials as high up as White House Chief of Staff Rahm Emanuel. And the issue has sparked contentious debates within the administration, including one shouting match...

Although environmentalists had expected the new administration to put the brakes on mountaintop removal, Rahall and other mining advocates have pointed out that Obama did not promise to end the practice and was more open to it than his Republican opponent, Arizona Sen. John McCain.

A review of Obama's campaign statements show that he had expressed concern about the practice without promising to end it. ... And his EPA administrator, Lisa Jackson, has said that the agency ... would "use the best science and follow the letter of the law in ensuring we are protecting our environment." Soon afterward, the agency in effect blocked six major pending mountaintop removal projects...

But this month, after a series of White House meetings with coal companies and advocates..., the EPA released the little-noticed letter giving the green light to at least two dozen projects. ...

Ed Hopkins, a top Sierra Club official, said some of the projects that have now obtained the EPA's blessing "are ... large and potentially destructive..." "It makes us wonder what standards -- if any -- the administration is using," Hopkins said. ...

Environmentalists were stunned to learn from Rahall's office May 15 that the EPA had given its blessing to 42 out of the 48 mine projects it had reviewed so far -- including two dozen mountaintop removals.

The news came in a letter ... from ... the EPA's acting assistant administrator, who wrote, "I understand the importance of coal mining in Appalachia for jobs, the economy, and meeting the nation's energy needs."

Carbon Offsets

Robert Frank argues for carbon offsets as a complement to carbon taxes or cap-and-trade:

Carbon Offsets: A Small Price to Pay for Efficiency, by Robert H. Frank, Commentary, NY Times: Are carbon offsets a good thing? They are intended to reduce the environmental impact of consumption. Traveling by plane, for example, causes carbon dioxide to be emitted into the atmosphere, so travelers can pay a specialist to offset those emissions some other way — perhaps by planting vegetation or installing renewable-energy technologies. It all sounds reasonable.

Yet carbon offsets have drawn sharp criticism, even ridicule. ... But the criticism is misguided. If our goal is to reduce carbon emissions as efficiently as possible, offsets make perfect economic sense.

Consider the decision of whether to buy a hybrid car. ... Many people drive so little that they wouldn’t save enough on gasoline to recoup the higher cost. Yet many such people buy hybrids anyway, because they think they are helping the environment. Well and good, but they could help even more by buying a standard car and using the savings to buy carbon offsets. ...

Of course, carbon offsets alone won’t eliminate global warming. People also need stronger incentives to take into account the environmental consequences of their actions.

President Obama has proposed attacking the problem with a carbon cap-and-trade system. ... This approach was first used in the United States to address acid rain... Compared with more traditional regulatory measures, the auction method substantially reduced the cost of achieving the law’s air-quality target.

As people learn more about such an approach, they seem less likely to oppose it. ... A carbon cap-and-trade system is functionally similar to a carbon tax. ... Carbon offsets are no substitute for the stronger incentives inherent in carbon taxes or cap-and-trade, but they can reinforce their effects. Both carbon taxes and permit auctions would also generate revenue that could be used to buy additional carbon offsets. ... Carbon offsets, though much maligned, are an excellent idea. If you want to help reduce carbon emissions, consider buying some.

"Moyo's Confused Attack on Aid for Africa"

More "Mud-Wrestling on African Aid":

Moyo's confused attack on aid for Africa, by Jeffrey Sachs, voxeu.org: Ms. Dambisa Moyo's recent Huffington Post article exposes the confusions that underlie her slashing attacks on aid. Most importantly, she seems to believe that sub-Saharan Africa was economically prosperous and then was pushed into poverty by aid. She makes the following statement: "No surprise, then, that Africa is on the whole worse off today than it was 40 years ago. For example in the 1970's less than 10% of Africa's population lived in dire poverty -- today over 70% of sub-Saharan Africa lives on less than US$2 a day."

Let's parse that statement for a moment. World Bank researchers Shaohua Chen and Martin Ravallion (2007) prepare the benchmark under-$2-a-day historical headcount data going back to 1981. According to their figures, headcount poverty under $2 a day was 74% of the population in sub-Saharan Africa in 1981 and 73% in 2005. Other prominent estimates that go back to 1950 or 1970 also contradict Moyo's statement, by showing high and persistent poverty. All of the macroeconomic time series by Maddison (1995), Summers and Heston (1988), and others tell the same story; the majority of Africa's population started out impoverished at the time of national independence in the 1960s and 1970s, and a majority remains impoverished till today.

Paul Krugman: The Perfect, The Good, The Planet

Is the proposed climate change bill good enough to support, or have compromises watered it down so much that it would be better to hold out in the hopes of getting something better?:

The Perfect, The Good, The Planet, by Paul Krugman, Commentary, NY Times: In a way, it was easy to take stands during the Bush years: the Bushies and their allies in Congress were so determined to move the nation in the wrong direction that one could, with a clear conscience, oppose all the administration’s initiatives.

Now, however, a somewhat uneasy coalition of progressives and centrists rules Washington, and staking out a position has become much trickier. Policy tends to move things in a desirable direction, yet to fall short of what you’d hoped to see. And the question becomes how many compromises, how much watering down, one is willing to accept. ...

If we’re going to get real action on climate change any time soon, it will be via some version of legislation proposed by Representatives Henry Waxman and Edward Markey. Their bill would limit greenhouse gases by requiring polluters to receive or buy emission permits, with the number of available permits — the “cap” in “cap and trade” — gradually falling over time.

It goes without saying that the usual suspects on the right have denounced Waxman-Markey: global warming isn’t real, emission limits will destroy the economy, yada yada. But the bill also faces opposition from some environmentalists, who are balking at the compromises the sponsors made to gain political support. ...

Al Gore has praised the bill... A number of environmental organizations ... have also come out in strong support. But Greenpeace has declared that it “cannot support this bill in its current state.” And some influential environmental figures ... oppose the whole idea of cap and trade, arguing for a carbon tax instead.

I’m with Mr. Gore. The legislation now on the table isn’t the bill we’d ideally want, but it’s the bill we can get — and it’s vastly better than no bill at all.

One objection — the claim that carbon taxes are better than cap and trade — is, in my view, just wrong. In principle, emission taxes and tradable emission permits are equally effective at limiting pollution. In practice, cap and trade has some major advantages, especially for achieving effective international cooperation.

Not to put too fine a point on it, think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions, as opposed to letting factory owners with the right connections off the hook. By contrast, it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels.

The more serious objection to Waxman-Markey is that ... in the first years of the program’s operation more than a third of the ... emission permits would be handed over at no charge to the power industry.

Now, these handouts wouldn’t undermine the policy’s effectiveness..., polluters ... still have an incentive to reduce their emissions, so that they can sell their excess permits to someone else. ... But handing out emission permits does, in effect, transfer wealth from taxpayers to industry. So if you had your heart set on a clean program, without major political payoffs, Waxman-Markey is a disappointment.

Still, the bill represents major action to limit climate change. ... And by all accounts, this bill has a real chance of becoming law in the near future. So opponents of the proposed legislation have to ask themselves whether they’re making the perfect the enemy of the good. I think they are.

After all the years of denial, after all the years of inaction, we finally have a chance to do something major about climate change. Waxman-Markey is imperfect, it’s disappointing in some respects, but it’s action we can take now. And the planet won’t wait.

Paul Krugman: Empire of Carbon

Paul Krugman says that if we want to save the planet from global warming, China's participation will be required:

Empire of Carbon, by Paul Krugman, Commentary, NY Times: I have seen the future, and it won’t work.

These should be hopeful times for environmentalists. Junk science no longer rules in Washington. President Obama has spoken forcefully about the need to take action on climate change; the people I talk to are increasingly optimistic that Congress will soon establish a cap-and-trade system... And once America acts, we can expect much of the world to follow our lead.

But that still leaves the problem of China, where I have been for most of the last week. Like every visitor to China, I was awed by the scale of the country’s development. Even the annoying aspects — much of my time was spent viewing the Great Wall of Traffic — are byproducts of the nation’s economic success.

But China cannot continue along its current path because the planet can’t handle the strain.

The scientific consensus on ... global warming has become much more pessimistic over the last few years. ... Why? Because the rate at which greenhouse gas emissions are rising is matching or exceeding the worst-case scenarios. And the growth of emissions from China ... is one main reason for this new pessimism.

China’s emissions, which come largely from its coal-burning electricity plants, doubled between 1996 and 2006. ... And the trend seems set to continue: In January, China announced that it plans to continue its reliance on coal... That’s a decision that, all by itself, will swamp any emission reductions elsewhere.

So what is to be done about the China problem?

Nothing, say the Chinese. Each time I raised the issue..., I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels. After all, they declared, the West faced no similar constraints during its development; while China may be the world’s largest source of carbon-dioxide emissions, its per-capita emissions are still far below American levels; and anyway, the great bulk of the global warming that has already happened is due not to China but to the past carbon emissions of today’s wealthy nations.

And they’re right. It is unfair to expect China to live within constraints that we didn’t have to face when our own economy was on its way up. But that unfairness doesn’t change ... that letting China match the West’s past profligacy would doom the Earth as we know it.

Historical injustice aside, the ... climate-change consequences of Chinese production have to be taken into account somewhere. And anyway, the problem with China is not so much what it produces as how it produces it. ...

The good news is that the very inefficiency of China’s energy use offers huge scope for improvement. Given the right policies, China could continue to grow rapidly without increasing its carbon emissions. But first it has to realize that policy changes are necessary.

There are hints ... that the country’s policy makers are starting to realize that their current position is unsustainable. But I suspect that they don’t realize how quickly the whole game is about to change.

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.

It’s time to save the planet. And like it or not, China will have to do its part.

"Straight Talk about Corporate Social Responsibility"

Nothing here causes me to alter my view that relying upon the goodwill of corporate America as a substitute for government intervention to resolve environmental, foreign aid, and other problems is not going to work:

Straight Talk about Corporate Social Responsibility, by Robert Stavins: Critical thinking about “corporate social responsibility” (CSR) is needed, because there are few topics where discussions feature greater ratios of heat to light. ... Much of what has been written on this question has been both confused and confusing.  Advocates, as well as academics, have entangled what ought to be four distinct questions about corporate social responsibility:  may they, can they, should they, and do they.

First, may firms sacrifice profits in the social interest - given their fiduciary responsibilities to shareholders?  Does management have a fiduciary duty to maximize corporate profits in the interest of shareholders, or can it sacrifice profits by voluntarily exceeding the requirements of environmental law?  Einer Elhauge, a professor at Harvard Law School, challenges the conventional wisdom that managers have a simple legal duty to maximize corporate profits. ...

If a company’s managers decide, for example, to use “green” inputs, devise cleaner production technologies, or dispose of their waste more safely, courts will not stop them..., no matter how disgruntled shareholders may be at such acts of public charity.  The reason is that for all a judge knows, such measures - particularly when they are well publicized - will add to the firm’s bottom line in the long run by increasing public goodwill.  But this line of argument contradicts the very premise, since it is based upon the notion that the actions are not sacrificing profits, but contributing to them.

This leads directly to the second question.  Can firms sacrifice profits in the social interest on a sustainable basis, or will the forces of a competitive market render such efforts transient at best?  Paul Portney, Dean of the Eller College of Management at the University of Arizona, notes that for firms that enjoy monopoly positions or produce products for well-defined niche markets, such extra costs can well be passed on to customers.  But for the majority of firms in competitive industries - particularly firms that produce commodities - it is difficult or impossible to pass on such voluntarily incurred costs to customers..., suggesting that, in the face of competition, such behavior is not sustainable.

This leads to the third question of CSR:  even if firms may carry out such profit-sacrificing activities, and can do so, should they - from society’s perspective?  Is this likely to lead to an efficient use of social resources?  To be more specific, under what conditions are firms’ CSR activities likely to be welfare-enhancing?  Portney finds that this is most likely to be the case if firms pursuing CSR strategies are doing so because it is good business - that is, profitable.  Once again, a positive response violates the premise of the question.  But for more costly CSR investments, concern exists about the opportunity costs... Further, in the case of companies that behave strategically with CSR to anticipate and shape future regulations, welfare may be reduced if the result is less stringent standards (that would have been justified).

Finally, do firms behave this way?  Do some firms reduce their earnings by voluntarily engaging in environmental stewardship?  Forest Reinhardt of the Harvard Business School addresses this question by surveying the performance of a broad cross-section of firms, and finds that only rarely does it pay to be green.  That said, situations do exist in which it does pay... - examples such as Patagonia and DuPont stand out - but the empirical evidence does not support broad claims of pervasive opportunities.

So, where does this leave us?  May firms engage in CSR, beyond the law? An affirmative though conditional answer seems appropriate.  Can firms do so on a sustainable basis?  Outside of monopolies and limited niche markets, the answer is probably negative.  Should they carry out such beyond-compliance efforts, even when doing so is not profitable?  Here - if the alternative is sound and effective government policy - the answer may not be encouraging.  And the last question - do firms generally carry out such activities - seems to lead to a negative assessment, at least if we restrict our attention to real cases of “sacrificing profits in the social interest.”

But definitive answers to these questions await the results of rigorous, empirical research. ...

Paul Krugman: An Affordable Salvation

Setting the record straight:

An Affordable Salvation, by Paul Krugman, Commentary, NY Times: The 2008 election ended the reign of junk science in our nation’s capital, and the chances of meaningful action on climate change, probably through a cap-and-trade system on emissions, have risen sharply.

But the opponents of action claim that limiting emissions would have devastating effects on the U.S. economy. So it’s important to understand that just as denials that climate change is happening are junk science, predictions of economic disaster if we try to do anything about climate change are junk economics.

Yes, limiting emissions would have its costs. ... A cap-and-trade system would raise the price of anything that, directly or indirectly, leads to the burning of fossil fuels. Electricity, in particular, would become more expensive, since so much generation takes place in coal-fired plants.

Electric utilities could reduce their need to purchase permits by limiting their emissions of carbon dioxide... But the steps they would take..., such as shifting to other energy sources or capturing and sequestering much of the carbon dioxide they emit, would without question raise their costs.

If emission permits were auctioned off — as they should be — the revenue ... could be used to give consumers rebates or reduce other taxes, partially offsetting the higher prices. But the offset wouldn’t be complete. Consumers would end up poorer than they would have been without a climate-change policy.

But how much poorer? Not much, say careful researchers, like those at the Environmental Protection Agency or the ... Massachusetts Institute of Technology. Even with stringent limits, says the M.I.T. group, Americans would consume only 2 percent less in 2050... That would still leave room for a large rise in the standard of living, shaving only one-twentieth of a percentage point off the average annual growth rate.

To be sure,... many ... insist that the costs would be much higher. Strange to say, however, such assertions nearly always come from people who claim to believe that free-market economies are wonderfully flexible and innovative, that they can easily transcend ... constraints...

So why don’t they think the economy can cope with limits on greenhouse gas emissions? Under cap-and-trade, emission rights would just be another scarce resource...

Needless to say, people like Newt Gingrich, who says that cap-and-trade would “punish the American people,” aren’t thinking that way. They’re just thinking “capitalism good, government bad.” But if you really believe in the magic of the marketplace, you should also believe that the economy can handle emission limits just fine.

So we can afford a strong climate change policy. And committing ourselves to such a policy might actually help us in our current economic predicament.

Right now, the biggest problem facing our economy is plunging business investment ... since they’re awash in excess capacity...

