NYT columnist Paul Krugman is not happy with NASA climate scientist James Hansen for the latter’s op-ed attacking cap-and-trade and proposing a tax-based alternative (which I blogged about here). Such arguments are “unhelpful,” Krugman says, because they ignore the fact that in the theoretical world of transaction-cost free blackboard economics caps and taxes are the same, and that cap-and-trade is the only game in town. While Krugman is correct that Hansen makes some silly, populist arguments, Hansen’s ultimate conclusion — that a fully rebated carbon tax is preferable to cap-and-trade — is completely sound.
On the difference between a carbon tax and cap-and-trade, Krugman argues that they are the same because any given cap equates to a given price and vice-versa. He even produces a graph to prove it.
The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story.
That’s true as a theoretical matter, particularly if one assumes that either policy will be implemented in a “clean” fashion, uncorrupted by political side deals, and if one ignores the fact that, ex ante, the government has no way of determining with any precision what carbon price will equal what level of emissions. And it’s silly to endorse any particular cap without any consideration of its potential cost.
In the real world, one effect of a cap is extreme price volatility (as we saw with the acid rain program and the EU’s carbon trading system). If allowed to persist, such price volatility kills new investment and technological innovation, which are essential if we are ever to have any prayer of reducing greenhouse gas emissions to the levels President Obama and others have proposed. TO avoid this problem, a cap-and-trade regime can have a safety valve — a means of loosening the cap if prices rise too high — but this then kills cap-and-trade’s primary (only?) advantage over a tax, which is the imposition of a hard cap on emissions.
Two other big problems Krugman ignores are that cap-and-trade systems are more vulnerable to special interest pleading and that such programs inevitably come with offset provisions that further undermine the reliability of the cap. In the case of Waxman-Markey, the offsets provisions are such that the bill has no prayer of achieving its stated emission reduciton goals, even with all the regulatory bells and whistles littered throughout the bill. It’s also worth noting that a cap-and-trade program is difficult to administer and implement. It took the EPA about five years to write the rules for the acid rain program, and it only covered a few hundred facilities. If we’re in a rush to impose emission controls, as Krugman claims, this is the wrong path to take. By comparison, British Columbia got a carbon tax system up in place within five months, and created incentives to reduce carbon emissions right away.
There’s more to say, but other pending matters demand my attention. So here’s more from Reihan Salam and David Frum. And here’s a final thought from Andrew Sullivan:
Krugman’s core point is political: cap and trade is all our system can achieve; it’s that or nothing; so shut up.I hope Hansen doesn’t shut up. His proposal is simpler, clearer, fairer and more likely to wean us off carbon sooner.
alkali says:
If we’re in a rush to impose emission controls, as Krugman claims, this is the wrong path to take.
It’s not that we are “in a rush,” but rather that under our political system, no emissions control legislation could be enacted unless (1) there is a 60-seat Democratic majority in the Senate, and (2) every member of that majority, including the Senators at most political risk from emissions control legislation, is in agreement. One does not have to predict a Democratic disaster in 2010 to recognize that it is more probable than not that the Democrats will not retain their 60-seat majority in 2010 and are not likely to regain it soon. So there is the current cap and trade bill in this session, or there is nothing for a long while.
December 8, 2009, 12:06 pmTatil says:
Even though I agree that carbon tax is a better solution, I have to disagree with some of your arguments.
Commodity prices fluctuate all the time, but I don’t see it killing investments. It is part of life in that field, why should it be worse for this?
That is the best argument for carbon tax, but there are many loopholes and special tax breaks in our regular tax code, so I am not sure the net effect would be that much different. There would still be a lot of lobbying to remove one greenhouse emission or the other to be exempt. You still need bureaucracy to monitor how much methane is emitted from garbage dumps and how much natural gas leaks from oil fields etc. Not all carbon comes from burning fuels. Of course, there are those who are thinking of storing carbon after burning fuels, they would need some kind of tax credit if there is a tax on all fuels.
If cap and trade is the only game in town, there is not much point in making perfect the enemy of the good. In the end, I doubt even the cap and trade will pass, so these arguments are probably moot.
December 8, 2009, 12:26 pmyankee says:
What’s the basis for this claim? Oil prices are extremely volatile, but that’s never stopped people from investing in finding new oil fields and developing new extraction technologies. Stock prices are extremely volatile, but that doesn’t stop Wall Street from paying quants big salaries and bigger bonuses to develop better trading algorithms.
I’m also unconvinced that the opportunities for special-interest rent-seeking are so much greater in an emissions permit scheme. The income tax code consists almost entirely of exemptions, credits, and deductions designed to favor various special interests.
Even if a carbon tax would theoretically be a better policy, you’ve done nothing to address the “only game in town” argument. It’s easy for conservatives to demagogue raising “taxes,” much harder to demagogue wonky programs the public doesn’t understand that well. We have an opportunity to pass a cap and trade program now; I see no chance of passing a carbon tax in the foreseeable future.
December 8, 2009, 12:52 pmwws says:
Rarely in life have I ever gotten everything that I have wished for, but I think this is one area where I will – in this fight BOTH Krugman and Hanson are going to lose! We will never impose the kind of economy-destroying tax regime Hansen wants, and what with Climategate and the impending collapse of the Copenhagen conference (see the news of the leaked memo this morning?) we’re not going to pass cap’n'tax either. As alkali noted, if this congress doesn’t do it, it ain’t gonna get done. And this Congress is not going to do it with an ugly election looming.
December 8, 2009, 12:56 pmThales says:
Price volatility is inherent to the fossil fuel and many other industries–one reason that cap and trade (as opposed to a tax) is so popular of an idea among certain interest groups is that a secondary/derivatives market will develop to smooth out the price fluctuations and in the process enrich investment banks, brokers and exchanges. The Chicago Climate Exchange is already online, and carbon futures trading would no doubt skyrocket were the U.S. to adopt cap and trade.
December 8, 2009, 12:59 pmd-berg says:
Difference is simple. Cap and trade will result in occasional extreme spikes in electricity prices (cf California, Enron). Possibly gasoline and other prices too. Regular folks all over the country will suffer. On the other hand, cap and trade by definition requires trading. So robust markets will develop, with Wall street making tens of billions trading carbon. In short, folks will pay to enrich Wall street. Any chance pols can pass up on that?
Oh yeah, on top of that, special interest will be able to lobby for exemptions and higher quotas, enriching congressmen directly. again, what’s not to love.
Tax will only have the latter (opportunity for lobbying for carbon tax exemptions) and not as rampant.
From this I conclude that carbon tax is against the interest of the decision makers and has no chance. Cap and trade is the only feasible option indeed.
December 8, 2009, 2:29 pmRyan Waxx says:
Krugman didn’t get his Nobel for this quality of work, did he?
December 8, 2009, 2:36 pmMark Buehner says:
How does that lunatic Hansen still have that job? The guy claimed coal was the “the single greatest threat to civilisation and all life on our planet“, which is just insipid demagoguery, particularly from a scientist. He claimed a rise in “sea level 75 metres higher”, which is over 100x more than the worst case IPCC scenario. link
And of course his famous “call for the chief executives of large fossil fuel companies to be put on trial for high crimes against humanity and nature.” link
This is one of the most powerful people in climate science in the world, if not the most, and he’s a raving lunatic. I can only imagine what Nasa’s ‘secret’ data and code looks like, forget their emails.
December 8, 2009, 3:11 pmOregonGuy says:
The lawsuit I’d never heard of before.
“In this case, the scientist fought back and won an unconditional surrender that revealed the complete corruption of Gore and at least one prominent Harvard climate researcher.”
http://robkremer.blogspot.com/2009/12/another-media-cover-up.html
December 8, 2009, 3:12 pm.
egd says:
These are features, not bugs.
More special interest pleading means more government control over the means of production.
More difficult administration means more government jobs (and therefore more people directly dependent on the government).
The first priority of liberals is power through the growth of government. Everything else (the environment, civil rights, even abortion) is a secondary consideration.
December 8, 2009, 3:23 pmbobC says:
As someone passionate about economics, I can find a huge fault with Hansen’s ideas. I know how to goto the government and rent-seek the crap out of the tax proposal. I could probably do it just as well as cap and trade.
December 8, 2009, 3:29 pmArrowSmith says:
The issue is not price volatility, but uncertainty about what the government is going to do next. That is what really killed business in the 1930s, FDR’s wild manipulations. So it goes with the Democrats. Next week – windfall profits tax on oil companies.
December 8, 2009, 3:37 pmArrowSmith says:
Government control of energy is a goal of lefties. They believe that all the energy belongs to “the people” in the first place.
December 8, 2009, 3:38 pmBC says:
FTFY.
December 8, 2009, 4:06 pmLaura(southernxyl) says:
“…more likely to wean us off carbon sooner.”
I guess I know what he means, but carbon is kind of ubiquitous. Really. Sugar, protein, DNA all are mostly made of it. It would be better if he said “wean us off energy sources that release carbon dioxide” if that is what he means.
December 8, 2009, 4:58 pmSarcastro says:
Totally true! As a lefty, I can tell you all I think about is socializing stuff. It consumes my every waking moment and haunts my dreams. It’s not about a social safety or the meaning of the social contract at all, it’s about hating the market and individuals!
It pisses me off when I see that damn sun all givin’ away free energy to private individuals. What are they gonna do with it that the government can’t do at least as well?
That’s why Obama has a secret plan to blow up the sun!
December 8, 2009, 5:00 pmlgm says:
I read Krugman as saying that: (1) A carbon tax is a political impossibility, so cap and trade is the next best thing. (2) They are almost the same thing. (3) Putting a price on carbon emissions is so important that we do not have the luxury of holding out for the best possible pricing mechanism.
Adler doesn’t challenge any of these points.
Krugman’s article also points out that Hansen is an expert on climate science, but not economics or politics. I wish Krugman had made this point more tactfully to someone who has given so much to his country as Hansen has. Still, Krugman is right. We should not look to Hansen for advice on the politics or even the economics of of reducing carbon emissions.
December 8, 2009, 5:06 pmMark Buehner says:
Huh? Like what? Aside from assiduously politicizing his post anyway.
December 8, 2009, 5:15 pmFoobarista says:
How about none of the above?
December 8, 2009, 5:17 pmjuandos says:
Well I see that Sullivan isn’t getting any better grip on reality: “His proposal is simpler, clearer, fairer and more likely to wean us off carbon sooner“…
Why would we want to be weaned off of carbon?
December 8, 2009, 5:19 pmRidolph says:
I was with you until you quoted Sullivan. Now I’m sure there must be something really seriously wrong with your argument if you’re deferring to the delusional…
Why even mention him?
[RESPONSE: I liked the quote. I was going to say "even Andrew Sullivan . . . " but then I thought better of it. JHA]
December 8, 2009, 5:20 pmBruce Hayden says:
The beauty of rent seeking is that those in power (Congress), and those close to it (lobbyists and Congressional staffers) can get very rich by essentially providing a secondary market for the carbon indulgences. Or, maybe, more accurately, the rent seeking market is the primary market, and the actual market for the indulgences is the secondary market, since they only deal in such that are granted to favored industry (through their rent seeking) and those that are left over.
I would go with ClimateGate scientist Hanson here over former Enron adviser Krugman, since Cap and Trade is designed to be corrupt and will, in the end, likely result in a more corrupt system. Both are, of course, corrupt, I just think that from what we have seen so far, the selling of carbon indulgences is more susceptible to being corruptly exploited.
December 8, 2009, 5:51 pmDan H. says:
Because the supply of other commodities isn’t fixed. Higher prices bring greater production. The promise of greater production increases results in a lowering of price volatility.
A carbon cap is like an artificially-created ‘peak oil’ scenario. If the cap isn’t raised, prices will become increasingly volatile as demand comes up against the fixed supply of the hard cap.
Of course, this just means the cap will be raised by fiat. Having a cap that is altered by fiat makes it extremely hard to price future carbon credits. This means there will be a risk premium on carbon futures. It also means Washington will be inundated with lobbyists and money in an attempt to carve exemptions for special interests. Each hearing on lifting the cap will create a giant feeding trough for politicians.
This is why cap and trade is so appealing to them. It puts them into the driver’s seat, with an opportunity to extract more graft every time the cap comes up for re-negotiation.
As policy, it’s vastly inferior to a carbon tax, which has a more linear response to changes in carbon taxes, and which is much easier and more transparent to regulate. This limits politician’s ability to collude with lobbyists to game the system.
December 8, 2009, 6:10 pmeric in dallas says:
Wait a minute – wait a minute. This all begs the question as to whether CO2 is a pollutant – which it is not and has not been proven to be.
Everyone decides the Titanic is going down and then argues about how to re-arrange the deck chairs.
December 8, 2009, 6:11 pmWhat if we are NOT on the Titanic and the only ones out to sea are those rushing to impose a new tax on us poor working rubes and distribute the proceeds around the world to those more willing to vote for, er, more deserving?
The Awful Truth says:
I think Hansen is more politically astute on this issue than Krugman. He realizes that the political momentum of the AGW has crested short of its goals and it’s time to move on to plan B.
Krugman fails to face the fact that cap and trade is dead for 2010. He just urges the Obama administration to keep its foot on the accelerator and ignore the fact that politically they’re going over a cliff.
Throughout 2009 Krugman has urged Obama on to its doom (see stimulus package). He has played the role in this administration that Chalabi played for Bush.
December 8, 2009, 6:31 pmSeerak says:
The first priority of
liberalsLeftists is power through the growth of government. Everything else (the environment, civil rights, even abortion) is a secondary consideration.Fixed. Don’t be confusing the two.
December 8, 2009, 7:34 pmTatil says:
I disagree. In a carbon tax scenario, the government decides on the level of taxation for a certain amount of emission reductions. If the actual reductions turn out to be less, they will try to increase it. If the reductions turn out better than expected, there will be public campaigns to reduce the tax. The uncertainty is still there. It is hard to avoid fiat either way.
No, it is not. Greenhouse emissions are not due to fuel burning alone. You need regulators either way. I still prefer carbon tax method, sure, but the difference is not vast.
December 8, 2009, 8:27 pmPerseus says:
Indeed, which is why V’Ger called humans “carbon units.”
December 8, 2009, 9:27 pmRich Vail says:
Unfortunately, the EPA has beaten everyone to the punch and plans to implement regulations that support their “finding” that “CO2 is harmful to human life”.
I suspect that there are already lawsuits that are going to contest this finding. If the EPA is allowed to persist, they will ruin an already fragile economy. That would be the result of any of these ideas, cap & trade, or tax & fee, or the EPA…all will finish of our economy and place us permanently in the third world. That’s economic suicide…which is why neither the Chinese or the Indians want any part of this mass hysteria/stupidity.
December 8, 2009, 9:38 pmbartman says:
JHA, if you honestly believe that a carbon tax will somehow be less prone to rent-seeking and political interference, than I have seriously lost a significant amount of respect for you. I had no idea you were this naive.
December 8, 2009, 9:50 pmken in sc says:
Krugman and Hansen are like cannibals fighting over the haunch of a victim.
December 8, 2009, 10:07 pmCurious passerby says:
What I haven’t seen discussed is that they didn’t even have accurate damn thermometers until less than 100 years ago, so how the hell can they talk about temperature 500 or 100 years ago and .5 degree or 1 degree projected rises when the margin of error guessing 90% of past temperatures must be at least 5 degrees?
December 8, 2009, 11:52 pmTweets that mention The Volokh Conspiracy » Blog Archive » Krugman v. Hansen -- Topsy.com says:
[...] This post was mentioned on Twitter by Wayne John, Eugene Volokh. Eugene Volokh said: Krugman v. Hansen: NYT columnist Paul Krugman is not happy with NASA climate scientist James Hansen for the lat.. http://bit.ly/5UXzkd [...]
December 9, 2009, 4:00 amAnonymous Coward says:
Posit: Fossil fuels were once part of the biosphere.
Thus burning them returns those materials back to the biosphere and allows for more life on earth.
December 9, 2009, 5:48 amDavid Becker says:
This is a Swiftian argument, like that between the big-enders and the little enders, two sets of fools. As a matter of fact, neither cap-and-trade nor a carbon tax are required for any good purpose. The AGW hypothesis which spawned it is completely false; the only other reason, energy independence, is an isolationist goal which would not be helpful to the US. In any case, if Obama and the Democrats seriously wanted energy independence, we would be drilling in Anwar. This argument is really about how to best seize control of the whole economy, Krugman’s way or Hansen’s way.
December 9, 2009, 6:23 amegd says:
1) Do not write a post on a white background with text that is one shade off of white.
2) Recognizing the differences between liberalism and leftism is insufficient to distinguish yourself as separate from the latter. Liberals can be leftists just like conservatives can be rightists.
3) If your comment was that there is a difference between a Classical Liberal and a Leftist, I would agree. However, under modern parlance, a Classical Liberal is more analogous to Libertarian, while a Classical Marxist is more analogous to a Liberal.
4) TL;DR.
December 9, 2009, 1:55 pmThe Volokh Conspiracy » Blog Archive » Applying the Precautionary Principle Consistently says:
[...] of Climategate, I think it probably is), or that we shouldn’t take any steps to reduce it. Like Jonathan Adler and Robert Hansen, I am sympathetic to the idea of using a revenue-neutral carbon tax to counter warming, though I [...]
December 9, 2009, 10:40 pmEMB says:
I don’t understand why a carbon tax on production of fuel would be equivalent to cap-and-trade: aren’t there technologies that decrease CO2 emissions (e.g. from coal plants) by somehow burying the CO2 or some such instead of reducing fuel consumption? It seems like those would seem beneficial under cap-and-trade but not under a fuel production tax.
(Though of course if you’re highly skeptical of global warming but favor higher fossil fuel energy prices for foreign policy reasons, I suppose this would be yet another argument in favor of such a tax over cap-and-trade.)
December 10, 2009, 12:05 amdsimon says:
David Becker: “In any case, if Obama and the Democrats seriously wanted energy independence, we would be drilling in Anwar.”
There isn’t enough oil in ANWAR to be anything more than a very short-term fix, especially at the rates that we’re using the stuff.
And the assertion that the AGW hypothesis is “completely false” goes against the vast weight of the evidence and the scientific community. Do we really think that all those people taking ice core samples or doing monitoring for decades of their lives are doing so out of some vast conspiracy to dupe the public? That would take an awful lot of coordination.
“This argument is really about how to best seize control of the whole economy”
No it isn’t. There are plenty of people who believe in AGW who are also pretty much free market folks. In fact, carbon taxes and cap-and-trade are market mechanisms.
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[...] Asked to prognosticate about future policy developments, Andrew Light noted that the Administration’s strategy is to squeak a climate bill through the Senate, drag out the reconciliation process through November’s midterm elections, and then pass the final bill in a post-election lame-duck session. For my part, I predicted that a meaningful climate bill will not pass Congress this year (though a pork-laden energy bill is possible), and the real question is whether a newly constituted Congress is really to abandon the Beltway class’ obsession with cap-and-trade in favor of more promising policy measures. (For more on why I believe a carbon tax is preferable to cap-and-trade, see here, here, and here.) [...]
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