Steve Johnson asked on our local energy list (c/t means cap and trade): > Hans- > You are attempting to link a c/t as a method to address some of the > externalities associated with cheap energy but are not doing so. How would > c/t address? I think that line of reasoning would be very effective when > talking to average professionals.
> Please expand on this thread... I am glad you are asking, because the relationship between efficiency and the prevention of climate disaster was muddled in my own mind. Here is an attempt to understand it better: The argument I presented to "Right On" was basically: energy prices are too low and therefore we are using too much energy. I was anticipating that "Right On" would think: "How can a price be too low? Isn't it a good deal for everyone if we get cheap energy?" Therefore I gave the standard neoclassical efficiency argument: Fossil electritity causes pollution which causes asthma, therefore society is forced to invest in hospitals for asthmatic children. If energy prices are too low, society consumes too much energy. It would be better for society to consume less energy, because then it would not have to build so many asthma hospitals. The benefit of the last kwh of energy produced is lower than the cost of the additional medical care necessary to combat the side effects of this additional energy production. So far I think the argument is solid, and the Utah Moms for Clean Air would probably the best organization to popularize the idea that energy prices are indeed too low. My next step is problematic, however. Implicitly, without saying so, I transferred this entire reasoning to global warming. The unspoken reasoning was: climate catastrophe is also an externality, and if we get the prices right, this will reduce our energy consumption enough that we can prevent catastrophic climate change. Some economists argue this. Although the idea is simple, it is very difficult to implement because you need a dynamic model in order to calculate the efficient price level. William D. Nordhaus just published a book "A Question of Balance: Weighing the Options on Global Warming Policies" which describes the results of his Integrated Assessment Model. The galley proofs can be downloaded from Nordhaus's web site at http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf His model, which works with the high discount rate of percent, finds that the efficient price of carbon is $30 a metric ton now, rising about 2 or 3% every year so that it hits $90 in 2050 and $200 in 2100. This carbon price is surprisingly low. A carbon tax of $30 would increase the price of gasoline by 9 cents per gallon, and the price of electricity by 1 cent per kWh. But in Nordhaus's mind global warming is not a big problem anyway. His model predicts that under business as usual, temperature increases in 2100 will be 3.1 degrees celsius, leading to a 2.5% loss in world output. This is clearly wrong; new MIT and Hadley Centre estimates say that business as usual will lead to over 5 degrees Celsius increase by 2100. The obvious unreliability of the models necessary to compute an efficient carbon tax is one of the arguments in favor of cap and trade. Cap and Trade begins with a quantity constraint, namely our carbon budget (the amont of CO2 we can emit without grilling ourselves). In theory, it enforces this quantity constraint in a flexible way. It lets the market determine prices instead of the regulator fixing possibly wrong prices. In practice, in the ETS, these theoretical expectations have not been met, but right now I am trying to understand the theory behind it. To sum up: Pigouvian taxes generate an efficient outcome internalizing the externalities. For climate change we can forget about Pigouvian taxes, because the correct tax level is almost impossible to compute. The best we can hope for is to achieve given emission reduction goals in a cost effective way. Since these goals, derived from climate science, are quantity goals, a quantity system such as cap and trade seems the logical choice. Here is another argument why efficiency should not be our goal: efficiency considerations ignore distributional implications. Economists justify this because in theory, those who gain could pay off those who lose and therefore create a state in which everybody is better off. But such payoffs are never made. Efficiency is therefore, in practice, used as a big smokescreen, as an excuse to ignore distributional issues. If we throw distributional equity into the mix, then I like the approach of EcoEquity best, see their Greenhouse Development Framework http://www.ecoequity.org/GDRs/GDRs_ExecSummary.pdf or the full book http://www.ecoequity.org/docs/TheGDRsFramework.pdf They say: for reasons of international equity, the developed countries have to act *as quickly as possible*, which means (for the authors Bear et al) industrial countries have to reduce greenhouse gas emissions by 6 percent annually. This swift action gives the developing countries a little bit of slack to continue to work themselves out of poverty: their emissions are allowed to rise until about 2015, and then the developing countries have to decrease emissions as well by 6 percent annually. The question is therefore not "how to do it most efficiently" and "let's not do it too quickly because this makes it more costly than necessary". The questions is: "how to do it as fast as possible in order to accommodate the right of the developing nations to overcome poverty." If the developed countries could do it even faster than 6 percent annually, this is what they would have to do for equity reasons. And in order to enforce that 6 percent annually and the necessary international aid, the authors are thinking of a cap and trade system. Instead of teaching "Right On" about internalizing externalities, as I tried in my first email, I think now the story that should be told when we talk to working people (and everybody else) about climate change is: We have to do things as quickly as possible; any slack must go in favor of the developed countries. Whether this "as quickly as possible" means carbon taxes (how high must taxes be so that emissions decline by 6 percent?) or cap and trade or perhaps tradable personal carbon rations (my own preference), this is still subject to debate. Hardly anybody in the US is seriously talking about international equity issues with respect to climate change. We have to start talking about it, because we need to come up with a complete plan that can really work. If we now only tell half the story, and later say: by the way, I didn't tell you that earlier, it is also our obligation to help India and China on a green development path, I think we will be less successful than if we tell the whole story now. Hans. Hans G. Ehrbar http://www.econ.utah.edu/~ehrbar [email protected] Economics Department, University of Utah (801) 581 7797 (my office) 1645 Campus Center Dr., Rm 308 (801) 581 7481 (econ office) Salt Lake City UT 84112-9300 (801) 585 5649 (FAX) _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