But suppose that Congress were to mandate gradually tightening emission limits, starting two or three years from now. This would ... create major incentives for new investment — investment in low-emission power plants, in energy-efficient factories and more.

To put it another way, a commitment to greenhouse gas reduction would, in the short-to-medium run,... give businesses a reason to invest in new equipment and facilities even in the face of excess capacity. And given the current state of the economy, that’s just what the doctor ordered.

This short-run economic boost isn’t the main reason to move on climate-change policy. The important thing is that the planet is in danger, and the longer we wait the worse it gets. But it is an extra reason to move quickly.

So can we afford to save the planet? Yes, we can. And now would be a very good time to get started.

Policy and Uncertainty

Robert Stavins:

What Baseball Can Teach Policymakers, by Robert Stavins: ...Uncertainty is an absolutely fundamental aspect of environmental problems and the policies that are employed to address those problems. Any analysis that fails to recognize this runs the risk not only of being incomplete, but misleading as well. ...

To estimate proposed regulations’ benefits and costs, analysts frequently rely on inputs that are uncertain – sometimes substantially so. Such uncertainties in underlying inputs are propagated through analyses, leading to uncertainty in ultimate benefit and cost estimates...

Despite this uncertainty, the most prominently displayed results ... are typically single, apparently precise point estimates of benefits, costs, and net benefits (benefits minus costs), masking uncertainties inherent in their calculation and possibly obscuring tradeoffs among competing policy options. Historically, efforts to address uncertainty ... have been very limited...

Over the years, formal quantitative uncertainty assessments — known as Monte Carlo analyses — have become common in a variety of fields, including engineering, finance, and a number of scientific disciplines...

The first step in a Monte Carlo analysis involves the development of probability distributions of uncertain inputs to an analysis. These probability distributions reflect the implications of uncertainty regarding an input for the range of its possible values and the likelihood that each value is the true value. Once probability distributions of inputs to a benefit‑cost analysis are established, a Monte Carlo analysis is used to simulate the probability distribution of the regulation’s net benefits by carrying out the calculation of benefits and costs thousands, or even millions, of times. With each iteration of the calculations, new values are randomly drawn from each input’s probability distribution and used in the benefit and/or cost calculations. ... Importantly, any correlations among individual items in the benefit and cost calculations are taken into account. The resulting set of net benefit estimates characterizes the complete probability distribution of net benefits.

Uncertainty is inevitable in estimates of environmental regulations’ economic impacts, and assessments of the extent and nature of such uncertainty provides important information for policymakers evaluating proposed regulations. Such information offers a context for interpreting benefit and cost estimates, and can lead to point estimates of regulations= benefits and costs that differ from what would be produced by purely deterministic analyses (that ignore uncertainty). In addition, these assessments can help establish priorities for research.

Due to the complexity of interactions among uncertainties in inputs..., an accurate assessment of uncertainty can be gained only through the use of formal quantitative methods, such as Monte Carlo analysis. Although these methods can offer significant insights, they require only limited additional effort... Much of the data required for these analyses are already obtained...; and widely available software allows the execution of Monte Carlo analysis in common spreadsheet programs on a desktop computer. ...

Formal quantitative assessments of uncertainty can mark a truly significant step forward in enhancing regulatory analysis... They have the potential to improve substantially our understanding of the impact of environmental regulations, and thereby to lead to more informed policymaking.

Macroeconomic policy uses the same type of framework for looking at uncertainty, but with additional twists, the addition of model uncertainty, and the addition of parameter uncertainty within a given model. The steps above are carried out over a variety of different policies, models, and a distribution of parameter values, and the goal is to find the most likely outcomes as well as the distribution of outcomes for each policy. The monetary and fiscal authorities then choose policies that, for example, avoid the chance that the policies will backfire and cause severe problems. But if the true model (or a close approximation to it) is not well represented by the models used in the uncertainty analysis, big policy errors are still possible. That's something we tend to forget when we do these types of analyses characterizing the degree of uncertainty that we face.