Included at the end here is an email from the Sutherland Institute, a conservative think tank in SLC, claiming that many jobs will be lost due to cap and trade. They cite the following report http://www.beaconhill.org/BHIStudies/WCI-2009/WCIReportFinal090323.pdf I just skimmed through this report to see how they get their results; they are using a Computable General Equilibrium (CGE) Model called STAMP (State Tax Analysis Modeling Program). This is a complicated mathematical procedure that has become the vogue in economics, a brief sympathetic overview is for instance at http://www.ictp.trieste.it/~eee/workshops/smr1541/Peterson3.pdf But Peter Dorman is questioning whether these models have a track record of correct predictions: here is a posting at Econospeak: http://econospeak.blogspot.com/2008/06/challenge-on-cge-modeling.html
Other than their track record, what theoretical critiques exist of CGE models? In order to explain what a CGE does, I am trying to use the following imagery (please tell me if this is right, I have never worked with a CGE): Use the basic things about market clearing and budget constraints you have learned in a principles of microeconomics class, and feed them into a computer together with real data, with the computer assuming everybody is a price taker and the economy is close to an equilibrium, looking at many markets at once and making sure the budget constraints are met. The predictions based on this paradigm are the predictions of a CGE. Is this a fair characterization? What is wrong with these models, and can they be done correctly? One line of critique seems to be the article by Martin Weitzman at http://www.economics.harvard.edu/faculty/weitzman/files/REStatFINAL.pdf which says that optimal control theory and Cost Benefit Analysis assumes that the damage functions have thin-tailed probability distributions, while catastrophic climate change is a thick-tailed outlier. If you ignore this fact you get misleading results. Another quite different line of critique is that climate policy models must work with induced technological change as opposed to "manna from heaven" technological change, look at chapter 38 in http://www.defra.gov.uk/environment/climatechange/research/dangerous-cc/pdf/avoid-dangercc.pdf These are some possibilities I have been thinking about, but I have the impression that far not enough is being done in this direction. The climate change deniers are using bad neoclassical economics, and those who are concerned for the sake of future generations do not have the theoretical tools to de-bunk their bad economics. So we tend to throw out cost benefit analysis and CGE models altogether, instead of entering the debate and telling them where their mistakes are and how it should be done right. The book by Revesz and Livermore, "Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health", OUP 2008 argues that CBA is being misused and that we should use CBA in the right way. Can one also argue that CGE models are being misused? Is it possible to use them in the right way? Thank you for reading and for your thoughts. Hans. ------- Start of forwarded message ------- Date: Thu, 26 Mar 2009 15:38:19 -0400 (EDT) From: Sutherland Institute <[email protected]> Subject: Sutherland Institute - March 26, 2009 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ March 26, 2009 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WESTERN CLIMATE INITIATIVE CAP-AND-TRADE INITIATIVE IMPOSES DRASTIC COSTS Utah would be one of the hardest hit; thousands of jobs and millions of dollars on the line A new economic study appears to confirm earlier findings that a Western carbon cap-and-trade scheme would destroy hundreds of thousands of jobs, and erode personal income for millions of citizens in the Western United States. For Utah, this could mean as many as 9,900 net jobs lost. The newly released study, by the Beacon Hill Institute of Suffolk University in Boston, comes on the heels of research conducted by the Western Business Roundtable released a few weeks ago which also found that the WCI plan could seriously damage the West's economy, if implemented in its present form. Four Canadian provinces and seven western states are full participants in WCI: California, Arizona, New Mexico, Oregon, Washington, Utah, and Montana. The BHI study found that, if under a scenario in which 100 percent of greenhouse gas emission permits were auctioned off to emitters in a cap-and-trade scheme, the seven states would: o Lose from 103,931 to 251,674 private sector jobs, while the permit would allow the state to hire 57,269 to 142,241 state employees; o Put firms' investment at serious risk by slowing investment in the region by $548 million to $1,448 million; o Diminish total personal income, by $6.36 billion to $18.31 billion per year; The negative economic effects stem from price and tax increases the states would impose on their respective energy and transportation sectors. A cap on carbon emissions is effectively a tax on energy production that is passed to industry, businesses and consumers, that would likely drive commerce and jobs to other states or countries. Beacon Hill found that none of the seven WCI states would escape economic harm if the cap-and-trade was imposed. Utah could lose as many as 9,899 of net jobs, $1.84 billion in personal income, and $743.32 of annual disposable income for a family of four. "The WCI is the worst sort of government planning, but its ill-effects would be typical. It creates a crisis out of thin, and evidently warmer, air and then creates solutions to address problems that don't exist. That's not policy, let alone sound policy. It's a case of good, if fanciful, intentions gone awry," said Sutherland President Paul Mero. The complete study is available at http://www.beaconhill.org/BHIStudies/WCI-2009/WCIReportFinal090323.pdf ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ------- End of forwarded message ------- 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
