TT's Lost in Tokyo — by TokyoTom

[Update below]

My last piece (on Bret Stephen‘s straight-faced but ridiculous dismissal in the WSJ of all concerns about climate change as a “sick-souled religion” and a “nonfalsifiable hypothesis, logically indistinguishable from claims for the existence of God”) brought the following piece of mail, from Luboš Motl, a theoretical physicist who blogs frequently from a contrarian view on climate change.

With Luboš’ kind permission, I offer his email and my response as a further illustration of the common dynamics of misperception and tribal side-taking (as I have noted recently in the context of remarks by Nick Kristof) that feed into conflicts over unowned or unprotected resources (and abound here, where it is difficult to “see” the climate and what influences, if any, we have on it over the course of decades and centuries).

My interlocutor writes:

Dear Tom,

did you write the mises.org text? It’s just terrible. I find it extremely zealous, insulting, and avoiding the essence of all the discussions here – scientific, sociological, and others. Why the hell do you think that “scientists” have concerns? Scientists are not there to have concerns. Scientists are there to understand and predict phenomena. It is green activists and politicians who have or may have “concerns”. I didn’t find anything insulting in the WSJ piece. It was a nice text. The very fact about the frequent and completely irrational usage of words like “concern” is a *proof* of a mass neurosis, as far as I am “concerned”.

Best, Lubos

My response:

Dear Lubos:

Thanks for your comment.  Yes, of course I wrote it.  I’m not entirely surprised that you found my piece insulting, as I meant it as a put down – but of Stephens, not you.  In any case, if you did find it insulting, it’s curious that you don’t find Stephen’s piece also insulting: the most offensive aspects of my remarks did nothing but hold the mirror of psychobabble to it, which is entirely fair.  But of course most my remarks were analytical and showed how it is Stephens who is trying to dismiss all debate by ignoring all rational disagreement and attacking a broad-brush strawman that all who worry about anything are irrational.  If I failed to address science arguments for or against global warming it is because of Stephen’s failure to raise them.

It looks to me that it is Stephen’s argument that is zealous; is mine?  Sure, I care enough about this issue to write about it, but does that make me different from him – or you, who troubled to respond to me?

You say I “avoid the essence of all the discussions here – scientific, social and others”, but I’m not sure what you mean.  Is it not rather Stephens who has avoided discussing anything but the psychological, and I who have tried to point it out?

Your thoughts on scientists are interesting, too.  Are they supposed to be emotionless and amoral automatons, with no reason to actually care about their research or its implications?  Sorry, but you can’t take human nature out of the human, nor the scientist out of society – nor should we.  (If you have an opposite ideal, are you suggesting that you yourself out to stop blogging?)  Perhaps what we could consider is to stop the public funding of science and technology research, as it tends to reinforce government power and the political football of struggles over resources  – where do you stand on that?

You say that it is “only green activists and politicians” who do have concerns, but obviously that’s wrong – you have concerns, so does Stephens and Chris Horner; we all do, and we are all entitled to our own preferences, and it is natural for us to express them when the absence of markets and property rights make words the only currency by which we can express our preferences.  This a very basic observation of libertarian economics, Lubos.  So far from “concern” being a “‘proof’ of mass neurosis”, all that it shows us is that an issue is a politicized one, whereby different interest groups are fighting over the wheel of government and public opinion, since the absence of markets makes it otherwise impossible for them to express their preferences through voluntary transactions.

Regards,

Tom

Check.

[Update:  Here is Lubos’ response; my further responses are in bold:]

Dear Tokyo Tom,

I apologize but I apparently agree with Stephens that those who want to create “global worries” are a priori irrational. It’s the same sentiment that leads Jehovah’s Wittnesses to predict a new coming of the Lord all the time.

TT:  While some aspects of the “Warmers” and the Jehovah’s Witnesses may be linked, the Warmers are descendent’s of those who raised awareness and fought for control of REAL pollution in the 60’s and 70’s.  Warmers also point to REAL phenomena, like increases in GHG levels, acidifying oceans, dramatic warming in the higher latitudes, pronounced climate zone shifts, etc.

They never learn anything from their failures and try to predict things that can’t be predicted and pretend that clearly very unlikely things are likely. The only different aspect of the AGW cult is that they also include a lot of scientific buzzwords but they don’t do proper science because they don’t abandon conjectures that have been falsified. In some sense, bad science is even worse than pure religion because the conclusions are equally crappy and moreover, it contaminates the good name of science.

TT:  Care to elaborate on your complaints?

The folly practically speaks for itself. 

Why does Bjorn Lomborg think that governments can better determine worthy investments than private firms?  And that such investments should be borne by ordinary taxpayers rather than those who are generating the externalities that are the basis for his concern?  And why does he think governments around the world will each bear their fair share of such expenditures, instead of free riding?

Lomborg’s policies will simply lead to more politically directed pork (wasted money) while doing nothing to discourage GHG emissions or to encourage private investments in GHG-lite technologies. 

h/t Don Boudreaux, who startlingly calls Lomborg’s post “great good sense”!

(Jim Hansen’ “carbon tax – 100% rebate” proposal (noted in my preceding post) – which is much along the lines of the revenue-neutral carbon tax/income tax rebate that kicks in July 1st in British Columbia – makes much more sense than having the government try to micromanage investments and other private decisionmaking.)

In response to Jim Hansen’s recent expressed desire for “public trials” for fossil fuel executives if, despite being “aware of long-term consequences of continued business as usual,” they continue their “campaigns” “to spread doubt about global warming” in order to “blocked [the] transition to our renewable energy future”, Andy Revkin of the The New York Times has received and posted on the NYT’s “Dot Earth” blog a note from Vic Svec of Peabody Energy, which Revkin notes is the largest private coal producer in the world.

Vic Svec’s note at “Dot Earth” is here.

In response, I posted a few comments to Mr. Svec on the Dot Earth blog thread, which I copy below [with some links added]:

Vic Svec
Senior Vice President, Investor Relations and Corporate Communications
Peabody Energy
(314) 342-7768
[email protected]

Dear Vic:

Nice try with your letter addressing Jim Hansen’s criticism of fossil fuel firms such as yours.

1.  You say that Hansen’s “Holocaust analogies [are] outrageous and demeaning.”

Hansen’s latest criticism of coal and oil firms contains ZERO Holocaust analogies.  So who is it who prefers not to address his actual remarks, but to “cheapen the dialogue and invite ridicule”?

Yes, Hansen did warn last year that rapid climate change may very well threaten the extinction of many species – a claim supported by many prominent biologists – and in that context said that further increases in coal plants could in effect be “death trains … loaded with uncountable irreplaceable species”.  http://www.columbia.edu/~jeh1/2007/IowaCoal_20071105.pdf.  You obviously don’t like his rhetoric, but do you care to explain why either his facts or his imagery are wrong?

2.  “The suggestion that a dissemination of ideas be criminalized –- coming from a government employee no less –- does hearken back to World War II.”

First, what was that you just said about cheapening debate?

Second, Hansen has not said that the speech of any fossil fuel executives should be restricted or criminalized.  Rather, he is making a stronger version of the argument that the British Royal Academy made last year to Exxon, when it sought to clarify if Exxon was going to continue to provide support to groups that deny what EXXON itself has conceded: that human GHG emissions present sufficient worry for public policy action now.

