Waxman-Markey cost-benefit calculations

I haven't finished perusing the sources you all sent to me, but the debate is racing beyond where I started, so I will report in midstream.  My current impressions are the following:

1. Whether you agree with them or not, there are reputable studies showing aggregate benefits from a significant cutback in carbon emissions.

2. Waxman-Markey makes only a very small dent in the overall climate problem. 

3. If you carve up the aggregate benefits from #1 into parts, and
calculate an average product for various climate change policies, maybe
you can get positive net benefits from Waxman-Markey.  But a true
marginal analysis of the bill will not yield the same benefits.  A true
marginal analysis will yield benefits which are essentially zero in
terms of improved climate.

4. You can argue that taxing carbon is better than taxing work and savings, but that doesn't establish the proposition that we should be stingy enough with permits to force a (costly) move to a green economy.  Furthermore it is already the case that 85 percent of the permits (and they're not finished revising the bill) are being given away, so the revenue argument applies less and less.

5. The bill allows for "carbon offsets," which lowers the climate benefits even further and makes the bill even more unworkable.  For the most parts these offsets are not verifiable.

6. Even this watered-down version of the bill may not pass.

7. Climate benefits require that other nations follow suit and that we take numerous further costly actions over time.  I haven't seen a case that this is likely to happen and the ongoing evisceration of the bill suggests it won't.  Standard public goods arguments — beloved by environmentalists I might add — suggest that such collective action won't be forthcoming

8. Waxman-Markey defenders argue "we must do something," "this is a first step and a framework," "the people who oppose the bill are fraudsters," etc. but all that non-marginal analysis does little to address the key problem.  Those arguments may make you feel better about affiliating with Waxman-Markey, and opposing its critics, but they are not geared toward solving the problem.  Beware when non-marginal moralizing becomes so prevalent in the case for a piece of legislation.

9. If you now favor Waxman-Markey, what would have to happen to convince you that we are on the wrong track with this bill?  Is passing a positive-cost, zero-benefit measure really a good means to pave the way for future policy improvements?

10. One alternative approach is to have a revenue-neutral carbon tax (or other measures) kick in, but only if we have first captured the "low-hanging fruit," namely preserving various forests, limiting indoor emissions in poor countries, and limiting meat-eating.  That way the major costs come only if we first show that we are even a wee bit serious about addressing the problem. 

11. I am not sure that #10 is the best way forward but at least it tries to come to grips with the risk of getting only costs and no benefits.  The people who are hurling moral rhetoric at Waxman-Markey opponents should try to come up with better versions of #10 and offer very clear assessments of the likelihood of success.

Addendum: Here is a new related post.

Comments

Your suggested solutions are much much harder to implement than cap and trade. Preserving the forests - good luck with than, since most of these forests are abroad in poor countries who cannot afford to lead by example (as opposed to developed countries like the US). Limiting indoor emissions in poor countries - ditto. Limiting meat-eating - you must be joking, that is a massive reduction in welfare with a much higher utility cost than your "costly move to a green economy"!

Tyler,

It seems clear that proponents of this and all other cap 'n trade/carbon tax proposals are working from a different objective function than you or anyone else who might try to calculate a marginal analysis of benefits. For example, under their objective function,

-limiting/regulating industry in and of itself is a benefit, measured with an independent positive term
-similarly, effects that involve new bureaucracies, more government jobs are considered positive terms
-there are also positive terms that measure winning a political battle over Republicans, signaling one's climate-friendliness to constituents, etc.

Under such an objective function, the position of proponents is perfectly consistent and makes total sense.

Tyler--

This post is mis-labeled. It's not about cost-benefit calculations. It's about your distaste for the flavor of the (informal, unattributed) arguments of supporters of Waxman-Markey.

In #8, you lump together some ad hominem attacks ("fraudsters") with the valid "this is a first step and a framework" argument. Your only response to the argument that this is a first step is that it is a non-marginal analysis. I think it is asking too much of climatology and macroeconomics to demand that every step from the status quo to a beneficial end state be marginally profitable.

You basically have two (or three) arguments:

1. If you divide carbon emissions efforts into small enough parts to be politically tenable, the error bars on the benefits of those small parts become too great to confidently argue for change.
2. Your criticisms of Waxman-Markey caused some commenters on your blog to make a weak defense using ad hominem attacks and "hurling moral outrage"--therefore the proponents have a weak case.
3. You imply that because proponents of the bill have not defined the terms under which they would surrender that there support for the bill is unconditional and independent of whether it will help our hurt the economy and the climate.

I think #1 is an unfair criticism. I think it is easy to find examples of #2 in any political debate--it's not an interesting argument for you to use. #3 is also unfair--it is not in the political interests of a movement to define to their opponents what they need to do to scuttle a piece of legislation.

Almost any measure taken to conserve carbon in the US at the moment will either have little global effect or will devastate the economy. That is not, IMO, a sufficient reason for not taking any measures.

Having a working cap and trade system that creates incentives to reduce carbon emissions, and more importantly to create more technologies more quickly that will reduce carbon emissions more cheaply, is a marginal net benefit. That the marginal net benefit will not be realized in noticeable overall global warming reduction does not eliminate this.

From a political economy perspective, a (fairly) straightforward cap and trade regime, instituted with little fuss or muss, will be a framework that can be expanded in the future. As the US ratchets up carbon controls, the question will be, instead of "shall we or shall we not pass this large, controversial bill?", "how much will we reduce carbon credits in each of the next few years?"

Politicians, seeing how low the marginal cost is (and, if credits are fully auctioned then refunded as tax credits, maybe even seeing net political benefits) will tend to signal green credentials by supporting such measures. This will be at the expense of other measures, but assuming the carbon credit system is not overly perverted with time and politics, that's probably a good thing. Measures that cause net harm, like requiring even more ethanol in fuel, will have a harder time being passed when there's a politically cheaper alternative, and a cap and trade system does, after all, have the same effect as some level of carbon tax, so a gradual ratcheting up of it will, if not stopped, end up reducing emissions significantly.

Successfully passing a cap and trade regime, especially if it ends up getting off on a better foot than Europe's, will also be a useful tool in international politics (especially, but not exclusively, international climate politics). But any feasible way that goes is far, far murkier.

Reducing meat eating will create its own problems since humans are designed to consume a high protein paleo diet.

Tyler,

W-M has lots of problems, and they seem to be getting worse, although many of the changes amount to reducing its negative
economic consequences (and thus increasing its political support). One still little mentioned is that different sectors
will have their own markets, which is clearly inefficient.

I agree with the critics of your point #10. While a revenue-neutral carbon tax may be doable (although is not sellable
internationally), the others are wildly unrealistic. Ain't gonna happen, no way, no how.

Others have pointed out that the first step argument is not so silly. Yes, other countries may well not engage in the
appropriate collective action response, but this is a high profile item and some may be willing to, with China clearly the
most important in the near future. What is clear is that if we do nothing, so will they, period. That will be that.

Finally, it is important to remind ourselves of the past successes of cap and trade. The reason the US pushed it at Kyoto
on the rest of the world was our success with SO2 cap and trade, then called "tradeaable emissions permits," which also fit
our more free market ideology, and which was originally inspired by Coasean arguments. The SO2 program has allowed for a
gradual tightening of the overall quantity cap, and indeed, emissions of SO2 have been declining steadily without serious
economic consequences. Yes, CO2 is much harder, but it is not impossible (and I do think the Heritage Foundation model of
what all this will cost is wildly overexaggerated). Nevertheless, W-M has turned into a real turkey.

Here are some relatively low-hanging fruit.

(1) Coal mine fires (like in Centralia, PA) put enormous amounts of CO2 into the air, with no social advantage. Let's work on putting them out.

(2) Emerging countries like India and China need to stop subsidizing energy consumption.

(3) There is a strong case for a high gasoline excise tax in the US based on congestion arguments and national security arguments. That tax might be much higher than what global warming externalities would suggest.

(4) Is the focus of cap and trade on the demand side or supply side? If all it does is push up energy prices so we consume less, we have a lower standard of living. No wonder there is opposition! But on the supply side, higher fossil fuel prices should induce substitution into other energy sources. So what are they? The major alternative is nuclear power. No one can build or operate a nuke without government permission. So, has the Obama administration or Waxman argued for a fast-track procedure for approving nuke construction?

Anyone who thinks the US economy of 2050, with 400 million people, can be powered with wind turbines is tilting at windmills.

Could you elaborate on 8? Why does the non-marginal analysis not move us closer toward a solution? And is the analysis really "non-marginal"?

I'm skeptical that any of the various climate change props are net net welfare promoting when we pro/con the known knowns. But there seem to be some known unknowns - namely the technological exogenous shocks that will arise from pricing carbon - that initially incline me in favor of most any legislation that begins to price carbon emissions.

"To get a global agreement (and action from China, for instance) requires that the US act first, so this is a downpayment on other countries doing things so the benefits aren't just the US action, but also the rest of the world action that this allow."

maybe, you really haven't addressed Tyler's point. The entire rationale for why we need environmental legislation is that collective action on public goods won't happen absent legislation. But if you grant that, then there's no reason to expect that China will actually take action if we do. Take for example gas taxes-- do you believe that higher gas taxes in Europe and Japan have caused the US, Canada, Australia, Thailand, etc. to raise their gas taxes? Or do you believe that it's caused us to say, "Suckers, cheaper gasoline for us then?" (Since they limit their own use, it lowers our prices.)

If we limit CO2, we'll give industry a greater incentive to relocate to China. Why would increasing the potential flow of investment if they don't limit CO2 cause China to limit their CO2? (At least until they become significantly wealthier, on par with the rich nations.) The USA going first actually makes it more profitable for China to fail to limit its CO2 emissions.

"The reason the US pushed it at Kyoto on the rest of the world was our success with SO2 cap and trade, then called "tradeaable emissions permits," which also fit our more free market ideology, and which was originally inspired by Coasean arguments. The SO2 program has allowed for a gradual tightening of the overall quantity cap, and indeed, emissions of SO2 have been declining steadily without serious economic consequences."

Barkley, you admit that CO2 is "much tougher." But the "much tougher" is the entire point of Tyler's post-- with SO2, the negative effects of SO2 pollution are mostly (if not entirely) localized in the US, so collective action is much easier. Even if industry leaves the US and goes to China because of our SO2 regulation, the USA still gets the environmental benefits. With CO2, if industry goes to China, we still suffer all the environmental negatives because CO2 environmental effects are global.

To either one of you: Do you believe that CO2 (or SO2, for that matter) could be dealt with by entirely US state-level actions, and that if one state raised taxes/capped CO2, then others would follow? SO2 action at the state level was difficult because acid rain doesn't respect state boundaries, but the US is large enough that the effects of SO2 mostly stays within the country, so countrywide regulation was sufficient, even if some of the public benefits accrued to other countries.

China will not be persuaded if we pass W-M. The only thing that will persuade them would be passing such a bill AND passing the sort of tariffs that Krugman proposed.

Passing W-M now would probably make politically passing tariffs much easier.

You're forgetting about the double-dividend literature.

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For a professor at George Mason, I find it stunning that you would fail to mention Coase. If the political reality is that the utilities/power companies currently have a right to pollute then establishing that property right and making it tradeable should be sufficient to achieve the optimal outcome. If we need to buy the permits back from them then so be it. Also, I would think you'd like the C/T framework for zeroing in on the lowest MARGINAL cost reductions rather than taxing carbon flatly. And does not C/T offer a mechanism for preserving those low-hanging fruit like various forests? I strongly suspect that were a carbon tax on the table you would be in fact making these points in an attack on it and that you're basically not interested in curbing it CO2.

Title says "Waxman-Market" instead of "Waxman-Markey". "Market"s in everything...

"To get a global agreement (and action from China, for instance) requires that the US act first, so this is a downpayment on other countries doing things so the benefits aren't just the US action, but also the rest of the world action that this allows"

This is a fundamental misreading of what motivates countries to act. They don't respond to moral posturing, or to 'good examples'. They act in their own interests. If the U.S. unilaterally punishes its own carbon use and adopts a high-cost energy infrastructure, China will have MORE reason to continue burning cheap carbon fuels, because they now have an advantage over the U.S.

I remember this same argument coming from the unilateral disarmament movement in the 1970's and 1980's. The thinking was that if the U.S. just unilaterally reduced the size of its military, other countries would see this as a positive example and follow suit. But in fact, when one side unilaterally reduces its military strength, it makes the marginal value of military units on the other side even greater. In a world with no other nuclear weapons, the country which has a single one is king. And therefore, there is huge advantage to be had in building nuclear weapons.

Reagan took the opposite approach, which said that if you keep building your military, we'll simply build ours faster. But if you want to negotiate joint reductions, we're all ears. THAT policy worked.

And so it goes with carbon emissions. The U.S. would be more likely to get China to agree to carbon reductions if it said, "Okay, if you're going to keep burning coal, so will we. And our coal is cheaper. In fact, we'll lower our restrictions on coal burning and make it even cheaper. On the other hand, if you are willing to restrict your emissions, we'll do the same."

Not that I'm suggesting such a policy - I'm just presenting it to illustrate the point that the path to global emissions treaties is not started by implementing unilateral painful cuts which give other countries added incentives to continue burning carbon.

John Thacker,

States are not the same as nations. There has been a long record of intense
negotiations over international CO2 standards, indeed, there was a treaty,
which we pulled out of, with the entire rest of the world watching to see
what we do, or not do. If we do nothing, well, maybe the Europeans will still
stumble along with their cap and trade market, but China and India will do
nothing. This is not Massachusetts does something, will Texas follow?

Yes, CO2 is harder, much harder in many ways, than CO2. Still does not mean
it cannot be done, and cap and trade still looks like the way to go, if it is
to be done.

It seems like all the anti- brigade have a very low opinion of the ability of engineers to actually solve the problems, given an incentive.

Engineers outside of NA have been given very strong incentives, and they ARE going to solve these problems with new technology.

Right now the choice facing the USA is to develop the solutions, starting now, or buy them from foreigners in a few years time. I don't know about others, but I'd prefer to be in the position of owning the new technology of the future, rather than buying it from someone else.

And let's not forget that having some rules in place gives the corporate types the certainty to make investments that will lead to the solutions. As long as there's nothing in place, the people with money are going to sit on their hands. How much does that cost workers who have no jobs right now?

I agree with your point that engineers inside NA do have indirect incentives because of the steps taken in the rest of the world. First Solar is an example of this.

Nonetheless, in my experience, the people with money have vision as far as the end of their nose, and thus there is and will be (relatively) little investment in NA in development unless there are govt mandates. Those mandates are in place in the ROW, at least to some extent. And let's not forget that the same protectionist barriers that are going up in USA will go up in Europe, Asia, ROW if any NA company got too big in this sector...

What really gets me is to see people here complaining that govt mandates/taxes/regulations will be the end of the world. Actually not. Allowing everyone else to get so far ahead in new technologies that NA can't catch up when finally we decide to, is the bad thing.

Allowing everyone else to get so far ahead in new technologies that NA can't catch up when finally we decide to, is the bad thing.

foo, this is protectionist logic, you realize. I can't see how you can decry protectionism in your post and yet make these statements that seem to deny the existence of gains from trade.

We don't have to invent everything in the US, so long as we're doing something useful with our money that we can then trade for the new technology.

You seem to assume that it would be really expensive to buy the new technology. Why? If Europe needs us to use the new technology to avoid climate catastrophe, and they care more about the climate catastrophe than the US, wouldn't that give us negotiating power in getting them to sell it to us cheap? "Unless you sell it to us cheaply, we won't be able to afford using it and we'll just use old technology. Don't you care about the world?"

"only if we have first captured the "low-hanging fruit," namely preserving various forests ..."

How does preserving forests affect climate change? I assume you mean by carbon sequestration.

We cannot save trees, of course. Trees eventually die and give up their carbon. But saving forests really means replacing the trees that die, or allowing them to be replaced.

Does it matter whether those trees are replaced on exactly the same plot of land? If we are referring to carbon sequestration only, couldn't carbon sequesrtation lost to deforestation in brazil be replaced by reforestation in any other nation? such as the southern part of the U.S.?

How do we ensure that trees will be grown in the U.S. - that land will be reforested? Simple. Provide incentives to landowners to plant trees. This doesn't require government subsidies, but simply a market for pulp and other wood products.

Continuing to use paper products - and using paper products instead of plastic products - will provide incentives for tree plantation owners to replant their carbon-sequestering trees.

That should be the cry for the environmental economist: Use paper! Save Forests!

John Thacker wrote: "We don't have to invent everything in the US, so long as we're doing something useful with our money that we can then trade for the new technology."

Well, the track record for the the past quarter century hasbeen to invest in consumption and investing in high consumption consumtion capital, like huge energy inefficient houses, massive consumer promoting shopping centers, and big institutions devolted to creating the illusion of wealth from junk debt. Oh, yeah, also creating the most expensive health care system in the world while delivering worse results.

I have waited a decade for action to be taken because I want an interesting job working on a sustainable economy. Instead I have chosen to retire because working at a low wage job isn't worth the low pay and I'm old enough that Social Security and the environment won't implode before I'm dead and I have no kids to feel guilty about.

I can't justify a moral outrage when someone follows the signals our government promotes that says that pollution has no cost and oil is an infinite resources so spending a little more for high efficiency is stupidity.

So, if nothing is done to both move to sustainability and to create real job growth in the US, then, I'll just sit back and cheer on the pollution in the hopes of seeing a glacier or two slide into the ocean while I'm alive so I can say "I told you so."

And the thing I find so absurd is the failure to translate all those unacceptably high cost of a carbon tax or cap and trade into the joy of massive job creation.

Are economists such morons that they forget that an economy is closed and that the tzxes collected on a carbon tax will be spent on goods made by people or paid in wages to people? In an economy like today's were the taxes have been cut significantly six times with no tax increases and the number of jobs as a share of the population has fallen significantly, what will it take to see that taxes don't kill jobs, and if anything they create jobs.

The only people who will suffer from a carbon tax or cap and trade are the oil and coal miners and rent collector, and for the oil, most of them are outside the US, while the people who will benefit are those hired to do whatever it takes to get the same benefit as burnging oil and coal with labor plus technology. Last time I checked, the US has massive amounts of idle labor who are drawing benefits from the government that will eventually be paid with taxes. Wouldn't it make more sense to pay that labor with tax dollars to build sustainable capital assets that will produce profit for decades to come instead of having them sit around idle?

One would think that economists would be able to explain why employing labor is a good thing for the economy, and that sustainability is a good way to employ labor.

Instead economists seem to be arguing for buring oil unsustainably in order to slash the labor needed and add that idle labor to the burden government bears and pays for with taxes.

John Dewey (or is that "John Dumb"?),

Can you not read? In the quote you provide I say that the strength of the
effect can be debated. You do a "..." delete on where I say other effects
might even outweigh it. What are you up to? Deliberate distortion for
stupid ideological point scoring? And, I never declared any "faith" in
computer models (and I have been studying both this subject and complex
dynamics for a very long time).

I demand an apology, sir.

BTW, do you dispute the direction of the effect?

Barkley Rosser: "do you dispute the direction of the effect?"

If you mean that increased CO2 concentrations are correlated with global warming over the past 110 years, then no, I do not dispute that correlation.

If you mean that increased CO2 concentrations caused all or most of the increase in global temperatures since 1900, I do not dispute that. But I am skeptical that the science is settled on this point.

If you mean that increased CO2 concentrations are, all else being equal, likely to cause some level of warming, then I agree.

What I am most skeptical about is the feedback effect of increased CO2 concentrations which are included in climate change models. I have seen no evidence that this "science" is settled. If you have read much about the climate change models, then you know that the feedback mechanism - the increase in atmospheric water projected from the increase in CO2 - is the cause for all the catastrophic climate change scenarios being promoted.

I am still amazed that intelligent people - not necessarily you, Barkley - have so much faith in computer models. Especially given past failures of the predictive ability of other computer models.

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