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Friday, May 01, 2009

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.

    Posted by on Friday, May 1, 2009 at 02:40 AM in Economics, Environment | Permalink  TrackBack (0)  Comments (112)

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