Like Exxon, your firm has publicly acknowledged that concerns about climate change are legitimate and, indeed, that massive investments are needed in new infrastructure to ensure that coal is burned more cleanly and that CCS (carbon capture and storage) technologies are employed (as you note in the projects listed in your item 4).  The only real differences between your firm’s position and Hansen’s is that you think that the government should subsidize your change in business model by (a) having Uncle Sam pay the bulk of capital costs for IGCC (integrated gas combined cycle plant) [something like $1 billion for the first one with CCS] and (b) giving you a further break (reduced royalties) on the sweet deals you already have for stripping coal from public lands, while Hansen proposes a carbon tax (rebated to citizens) to motivate changes in demand and a moratorium on new coal plants until CCS is in place.

While Peabody has every right to conduct its business as it sees fit, so does Hansen have the right to hope that fossil fuel firms will be called to public account for the years of delay that they have purchased, not by openly arguing with the science, but by back door channels/contributions and third-party proxies – tactical activities that are hardly subject to dispute.  THAT, and not open disputes on science or policy, is what Hansen is criticizing.

3.  “Blaming big oil and big coal for the broad array of opinions about climate change is disingenuous.”

Is that at all what Hansen has done, or do you just find strawmen to be irresistible?

“If he would imprison those who don’t march in lockstep with his views, the jails would be very, very big.”

Ahh, here we go with more cheap and shameful metaphors of the very type that you yourself decry, plus another great strawman.  Hansen hasn’t suggested jailing anyone who disagrees with him, as I previously noted.  He’s just castigating the fossil fuel firms for what is rather pedestrian (and undeniable) in the modern world – that powerful economic interests have no qualms about ignoring public and common interests for the sake of private gain, or about employing whatever tool they can to influence government action via both politicians and public opinion.  Hansen, whose views on science you conspicuously refuse to address, is now obviously trying to play the same game of influencing political discourse by putting pressure on you.  As a scientist, Hansen obviously has only a political bark and no formal bite.

Your aim now is simply to discredit the barker, the better to get government subsidies, cheaper coal from the government by lowering royalties, and to continue commercial activities that shift the costs and risks of GHG emissions to others and to the future.  That, of course, is the “serious work” for which Peabody employs you as SVP of Investor Relations and Corporate Communications.

As for the “thousands of scientists and university professors” who have opinions that differ from Hansen’s, I’ll wager that, like Exxon, your scientists tend to agree with Dr. Hansen and that your only connection with any of the other thousands is via funding for PR efforts.  Maybe you could clarify this?

Thanks so much for your sound bites.

[Note to first-time readers: the title is tongue-in-cheek.]

I have previously blogged on libertarian, non-state approaches to climate change; allow me to use this post to pull together for diligent readers various recent sources of opinion and information on carbon taxes – which are much more transparent, easier to implement and, if rebated, are much more likely to both be ethically fairer to citizens (and thus more poltically sustainable) and involve much less pork than cap and trade policy proposals:

–  Dr. James (“PublicTrials”) Hansen – “Carbon Tax and 100% Dividend” proposal (dated June 6, 2008) (be sure to check out his many lucid posts on scientific aspects of climate change as well):

“Carbon tax and 100% dividend” is spurred by the recent “carbon cap” discussion of Peter Barnes and others. Principles must be crystal clear and adhered to rigorously. A tax on coal, oil and gas is simple. It can be collected at the first point of sale within the country or at the last (e.g., at the gas pump), but it can be collected easily and reliably. … The entire carbon tax should be returned to the public, with a monthly deposit to their
bank accounts ….

The worst thing about the present inadequate political approach [cap and trade] is that it will generate public backlash. Taxes will increase, with no apparent benefit. The reaction would likely delay effective emission reductions, so as to practically guarantee that climate would pass tipping points with devastating consequences for nature and humanity.

Carbon tax and 100% dividend, on the contrary, will be a breath of fresh air, a boon and boom for the economy. The tax is progressive, the poorest benefitting most, with profligate energy users forced to pay for their excesses. …

Special interests and their lobbyists … will fight carbon tax and 100% dividend tooth and nail. They want to determine who gets your tax money in the usual Washington way, Congress allocating money program-by-program, substituting their judgment for that of the market place. …  Helping Washington figure out how to spend your money is a very lucrative business.

I note that Hansen has drawn on Peter Barnes, who has long advocated the “Sky Trust” concept, which asserts that citizens are the owners of the atmospheric commons and involves the state in charging and collecting revenues.  Barnes has more recently backed similar proposals, such as Hansen’s “Carbon Tax and 100% Dividend” and the “Cap and Dividend” approach floated last winter by James Royce and Matt Riddle.

Spin analyst George Lakoff has recently examined and compared the moral and cognitive footings of the Warner-Lieberman-style cap and and trade and the Cap and Dividend approaches in “Comparing Climate Proposals: A Case Study in Cognitive Policy”. 

–  Lewis Hay, III, Chairman and CEO of FPL Group, Inc. – speech to the 2008 Florida Summit on Global Climate Change in Miami (June 25, 2008):

[It is] an undeniable reality … that global climate change is real, that human activity is one of the causes, and that we must take action to slow, stop, and reverse the emission of greenhouse gases into the Earth’s atmosphere. …
The United States has been debating climate change at least since the first congressional hearings on the topic were held in the mid-1980s by a little-known Representative from Tennessee named Al Gore. More than 20 years later, it is time for the country to take meaningful action. Every day we delay, another 18 million tons of CO2 are released into the atmosphere, most of which will remain there for close to a century. And with every year of inaction, the carbon reductions needed to deal successfully with climate change become larger and harder to achieve.

There are still a few global warming skeptics left in the world – often big emitters of CO2 – who continue to hope that the science is wrong and advocate taking little or no action toward reducing carbon. They want to keep freely emitting CO2 like there is no tomorrow. We cannot let these people have their way, or there might not be a tomorrow.

So how do we go about reducing the amount of carbon that our economy pumps into the atmosphere? … In the process of producing various goods and services – including electricity – carbon dioxide is released with potentially huge costs on society. But the producers and consumers of goods and services don’t pay those costs. They are external to the transaction, which is to say that society pays them. The goal of public policy toward climate change must be to push those costs back onto the parties responsible for carbon emissions. In short, we must “put a price” on carbon, which will create powerful incentives to emit less of it.

Will that price impose an undue burden on the U.S. economy? The global warming skeptics say yes, but I disagree. If we do nothing to reduce the amount of CO2 pouring into the atmosphere, we are not avoiding the cost. We are simply pushing both the cost associated with the growing consequences of global warming and the future cost of CO2 reductions down the road, onto our children and grandchildren. And if we do take action, I am confident the cost will be far lower than projected. America’s economy is driven by a fierce entrepreneurial spirit. Tell a capitalist there’s money to be made in finding cost-effective CO2 reductions, and watch the market burst with cost-effective solutions.

Now I happen to believe that the simplest and most effective way to start putting a price on carbon is with a continuously escalating fee – or a “tax” as the big carbon emitters like to call it. Under a carbon fee that starts modestly and rises steadily over time, companies will find it more and more expensive to use dirty fuels. And if there’s one way to get the attention of America’s CEOs and their boards of directors, it’s to hit them in the bottom line. Equally important, if there’s one way to get Americans to consume less high-carbon energy, it’s to steadily raise the price of goods and services produced with high-carbon fuels. Eventually, everyone will embrace conservation and switch to low-carbon energy alternatives. …

Under any cap-and-trade program that would give away most of the allowances to emit carbon based on historical emissions, the biggest emitters – the very same companies that have seriously harmed our environment and done nothing to reduce their carbon footprint – could reap unearned windfall profits, just as has happened in parts of Europe. To put it bluntly: They would be paid to pollute, turning cap-and-trade into what I call “cap-and-evade.” …

When carbon carries a cost, power companies will also work a lot harder to clean up their fossil fuel fleets. … Of course, the real gains are to be had by shutting down old, inefficient coal plants across the country. Those dinosaurs, which have operated way beyond their intended useful life, account for more than 480 million tons of the CO2 pumped into the atmosphere every year and should be taken offline. And if carbon is priced appropriately, they will be.

I refuse to believe that we are powerless to change the future. On the contrary, I believe that through commitment, effort and intelligence, we will not only come up with the right policy response to climate change, but that our innovation-driven economy will find the best technological solution to climate change – one that curbs emissions even as it controls costs. Some of us in the electric power industry are ready to lead the charge into a clean energy future. To those who stubbornly cling to a carbon-based past that cannot last, we kindly ask that you step out of the way.

– Keith Crane, senior economist and James Bartis, senior policy researcher at the RAND Corporation, “On Carbon Dioxide, a Better Alternative“ (Washington Post, November 29, 2007):

The only effective way to begin reducing greenhouse gas emissions and slow global climate change is to make it more expensive to emit carbon dioxide. Unless businesses and consumers pay a price for carbon dioxide, neither will make the investments in technology and changes in energy use needed to dramatically reduce emissions.

Most of the climate change legislation currently before Congress proposes a complicated “cap-and-trade” system. This would set a limit on emissions below current levels and then allocate permits to pollute that could be bought and sold. The alternative would be to impose a direct tax on carbon dioxide emissions. …

The attraction of cap and trade for its supporters is that the cap sets a limit on emissions of carbon dioxide. But it’s difficult to get the limit right. The cap may be set too high to induce firms to make the large investments needed to reduce emissions. Or it may be set so low that costs skyrocket and political support to combat climate change falters.

The major disadvantage to cap and trade is that the price tag for reaching the target is highly uncertain. In contrast, a tax on emissions provides businesses and consumers with certainty about costs, while leaving the size of the reduction less certain. …

Instead, we suggest a tax on carbon dioxide in which all the proceeds collected by the government would be returned to Americans each year when they file income taxes. In contrast to current congressional proposals for cap and trade, a tax on carbon dioxide refunded directly to individuals would cut emissions while cushioning the impact on the pocketbooks of American families. ...

A carbon dioxide tax with refund is fair because the people responsible for the most emissions would pay the most. The tax would also be progressive. Many Americans with lower incomes would find the refund would more than defray the higher costs of gasoline and electric power.

A tax is simple and can be phased in quickly. It encourages individuals and businesses to make long-term decisions with confidence, rather than trying to guess what the future price of permits will be. With a tax and refund, consumers would only pay the extra costs associated with carbon abatement measures.

A carbon dioxide tax with refund can be implemented easily. It can be collected at a few key links in the supply chain: refineries, power plants or pipelines. …

A carbon dioxide tax can be easily adjusted as lower-cost means of reducing emissions are tapped and new technologies become available to tackle more difficult sources. The tax could be started low, but with a clear schedule of increases so that individuals, local governments and businesses will begin now to make the changes and investments required to dramatically reduce emissions within 15 years. …

U.S. consumers and industry need to reduce carbon dioxide emissions. A refunded carbon dioxide tax is the best way to achieve reductions. It is simple, good for the planet, and imposes the least additional costs on the American economy as compared to any other policy alternative. Most importantly it can be crafted to ease the burden on families and protect industries from unfair competition in the global marketplace.

–  Ken Cohen, vice-president for public affairs, ExxonMobil – “ExxonMobil’s top executives on climate-change policy” (February 14, 2007):

[T]here are two debates that one can be participating in right now. One is: is climate change real? What is the cause? Call it the blame game or whatever you want. And the other discussion is: what we do about it?

We prefer to be involved in the second discussion, which is what do we do about climate change – what policies make sense to both produce the energy which the world absolutely has to have and do it in a way that starts us on a path to reduce emissions associated with the production and use of energy. …

Some have said for instance that we need to stabilise CO2 emissions at 550 parts per million. But that is more of a political conclusion than a scientific conclusion. It may be that we’ll learn that 550 ppm is not an aggressive enough target. It may be that science will tell us that the target needs to be something lower than 550 ppm. …

So yes, the policies need to be adjusted. Or conversely, it could be that the anthropogenic contribution can be mitigated somehow by sinks or what have you as we learn more. So, what we are trying to convey is: we know enough now to say that we need to be on a path to start addressing anthropogenic emissions. But we also need to keep the science effort going and we need to keep in mind the economic impacts of the policies. …

We are believers in the market system as the most efficient allocator of resources. We believe for example that markets do a much better job of picking winners and losers on the technology side than governments. So we believe that when we design policies we need to harness the power of the market system as best as we can within the policy that we are designing. … We are not saying, ‘laissez-faire’, just let the market operate. …

Politicians know this very well, one of the elements on our first principles is not political attractiveness. You don’t hear much discussion for example about a carbon tax. Yet most economists who look at this issue say that the most effective way to address carbon emissions would be with a carbon tax. …

In fact, from an efficiency standpoint, from spreading the cost of carbon across the economy in an efficient and uniform and predictable way, as a way to maximize the use of markets, as someone who studied economics, yes I think that a carbon tax ought to be looked at with equal force as the other options.

Now, as we said before, the devil is in the details and there are a number of questions. Whether it is going to be a regressive tax? What would the rate of the tax be and making sure you don’t exclude people from it; what is the revenue going to be used for; are we going to take out another regressive tax? Or are we going to take that money and use it for some other purpose? So there are major issues that would need to be addressed, but from an economist’s standpoint and in fact, this is the favored option.

– Ken Green, Steven Hayward and Kevin Hassett of AEI (The American Enterprise Institute for Public Policy Research ), “Climate Change: Caps vs. Taxes” (June 2007):

Most economists believe a carbon tax (a tax on the quantity of CO2 emitted when using energy) would be a superior policy alternative to an emissions-trading regime. In fact, the irony is that there is a broad consensus in favor of a carbon tax everywhere except on Capitol Hill, where the “T word” is anathema. Former vice president Al Gore supports the concept, as does James Connaughton, head of the White House Council on Environmental Quality during the George W. Bush administration. Lester Brown of the Earth Policy Institute supports such an initiative, but so does Paul Anderson, the CEO of Duke Energy. Crossing the two disciplines most relevant to the discussion of climate policy— science and economics—both NASA scientist James Hansen and Harvard University economist N. Gregory Mankiw give the thumbs up to a carbon tax swap.

There are many reasons for preferring a revenue neutral carbon tax regime (in which taxes are placed on the carbon emissions of fuel use, with revenues used to reduce other taxes) to emissions trading. Among them are: [the following are paragraph headings only]:

–        Effectiveness and Efficiency
–        Incentive Creation
–        Less Corruption
–        Elimination of Superfluous Regulations
–        Price-Stabilization 
–        Adjustability and Certainty
–        Preexisting Collection Mechanisms
–        Keeping Revenue In-Country 
–        Mitigation of General Economic Damages

A cap-and-trade approach to controlling GHG emissions would be highly problematic. A lack of international binding authority would render enforcement nearly impossible, while the incentives for cheating would be extremely high. The upfront costs of creating institutions to administer trading are significant and likely to produce entrenched bureaucracies that clamor for ever-tighter controls on carbon emissions. …

A program of carbon-centered tax reform, by contrast, lacks most of the negative attributes of cap-and-trade, and could convey significant benefits unrelated to GHG reductions or avoidance of potential climate harms, making this a no-regrets policy. A tax swap would create economy-wide incentives for energy efficiency and lower carbon energy, and by raising the price of energy would also reduce energy use. At the same time, revenues generated would allow the mitigation of the economic impact of higher energy prices, both on the general economy and on the lower-income earners who might be disproportionately affected by such a change. Carbon taxes would be more difficult to avoid, and existing institutions quite adept at tax collection could step up immediately.  Revenues would remain in-country, removing international incentives for cheating or insincere participation in carbon-reduction programs. Most of these effects would remain beneficial even if science should determine that reducing GHG emissions has only a negligible effect on mitigating global warming. …

Coal-based energy prices would be affected more strongly, which is to be expected in any plan genuinely intended to reduce GHG emissions. A number of possible mechanisms are available to refund the revenues raised by this tax. On net, these tools could significantly reduce the economic costs of the tax and quite possibly provide economic benefits.

– Margo Thorning, Senior Vice President and Chief Economist at the American Council for Capital Formation (November 1, 2007 interview on E&E TV):

Margo Thorning: I think Senator Lieberman and Warner are to be commended for their efforts to reduce greenhouse gas emissions, because I think we’re all united that that’s a goal we need to put a lot of resources into. …

Q: One of the bill’s ideas is to set up a financial board of sorts that would oversee the new greenhouse gas market. What’s your take on setting up a board of regulators?

Margo Thorning: I think the idea of expecting regulators to know what the price of carbon should be is probably not very well grounded. It does serve as a backstop in that I assume if prices got so high that producers and households were experiencing severe economic pain they could say, well, just go ahead and emit. But it creates uncertainty, because for someone trying to invest in new equipment, if they don’t know what the price of carbon will be, that adds to the risk of the investment. That’s the problem with a cap-and-trade system and that’s what’s happening in Europe. Investors don’t know what the price of carbon will be from one month to the next or one year to the next and it’s been very volatile. So that makes the cost of capital higher, investment more uncertain, and produces less investment. An advantage of a carbon tax, if you want to impose some sort of penalty on carbon use, is that an investor knows, given the projected say set of increases in carbon prices from one year to the next, he knows what the carbon price will be and he can factor that in to what kind of capital equipment he buys, what sort of transport fleet he puts in place, and it provides more certainty. And it also, a carbon tax, provides a stream of revenue for the government to spend on new technology or to pay for offsetting the burden on low income individuals of higher energy prrevenue-neutralices.

Q:So, if you were given the opportunity to sort of write your own proposal of how the U.S. should reduce emissions and not hurt itself economically, you’d go with the carbon tax?

Margo Thorning: I would go with the carbon tax and more incentives for new technology development. And I would change the U.S. tax code, because we have the slowest depreciation allowances for new energy investment of 12 countries that we compared recently. We have very high capital costs for new investment because depreciation is so slow and our effective tax rate is very high, because our corporate tax rate is the highest in the industrial world. So our companies are disadvantaged vis-à-vis our trading partners because of our tax system.

Q: So, if a cap and trade is not the way to go as you’re saying, why has the business community come out in support of a cap and trade?

Margo Thorning: Well, a significant portion of the business community would prefer a carbon tax and there’s beginning to be more discussion about that. So I think one reason some in the business community have supported a cap and trade is they expect to make money on it. They’ve maybe made emission reductions or expect to be able to make emission reductions. They expect to be winners. On the other hand, new companies or companies that are expanding that need more credits will be losers. So the winners under a cap-and-trade system, as is for example in Europe, the big electric utilities have been winners because they’ve been able to pass forward to consumers the price of the carbon credit even though they were given those credits by the government. So people who expect to make money on it naturally are supportive.

– major economists:

• Terry Dinan of the Congressional Budget Office’s Microeconomic Studies Division – “Policy Options for Reducing CO2 Emissions” (outside reviewers were Billy Pizer (Resources for the Future) and Martin Weitzman (Harvard)(Feb. 2008):

Given the gradual nature of climate change, the uncertainty that exists about the cost of reducing emissions, and the potential variability of the cost of meeting a particular cap on emissions at different points in time, a tax could offer significant advantages. If policymakers chose to specify a long-term target for cutting emissions, a tax could be set at a rate that could meet that target at a lower cost than a comparable cap. In addition, if policymakers set the tax rate at a level that reflected the expected benefits of reducing a ton of emissions (which would rise over time), a tax would keep the costs of emission reductions in balance with the anticipated benefits, whereas a cap would not. …

CBO draws the following conclusions:
A tax on emissions would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement. …

Analysts generally conclude that a tax would be a more efficient method of reducing CO2 emissions than an inflexible cap. The efficiency advantage of a tax stems from the contrast between the long-term cumulative nature of climate change and the short-term sensitivity of the cost of emission reductions. Climate change results from the buildup of CO2 in the atmosphere over several decades; emissions in any given year are only a small portion of that total. As a result, limiting climate change would require making substantial reductions in those emissions over many years, but ensuring that any particular limit was met in any particular year would result in little, if any, additional benefit (avoided damage). In contrast, the cost of cutting emissions by a particular amount in a given year could vary significantly depending on a host of factors, including the weather, disruptions in energy markets, the level of economic activity, and the availability of new low-carbon technologies (such as improvements in wind-power technology).

Relative to a cap-and-trade program with prespecified emission limits each year, a steadily rising tax could better accommodate cost fluctuations while simultaneously achieving a long-term target for emissions. Such a tax would provide firms with an incentive to undertake more emission reductions when the cost of doing so was relatively low and allow them to reduce emissions less when the cost of doing so was particularly high. In contrast, an inflexible cap-and-trade program would require that annual caps were met regardless of the cost, thereby failing to take advantage of low-cost opportunities to cut more emissions than were required by the cap and failing to provide firms with leeway in years when costs were higher.

The efficiency advantage of a tax over an inflexible cap depends on how likely it is that actual costs will differ from what policymakers anticipated when they set the level of the cap. Given the uncertainties involved, such differences are likely to be large—and, therefore, analysts generally conclude that the efficiency advantage of a tax is likely to be quite large. Specifically, available research suggests that in the near term, the net benefits (benefits minus costs) of a tax could be roughly five times greater than the net benefits of an inflexible cap. Put another way, a given long-term emission-reduction target could be met by a tax at a fraction of the cost of an inflexible cap-and-trade program. …

Administering an “upstream” tax or cap-and-trade program for CO2 emissions would involve taxing or regulating the suppliers of fossil fuels—such as coal producers, petroleum refiners, and natural gas processors. Compared with a “downstream” design, which would tax or regulate users of fossil fuels, an upstream approach would have two administrative advantages. It would involve regulating a limited number of entities, and it would not require firms to monitor actual emissions. Rather, each firm’s tax payment or allowance requirement could be based on the carbon content of its fuel and the amount it sold.

An upstream tax may be somewhat easier to implement than an upstream cap-and-trade program because many of the entities that would be covered by either policy are already subject to excise taxes. A CO2 tax could build on that existing structure. …

With harmonized taxes, lax monitoring or enforcement by any one country could reduce the incentives for emission reductions in that country. But with linked cap and-trade programs, laxity in one area could undermine the integrity of allowances throughout the entire system. …

A tax would have significantly lower start-up costs than a cap-and-trade program with grandfathering provided that policymakers did not decide to grant exemptions based on historical production or emissions data. Further, implementing a tax would not require the government to set up a process for auctioning allowances.

• CLIMATE CHANGE: Expert Opinion on the Economics of Policy Options to Address Climate Change, US GAO (Government Accounting Office) (May 2008)

• Greg Mankiw, “One Answer to Global Warming: A New Tax” (September 16, 2007) (Mankiw also keeps a list of other economists who are in his pro-tax “Pigou Club”, for which the anti-statist “No Pigou Club” is a useful counter-tonic):

Using a Pigovian tax to address global warming is also an old idea. It was proposed as far back as 1992 by Martin S. Feldstein on the editorial page of The Wall Street Journal. Once chief economist to Ronald Reagan ….

Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. Republican consultants advise using the word “tax” only if followed immediately by the word “cut.” Democratic consultants recommend the word “tax” be followed by “on the rich.”

Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. …
The case for a carbon tax looks even stronger after an examination of the other options on the table. … [T]he history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.

The international dimension of the problem also suggests the superiority of a carbon tax over cap-and-trade.

– Robert J. Shapiro, chairman of Sonecon, LLC, “Addressing Climate Change Without Impairing the U.S. Economy: The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief” (June 2008):

This study examines one such approach: Apply a tax or charge to fuels based on their carbon content, at the levels required to reduce emissions sufficiently to move to a path that over time would stabilize GHG concentrations in the atmosphere at sustainable levels; and use most of the revenues to reduce other taxes for people and businesses. This strategy would change the relative price of different forms of energy based on their carbon content, so that people and businesses have strong incentives to shift to alternative and less carbon-intensive fuels, and more energy-efficient technologies. The consequent economic burden on individuals and businesses would be largely offset by reductions in payroll taxes or in their effective burden, increasing the public’s willingness to accept a carbon-based tax.

Our analysis found that this strategy can reduce GHG emissions in the United States to levels consistent with substantially lowering the risks and threats of climate change, without slowing economic growth or reducing gains in people’s incomes to a significant degree, or imposing a regressive burden on low- and moderate-income Americans. …

Many economists support this approach to climate change, because it would directly and predictably raise the relative price of goods and services based on their carbon intensity, and so directly encourage consumers to prefer less carbon-intensive fuels, and products and businesses to adopt or develop less carbon or energy-intensive materials, technologies, production processes and fuels. Economists and governance experts also note that a carbon tax would not create the new price volatilities, administrative burdens, and large opportunities for evasion and fraud that could characterize a cap-and-trade program. By setting a predictable price for carbon emissions, it also creates clear and known incentives to develop and deploy more climate-friendly technologies and fuels.

Critics argue that it would raise costs and prices, and would dampen economic growth. They further note that no one favors higher taxes or the economic distortions they can cause, and consequently voters will resist paying a substantial new tax simply to avert unknown, adverse effects decades from now. We propose to address these shortcomings by returning the revenues from a carbon-based tax to households and businesses through other forms of tax relief, so that economic growth and the incomes of most households would be much less affected.

This carbon-based tax policy design should be preferable economically and politically to top-down regulation or cap-and-trade programs. To begin, traditional regulation and cap-and-trade programs treat a plant or industry’s initial carbon emissions as effectively “free,” up to the point of the regulatory ceiling or cap, while a carbon-based tax extracts a cost for emissions from the first part per million. In addition to the economic costs of introducing new volatility in energy prices, cap-and-trade programs and regulatory caps would impose other administrative and monitoring costs on consumers and businesses that would be generally comparable to a carbon-based tax, only in less obvious ways and in many cases with no additional revenues that could be rebated to offset their effects. … [C]onsumers and businesses also will end up paying the billions of additional dollars required to administer, monitor and enforce a cap and trade or regulatory system. … Moreover, much as voters would likely oppose significant new, climate-related taxes without offsetting tax relief, they will likely resist climate change regulation or a cap-and-trade program when they recognize the actual costs. …

Using the NEMS modeling system, we test the proposition that applying a new tax package on energy sources based on their carbon content, and using 90 percent of the revenues to reduce payroll taxes or their equivalent could bring down projected CO2 emissions to a path that should stabilize their atmospheric concentrations at levels safe for the global climate, and without materially affecting most people’s incomes or the economy’s capacity to grow and create jobs. 

• others, as summarized by The Wall Street Journal(Feb. 9, 2007),

– George Will (as previously blogged)

Prominent climatologist Dr. James Hansen, Director of the NASA Goddard Institute for Space Studies and Adjunct Professor of Earth and Environmental Sciences at Columbia University, who has long been warning of the long-term consequences of man’s essentially uncontrolled experiment with the world’s climate through emissions of GHGs (CO, methane and CFCs), soot and agricultural practices, has recently ramped up his message that urgent action is needed in order to avoid triggering “dangerous” climate change in the form of rising temperatures and an irreversible melting of the Greenland and Antarctic ice caps. 

1.  Hansen has apparently decided that it is time to take the gloves off in a battle that he thinks requires government action, which action he views as having been delayed by fossil fuel firms that have benefitted from (and underwritten efforts to stall movement away from) the status quo.  Accordingly, in order to shift the political balance, Hansen has decided to call not merely for decreases in GHG emissions, but direct leverage against the fossil fuel companies (in an op-ed at the Huffington Post):

Special interests have blocked transition to our renewable energy future. Instead of moving heavily into renewable energies, fossil companies choose to spread doubt about global warming, as tobacco companies discredited the smoking-cancer link. Methods are sophisticated, including disguised funding to shape school textbook discussions.

CEOs of fossil energy companies know what they are doing and are aware of long-term consequences of continued business as usual. In my opinion, these CEOs should be tried for high crimes against humanity and nature. If their campaigns continue and “succeed” in confusing the public, I anticipate testifying against relevant CEOs in future public trials. …

The fossil-industry maintains its stranglehold on Washington via demagoguery, using China and other developing nations as scapegoats to rationalize inaction. In fact, we produced most of the excess carbon in the air today, and it is to our advantage as a nation to move smartly in developing ways to reduce emissions. As with the ozone problem, developing countries can be allowed limited extra time to reduce emissions. They will cooperate: they have much to lose from climate change and much to gain from clean air and reduced dependence on fossil fuels.

(emphasis added)

Is this rhetoric appropriate?  Certainly not, even as the frustration that underlies it is an understandable manifestation of the frustration that is common (and perhaps unavoidable) in politicized fights over the use of government to satisfy one’s preferences over the preferences of others (viz., “rent-seeking”).  Granted, much is at stake (particularly if Hansen’s views of the risks are correct), and my sympathies are with Hansen (I am persuaded that his concerns have merit, and the rent-seeking by fossil fuel firms is undeniable), but such rhetoric is inappropriate as long as it is unsupported by allegations of actual criminal behavior – as opposed to simple frustration that the fossil fuel firms have been effective in lawfully manipulating the political system for their private gain. 

While a libertarian may sanction the use of moral suasion and opprobrium – even civil litigation – to strong-arm one’s opponents, calling for criminal sanctions by the state against those have successfully manipulated politicians and bureaucrats is a step that simply compounds the underlying illness of statist rent-seeking.

One suspects that Dr. Hansen is simply playing a public relations game, and is not serious about the “state trials”, as he has not called for the firms to be muzzled, but rather expressed his opinion and hope that they should some day be held to account for their actions.  Well, Dr. Hansen is certainly entitled to his opinion AND to castigate fossil fuel firms for behaviors that he objects to; while his rhetoric is disturbing, at least he’s only volunteering to be a witness and not prosecutor, judge and jury.

Sadly, differing preferences over how to use resources are inevitably politicized when there are no clear owners of such resources or ownership is socialized through government ownership or regulation.  The fossil fuel companies and their heavy users have clearly been rather adept at manipulating political levers up until now; whether Dr. Hansen’s effort to turn up the heat on them will be effective or simply provides them with more ammo remains to be seen.

2.  On another level, I do think that Hansen’s rhetoric on this is unfortunate, as it is likely to detract from his scientific message, which he elucidates very well in articles, presentations and scientific publications available at his Columbia U. webpage (linked above).  It also draws attention away from his specific policy positions, which have been critical of pork and bureaucratic management of the type presented by the Warner-Lieberman bill.   Hansen has recently expressed strong preference for a simple carbon tax that is fully rebated on a per capita basis, as further noted in the same op-ed (in which Hansen sounds very much like George Will, who also prefers a carbon tax over cap and trade):

Carbon tax on coal, oil and gas is simple, applied at the first point of sale or port of entry. The entire tax must be returned to the public, an equal amount to each adult, a half-share for children. This dividend can be deposited monthly in an individual’s bank account.

Carbon tax with 100 percent dividend is non-regressive. On the contrary, you can bet that low and middle income people will find ways to limit their carbon tax and come out ahead. Profligate energy users will have to pay for their excesses.

Demand for low-carbon high-efficiency products will spur innovation, making our products more competitive on international markets. Carbon emissions will plummet as energy efficiency and renewable energies grow rapidly. Black soot, mercury and other fossil fuel emissions will decline. A brighter, cleaner future, with energy independence, is possible.

Washington likes to spend our tax money line-by-line. Swarms of high-priced lobbyists in alligator shoes help Congress decide where to spend, and in turn the lobbyists’ clients provide “campaign” money.

Hansen’s “tax and 100% dividend” proposal, which he floated earlier this month, is based on Peter Barnes’s “Sky Trust” cap and dividend approach outlined in “Who Owns the Sky: Our Common Assets and the Future of Capitalism” (Island Press, Washington, D.C., 2001) and reviewed here.

3.  Libertarian legal scholar Jonathan Adler cited Hansen’s op-ed at the Volokh Conspiracy blog; I copy below a few comments that I noted in response:

Jon, first, let’s not forget that Hansen is specifically addressing not only oil cos but also the coal firms like Peabody and Massey – firms that are leaving massive messes because either they deal in publicly owned and bureaucratically administered land or because they’ve managed to capture the police, prosecutorial, judicial and political machinery where they operate, as well as the favor of the administration and federal regulators [see my blog post here].

Second, all of his words about public trials notwithstanding, Hansen is obviously waging battle in the courts of public opinion, which is obviously something he has every right to and, far from infringing libertarian principles, seems entirely consistent with them. As Gene Callahan has recently noted,

One way negative externalities can be addressed without turning to state coercion is public censure of individuals or groups widely perceived to be flouting core moral principles or trampling the common good, even if their actions are not technically illegal. Large, private companies and prominent, wealthy individuals are generally quite sensitive to public pressure campaigns.

After all, if libertarians had their way and government stepped out of the roads and regulatory businesses, it’s long been the libertarian position that private actions, including lawsuits against road owners, would lead to voluntary collective actions and large damage suits that would better manage resources by incentivizing reductions in pollution and other externalities. (In this context, there are, of course, private action suits now under way against the major fossil fuel firms for climate change damage; these face obvious hurdles, but a libertarian might wish for success, simply to breathe a little more life into common law remedies and take the pressure off of the demands for state action.)

Libertarians do not, as a matter of principle, object to informal public pressure. It is simply Hansen’s implication that criminal trials are more appropriate than the common law tort mechanism – which is sadly not too well known and admittedly rather withered due to the success in polluters in subverting injunctive remedies and in capturing the resulting regulatory process – that offends.

On the policy end, of course Hansen does have a statist proposal, but it is probably the cleanest one out there: the carbon tax and 100% rebate proposal, which would put all carbon tax revenues back in the pockets of Americans and than cut short alot of the rent-seeking and pork-management efforts now underway. That’s why George Will has recently concluded that a carbon tax is the best approach.

The Warner-Lieberman bill has been withdrawn for consideration by Congress this year – and thank goodness. 

Why do I say that?  A few weeks ago George Will published a column that explains very clearly why we are fortunate that this bill has been put on hold, and why, if any climate change policy is to be adopted by government, a carbon tax is much preferable to cap and trade.  Here are excerpts (with my emphasis added in bold):

If carbon emissions are the planetary menace that the political class suddenly says they are, why not a straightforward tax on fossil fuels based on each fuel’s carbon content? This would have none of the enormous administrative costs of the baroque cap-and-trade regime. And a carbon tax would avoid the uncertainties inseparable from cap-and-trade’s government allocation of emission permits sector by sector, industry by industry. So a carbon tax would be a clear and candid incentive to adopt energy-saving and carbon-minimizing technologies. That is the problem.

A carbon tax would be too clear and candid for political comfort. It would clearly be what cap-and-trade deviously is, a tax, but one with a known cost. Therefore, taxpayers would demand a commensurate reduction of other taxes. Cap-and-trade — government auctioning permits for businesses to continue to do business — is a huge tax hidden in a bureaucratic labyrinth of opaque permit transactions. …

Lieberman guesses that the market value of all permits would be “about $7 trillion by 2050.” Will that staggering sum pay for a $7 trillion reduction of other taxes? Not exactly.

It would go to a Climate Change Credit Corporation, which Lieberman calls “a private-public entity” that, operating outside the budget process, would invest “in many things.” This would be industrial policy, a.k.a. socialism, on a grand scale — government picking winners and losers, all of whom will have powerful incentives to invest in lobbyists to influence government’s thousands of new wealth-allocating decisions.

Lieberman’s legislation also would create a Carbon Market Efficiency Board empowered to “provide allowances and alter demands” in response to “an impact that is much more onerous” than expected. And Lieberman says that if a foreign company selling a product in America “enjoys a price advantage over an American competitor” because the American firm has had to comply with the cap-and-trade regime, “we will impose a fee” on the foreign company “to equalize the price.” Protectionism-masquerading-as-environmentalism will thicken the unsavory entanglement of commercial life and political life.

McCain, who supports Lieberman’s unprecedented expansion of government’s regulatory reach, is the scourge of all lobbyists (other than those employed by his campaign). But cap-and-trade would be a bonanza for K Street, the lobbyists’ habitat, because it would vastly deepen and broaden the upside benefits and downside risks that the government’s choices mean for businesses.

I highly recommend that readers view the debate (or the transcript) between the above participants that Reason held last October but has just given renewed prominence at Reasononline and in their July 2008 print edition. 

Ron Bailey is the Science Correspondent at Reason and is the author of ECOSCAM: The False Prophets of Ecological Apocalypse (1993) and the editor of Global Warming and Other Eco-Myths: How the Environmental Movement Uses False Science to Scare Us to Death (2002), Earth Report 2000: Revisiting The True State of The Planet (1999), and The True State of the Planet (The Free Press, 1995).  Remarkably, Ron now shills FOR government policy to address climate change.

Fred L. Smith, Jr. is the President and Founder of the Competitive Enterprise Institute (which published Bailey’s 2002 Global Warming and Other Eco-Myth book).

Lynne Kiesling is an expert on the regulation of electric power generation and distribution, Senior Lecturer in Economics at Northwestern University, and former director of economic policy at the Reason Foundation.

Below I excerpt what I consider the key remarks of each participant:

Lynne Kiesling:

From an economic perspective, the problem of climate change is twofold. First, there are incomplete and uncertain property rights in the air. It’s ludicrous to imagine us each walking around with a bubble over our heads so that we can only breathe and use the privatized air sphere around us. Second, there’s a large number of affected parties … some would argue the entire planet is affected.

When a common-pool resource is shared by millions of diverse individuals, defining the use rights over that resource is really hard and costly. This is the kind of situation in which decentralized market processes have trouble even emerging. In this imperfect world, we’re considering two imperfect alternative policies: a carbon tax and cap and trade.

Our experience with common-pool resources, ranging from agreements to share the team of oxen in the medieval village to the development of the sulfur dioxide acid rain program in the 1990s, tells us that effective policy focuses on reducing transaction costs and better defining property rights so that private parties can engage in mutually beneficial exchange. That’s the logic behind the carbon cap-and-trade policy.

Like all policies in such a complex area, it’s got problems itself. How do you allocate carbon permits? There’s the knowledge problem: How do we know how many carbon permits is the right number? Also, as a policy instrument, it’s prone to political manipulation. Electric utilities are already seriously jockeying to make sure they’re playing a part in getting the rules written and that they’re involved in determining the allocation mechanisms if such a policy comes into place.

Another problem is that unlike with sulfur dioxide, the likely participants are really heterogeneous. When we were dealing with sulfur dioxide, it was mostly large-scale central-generation power plants, a pretty homogeneous bunch.

A carbon tax is also prone to some of these problems, particularly the knowledge problem and the political manipulation problem. The benefits to a permit market that have been shown in other situations are that defining property rights and reducing transaction costs does a better job of taking advantage of diffuse private knowledge. It’s also more likely to induce the process that’s at the foundation of economic growth, which is innovation. So I tend to come down on the side of cap and trade, although it’s not a ringing endorsement. …

Finally, I think most people fail to realize that the abysmal job we do of pricing electricity contributes substantially to our energy use. The only resources that are priced as badly as electricity in our economy are highways and water.

Retail competition and choice for consumers would increase the offering of time-differentiated dynamic pricing, which shifts resource and electricity use across time. Research shows that this promotes conservation and more efficient use of electricity, increases offerings of green power to consumers who want to choose a green power option, and increases the incentives to develop and adopt technologies, such as price-responsive appliances, that enable private individuals to control their own energy use.

So the message from me is this: It’s a complicated, imperfect world, and the policies we can adopt that induce innovation and harness diffuse private knowledge will be the most effective for this long-term problem.

Ronald Bailey:

Before we began this session, Fred Smith asked me would it be all right if he referred to me as a commie symp. …  I stand before you as somebody who’s been reporting and writing on environmental issues for over 20 years. To the extent that I’m known at all, I’ve been known as someone very skeptical of all kinds of environmentalist dooms. My first book was called Ecoscam: The False Prophets of Ecological Apocalypse. It pains me to have concluded, following the scientific data, that one of the dooms is a real problem.

As Lynne very ably pointed out, one of the problems with global warming is that it exists in a commons—that means the atmosphere is very hard to divide up and make into private property.

When you have an environmental commons, we typically have two ways of handling that problem. One is that we privatize it. In many environmental issues, we’re moving in that direction. Fisheries, for example, are being privatized. Forests are being privatized. Water resources can be privatized as well.

The problem with air pollution—and global warming is a form of air pollution—is that I don’t see a good, easy way to privatize it. The transaction costs are too large. And if you can’t privatize it, you have to regulate it. So now the question is: What’s the least bad way to regulate? And that is why I’ve come out in favor of a carbon tax.

As a good libertarian, I thought I would like cap and trade. The problem is I’ve been watching the European attempt to do this, and it’s a complete disaster. The governments, not surprisingly, cheat constantly. Their carbon market collapsed a year ago because the governments allocated more permits for carbon emissions than were necessary to cover what was being emitted, so naturally the price went to zero. And if the Europeans can’t pull this off, how could you expect the world to pull this off?

I understand the diffuse knowledge problem—how markets can and, in fact, do marshal that kind of information in very good ways. The problem is that there’s no baseline for the rest of the world.  …  So I come out in favor of the tax because you have a baseline. You have a way of internationally monitoring that. The baseline is a zero tax and from that, you can build up. You could start the tax low and, as you gain more information about what the atmosphere is likely to do, you could adjust the tax over that time.

For consumers, for inventors, for innovators, a tax offers price stability in a way that the cap-and-trade markets don’t.  …

I, against my values, have decided that this is a problem. I would really like to be persuaded that classical liberalism and markets and so forth have a way of solving this problem. I’m still waiting for Fred’s proposal. I don’t think it can be done voluntarily around the world. The voluntary carbon markets are tiny— … And if you don’t have an economic incentive to participate in those carbon markets, like a tax or like a cap-and-trade permit, most people aren’t going to do it. Why would they? Why would they spend money that they don’t have to spend? …

Basically it would be a globally harmonized tax, but the money would be collected by each country and spent by the governments in each country.  In the ideal world, you would recycle that money by reducing other taxes, so the overall tax level in the country would not increase. What you would be doing is incentivizing people to conserve energy but also incentivizing people to innovate, to find new ways to produce energy that people would want using low-carbon technologies or carbon-sequestering technologies. …

Government does not innovate. So by creating a carbon tax you would encourage private people to marshal the information in response. So carbon tax is a price, to figure out better ways to make energy, low-carbon energy. I don’t know what those energies will be. I’m sure the government doesn’t know either, and I don’t want them wasting the money doing it.

Fred L. Smith:

What’s the best way of addressing whatever risks there are in global warming? Should the risk of catastrophic global warming justify abandoning our general preference for freedom over coercion? Should we free market advocates champion carbon taxes or carbon rationing, some form of suppressing energy use, or should we favor economic liberalization? …

There is evidence that there has been some warming, moderate amounts, but the idea that we’re facing imminent catastrophe has weakened. Our ability to do anything about CO2 increases for the next half-century is now obviously nonexistent. And the tensions we could create by pushing the world into some form of energy rationing, I think, are underestimated. Recall that in World War II, one of the incidents that pushed the war party into power in Japan was an energy boycott on that Asian nation. We are going to do that again with China. It doesn’t make a lot of sense to me.

Shouldn’t we be asking whether the risks of global warming are more or less than the risk of global warming policies?

The costs of energy rationing are not trivial. Energy is what makes it possible to have mobility, to have labor-saving technology, to have lives that are comfortable, to have hope for the future. Energy rationing would lead to slower economic and technological growth, a darker, less human-friendly world. The trillions we’re talking about spending over the next generations on global warming could go to much better causes, could save lives and inspire hopes today.

But we’ve been told—we’ve heard it from Ron, at least—that we must do something. Perhaps. But why must that something be the expansion of state power over our lives? Why do we limit ourselves to taxes or rationing? There are other alternatives out there.

We could do some more R&D. We could mitigate. What about mirrors in space? What about fertilizing the oceans? Those of us who have looked at NASA and so forth are not overly enamored with government’s ability to underwrite those kind of policies, but we should be equally optimistic about government’s attempt to tax in this academic-blackboard economic way.

Resiliency is what we should be talking about. Not whether taxes or quotas are the better way to suppress freedom, but how we can use the global warming concerns to advance an agenda of freedom. How do we find ways of accelerating economic and technological progress? How do we liberalize the economies of the world? How do we expand the institutions of liberty even into the air sheds?

We can free biotechnology. I’m sure Ron and I both agree with that. If the world is hotter, colder, wetter, drier, we’re going to need the ability to modify our crops much more than we have today. Freeing biotechnology from the regulatory straitjacket it’s in today would be a way of doing that.

As Lynne said, we could complete the job of freeing our electricity system, not just for pricing electricity but also for incentivizing the grid to be smarter and more robust so we can free the trapped electricity that sits idle throughout America. Move fire, storm, and other insurance out of the government subsidy range and put it back into the private sector so we can guide people away from living in high-risk areas.

Unilateral free trade. Extend property rights to water. Liberalize energy exploration. Cuba can drill off the coast of Florida; why can’t America? Where is nuclear power? Certainly Al Gore hasn’t mentioned it. Eliminate the corporate income tax. Accelerate the turnover of capital goods and equipment. That would mean a much more efficient world to live in. …

Today, fears about global warming are pushing the world towards disaster. This time the threat is not just to the lamps of Europe but to the lamps of the world. Energy suppression, if it happens, might last for many lifetimes. …

I have one strong procedural difference with both Ron and Lynne on this. The argument is that when you have a common property resource, your choices are either to privatize that resource, move towards institutions of liberty, or politicize it in some enlightened way as Lynne and Ron have talked about. But Ronald Coase said there’s always a third option, that the costs of transaction in that area are much higher than the failure to have transaction in that area and therefore we should allow evolution to proceed and see what creative solutions emerge. That is basically what we should be doing in the global warming area.

Bailey: So, Fred, are you saying that human beings are not clever enough to come up with low-carbon energy?

Smith: I’m saying that technocratic social engineering projects aren’t the best way to free the creative energies of mankind.

Bailey: Unfortunately, Fred, you haven’t shown a path for evolution to this. I’m sorry. I realize that you believe that somehow the invisible hand will take care of a commons problem always, but commons problems are solved by creating property.

Smith: Government.

Bailey: And the government helps create property, defends property. It’s an institution.  It’s not a great institution. Right now all the big emitters are coming to Washington and begging for free permits so they can get tons of money, basically, and extract it from our pockets—which is another reason I don’t like cap-and-trade systems. They want the government to create an asset for them worth hundreds of billions of dollars.

1.  Check out the San Diego-based The Prometheus Institute, http://www.prometheusinstitute.net/, which has just launched a new website calling for carbon taxes: http://www.payyourairshare.org/.

They propose that:

• 
  
  A tax be levied on all major emitters of greenhouse gases, set so that fossil fuel prices will reflect their true social cost, which will create a seamless market-based incentive for the development of alternative energy.


• 
  
  Most of the revenue raised should be returned to the people in the form of an across-the-board income tax cut, but as the climate system has great inertia, a portion of the carbon tax revenues should support private sector and community-based projects to adapt to effects of climate change.

The site contains a number of articles to explain just how in the heck The Prometheus Institute (http://en.wikipedia.org/wiki/Prometheus_Institute) could convince itself to come up with this Pigouvian scheme. 

(h/t Greg Mankiw: http://gregmankiw.blogspot.com/2008/02/pi-joins-club.html)

2.  Another recent piece that I highly recommend is Edwin G. Dolan‘s “Global Warming: Rethinking the Market Liberal Position”, from the Fall 2006 issue of The Cato Journal: www.cato.org/pubs/journal/cj26n3/cj26n3-3.pdf.  Dolan argues that a Lockean position does not permit an easy dismissal of calls for policy changes relating to climate change.

FWIW, Dolan was the editor of the Austrian classic, The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976).

(h/t Donny with an A: http://mises.org/Community/members/Donny-with-an-A.aspx)

There is a new paper out by economist Richard Tol that summarizes all of the economic work on climate change over the past two decades, in light of recent analyses, particularly the ground-breaking new work by Harvard’s Marty Weitzman on how the “fat tail” of climate risk affects cost-benefit analysis.  Tol is attached to the Economic and Social Research Institute (Dublin), the Institute for Environmental Studies, Vrije Universiteit (Amsterdam), and the Department of Engineering and Public Policy, Carnegie Mellon University.

Tol`s paper, “THE SOCIAL COST OF CARBON: TRENDS, OUTLIERS AND CATASTROPHES”, is here: http://www.fnu.zmaw.de/fileadmin/fnu-files/publication/working-papers/margcostmetawp.pdf

 Tol`s conclusions?

There are three implications.

Firstly, greenhouse gas emission reduction today is justified. The median of the Fisher-Tippett kernel density for peer-reviewed estimates with a 3% pure rate of time preference and without equity weights, is $20/tC. This compares to a future price of carbon permits of $8/tC in the European Union (and a spot price of ¢3/tC).  The case for intensification of climate policy can be made with conservative assumptions. One does not have to rely on dodgy analysis as in Schneider et al. (2007) and Stern et al. (2006).

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. Papers often conclude with a call for more research, and often this is a call for funding for the authors or a justification for further papers by the authors. In this case, however, quality research by newcomers in the field would be particularly welcome.

Tol drew these conclusions from the principal results of his research, which were as follows:

Besides more data and more advanced statistical analysis, this paper offers four results.

Firstly, there is a downward trend in the estimates of the social cost of carbon – even if the IPCC (Schneider et al., 2007) would like to believe the opposite.

Secondly, the Stern Review (Stern et al., 2006) is an outlier – and its impact estimates are pessimistic even when compared to other studies in the gray literature and other estimates that use low discount rates.

Thirdly, the uncertainty about the social cost of carbon is so large that the tails of the distribution may dominate the conclusions (Weitzman, 2007) – even though many of the high estimates have not been peer-reviewed and use unacceptably low discount rates.

Fourthly, if everyone were to pay a carbon tax equal to the social cost of carbon (but not reduce emissions), there is a fair chance that annual taxes would exceed annual income for many people.

(emphasis added)

The recent Marty Weitzman paper that Tol refers to is here:

Marty Weitzman: “On Modeling and Interpreting the Economics of Catastrophic Climate Change”, December 5, 2007 [Update: Weitzman has revised; the latest version is dated Februaru 8, 2008]; http://www.economics.harvard.edu/faculty/weitzman/files/modeling.pdf