The Closet Moderate: Hot air

Tuesday, December 08, 2009

Hot air

I don't normally involve myself in the fine points of reducing carbon dioxide output -- asking me what carbon tax I prefer is like asking me which rope I'd prefer to be hanged with (sisal, for the record) -- but I'm intrigued by this week's tête-à-tête between Paul Krugman and James Hansen. It seems to illustrate the difference between social scientists and science scientists fairly well.

It's definitely a New York Times type of disagreement, in that both men are proposing to tax the American people, they just disagree on the best way to do it. The plan currently proposed by the Obama administration is to create an artificial market in carbon dioxide using what's called a "cap-and-trade" system. That is, the government invents a limit on the amount of that gas that we may produce, and creates permits that allow us to create it. They then give out these permits -- mostly gratis -- to the more important campaign donors in swing states. The permits may then be traded among the various companies that need to let out some CO2. This is what the Democrats in Congress call "a free market".

Hansen, a "climatologist," wrote an op-ed in the New York Times on Sunday suggesting that this system has been ineffective wherever it's been tried. As Hansen writes, "[c]onsider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap." I'm not big on altruism, as such, but Hansen is correct that this system would mean that any individual action would not necessarily give you anything to feel good about. And if there's one thing the environmental movement demands, it's feeling good about themselves.

Hansen proposed instead a "fee and dividend." As he describes it:
Under this approach, a gradually rising carbon fee would be collected at the mine or port of entry for each fossil fuel (coal, oil and gas). The fee would be uniform, a certain number of dollars per ton of carbon dioxide in the fuel. The public would not directly pay any fee, but the price of goods would rise in proportion to how much carbon-emitting fuel is used in their production.

Good so far, but here's the kicker:
All of the collected fees would then be distributed to the public. Prudent people would use their dividend wisely, adjusting their lifestyle, choice of vehicle and so on. Those who do better than average in choosing less-polluting goods would receive more in the dividend than they pay in added costs.

Yeah, that's right: the government doesn't get to keep the money. Clearly, the Second Coming of Keynes would have to inveigh against this assault on central planning. Sure enough, he does not disappoint, stating that Hansen "hasn’t made any effort to understand the economics of emissions control." Meow!

Krugman continues, telling us that the result is the same either way:
A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.

The difference, as this bloggard points out, is that Krugman assumes we live in the fantasy world of economists, where there are no transaction costs and no corruption. The House cap-and-trade bill already would distort this artificial market by passing out free permits to important interest groups. Would a rational anti-carbon bill really give $60 billion to coal companies? Given that coal is made of carbon, this seems counter-productive from an environmental point of view. Further, the auction system would require the creation of a whole new bureaucracy, and would remove more money from the economy by not refunding the cost of the permits to the people.

Hansen's plan would tax all carbon dioxide in fuels at the same rate and at the same time (either at extraction or at importation). It would take Congress a few years to distort that effect, while cap-and-trade comes pre-distorted for your campaign fund-raising pleasure. Fee and dividend would then give the money back to the people where they, not some central planner, could decide its best use for themselves. One of these proposals sees an imperfect world and imposes a simple solution; the other picks a complex solution, and assumes a simple world. I'm inclined to see this as the difference between a hard science, which must deal with the absolutes of a physical world (pace East Anglia) and a soft science, which fudges the world to fit its theories.


emlen said...

Alternately, Krugman's dealing with the kind of real-world solution that's so concrete and real-world that it's actually involved some action by real, live political figures, as opposed to merely existing in the minds of its academic supporters. If Congress were working on a carbon tax, then they would come up with one with lots of complicated attached rules, and cap-and-trade supporters would be saying "why can't they use our system, which is so much simpler."

Also, why on earth is "'climatologist'" in quotation marks?

Silent Cal said...

Here's another article in favor of a carbon tax: