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George Will on why a carbon tax is much preferable to cap and trade

June 24th, 2008 3 comments

The Warner-Lieberman bill has been withdrawn for consideration by Congress this year – and thank goodness.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

[Updated] Bob Murphy heroically nitpicks the CBA model of reluctant carbon tax advocate, William Nordhaus

June 5th, 2008 2 comments

Bob Murphy, an economist at Rob Bradley‘s Institute for Energy Research, has posted on the main Mises Blog a link to a paper that he has submitted to an economic journal, “Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax“.

[Update:  Bob thoughtfully copied environmental economist David Zetland on his draft paper, and while he has not returned to comment at his own Mises thread, Bob has made further comments at David’s blog and at his own shared blog.]

IER promotes Murphy’s paper as ambitiously “tackl[ing] the basic premise of pricing carbon … using William Nordhaus’ DICE model as the representative of economic orthodoxy”, but it seems to me that both his objectives and his achievements are far more modest.  Murphy:

(1) fails to attack either the fundamental premises of orthodox cost-benefit analysis as applied to climate change or the basic premises of the DICE model,

(2) focusses chiefly on various uncertainties involved in the parameters in Nordhaus’ model, while ignoring not only that such uncertainties cut in more than one direction, but that other economists have strongly argued that Nordhaus has underestimated or mishandled important damages and uncertainties (e.g., John Quiggin and Sterner & Persson) and has simply misunderstood the usefulness of CBA in the face of important uncertainties that CBA cannot easily handle (e.g., Martin Weitzman, Richard Tol, others),

(3) fails to note the point (made by McKitrick and others) that even if imperfect, carbon taxes, if substituted for income, capital gains and other taxes, will significantly lessen important economic distortions; and

(3) fails to offer much in the way of Austrian approaches to CBA, much less to the property rights and preference issues involved in economic decisions involving significant externalities or open-access common resources, fails to point to possible ways in which government policy may be inefficient, costly, and subject to the skewing effects of rent-seeking, and fails to recommend important policy changes that are needed to facilitate a transition to a lower carbon economy, by promoting economic freedom, competition in energy and power markets, easing corporate tax depreciation rules that slow innovation, and strengthening property rights and common law enforcement mechanisms (Bruce Yandle and Jon Adler have both made concrete suggestions on desirable policy changes; what is holding back people at LvMI?)

In short, what Murphy delivers is flawed and far less than billed.

[Update:  As Ludwig von Mises himself noted (see my blog post Mises on fixing externalities“), private property institutions arose in response to the economic inefficiency of older systems that did not force economic actors to bear the external effects of their actions.  We are intelligent and occasionally rational creatures – why should we not be pro-actively considering what institutions might be desirable and feasible for dealing with the effects of our activities on the atmosphere and  climate (and oceans, ecosystems and unowned species, or how to improve governance in countries that don’t recognize or protect property rights)?]

I copy below (with some typo corrections) the comments that I posted on Bob’s Mises thread; I will try to revisit later to add links and further resources:

Bob, thanks for posting this

Here are a few quick notes:

– although you note that every step in Nordhaus’ analysis involves uncertainty, you have failed to note Marty Weitzman’s recent work that tells us how strongly uncertainly serves as a factor SUPPORTING early action – an important factor that neither Nordhaus nor you take into account at all. Weitzman states, “the influence on cost-benefit analysis of fat-tailed structural uncertainty about climate change, coupled with great unsureness about high-temperature damages, can outweigh the influence of discounting or anything else.”

– while you indicate that one key area of uncertainty is that future GHG concentrations may be overstated, your observations actually suggest the opposite – that because the oceanic sink is finite, as it becomes saturated atmospheric GHG concentrations are apt to rise even more sharply.

– while you indicate that the temperature increase form a given GHG concentration may be overstated, you ignore the possibility of the opposite – that the long-term temperature impact of a given GHG level may be higher than the number Nordhaus has used. Further, given paleo evidence that Hansen has noted, it appears unlikely that climate sensitivity will be less than 3 degrees C.

– Similarly, while you note that economic damages from a given temperature increase may be overstated, you fail to address the possibility that such damages may be understated – and also fail to note that the Earth is apparently more sensitive to climate changes than has been expected, witness the rapid Arctic/Greenland melting that we are seeing at only a 0.7 C increase, and the rapid expansion of tropical zones.

– it is a distinct possibility that Nordhaus has underestimated nonmarket damages, as John Quiggin and others argue. In any case, Nordhaus does not account for the changing relative prices for various goods and services that the changing composition of the economy and climate change will induce,as Sterner and Persson have noted in a recent paper at RFF:

“future scarcities that will be induced by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services, raising the estimated damage of climate change and counteracting the effect of discounting. … [C]hanging relative prices … has major implications for a correct valuation of future climate damages. We introduce these results into a slightly modified version of the DICE model (Nordhaus 1994) and find that taking relative prices into account can have as large an effect on economically warranted abatement levels as can a low discount rate.”

– in looking at damages, you tend to focus on the US picture alone, without regard to other nations – largely poorer ones – in which greater net losses are expected to be felt. You also completely fail to address, even in the case of the US, that benefits and impacts will not be uniformly shared, and that those with net benefits presently have no obligation to compensate those shouldering losses.

– while you fairly note that Nordhaus’ analysis can be helpful in comparing the relative net costs and benefits of different proposals, you fail to note that with changed assumptions, even using Nordhaus’ model as is, much higher estimates of “optimal” levels of carbon taxes can be derived.

– You point to Nordhaus’ remarks on how free-riding be various countries will drastically affect the benefits to be derived from any carbon taxes, but argue that this itself is a justification for the US to free ride, rather than for us to work to coordinate compliance by others.

– You also seem to be very worried that a coordinated approach would actually result in heavily distorted worldwide production, when widespread noncompliance by the various Kyoto parties indicates how ready nations are not to unilaterally assume burdens that other nations will not share.

– You also express concern that any coordinated approaches to climate change may be difficult to unwind as information changes, when it is clearly that various nations (and their industries) are acutely aware of comparative advantage and quite ready to react to what others are or are not doing (in the fact of the easy movement of capital).

– Further, you have confused measures like possible geoengineering and carbon sequestration approaches – which would be incentivized by carbon taxes and are a form of “mitigation”, with what is properly considered as “adaptation” to unavoided temperature increases and climate changes.

There are of course many other points that one would like to see Austrians making – such as the benefits of freeing up the economy from burdensome regulations (while strengthening property rights and private litigation remedies), adding greater degrees of freedom and competition to energy markets to drive greater energy efficiency, allowing immediate depreciation of capital investments, and the desirability of avoiding government-directed investments and subsidies – but perhaps these are things you intend to address in another paper spelling out a truly Austrian approach, rather than nitpicking at a single conventional CBA argument?



(I apologize that this is link-poor, but it seems like the best way to actually have this comment posted.)

Published: June 12, 2008 7:49 AM

Bob, allow me to suggest that you (and others) may also wish to consider taking a look at addressing also the recent short pieces by Joe Stiglitz, Tom Schelling and Ken Arrow others in last year`s The Economists’ Voice; they are as relevant as Nordhaus, and much more accessible to the average reader:

Joseph Stiglitz, A New Agenda for Global Warming

Kenneth J. Arrow, Global Climate Change: A Challenge to Policy

Thomas C. Schelling, Climate Change: The Uncertainties, the Certainties and What They Imply About Action

Published: June 12, 2008 9:41 AM

"Pay Your Air Share" – Libertarian think tank advocates carbon taxes!

February 13th, 2008 10 comments

1.  Check out the San Diego-based The Prometheus Institute,, which has just launched a new website calling for carbon taxes:

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 ( could convince itself to come up with this Pigouvian scheme. 

(h/t Greg Mankiw:

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  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:

Does Cordato favor carbon taxes? McKitrick’s "innovative carbon tax proposal"

December 10th, 2007 4 comments

[Snark level – medium] 

[update below]

Austrian economist Roy Cordato is playing at collectivism by bringing favorable attention to Ross McKitrick’s “T3” carbon tax proposal on Cordato’s blog, Environment NC (hosted by the John Locke Foundation, where he is Vice President for Research & Resident Scholar). 

Says Dr. Cordato:

“Canadian economist/statistician Ross McKitrick has a good article in the Christian Science Monitor describing his innovative carbon tax proposal. The tax is tied to actual temperatures as measured in the tropical troposphere. It is an interesting approach in that it does not involve betting on the science coming from either side of debate.”

 McKitrick raised his intriguing carbon tax idea six months ago at the Financial Post

Steve McIntyre put the proposal up at the Climate Audit blog – in a post which is apparently still open for comment.  This tax was discussed on ealier on the Mises blog here. Some comments by yours truly litter both sites.

I’m not sure Dr. Cordato fully understands what he is up to – give the misanthropic enviros, “alternative energy” rent-seekers and their political gatekeepers an inch, and they’re guaranteed to take a mile.  If McKitrick’s idea gets any play at all, it’s probably to the effect that, despite his criticism of some scientific work, McKitrick thinks that climate change IS something to be taken seriously and that TAXES are an appropriate policy tool. 

Dr. Cordato seems determined to help move the Overton Window further in the direction of the Warmers.  Is he intentionally yielding ground?


I note that Austrians who oppose environmental measures that involve the coercive machnery of the state would probably dismiss such measures as “faux environmentalism”.  Here, the T3 proposal of McKitrick and favorably commented on by Dr. Cordato is an example of such “faux environmentalism”.  I guess that makes ME the “faux environmentalist” for drawing our dear readers’ attention to Dr. Cordato’s post.  My humble apologies!]

Categories: climate, cordato, enviros, mcintyre, mckitrick, tax Tags:

Republicans (Sen. Lindsey Graham & others) give Dems a climate deal? In exchange for streamlining for nukes, "clean coal" subsidies, offshore drilling, carbon price ceiling & import taxes

October 12th, 2009 No comments

Senate Dems, who lack sufficient votes on their own to approve a cap-and-trade bill over a possible Republican fillibuster, have sought help from sympathetic Republicans, who have apparently used this leverage to broaden the bill and to extract key concessions on various issues; such  concessions are sure to please a wide range of lobbying groups, and it looks like there may be a good chance that they will be sufficient to slip a cap-and-trade bill past opposition from coal-producing and -burning states.

The framework of the bi-partisan package was spelled out on Sunday, October11, in a joint NYT op-ed, “Yes We Can (Pass Climate Change Legislation)”,  by liberal Senator John Kerry (D-Mass.) and conservative Senator Lindsey Graham (R-SC).

While details are sketchy (and details sure to still be fought over), it looks like Pres. Obama will have, if not final legislation, then at least high prospects for a cap-and-trade bill that he can use for the negotiations that will start in a few weeks in Copenhagen (over the shape of a global climate treaty to replace the expiring Kyoto Protocol).

Excerpts from the Kerry-Graham op-ed are here (emphasis added; with a few comments in brackets):

Many Democrats insist on tough new standards for curtailing the
carbon emissions
that cause global warming. Many Republicans remain
concerned about the cost to Americans relative to the environmental
benefit and are adamant about breaking our addiction to foreign sources
of oil
[Republicans are so easily jerked around over “energy security”].

However, we refuse to accept the argument that the
United States cannot lead the world in addressing global climate
change. [but do China, India and others want to follow?] We are also convinced that we have found both a framework for
climate legislation to pass Congress and the blueprint for a
clean-energy future that will revitalize our economy, protect current
jobs and create new ones, safeguard our national security and reduce
pollution. …

First, we agree that climate change is real and threatens our
economy and national security. That is why we are advocating aggressive
reductions in our emissions of the carbon gases
that cause climate
change. We will minimize the impact on major emitters through a
market-based system that will provide both flexibility and time for big
polluters to come into compliance without hindering global
competitiveness or driving more jobs overseas. [cap-and-trade]

Second, while we
invest in renewable energy sources like wind and solar, we must also
take advantage of nuclear power, our single largest contributor of
emissions-free power. Nuclear power needs to be a core component of
electricity generation if we are to meet our emission reduction
targets. We need to jettison cumbersome regulations that have stalled
the construction of nuclear plants in favor of a streamlined permit
that maintains vigorous safeguards while allowing utilities to
secure financing for more plants. We must also do more to encourage
serious investment in research and development to find solutions to our
nuclear waste problem

Third, climate change legislation is an
opportunity to get serious about breaking our dependence on foreign
. For too long, we have ignored potential energy sources off our
coasts and underground. Even as we increase renewable electricity
generation, we must recognize that for the foreseeable future we will
continue to burn fossil fuels. To meet our environmental goals, we must
do this as cleanly as possible. The United States should aim to become
the Saudi Arabia of clean coal.
For this reason, we need to provide new
financial incentives for companies that develop carbon capture and

In addition, we are committed to
seeking compromise on additional onshore and offshore oil and gas
— work that was started by a bipartisan group in the Senate
last Congress. Any exploration must be conducted in an environmentally
sensitive manner and protect the rights and interests of our coastal

Fourth, we cannot sacrifice another job to competitors
overseas. China and India are among the many countries investing
heavily in clean-energy technologies that will produce millions of
jobs. There is no reason we should surrender our marketplace to
countries that do not accept environmental standards. For this reason,
we should consider a border tax on items produced in countries that
avoid these standards
. This is consistent with our obligations under
the World Trade Organization and creates strong incentives for other
countries to adopt tough environmental protections
.[probably just a signal to China & India; any bill would have to leave flexibility to the Administration.]

Finally, we
will develop a mechanism to protect businesses — and ultimately
consumers — from increases in energy prices. The central element is the
establishment of a floor and a ceiling for the cost of emission
This will also safeguard important industries while they
make the investments necessary to join the clean-energy era. We
recognize there will be short-term transition costs associated with any
climate change legislation, costs that can be eased. But we also
believe strongly that the long-term gain will be enormous. …

If Congress does not pass legislation
dealing with climate change, the administration will use the
Environmental Protection Agency to impose new regulations. Imposed
regulations are likely to be tougher and they certainly will not
include the job protections and investment incentives we are proposing. 

The message to those who have stalled for years is clear:
killing a Senate bill is not success; indeed, given the threat of
agency regulation, those who have been content to make the legislative
process grind to a halt would later come running to Congress
in a panic
to secure the kinds of incentives and investments we can pass today.
Industry needs the certainty that comes with Congressional action.

Joe Romm on the left applauds the proposed deal (though there is sure to be disagreement about support for coal, nuclear power and offshore oil & gas exploration), and Bill Scher says “Sen. Lindsey Graham Crosses the Climate Rubicon” and thus “made a deal all but inevitable”.

On the right, Michelle Malkin reports that she was right to warn about Republican turn-coats, the National Review `s Gore-haters are dispirited, and MasterResource, the coal-funded “free market” energy blog by libertarian Rob Bradley, has nothing to say.

Political scientist Roger Pielke, Jr. notes the lack of precision and suggests that Republicans now have the upper hand in negotiating the bill.

More reaction and background that readers may find useful is here:

Let’s Try This Again: Are There GOP Senators Who Will Back The Climate Bill? (Bill Scher, Campaign for America`s Future, October 7, 2009)
Senators link drilling with cap-and-trade (Houston Chronicle, October 6, 2009)
Is Lieberman at it again? (Politico,


On the Climate Bill Fence: How Sen. Graham Got There by Bill Chameides (Dean of Duke U`s school of the environment) | Aug 27, 2009

– More on other senators by Bill Chameides

From a libertarian perspective, I ask other libertarians and those on the right whether it is not too late to get a leaner climate/energy bill, that would:
  • instead of a cap-and-trade program (that hands out emissions permits free to existing fossil fuel users, with costs being borne regressively by energy users), use upstream carbon taxes, with the revenues rebated per capita to all Americans;
  • allow limited use of offsets in lieu of taxes (effectiveness of eligible offsets to be insured for a period of 50 years) by Lloyd`s of London);
  • eliminate subsidies for all energy technologies (including ethanol and biofuels)
  • provide that at least half of all revenues taken in by the federal
    government and state government for offshore oil & gas leases and for coal leases will be paid per capita to citizens (and state residents);
  • allow nuclear fuel reprocessing and breeder plants, while eliminating federal insurance for nuke plants;
  • eliminate the grandfathering of dirty coal-burning plants under the Clean Air Act;
  • allow immediate tax deduction of a ll capital expenditures (eliminating multi-year amortization limits);
  • eliminate mandates that public utilities increase use of green, renewable fuels, in favor of the removal of antitrust protection for the grant of local monopolies (and other measure that introduce real competition into the retail power sector), and application of Commerce Clause protection to those who want to sell power out-of-state;
  • establishes energy efficiency targets, as opposed to mandates, with awards to category winners, and publishes results;
  • privatize the TVA (by distributing shares per capita to all who are served by TVA);
  • publish information on the locations of coal fly-ash storage sites;
  • make it clear that federal and state licenses for energy facilities and mines are not licenses to pollute, do not extend any immunity for actual damages caused, and do not prevent injunctions for facilities identified as causing particular damage; and
  • to dampen NIMBYism, establish compensation schedules for federally-licensed facilities, and encourage states to do the same (based on distance and like wind and water flow).

WSJ: In DC at the Economic Club, Exxon CEO Rex Tillerson again proposes a straight, rebated tax on carbon emissions (OR, climate policy gamesmanship & the importance of being earnest)

October 3rd, 2009 2 comments

Exxon CEO Rex Tillerson has done it again*, by proposing in a speech on October 1 in Washington, D.C. that the U.S. shelve cap-and-trade legislative approaches to managing greenhouse gas emissions in favor of direct carbon taxes that are rebated to consumers.  Tillerson`s full speech is here; the press release is here.

[*Again? It might be news to some readers, but Tillerson and other executives at ExxonMobil, which once funded Rob Bradley`s climate denial shop at IER (you know, the coal-funded think tank that funds Bob Murphy`s climate policy efforts) have rather clearly stated over the past few years that they
believe that man`s activities pose significant climate change risks and
that a globally coordinated government policy approach centered on
carbon pricing – and preferably carbon taxes over cap-and-trade – is
. ]

The Wall Street Journal`s Environmental Capital blog provided coverage, summarizing both the substance of Tillerson`s remarks and noting both that his speech came just as the Senate rolled out its climate bill (Kerry-Boxer) counterpart to the House Waxman-Markey bill, and that people are already questioning Exxon`s motives.

For example, the Green Energy Reporter observed that while Tillerson has “distinguished company” in supporting carbon taxes, such as NASA climate scientist James Hansen (and others I`ve noted),  

[Tillerson] likely has some different motivations. Tillerson surely knows
that a carbon tax would be dead on arrival in Congress for any number
of reasons, mainly because legislators are already a long way down
the road on cap-and-trade and it would be almost impossible to change
course now. …

We think it’s fair to view Exxon’s opposition to cap-and-trade –
Tillerson’s reasonable critiques notwithstanding – as a tactic meant to
delay passage of meaningful legislation.

Poor Exxon; they`ve played the climate denial and delay game for so long and so consummately (the boy who cried “there`s no wolf” too many times?) that no one seems to be taking seriously their professions of change of heart (as I noted a month or so, when Joe Romm devoted a post on “grassroots” efforts by some oil firms to criticizing PAST activities of Exxon) , even as they are now backing their words with deeds (such as significant investments climate change basic research and biofuels).

In anticipation of such criticism, Tillerson has tried to directly address this skepticism in his speech (emphasis added):

These costs and consequences inherent to cap-and-trade schemes have led
many policy experts and economists to prefer another course of action
to reduce greenhouse gas emissions.  That other option is a
revenue-neutral carbon tax.
  I know that’s hard for a politician to
say, so we have given it a new name.  We call it a “refundable
greenhouse gas emissions fee.”

a businessman, I have to take a deep breath every time I speak about
this, because it’s hard for me to speak favorably about any new tax.  I
hope you see it shows how serious we are about this issue. …

Now, some people have suggested that a revenue-neutral carbon tax
has no chance of gaining sufficient support in Congress to become law.
 They say a carbon tax is too politically sensitive and that it is
easier and more politically expedient to support a cap-and-trade
approach, because the public will never figure out where it is hitting
  They will just know they hurt somewhere in their pocketbook.

disagree with this assessment.  I believe the American people want
climate policy to be transparent, honest, and effective.
generally agree that achieving a given emissions target costs less
under a tax or fee approach than under a cap-and-trade system.  I
firmly believe it is not too late for Congress to consider a carbon tax
as the better policy approach
for addressing the risks of climate
change.  Indeed, there has never been a more opportune time for
Congress to pursue this course of action.

As a follow-up to the citation of their first comments by the WSJ, the folks at Green Energy News came back and noted that there are very legitimate concerns about cap-and-trade (citing commentary by Gregg Easterbrook that the Waxman-Markey bill “is nightmarishly bad legislation – more than 1,400 pages of
special-interest favors for political donors, command-and-control
bureaucracy and handouts to the privileged. If enacted, it will do
little to reduce greenhouse gases, while discrediting the notion of
climate change legislation.”
), but they nevertheless concluded that:

until Exxon starts lobbying (read: throwing lots of dollars around) for
a viable carbon tax, it will be tough to believe that the company wants
climate change legislation of any sort.

Even while dismaying, I suppose it`s a fair point. Not merely Exxon, but others who want an effective, affordable and politically sustainable climate policy, as well as those who are simply opposed to the massive and opaque pork-barrel approach that Congress is now brewing up (in part for a new set of special interests to edge coal aside from the public troughs), are going to have to start speaking up.


By the way, Tillerson`s speech is a good read; I copy below his remarks about climate policy (emphasis added):

Principles of Policymaking
Climate change policy is one example where such an approach is needed. 

Congress debates important legislation for addressing the risks of
climate change, we must remember the fundamental realities governing
the energy system, the need for and pace of technological change, and
the role of stable policies to help encourage innovation, investment,
and collaboration

When it comes to managing the risks of climate
change, in my view, the most effective policy approaches must be guided
by several key principles.

First, a successful carbon-reduction
policy needs to establish a uniform and predictable cost for emissions
for use in all economic decisions.  This will ensure government is not
put in the position of arbitrarily picking winners and losers

the best way to ensure that carbon costs are minimized is to allow for
markets to select the best methods to reduce emissions through new
investments and technology

Third, we should seek to minimize
administrative complexity.
  Our shared goal is to reduce emissions at
the lowest cost to society.

To do that we must keep
administrative costs low
so that market participants can invest in
technologies that actually reduce emissions — not become bogged down in
bureaucratic demands or incur the costs of financially burdensome
regulatory systems.

Fourth, we should seek to maximize cost
  By providing this transparency, companies and consumers
assess costs for themselves within the context of different public
policy options, as well as assess those costs in light of their own
needs and resources, allowing them to make the best decisions possible.

our national policy approach should encourage global participation
Energy is critical to progress and economic opportunity in both
developed and developing countries.  Thus, for long-term emissions
reductions to succeed, every nation must be involved.  Developed
nations cannot do it alone.  Developing nations cannot be expected to
forgo economic growth and advancement.  Thus, any carbon-reduction
policy must take these realities into account and encourage every
nation to participate in the most appropriate way to meet our shared
goals for reducing emissions globally.

And of course, there will
need to be periodic reviews and assessments to ensure that we can adapt
to any changes in climate science that might emerge or to respond to
any adverse impact these policies might be having on economic

Shortcomings of Cap and Trade
So how does the current proposal before Congress to reduce carbon
emissions measure up against these principles for effective
policymaking?  Will a cap-and-trade system accomplish our society’s
shared goals?

experience indicates that a cap-and-trade system will result in
volatile prices for emissions allowances — and this volatility will
carry a heavy cost for both the economy and the environment.  For
businesses and industry, price volatility undermines the ability to
invest in advanced technologies.  Price volatility also creates
economic inefficiencies and invites manipulation in the markets

For businesses and entrepreneurs, the added
complexity and lack of a predictable cost for emissions make it
difficult to plan
— especially over the long-term. 

And as we discussed earlier, steady and disciplined investment is needed to develop and deploy new technologies.

are not alone in this assessment.  The Congressional Budget Office
studied cap and trade and concluded, I quote: “Volatile allowance
prices could have disruptive effects on markets for energy and
energy-intensive goods and services and make investment planning

Cap-and-trade schemes create another potential cost:
opportunities for market manipulation.  Yet, even with regulations
aimed at minimizing the potential for market manipulation, the
volatility inherent in a cap-and-trade system will add to consumer
concerns about energy prices and the consumer’s ability to manage
energy-related expenditures.

Benefits of a Carbon Tax
These costs and consequences inherent to cap-and-trade schemes have led
many policy experts and economists to prefer another course of action
to reduce greenhouse gas emissions.  That other option is a
revenue-neutral carbon tax.
  I know that’s hard for a politician to
say, so we have given it a new name.  We call it a “refundable
greenhouse gas emissions fee.”

a businessman, I have to take a deep breath every time I speak about
this, because it’s hard for me to speak favorably about any new tax.  I
hope you see it shows how serious we are about this issue. 
revenue-neutral carbon tax has the advantage of being well focused for
achieving our society’s shared goal of reducing emissions over the long
term.  It can be predictable, transparent, and comparatively simple to
understand and implement. 

A carbon tax can create a clear and
uniform cost for emissions in all economic decisions.
  This encourages
every business, every industry, and every consumer to become more
efficient and do their part
to increase efficiency and reduce emissions
through other choices they might make.  Because a carbon tax is
directly applied to the carbon content of fossil fuels or to other
greenhouse gas emissions, there is no need for a government to pick
winners and losers in industry through complex allowance allocation
as we have witnessed on the Hill of late.

eliminating price volatility, a carbon tax provides predictability. 
And predictability allows entrepreneurs and businesses to plan over the
long term
to research emerging technologies and develop the integrated
solutions that have the most positive impact. 

A carbon tax also
avoids the costs and complexity of having to build a new market for
emissions allowances or the necessity of adding a new layer of
regulators and administrators to police this market.  And a simple
carbon tax can be more easily implemented.  It could largely be built
on the existing tax infrastructure. 
We pay a lot of taxes, excise
taxes, federal taxes.  We’ll just add this to the list.

There is
another advantage: A revenue-neutral carbon tax can ensure that
government policy is specifically focused on reducing emissions, not on
becoming a revenue stream for other purposes.  In other words, the size
of government need not increase due to the imposition of a carbon tax
to solve a threat to society.

By returning the tax revenue back
to consumers through reductions in other taxes — payroll taxes or a
simple dividend — we can reduce the burden on the economy and on our
most vulnerable citizens
.  In this current economic downturn, American
families and businesses can hardly afford to be paying a higher cost
for energy, so a direct and transparent refund mechanism is a political

Finally, there is another potential advantage to
the tax approach.  A carbon tax may be a more viable framework for
engaging participation by other nations.  A tax framework is easier to
implement and it does not cap economic growth. 

In addition, it
can be easily adapted to reflect the circumstances of each country. 
Given the global nature of the greenhouse gas challenge, and the fact
that the economic growth in developing economies will account for a
significant portion of future greenhouse-gas emissions, policy options
must be flexible in order to encourage global engagement. 

some people have suggested that a revenue-neutral carbon tax has no
chance of gaining sufficient support in Congress to become law.  They
say a carbon tax is too politically sensitive and that it is easier and
more politically expedient to support a cap-and-trade approach, because
the public will never figure out where it is hitting them.  They will
just know they hurt somewhere in their pocketbook.

I disagree
with this assessment.  I believe the American people want climate
policy to be transparent, honest, and effective.  Economists generally
agree that achieving a given emissions target costs less under a tax or
fee approach than under a cap-and-trade system.  I firmly believe it is
not too late for Congress to consider a carbon tax as the better policy
approach for addressing the risks of climate change.
 Indeed, there has
never been a more opportune time for Congress to pursue this course of

Call to Action
During this time of
economic challenge, we must remember that our nation’s economic growth
and success are built on the innovation, energy, and ingenuity of the
American people.  In the months ahead, our nation will make many
important decisions about the direction of our energy policies.

U.S. oil and gas industry, and I certainly can commit ExxonMobil, is
committed to working with government leaders to help reenergize the
economy, create new jobs, protect the environment, and strengthen
America’s energy security.  We’re going to continue to do our part to
achieve all these shared goals by investing in and developing
integrated, technology-based solutions to our nation’s economic and
environmental challenges even in the face of an economic down cycle. 
And I’m confident, with sound and stable public policies in place, that
these investments hold the promise for a brighter future for not just
all Americans, but for the entire global community as well.


[To comment, please visit this post at my main blog at the Ludwig von Mises Institute.]

A note to Joe Romm about big, bad, carbon-tax-supporting Exxon and the API

August 28th, 2009 No comments

Joe Romm has a post up at Climate Progress that is highly critical of the U.S. oil industry, his ire no doubt triggered by the news that the American Petroleum Institute (API) is coordinating a series of “Energy Citizen” rallies by oil industry employees that target U.S.
Senators in 21 states

Romm`s post largely focuses on past efforts by Exxon to influence the debate by emphasizing Exxon`s PAST role in funding others to cast doubt on the science of climate change – a campaign that Exxon appears to have abandoned – and the greater part of the post consists of a requote of a recent commentary by Bloomberg reporter Eric Pooley, “Exxon Works Up New Recipe for Frying the Planet“.  It seems to me that neither Romm nor Pooley has done a good job of establishing a case for laying their current ire at the foot of “carbon-tax” Exxon.

I left the following comment at Romm`s blog, and look forward to his response after it slips through moderation:

Joe, I understand your suspicions of Exxon, but even as they are convenient whipping boy, they are not coal firms, which I`m sure you understand are a much greater climate threat and which are treated so favorably under Waxman-Markey.

Moreover, you and Pooley paint over your lack of substantiation with very broad brush strokes that are more fairly directed to other members of the API. Granted Exxon is a bit late, but:

– they have expressly agreed that climate risks merit mitigation policies,

– CEO Rex Tillerson has specifically advocated carbon taxes (for which he is good company with Jim Hansen, most economists – and now even Margo Thorning of the ACCF!),

– they are making substantial investments in climate research and biofuels; and

– they are not supporting the API`s fake “citizens” meetings.

Why is Exxon still Public Enemy #1 for you, and not Peabody and other coals firms – and the states and US government, who are hooked on royalties?

I agree with the many economists who strongly prefer a rebated carbon tax. I would love to hear your scientific and political calculation that leads you to favor cap and trade.

Categories: carbon pricing, Exxon, Joe Romm Tags:

Bruce Bartlett: Conservatives should accept the need for more taxes, and focus on limiting the damage

January 29th, 2009 No comments

Bruce Bartlett, who worked in both the Reagan and Pappy Bush administrations and was a trenchant critic of the recent Bush administration, has a new article in the Politico that argues that conservatives should resign themselves to rising welfare costs that have been bequeathed to the Obama administration (with further damaging increases as the Bush administration and now Obama and Dems implement plans to deal with the economic crisis) and should focus instead on finding least-damaging ways to raise the taxes needed to close the fiscal deficit.

Bartlett’s key point is as follows – it almost sounds like Bartlett is arguing for a shift from taxes on income, capital and labor to consumption taxes (query: carbon taxes?):

I think conservatives would better spend their diminished political capital figuring out how to finance the welfare state at the least cost to the economy and individual liberty, rather than fighting a losing battle to slash popular spending programs. But this will require them to accept the necessity of higher revenues.

It is simply unrealistic to think that tax cuts will continue to be a viable political strategy when the budget deficit exceeds $1 trillion, as it will this year. Nor is it realistic to think that taxes can be kept at 19 percent of GDP when spending is projected to grow by about 50 percent of GDP over the next generation, according to both the Congressional Budget Office and the Government Accountability Office. And that’s without any new spending programs being enacted. 

If conservatives refuse to participate in the debate over how revenues will be raised, then liberals will do it on their own, which will likely give us much higher tax rates and a tax system that is more harmful to growth than necessary to fund the government. Instead of opposing any tax hike, I think it makes more sense for conservatives to figure out how best to raise the additional revenue that will be raised in any event. 

In the end, the welfare state is not going away, and it will be paid for one way or another. The sooner conservatives accept that fact, the sooner they will regain political power.

Jerry Taylor/Cato fails to fully engage Yglesias’ "free-market case for revenue-neutral carbon pricing"

November 25th, 2008 No comments

Along with Roderick Long‘s recent Cato Unbound piece on libertarianism and corporatism, Cato hosted a reaction essay by liberal Matthew Yglesias, in which Yglesias made the following side comment:

The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.

Yglesias’ comment on carbon pricing elicited a longer response by Cato senior fellow Jerry Taylor, who in Cato-at-Liberty argues that the case for carbon taxes was not at all “impeccable”.   Unfortunately, Taylor does exactly what Yglesias argues –

  • Taylor ignores Yglesias’ implicit agreement that any carbon pricing should be as revenue-neutral as possible, which further implies support by Yglesias of the notion that the government should avoid using any carbon revenues to subsidize particular technologies;
  • Taylor refuses to address the question of whether relatively slim, revenue-neutral carbon pricing approaches are much preferable to the heavy-handed, pork-ridden policy alternatives that are being floated before Congress; and
  • by proffering arguments by Indur Goklany, Taylor in effect concedes that the best policy is for the government to do nothing, other than to encourage adaptation and to fund adaptation efforts in the developing world – thus conceding to industry a continuing “right to emit GHGs”. 

It is a puzzle that Taylor doesn’t explicitly address these points, particularly as the policy debate has very much shifted ground from whether the government should act to the question of what policy is preferable.   While I believe that Jerry Taylor and Indur Goklany make important points, they can hardly expect to be effectual in their efforts to stand against greater federal policy intervention if they ignore the change in political currents and fail to more directly engage obviously sympathetic observers like Matt Yglesias, to establish and build on common ground, or to more forcefully argue on the basis of principles.

Moreover, Taylor rather surprisingly compounds his disengagement by pulling an apparently skewed figure (the rather low mode rather than the higher mean) from a 2004 review of climate change cost-benefit studies by economist Richard Tol,  who has conducted further reviews and analyses and this year has come very strongly out in favor of carbon taxes.  In the August 12, 2008 issue of Economics — the Open-Access, Open-Assessment E-Journal, Tol concluded:

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

There are three implications. 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.

Tol, R.S.J. (2008), ‘The Social Cost of Carbon: Trends, Outliers, and Catastrophes‘.

Taylor should be aware of this paper, as Richard Tol is well-known and -regarded, and Tol’s above paper was available as a draft in August 2007 and widely discussed (including here).  Consequently, Taylor’s quoting of old numbers that Tol has himself moved away from looks like cherry-picking and in any case will not convince anyone who has moved on from 2004.

Further, while Taylor refers readers to an excellent study by Indur Goklany, he fails to note that Goklany is a strong advocate for “adaptation”, namely, the view that:

The world can best combat climate change and advance well-being, particularly of the world’s most vulnerable populations, by reducing present-day vulnerabilities to climate-sensitive problems that could be exacerbated by climate change rather than through overly aggressive GHG reductions. 

But can’t one agree with Goklany’s preferences and yet kill two birds with one stone, by using domestic carbon taxes to fund contributions to global development efforts?  The “adaptation is preferable to mitigation” dichotomy simply fails.

Here’s to hoping for more constructive engagement from Jerry Taylor and from Cato.

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.”

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”

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.”