Earlier this week Brad Polumbo published a piece in the Washington Examiner making a case for a carbon tax. His piece, “A Conservative Case for the Carbon Tax,” Washington Examiner, July 26, 2018, covers some ground that will be familiar to many people who have followed the debate. The best case I’ve seen so far against the kind of case he makes, although it was published a few days earlier, is by Dan Mitchell. Mitchell’s piece is “The Unpalatable Consequences of a Nationwide Carbon Tax,” July 22, 2018.
I want to make two points, though, a major one that I don’t see my allies making, and a minor one specific to Polumbo’s piece.
The major one is this: Let’s say that those who fear global warming are totally correct and, furthermore, that we can estimate the cost imposed on others fairly accurately. Let’s say we judge that the social cost of carbon is $20 per ton. (You can choose any number; none of my argument hinges on the number, as you’ll see shortly.)
Setting a tax equal to $20 per ton will cause people to take that cost into account in their private decisions. That’s the point of the tax.
But what if taxing carbon is not the cheapest way to go? What if there are geo-engineering solutions that would substantially reduce the damage caused by carbon usage, and what if those solutions are incredibly cheap compared to a carbon tax? This isn’t fanciful. Robert Murphy has written about it at length for Econlib. Co-blogger Bryan Caplan, in a post that is available, makes that point succinctly, quoting later to be co-blogger Scott Sumner. Steven D. Levitt and Steven J. Dubner wrote about it extensively in Superfreakonomics. I discussed their point here. It’s conceivable that the solution could cost a few billion dollars or even just a few hundred million dollars, not the tens of billions of dollars in deadweight loss (in present value terms) that could come about due to even a modest carbon tax.
You might say, “What do you mean, deadweight loss? If the tax is correcting for a negative externality and is set carefully, there’s no deadweight loss.” That’s not true. If there’s a much cheaper alternative, e.g., geo-engineering, then the tax-induced reduction in carbon does cause a deadweight loss.
You might argue further that those who come up with a geo-engineering solution would, by reducing carbon usage, capture some benefits from a carbon tax. No, they wouldn’t. All of the geo-engineering solutions I’ve read about do so without directly addressing carbon. They take the amount of carbon usage as given and figure out how to solve the problem in other ways. They would get no payoff out of carbon tax revenues for their solution.
I think I’m making the point that James M. Buchanan and William Craig Stubblebine made in their classic 1962 article in Economica titled “Externality.” I don’t have ready access to that article. And if they didn’t make that point, the point holds nevertheless.
The minor point. Polumbo writes:
NASA reports that 97 percent of climate scientists agree that the earth’s climate is warming and that human activity is a major factor behind this change.
But follow the link and you see that the NASA is to a piece by John Cook et al: J. Cook, et al, “Consensus on consensus: a synthesis of consensus estimates on human-caused global warming,” Environmental Research Letters Vol. 11 No. 4, (13 April 2016); DOI:10.1088/1748-9326/11/4/048002
In a previous post, I pointed out what’s wrong with Cook et al’s claim and commenter Mark Bahner went above and beyond by taking Cook’s original data and showing what you can actually say based on Cook’s data. Notice also that Cook replied in the comments, unsatisfactorily.
READER COMMENTS
Kevin Dick
Jul 28 2018 at 4:47pm
David. You will find fewer people more skeptical of the claim we should do something substantial about AGW than I. However, I think your geoengineering criticism is weak. I believe a tax credit equal to the tax per ton addresses this concern and provides substantial profit motive for entrepreneurs to develop such technologies (which, given that we assumed the issue is serious, we would want). This is a classic Pigouvian subsidy, correct? I have seen serious proponents of a carbon tax include this feature and my memory is that this achieves efficiency.
Rather, as I believe I commented on one of your previous AGW posts, a Pigouvian carbon tax would probably not produce the 1st order results proponents think. To be efficient, the tax must replace all mandates, subsidies, and existing fuel specific taxes. This means getting rid of fuel efficiency standards, electric car subsidies, and renewable power subsidies/mandates.
Moreover, given the existing federal and state gasoline excise taxes, a Pigouvian tax at the current mid range estimates of the social cost of carbon would _not_ raise the price of gasoline in most states and could lower it in California. But getting rid of fossil fuel subsidies and taxing fossil fuel used in generation would increase the price of electricity. Driving in automobiles would not change and might even go up. Moreover, the incentive to switch to electric cars would be further diminished (which is obviously fine from an efficiency perspective but causes some eye bugging when I explain this to carbon tax proponents).
So honestly, I think the best strategy here is to enthusiastically welcome a revenue neutral Pigouvian carbon tax/credit scheme. The improvement in deadweight loss from getting rid of all the other regulation would be substantial.
David Henderson
Jul 28 2018 at 5:34pm
Kevin,
You write:
I believe a tax credit equal to the tax per ton addresses this concern and provides substantial profit motive for entrepreneurs to develop such technologies (which, given that we assumed the issue is serious, we would want).
That’s incorrect. Geo-engineering, as I noted in my post, will typically do nothing to reduce the number of tons of carbon used. Therefore the amount earned via tax credits by geo-engineers who solve the problem will equal 0.
Kevin Dick
Jul 28 2018 at 5:55pm
David. I think you are still failing to “steelman” the other side. And remember, I’m on your side.
There are two types of geoengineering technologies of which I’m aware. One removes Co2 from the atmosphere. Obviously, crediting these with a ton of CO2 removed is trivial.
Others cool directly. But given that we’ve assumed, in arguendo, that the AGW models are correct, these models actually produce a well defined curve of marginal temperature increase per ton (though the units are very small). If a direct cooling technology demonstrates a cooling effect of X per unit of Y (where Y is technology specific), once we have the curve, it’s a simple matter to convert that to equivalent tons of Co2 removed. So for every Y performed, we can calculate the credit.
Given that we’re in the “for sake of argument” world, a system of Pigouvian taxes and subsidies tied to CO2’s effect on temperature (and the social consequence of temperature) results in less deadweight loss than our current hodgepdge. Correct?
David Henderson
Jul 28 2018 at 10:04pm
You wrote:
True. That one’s easy, and you’ve correctly pointed that this geoengineering technology does involve carbon. I was sloppy in my original exposition.
You wrote:
I don’t think so. The best way to show it is with an extreme example. Let’s say that someone calculates the social cost of carbon at $20 per ton. But with billions of tons, the tax is huge.
Now someone comes along with a technology that costs $100 and will solve the carbon problem. It’s all or nothing–there’s no curve.
There are two problems with your reasoning. First, it’s not obvious at all that a government will say, “Oh, we’ll pay you what the carbon tax would have yielded on that number of tons.” Second, if the government does do this, it will pay hundreds of billions of dollars to someone whose cost of the technology was $100. Of course, that would be efficient relative to a carbon tax. But it wouldn’t be efficient relative to having the guy–call him Paul Allen–pay the $100 out of benevolence. Those hundreds of billions have to be raised somehow and doing so will cause a huge DWL.
Kevin Dick
Jul 28 2018 at 11:49pm
Excellent. We’re making progress. And I’m playing Devil’s Advocate here.
There are two obvious responses to your counterexample, one explicit in the serious discussions I’ve seen and one implicit.
The explicit one is that, because the social cost of carbon is based on probabilistic forecasts, people seem to agree that it _must_ be recalculated relatively frequently to account for new information, say every 1-5 years. Major factors include:
Improved understanding of the atmospheric physics
Changes in the realized CO2 concentration pathway
Changes in adaptation capacity due to demographics or technology
Changes in the forecasts of 2 and 3
Arrival of random events like volcanic eruptions and Super El Ninos
So this puts an inherent limit on the profit from the type of solution you hypothesize. The recalculation will take into account the new technology and lower the SCC, along with its corresponding credit. When combined with the likely research and deployment timelines of actual technologies, this is probably an effective brake in and of itself.
The implicit one is that, as with most such tax credits and subsidies, it seems to me that everyone assumes they would be subject to phase outs and limitations. To use an extreme example of my own, the total carbon tax credit in any one year could not be more than the total carbon tax collected in that year. But obviously a much lower limit would probably provide sufficient incentive to research and develop the types of technologies we’re talking about.
Notice that the recalculation and annual credit limitations combine together to make the possible profit. You hit your limit each year and your progress is soon incorporated into the forecast, lowering future credits. If the technology really does solve the problem completely, the credits converge to 0.
Finally, I have a technical question about Pigouvian subsidies and deadweight loss. I only went as far as a Master’s degree and I have no recollection of this topic. I thought the whole point of a set of optimal Pigouvian taxes and subsidies was that it perfectly aligned profit and social costs-benefits and was thus efficiency enhancing.
If it costs me $100 to invent a piece of software that I sell for $100B because it delivers at least that much benefit to consumers, how is this any different than it costing me $100 to invent a technology where I get $100B in tax credits because it saves at least that much in social costs? Why is the latter a deadweight loss?
My recollection of deadweight loss in general is that it’s the difference between the efficient outcome and the equilibrium outcome in the presence of a distortion. But Pigouvian taxes and subsidies move us closer to the efficient outcome. What am I missing?
David Henderson
Jul 29 2018 at 6:05am
Kevin,
I don’t have time to answer you completely now. I’m on vacation and driving to another lake this morning. But I do have an answer to your last paragraph. Indeed, I anticipated that objection, which is why I wrote the following in my original post:
Kevin Dick
Jul 30 2018 at 1:58pm
I understand about being on vacation. Just returned myself. If you don’t have the time, no problem. But I do feel we are making some progress on this issue. We’re now getting into territory I have not seen discussed anywhere else before and which thus might be generally useful to people thinking about this.
My punch line is: it is logically incorrect to conclude that we should not do Policy A merely because it has a non zero expected deadweight loss when the Status Quo _already_ has a non zero expected deadweight loss. We have to calculate them and choose the lesser.
So what I propose is a Pigouvian tax on CO2, Pigouvian subsidies for demonstrated technologies based on CO2 equivalent temperature effect, recalculation every 1-5 years, subsidized prediction markets to estimate the various uncertainties, including the chances of a breakthrough technology, with tax and subsidy schedules set to minimize the _expected_ deadweight loss.
The details of my reasoning… The standard treatment of externalities says that there is already a deadweight loss in the “untreated” market–the externality is the distortion that produces the difference in the efficient outcome and the equilibrium outcome. Correct?
I think our disconnect is a subtle shift from “demonstrated existence” of alternatives to “potential existence” of insanely great alternatives. Your original point about deadweight loss with a Pigouvian tax obviously applies when there is demonstrated existence of alternatives. But I have taken care of that with a Pigouvian subsidy based on CO2 equivalent cooling effect.
I have never seen a discussion of deadweight loss existing due to an optimal set of Pigouvian taxes and subsidies. My vague memory is that we can show such an optimal set exists (under certain assumption of course) using the tools of optimal contract theory with society as the principal and consumers/producers as the agent–but this is a really old memory.
The possibility of a breakthrough alternative gets us into decision making under uncertainty. And the uncertainty is very important. This was the concentration of my Master’s, so I am comfortable on this ground.
The policy goal has to become minimizing the _expected_ deadweight loss. Obviously, there are a bunch of uncertainties that must be incorporated into this calculation. Our friend Robin Hanson has the solution in prediction markets. And we could subsidize them to induce the best societal forecast of these uncertainties.
David Henderson
Aug 4 2018 at 6:43am
Kevin Dick,
I did answer you. But I thought it would be of more general interest, so I put it below.
Steven E Landsburg
Jul 28 2018 at 5:03pm
David:
First, I teach the Buchanan/Stubblebine paper every year, and I don’t think their point has anything to do with yours. Their point comes down to this: If A burns carbon, imposting a $20-per-ton external cost on B, and <b>if</b> there are no transactions costs between A and B, then B offers A $20 per ton to cut back on carbon-burning. Every time A burns a ton of carbon, he forgoes this payout, which adds $20 to A’s costs. Now if you add a Pigou tax of $20 per ton, A is in effect being taxed $40 per ton, and therefore chooses to burn too <b>little</b> carbon.
In your scenario, it’s crucial that there’s an alternative technology to ameliorate the problem. In the Buchanan/Stubblebine scenario, it’s crucial that there is <b>not</b> an alternative technology to ameliorate the problem, so we can be sure that B will attempt to bribe A, rather than implement that policy.
(Incidentally, I always pose the following riddle to my students: We generally expect to get efficient outcomes in the absence of transactions costs. Yet here is a case where the inefficiency (the suboptimal amount of carbon usage) is <b>caused</b> by a lack of transactions costs. What gives?)
As to your main point, I’m not sure I completely understand it. The Coasian reason to be skeptical of a carbon tax is that it reduces the incentive for others to take precautions against being damaged by carbon. In the usual setup, those “others” are the individuals being damaged, and are assumed to be optimizing. But your setup is a little different: You’re worried, I think, about the incentives to implement a huge engineering project that protects everyone at once, not the incentives for those people to protect <b>themselves</b>. So I <b>think</b> your story revolves around a political-economy-related concern that the government, having declared the carbon problem “fixed”, will fail to pursue such projects? But I’m not entirely sure what assumptions you’re making about the government’s incentives.
David Henderson
Jul 28 2018 at 9:08pm
Steve,
You’ve jogged my memory and stated the Buchanan/Stubblebine point correctly. I’m glad my argument didn’t hang on that.
You wrote:
You’re worried, I think, about the incentives to implement a huge engineering project that protects everyone at once, not the incentives for those people to protect <b>themselves</b>.
Correct.
You wrote:
So I <b>think</b> your story revolves around a political-economy-related concern that the government, having declared the carbon problem “fixed”, will fail to pursue such projects? But I’m not entirely sure what assumptions you’re making about the government’s incentives.
I’m assuming a carbon tax. As I said in my post, if there’s a solution that doesn’t involve reducing carbon and is much cheaper, it won’t be used and we’re stuck with a carbon tax. If you want to put it in terms of political incentives, we could: it’s plausible that a government that has a carbon tax will not get rid of it. But that’s not my main point. My point is what I said in the post and above in this response to your comment: a carbon tax is suboptimal if there’s a cheaper solution.
Alan Goldhammer
Jul 28 2018 at 5:37pm
I’m not an economist and had to google ‘Pigouvian subsidy’ to see what it meant. Regardless, I’ve been supportive of a carbon tax for several years now. To me it is a more fair way to deal with global warming which according to my reading of the science is real. The CAFE standard was always a weak attempt and never reflective of real world driving. I would be happy to see it consigned to the dust bin. I would also like to see the ethanol mandates disappear though I think the corn farming lobby will prevent that from happening.
The only way to ‘reasonable’ transition to a lower fossil fuel economy is through a carbon tax. It allows the marketplace to determine what alternatives are financially competitive without explicit subsidies for any one technology.
David Henderson
Jul 28 2018 at 9:13pm
Alan,
You haven’t dealt with my point about geo-engineering.
You write:
But that crystallizes the point nicely. You’re begging the question; you’re assuming that the goal is to transition to a lower fossil fuel economy. You’ve completely avoiding addressing my point, which is that a lower fossil fuel economy may not be the efficient solution.
Alan Goldhammer
Jul 29 2018 at 8:06am
David, thanks for the response. I think the geoengineering and “procrastination approach” as outlined in the Murphy blogpost that you linked to is unrealistic (not to mention problematic such as sulfur dioxide injections in to the atmosphere leading to increased acid rain). Some technologies have been adopted on various scales such as solar, wind and ethanol. However, these developments were the result of either mandates or tax breaks which run contrary to the libertarian philosophy. Would the state of renewable energy use in the US be where it is without these? I didn’t make it clear that as energy costs rise because of a carbon tax, there will also be an impetus towards conservation and improved efficiency. This has to be considered as a factor.
John Hare
Jul 29 2018 at 2:57pm
Say a landscape company developed a grass that would cool the local area through radiating heat on a wavelength that would result in lower temperatures regardless of carbon dioxide in the air. How would the carbon tax incentivize planting this grass worldwide?
If it was an accidental discovery that cost nothing, why would the government give the discoverer anything? Especially if they could market it at a profit.
James
Jul 29 2018 at 4:27pm
The title says this argument is for all ideologies but that seems wrong. People who are ideologically anti-business or people who just want to see purchasing power transferrred from the private sector to the public sector by any means necessary will not find this argument (or any argument against any tax) compelling.
Maybe that should be the starting point. A Pigouvian tax will not influence people’s behavior at all if the government collects that tax and immediately spends it on whatever they were going to spend it on privately. In order for the tax to be effective, the public has to view the government expenditure of the tax revenue as something less desirable than whatever they were going to spend that money on.
If the government is good at finding ways of spending money that promote people’s well being more so than people spending their own money privately (this seems to be a central premise of many progressives) then a Pigouvian tax won’t reduce the targeted behavior. On the other hand, if taxing and spending does influence behavior, that indicates taxing and spending makes people worse off than just letting them keep their money and spend it privately.
Tom DeMeo
Jul 29 2018 at 4:55pm
Even assuming some way to mitigate carbon emissions without risk or cost, it is not in the public interest to continue to accommodate fossil fuels.
Besides the CO2 emissions, burning this stuff is poisonous and causes us great economic harm. It requires enormous, complex brittle supply chains and huge centralized investments and accomodations, the value of which unfortunately locks out competing technologies. As a high value extracted resource, it has corrupted human politics and induced wars. It is an economic dead end.
Jon Murphy
Jul 30 2018 at 7:53am
Tom-
There’s a subtle contradiction (or, at least, a tension) in your argument. You say:
“burning [fossil fuels]…causes us great economic harm,” and then you say “It requires enormous, complex brittle supply chains and huge centralized investments and accomodations, the value of which unfortunately locks out competing technologies” (emphasis added).
If fossil fuels were causing great economic harm, and that harm exceeded the economic benefits (ie, the value) of alternative fuels, then the competing technologies would not be locked out. Indeed, people would tend toward them.
That is the tension I note in your comment.
Tom DeMeo
Jul 30 2018 at 10:00am
“If fossil fuels were causing great economic harm, and that harm exceeded the economic benefits (ie, the value) of alternative fuels, then the competing technologies would not be locked out. Indeed, people would tend toward them.”
I know you know that’s not true when there are expensive externalities. Those costs are never there at the margins. And locked out is not meant literally. A growing number of people are willing to pay a premium for renewables. Its just a very steep climb.
Fossil fuels require accommodations. We protect supply chains at a military level. We allow transfer stations and pipelines and refineries. Gas stations always compromise their sites for future uses. Fossil fuels can’t compete in the market without these accommodations. We have to make the necessary public and private commitments required to make fossil fuels work.
We shouldn’t have a carbon tax. We didn’t have an asbestos tax. We just sunsetted the technology, and thats what we should do here. Just stop future accommodations for fossil fuels.
Jon Murphy
Jul 30 2018 at 12:47pm
Only in a highly specific case (the externalities are known but the transaction costs are incorrectly estimated and the market participants should have known better). Even if the externalities are expensive, if the transaction/transition costs are even higher, then the market is efficient with the externalities in place.
I’m all for reducing accommodations if that means ending subsidies and the like (not if it means legislating against it like asbestos). it should be symmetrical, too. Eliminate accommodations for other sources as well.
Tom DeMeo
Jul 30 2018 at 3:53pm
Jon,
Its rather the opposite of what you describe. Renewables don’t have the feature of huge transition costs. They do still have higher marginal costs, and part of that is because almost all of the costs are reflected there, except those we choose to subsidize. (It is possible to point to externalities with renewables, but they are tiny compared to fossil fuels)
When I’m speaking of accomodations, I’m talking about continuing to permit new and updated industrial infrastructure of coal, oil and natural gas. For most of the 20th century, consenting to this gigantic, invasive stuff was the only way to scale our economy. Fossil fuels couldn’t evolve as a pure private play just like air travel couldn’t, but the pluses clearly outweighed the minuses. Whether you like it or not, energy became a public decision because that was the only way to get enough energy.
Fossil fuels will become a stranded technology if our society decides it won’t consent to this stuff any more. If we continue to consent to it, the market will have a hard time coming up with a replacement. Fossil fuel prices can plummet dramatically whenever demand goes down.
Jon Murphy
Jul 30 2018 at 6:20pm
@Tom
Then we are back to my original objection.
Just Me
Aug 11 2018 at 12:45am
So called renewables have “accommodations” which are just as large as conventional energy sources, if not larger (actually much larger). They are intrinsically diffuse sources of energy which means that their foot print alone dwarfs that of conventional sources of energy. Solar PV can generate about 100W/m^2 when it is working, which is limited to about 8 hours/day. Wind is about a fourth of that (but can work at night).
Even worse, the prime locations are generally far removed from demand leading to much larger transmission line requirements than we presently have. And then we come to the problem of intermittency. The LCOE in EIA/IEA analyses do not account for the backup power required to smooth out the inherent lack of reliability from renewables. Batteries are hideously expensive with limited lifetimes and can only buffer very brief events (hours at best). The physics of reality are so stubborn that our best form of energy storage remains pumping water up a hill, and the potential reservoirs for that simply aren’t numerous enough. Even if they were they would only further obliterate your contention that renewables have fewer “accommodations.” A back of the envelope approximation yields the need for 100-500 additional Hoover Dams to supply adequate backup for the US alone.
But wait, there’s more! We haven’t touched on the massive scale up required to produce the quantity of rare earths let alone cobalt required to fuel your transition. Just converting the US alone to electric transport would require doubling global rare earth production for the next 20 years. The good news is that the world does have sufficient reserves of RE’s to source that, but we’re still talking a massive scale up. Cobalt reserves are a different story. Many new sources would have to be discovered and brought online to meet your transition. That will not be cheap and will likely involve plenty of unstable regions which you claim we pay for “militarily.”
And if you want environmental impact, look no further than monazite extraction and processing. Rare earth production in the US is essentially non-existent because of environmental regulations essentially banning the process.
JFA
Jul 29 2018 at 8:10pm
The argument hinges on the alternative geo-engineering solutions. This seems to make the case for carbon taxes stronger. Given David’s past skepticism in the climate models, I am surprised to see him advocating for geo-engineering, which surely has wider ranges of uncertainty around th effects and unintended consequences than simple reductions in carbon. Given this uncertainty, it seems like a no-brainer to impose a carbon tax rather than relying on science fiction alternatives.
David Henderson
Jul 29 2018 at 10:48pm
JFA,
Given David’s past skepticism in the climate models, I am surprised to see him advocating for geo-engineering,
I’m not advocating geo-engineering. I’m saying that if ge0-engineering is cheaper, then it’s preferable to a carbon tax.
which surely has wider ranges of uncertainty around th effects and unintended consequences than simple reductions in carbon.
Please explain why.
JFA
Jul 30 2018 at 9:12am
I’m saying that if ge0-engineering is cheaper, then it’s preferable to a carbon tax.
OK… but if that’s all you’re saying, then it’s a little banal.
Why is geo-engineering likely to have more uncertainty? I understand that there is some uncertainty in how carbon affects climate, but it seems like the consensus (by a wide margin) is that it leads to warming. So we can make a reasonable guess that reducing the levels of carbon to what they were at some point in time will not have drastic effects.
The main (fatal one might say) conceit of geo-engineering is that we can fine tune the earth’s climate and know that the effects of geo-engineering on the ocean and land environments will not be detrimental. To take the injection of sulfuric acid into the stratosphere. It may reduce the amount of warming, but that assumes we know the amount necessary. However much we spray (too little or too much), we might see acidification of oceans. Even if we spray the right amount, there still might be large regional variation in effects (making some places worse off). Potential ozone depletion if too much is sprayed. You can probably think of a few more.
Both policies are trying to bring about some change in a complex system. It just seems to me that there is much less uncertainty around reducing carbon emissions than around an idea that was inspired by observing the effects of volcanic eruptions.
Jon Murphy
Jul 30 2018 at 8:14am
JFA-
Even if geo-engineering “surely has wider ranges of uncertainty around th[e] effects and unintended consequences than simple reductions in carbon,” it doesn’t necessarily follow that carbon taxes would be preferable to geo-engineering (or other ground-up schemes).
From a theoretical point of view, the carbon tax is straightforward. But bringing that theory into reality is a totally different story. It requires a number of assumptions:
The tax can be accurately calculated and administrated
Whoever is in charge of the tax can resist political pressure to alter it for political or other non-environmental reasons
People do not change their behavior (other than to use less carbon)
Just to name a few.
Given these assumptions, and the fact they are surely violated when we move from the highly stylized world of economic models into the messy real world, even huge error bars on geo-engineering and unintended consequences may be preferable to carbon taxes. Indeed, if you are right and there is much uncertainty (on both sides of the equation), then it is all the more reason for a neutral government so as to not make any errors in judgment systematic.
JFA
Jul 30 2018 at 9:37am
See my comment to David above on the issue of uncertainty. Will the assumptions around a carbon tax be violated? Almost certainly. But it seems that this argument applies (probably more so) to geo-engineering as well.
Indeed, if you are right and there is much uncertainty (on both sides of the equation), then it is all the more reason for a neutral government so as to not make any errors in judgment systematic.
This statement assumes quite a bit. You imply that geo-engineering is a ground-up solution. I’m honestly not sure how to categorize these types of projects (top-down, bottom-up, whatever). Generally, when discussing ground-up solutions, I think about actions that don’t effect an entire complex system or that are responsive to feedback. Just because a non-governmental actor is doing something doesn’t mean it is ground-up. Given that geo-engineering is supposed to effect global climate, I don’t see much of a future in the development of a market (though I am perfectly willing to admit the possibility of one). The two likely ways geo-engineering gets implemented is through government policy or some eccentric billionaire (or group of eccentric millionaires who pool their money). I don’t see either one as bottom-up.
I honestly see government as the more responsive alternative. It seems the carbon tax is just as likely to be set at too low of a rate than too high of a rate. For all its flaws, democratic government does actually respond (if imperfectly and slowly) to the public.
You are also assuming (in the statement I quoted) that the effects of uncertainty around each policy are of equal value. It seems to me that the expected value of the effects of geo-engineering is (considering the seemingly very bad downsides) much lower than the expected value of a carbon tax. Economies have weathered bad tax policies (just look at how countries have liberalized their economies since 1950). The planet might not weather poorly mismanaged geo-engineering.
Jon Murphy
Jul 30 2018 at 9:56am
I didn’t mean to imply that. I just meant to point out that government should be neutral given the uncertainty so as to not make a bad decision systemic
Thaomas
Jul 30 2018 at 8:43am
A carbon tax and geoengineering are not really alternatives. The existence of a carbon tax does not prevent a geoengineering contribution to reducing the “warming” aspect of the CO2 emissions externality and geoengineering does nothing about ocean acidification. It would be good to substitute a miles traveled per vehicles of different weights and sizes for gasoline taxes with or without carbon tax.
nobody.really
Jul 30 2018 at 1:42pm
To review:
Yup, we’d want to adopt the least-cost/best-outcome policies. And where we can harness the dynamic power of markets and individual initiative/choice, often this proves to provide the best outcomes at the lowest cost.
2. Yup, externalities pose problems for market dynamics. Pigouvian taxes are one way to adjust for some problems while retaining the benefits of market dynamics.
3. But to design a good Pigouvian tax, it helps to identify the problem we’re seeking to remedy with great particularity. Thus, as we’ve discussed, CO2 contributes to global warming/climate change. And also ocean acidification. And also increased plant/crop growth. Etc. ideally we’d run some giant multivariate regression function to quantify the costs (and benefits?) arising from the most proximate causal variable. Alas, “most proximate cause” is an ill-defined concept. Is the world getting warmer because of the extra CO2 I emit, or because we haven’t yet implemented geo-engineering?
That said, which people find fault with Pigouvian taxes, I haven’t seen anyone deny that externalities exist, or to argue for a better remedy. At most, I’ve understood people to argue that the net benefits of a Pigouvian tax are indeterminate.
I sense the harm of a Pigouvian tax arises from the failure to apply it to the most proximate (low-cost?) source of the alleged harm–or the failure to create property rights in conduction with the tax, thereby permitting people to buy and sell their risks.
So here’s a proposal: Identify and quantify different costs (and benefits), and establish different variables for each type of cost (and benefit). Thus, have one Pigouvian tax for conduct that contributes to ocean acidification. And a separate tax (credit?) for incremental plant growth. Etc.
But what about temperature rise? What if we tax people who emit CO2—but the amount of the tax would be re-calculated on a regular basis to reflect the latest research about the (average?) cost temperature rise? People paying lots of CO2 tax would then have an incentive to research and support geo-engineering projects. If and when the people calculating the tax conclude that the cost of emitting an extra ton of CO2 has declined (due to the rise of technologies that reduce the correlation of CO2 emissions and temperature), the amount of the tax would fall. This wouldn’t exactly give taxpayers a property interest in a low temperature, but it’s close.
Finally, a word on efficiency/deadweight social costs: People object that an excessive CO2 tax would generate needless deadweight social costs. But we haven’t discussed what would happen to the REVENUES arising from these Pigouvian taxes. Arguably we could use them to offset other taxes—taxes that ALSO generate deadweight social costs. If we understand Pigouvian taxes as a substitute for some other kind of tax (which is generally how discussions of public finance should go), then the efficiency gains from getting the size of the tax exactly right declines.
David Henderson
Jul 30 2018 at 1:53pm
Reply to Kevin Dick.
Kevin, you write:
The problem is that the carbon tax gives zero incentive for geo-engineering solutions that don’t involve reducing carbon. In the best case for what you argue above, yes, once the problem is “solved” by geo-engineering, the carbon tax could be cut to zero. But it wasn’t the carbon tax that solved the problem before it was cut to zero; it was ge0-engineering. (I’m of course hypothesizing that geo-engineering works and at a much lower cost than the cost of carbon reduction.)
Roger Levy
Jul 30 2018 at 4:11pm
What a confusing article, based on nothing more than supposition. Let’s simplify the carbon issue.
I’ll assume there is a weather related carbon dioxide problem, even though the science is still very speculative.
Name any unlimited combination of monetary, behavioral, or technical actions the US or any international alliance could take today that would be expected to ‘solve’ the carbon ( temperature increase) by the end of this century. In fact all of the published studies I ‘ve reviewed suggest the answer to this question is: There is no combination of actions expected to solve the carbon problem.
If the conclusion from (2) is correct, why is a carbon tax even being seriously considered. Even if a carbon tax might have value, what criteria will be used or who will be ordained to set the price. There is no objective basis foepr establishing a carbon tax, so it will be a purely arbitrary number.
Don’t forget to also address the cost of the subsidies for the poor and additional policy aberrations necessary to offset the higher costs and misdirected resource allocation decisions any carbon tax will produce.
Charlie
Jul 30 2018 at 4:35pm
“Assume a can opener…”
John Halstead
Jul 31 2018 at 12:32pm
This piece is completely at odds with the dominant view in the geoengineering literature, which is that mitigation should be priority number 1, and that geoengineering should be combined with strong mitigation. I cannot think of a single mainstream geoengineering scientist who thinks that geoengineering should be done alone, even among those such as David Keith, who think geoengineering might be a good idea.
Your knowledge of this issue seems superficial at best, given that it relies only on other blogs on econlog and on superfreakonomics, which received enormous criticism for its analysis of climate change. You give the impression as being someone who is motivated to argue against a carbon tax for ideological reasons, and who does not seriously engage with the literature on something as complex and controversial as geoengineering. This is ridiculously epistemically cavalier. Have you ever read an academic paper on geoengineering?
Mark Bahner
Jul 31 2018 at 3:52pm
If geoengineering is considerably less expensive than mitigation, how can the “dominant view” that “mitigation should be priority number 1” be justified?
I’m particularly thinking about geoengineering that removes carbon dioxide from the air. If geoengineering that removes carbon dioxide from the air is considerably less expensive than mitigation, why would mitigation be “priority number 1”?
John Halstead
Jul 31 2018 at 5:07pm
This is a good example of why having opinions while knowing literally nothing about the relevant literature is not a good idea. The fact that you can’t think of a good example having only read an absurdly biased blog is indication that you should read around. I would recommend Oliver Morton’s The Planet Remade or anything by David Keith. There are a multitude of risks involved in geoengineering without mitigation, including the risk of large regional damages which would not be accepted by those affected, massive governance problems, elevated risk of war, ocean acidification etc etc etc.
The author rather reveals his own ignorance by saying “All of the geo-engineering solutions I’ve read about do so without directly addressing carbon.” If so you haven’t read enough mate, and yet you feel confident enough to write a blog on the issue. Truly pathetic.
John Halstead
Jul 31 2018 at 5:10pm
Geoengineering that removes carbon from the air is not cheaper than mitigation. