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On Bob Murphy`s narrow attack on Krugman`s support for the Waxman-Markey climate bill

June 12th, 2009 No comments

I just stumbled into Bob Murphy`s June 8 post at the LvMI Daily site, and submitted a few comments.  As it looks like my links prevented my comments from posting, I`ve copied them here (with a few typo tweaks and links added):

Bob, I didn`t realize you had put a post up here.

Allow me first to copy here a few points that I made on your related post at MasterResource, but which freedom- and open-debate-loving Rob Bradley blocked (your truly has been banned there for the past few months):

“The below is copied from MasterResource, where I remain on permanent moderation – IOW, banned – even though Bob and the authors of various threads seem perfectly interested in engaging me.

“TokyoTom { 06.09.09 at 12:53 am }

A few comments, if I may (in the hope that springs eternal that even the “unclean” will be allowed to post): [Note to readers:  rest easy; that the final “I`ve been banned!” reference.]

1. “Cost/Benefit Analysis Cannot Justify Waxman-Markey’s Aggressive Targets”

Why this headline, which is completely unsupported in the post?

You do link to a prior post, where you try to draw the conclusion that “If the whole world adopted the stringent emission cutbacks in Waxman-Markey, then the costs to the global economy would far outweigh any reasonable estimate of the benefits (measured in avoided climate damage)”, but both there and here you fail to address Weitzman, much less more fundamental problems regarding the validity of CBA (aggregating preferences across persons situated vastly differently, ignoring the problems of frustrated preferences, enrtrenched rent-seeking and the continuing lack of property rights or other mechanisms to manage an important commons).

And far from “agree[ing] with you”, the RFF paper much more fairly illustrates some of the complexities in applying CBA to the moving ball of international negotiations.

2. “the costs to the global economy would far outweigh any reasonable estimate of the benefits (measured in avoided climate damage)”

“Yet mainstream models of the global economy and climate system show that worldwide adoption of Waxman-Markey would be foolish as well. It takes heroic assumptions both of lurking climate catastrophes and of international dipomacy to justify support for the current bill.”

Again, you offer conclusions not established here or elsewhere. You appear to acknowledge your overstatements when you say: “If proponents of aggressive government measures want to say the benefits justify such costs, fair enough; but let’s not kid ourselves that this is going to be cheap.”

3. “RFF study, which says the cumulative cost through 2050, expressed today in present-value terms, is up to $43 trillion worldwide.”

Actually, don`t the RFF authors make clear that this estimate is based on universal adoption worldwide and least-cost reductions – 70% of which would take place in developing countries – with a clear indication that such countries are not likely to act agressively for decades? Accordingly, the RFF study implies that global costs will fall below the straight estimate.

4. It is interesting to me that you ignore the dynamics of the international context of climate policy and negotiations. Why no comment on the observations in the RFF paper that likely “leakage” of carbon-heavy industry to developing countries and dampening Western demand for fossil fuels will constitute net subsidies that spur development in poorer parts of the globe?

Your comment is awaiting moderation.”

Thanks for putting these up at your own blog.

Further, let me note:

1.  Your criticism of W-M on conventional CBA grounds is limited to W-M, and doesn`t address the many CBA analyses that conclude (as Nordhaus has done weakly for decades) that carbon pricing mechanisms are now justified.  Economist Richard Tol last year summarized the economic literature as follows:

Firstly, greenhouse gas emission reduction today is justified. Even the most conservative assumption lead to positive estimates of the social cost of carbon (cf. Table 1) and the Pigou tax is thus greater than zero. Yohe et al. (2007) argue that there is reason to reduce greenhouse gas emissions further than recommended by cost-benefit analysis. The median of … peer-reviewed estimates with a 3% pure rate of time preference and without equity weights, is $20/tC. …. The case for intensification of climate policy outside the EU can be made with conservative assumptions. … Secondly, the uncertainty is so large that a considerable risk premium is warranted. With the conservative assumptions above, the mean equals $23/tC and the certainty-equivalent $25/tC. More importantly, there is a 1% probability that the social cost of carbon is greater than $78/tC. This number rapidly increases if we use a lower discount rate—as may well be appropriate for a problem with such a long time horizon—and if we allow for the possibility that there is some truth in the scare-mongering of the gray literature.  Thirdly, more research is needed into the economic impacts of climate change—to eliminate that part of the uncertainty that is due to lack of study, and to separate the truly scary impacts from the scare-mongering.”

[Cato`s Jerry Taylor has a good summary of Tol`s review here.]

2.  Granted that you focussed narrowly on W-M, but by doing so you completely fail (a) to acknowledge the atmosphere/climate system as an open-access commons under growing infuence by man, and (b) to put forward a “free market” agenda that would serve as a win-win response to the wide array of people, firms, institutions and nations that are concerned about man`s role in ongoing climate change and about the likelihood of future climate change stemming from the growing use of fossil fuels and other human activities.

Are you indeed interested in addressing people`s legitimate preferences regarding climate, and pushing for freer markets?  This is a question that I have asked Rob Bradley at his self-declared “free market” MasterResource blog any number of times.

Rob has stated there in response to me [before he banned me] that: “a free-market approach is not about “do nothing” but implementing a whole new energy approach to remove myriad regulation and subsidies that have built up over a century or more”, but he and his co-bloggers (including you) haven`t  seen fit yet to actually recommend ANY free market approaches to climate concerns!

Failing any effort to actually offer policy suggestions, is it unfair to wonder whether you guys are, consciously or not, simply providing cover for the rent-seekers who benefit most by generating pollution and other risks in the manner permitted by current regulations?  (Why did Exxon stop funding Rob`s Institute for Energy Research, BTW?) 

[It`s very clear that Joe Romm and others perceive you this way; are you not seeking to persuade them?]

Regards,

Tom

PS:  Your chief post doesn`t actually link to the comment thread, which readers have to search for.  You might want to fix that.

 

Lomborg misapplies the "Copenhagen Consensus" to ignore carbon pricing and yet argue for massive government investments in clean energy

September 4th, 2008 No comments

I copy below comments I made on a related thread at Roger Pielke, Jr.’s Prometheus science policy blog, regarding recent duelling op-eds on climate change policy between the left-leaning Danish political scientist Bjørn Lomborg and economist Gary Yohe.

Lomborg has stirred up discussions of environmental issues with his books, The Skeptical Environmentalist (2004) and Cool It: The Skeptical Environmentalist’s Guide to Global Warming (2007), and conceived, organized and directs the Copenhagen Consensus Centre at the Copenhagen Business School, where Lomborg is now an adjunct professor.  Yohe, on the other hand, is a professor of economics at Wesleyan University (Ph.D. Yale), is a leading economist on climate change an one of the Lead Authors of the Intergovernmental Panel on Climate Change (IPCC)’s Third and Fourth Assessment Reports.

At issue in the dust-up between Lomborg and Yohe were discrepancies in interpretation of (1) the conclusions of the 2008 Copenhagen Consensus – by which a panel of leading economists tried to prioritize various government policies for improving welfare in the developing world – and (2) the challenge paper on climate change that Yohe, Richard Tol and others prepared and submitted to the Copenhagen Consensus panel.

My remarks were as follows; for more context, please see Pielke’s post and thread (linked above), as well as his follow-up post (here) (minor edits and emphasis added):

Round 1:

If I may venture a few comments:

“1. It seems to me that Tol and Yohe have a point that Lomborg has confused his readers as to what Yohe and Tol concluded, but fail to focus on the point of confusion – only Roger seems to have caught the drift, but doesn’t identify any responsibility for Lomborg in it.

Lomborg first mentions Yohe as “one of the lead economists of the IPCC” who “For the Copenhagen Consensus … did a survey”. But in concluding what climate policy should be, Lomborg completely ignores the strong recommendation of Yohe and Tol (for a policy that focusses on mitigation, with R&D investments to be primarily market driven and some limited government-funded efforts to aid adaptation in developing countries) for “the best climate solution from the top economists from the Copenhagen Consensus”, without making any effort to clearly distinguish Yohe/Tol from those who voted on the CC ranking.

Says Lomborg, “if we are to find a workable and economically smart solution, we would do well to look at the best climate solution from the top economists from the Copenhagen Consensus. They found that, unlike even moderate CO2 cuts, which cost more than they do good should focus on investing in finding cheaper low-carbon energy. This requires us to invest massively in energy research and development (R&D). Right now, we don’t – because the climate panic makes us focus exclusively on cutting CO2.”

But none of these conclusions can be derived from the Yohe/Tol work, and since Lomborg first refers to them, it is a puzzle that he did not do a better job of distinguishing their conclusions from those of the CC voting panel of economists.

2. The disjunction between Lomborg scoffing at Tickell’s concerns about the immediate and long-term effects of a global average warming by 2100 in the range of 3-4 degrees C (with costs to global GDP of only a few %) and but then nevertheless insisting that climate risks “requires us to invest massively in energy research and development (R&D)” is more than a bit much.

If there’s no serious problem, why should our governments do anything about it? If there is – and a global average temperature increase of 3-4 degrees C sounds EXTREMELY serious to me – why is having governments throw money at the best solution? Why does Lomborg think the CC ranking means we should ignore what the entire economics profession has been telling us for decades about pricing carbon, and about letting private markets determine where investment funds should flow and what other behavior changes are warranted?

3. Lomborg’s assertion that “climate panic” makes us focus exclusively on cutting CO2, at the expense of R&D, is not merely unsupportable but manifests a fundamental misconception – apparently also embedded in the CC process – as to what drives (and who makes) investment in market economies.

Absent a serious concern about climate change, there is simply little justification for government funding of low-carbon energy R&D investments. That we are finally seriously talking about such investments in the US (Warner-Lieberman was full of such pork) is only a result of what Lomborg dismisses as “climate panic”. Clearly, then, mitigation and government R&D funding can go hand-in-hand and in fact are intimately linked.

But the more basic confusion is that R&D of the type Lomborg and the CC calls for is in fact already underway – in the private economy. Because there is really little justification for the government to directly be making such investments, it is wrong to somehow lump this R&D into government expenditures, in the manner that both Lomborg and the CC do. Rather, the vast bulk of such investments can be made by the private economy once carbon pricing mechanisms – which are really a form of factor pricing with respect to what has until now been a valued but unpriced open-access resource – are in place.

For purposes of the CC valuations, the only real governmental cost that should be measured is the cost of establishing measures to administer carbon prices; these can be extremely cheap if carbon taxes are used, or more expensive if politicians prefer opacity and side deals for rent-seekers (cap and trade). In either case, the administrative costs will be much less than the level of private R&D that carbon pricing will elicit from markets.

 

Round 2:

 “I would agree with davidacoder: the misrepresentation here lies in the silly rules of the CC exercise and the liberties Lomborg takes in describing the conclusions.

The whole premise of the CC is that if governments are going to spend a limited pot of money, what would they spend it on? The economists’ panel recognized the foolishness of this in part by putting Doha at second to the top – and explained that freeing trade costs nothing and in fact improves GDP. Much the same for climate change – although in this case the economists didn’t focus on the question of whose pocket the money was coming from. To pose the issue starkly, if governments imposed and fully rebated carbon taxes, what do the carbon taxes cost the governments? Nothing, but an effective mitigation industry nevertheless springs up. Meanwhile, governments remain free to spend on other priorities.

Of course, an observer might note that if governments DON’T rebate carbon taxes or permit revenues, they actually have MORE revenues to spend on a Copenhagen Consensus agenda, not less.

Accordingly, the CC ranking tells us almost nothing about climate change policy.

Thomas Schelling’s explanation for the low ranking for climate change specifically confirms that they were looking only at government dollars spent, for which one looks at mitigation only if it is the government paying industry/utilities to mitigate:

“The reasons why climate change measures came out so low on the list of priorities are that, for one, the Conference tried to look at cost-benefits, and, for another, its original idea was to rank things in terms of priority for immediate expenditure of money. Therefore, we proposed to eliminate poverty over and above anything else. The trade liberalization ranked fairly high. This was expected, whenever economists got together to talk about a variety of things including trade liberalization. The climate issue became lower ranks, because the paper on climate advocated for the project that stretched out to the year 2250 with the estimated costs to be in many trillions of dollars. We did not see how spending any part of 50 billion dollars on climate change measures would make a difference, although putting way down the list did not necessarily mean that we considered it as not an urgent subject. We put climate way down the list of priorities, because we did not see how spending a little bit of money over next few years would significantly improve the cost effectiveness.”
http://www.gispri.or.jp/english/Annual/2005-9.html

Further, as I and others have noted, the papers presented and the conclusions of the economists panel certainly don’t tell us, as Lomborg would have it in his editorial, that mitigation strategies “cost more than they do good”. This is a liberty too far, not only from the Yohe/Tol paper, but from Chris Green’s as well. Green specifically suggests using a mitigation-spurring carbon tax to raise the pot of money for government-spent R&D:

“If the $60 billion were raised by a carbon tax, then even a tax with a 25% cost of public funds would stay within the CC budget constraint ($60 + 25(60) = $75 billion). A tax of $4 per ton CO2 on just 50% of the approximately 30 GtCO2/yr (~8GtC/yr) currently emitted would raise 60$ billion/yr. But frankly, if it were politically feasible, I cannot see why we cannot do better by starting with a more robust $8-10/tonne CO2, and then allow the tax to rise gradually over time. To keep within CC ground rules the extra revenues could be used to reduce other taxes that have even higher marginal costs of public funds.”

 

Round 3:

 “Roger, as to justifications for government R&D soending, I think my main point stands; namely, that Lomborg is wrong to blame “climate panic” and a focus on mitigation for stymieing low-carbon energy R&D investments.

In market economies, it is the private economy that makes investment decisions and drives wealth, not the government. While there is plenty of low-carbon energy R&D investments already underway, one of the the most effective ways to get more research done is to send the market carbon pricing signals. The government may of course decide to drive research by spending for it itself, but this is money that has to come out of the pockets of the private economy.

In either case, the government can only act in a meanful way if politicians are supported by a sufficiently serious concern about climate change. Those who argue for mitigation are NOT getting in the way, but are obviously pushing things along. If Lomborg believes that the best way to move policy along is to bash his putative allies and throw government money/pork to those are blocking policy change, then even while I oppose pork I’d at least be able to understand where he is coming from.

In response to my position that “Absent a serious concern about climate change, there is simply little justification for government funding of low-carbon energy R&D investments,” you argue that “The costs of energy, energy demand, energy security, and non-climate environmental concerns all provide solid justifications for such investments.” In this, apparently I am even more of a “non-skeptic heretic” than you, who take a classic big-government position (hard to say whether your position is liberal or conservative these days, after we’ve just wasted trillions in Iraq on an “energy security” fantasy).

The market addresses all of these concerns well. The only items I have sympathy for are some you haven’t listed – but which Jim Manzi argues for at Cato:

“improved global climate prediction capability, visionary biotechnology to capture and recycle carbon dioxide emissions, or geo-engineering projects to change the albedo of the earth’s surface or atmosphere”

http://mises.org/Community/blogs/tokyotom/archive/2008/08/23/more-on-manzi-cato-on-climate.aspx

We should leave decisions on particular investments in energy technologies with private markets. Governments will never have more knowledge than markets do, and they tend to give us pork-barrel boondogles instead, like synfuels and corn-fed ethanol.”

 

Comment to Bob Murphy on whether "Cap and Trade" is a "market solution"

June 5th, 2008 1 comment

I copy below comments I made on June 11 (Tokyo time) on Bob Murphy‘s June 4 blog post, Cap and Trade Is Not a “Market Solution”, that have apparently been held up for moderator approval (perhaps because my three links triggered the blog’s spam defenses?):

Bob, I thank you for posting your piece from IER, which has stimulated a relatively even-tempered and productive discussion.

But allow me to express a little disappointment.  Even as I agree fully with the gist of your post (the largely self-evident and unsurprising point that politicians prefer, as an alternative the more honest, open and politically less-palatable approach of direct Pigouvian taxes of the type supported by a wide range of mainstream economists, to address the concerns of scientists, economists, business leaders and others about man’s contribution to ongoing climate change by dressing up such taxes as a “market approach” involving a cap and trade program), I think that:

(1) you unfairly conclude that, since it will be government that will be implicitly pricing carbon emissions, such pricing “won’t reflect genuine economic scarcity” at all, when Austrian approaches do not deny that lack of property rights will result in economic actors ignoring external costs, but simply indicate the government pricing of resources can only imperfectly reflect economic factors;

(2) you’ve gone to a bit of unjustified rhetorical excess with your statements that:

“[t]his is no more a “market price” than if the government decided to sell people permits giving them permission to sneeze”:  rather, it’s more like the government trying to price grazing rights, resources extraction rights or other user fees on “public lands”– yes, such prices are not market prices (and are perhaps more likely to be underpriced rather than overpriced), but that does not mean that they do not represent or at all reflect valuable resources.

“Cap and trade is not a market-based solution” – while not a true market solution, a cap and trade approach is clearly one that makes use of markets.

– “Cap and trade … can therefore be justly viewed as a tax, stealthy or otherwise, on energy – the lifeblood of our economy” – this not only overbroad, as it would only tax certain types of energy, and overdramatic, it completely ignores the point that certain activities (a wide array not limited to combustion of fossil fuels, including release of other GHGs) are perceived as adversely affecting (now and in the continuing future) many within the country as a result of externalities involving an open-access and unowned and unmanaged commons, which is precisely what expressly motivates (actually or allegedly) so many – including many in your profession – to support Pigouvian approaches;

(3)  surprisingly, you failed to take the opportunity to add to the discussion by informing your readers of Austrian concerns, including the following:

– the calculation problem;

– whether, as you note it posting here, there is any reasonable basis to “trust governments around the world to implement the scheme ‘properly'” (by exploring problems with rent-seeking and bureaucratic incentives);

– whether it is desirable for the government to presume that it should act as the owner of the atmosphere in creating emissions rights (as opposed to citizens generally or long-standing/homesteading users of fossil fuels), and the related ethical issue of creating rights to emit that cut off those who may be harmed from any direct remedy (such as a share of the proceeds of the sale of rights); and

– the underlying institutional problem of lack of clear or enforceable property rights (for which past interferences by government have some responsibility); and

– whether growing concerns (and private responses) regarding the shared global issue (affecting nations with different circumstances and legal systems than ours) of increasing GHG emissions might be addressed less expensively and more rapidly by voluntary actions and national and international litigation rather than by coordinated action by various governments and implemented by individual nations.

None of these points is easily addressed, but they would help to provide a Austrian framework that may be useful to your readers. 

(4)  Finally, it is disappointing that you completely failed to take on any of your mainstream colleagues (such as those in Gregg Mankiw’sPigou Club”  http://en.wikipedia.org/wiki/Pigou_Club) who support either carbon taxes or cap and trade approaches. 

I understand that you’ve got a paper in the works addressing Nordhaus, but he’s hardly the only one writing specifically on climate change; I hope you will also be looking at Marty Weitzman at Harvard, Richard Tol and a few others noted here and here:

http://mises.org/Community/blogs/tokyotom/archive/2007/12/16/the-social-cost-of-ignoring-carbon.aspx
http://mises.org/Community/blogs/tokyotom/archive/2007/10/17/reason-congratulations-to-al-gore.aspx

Sincerely,

TT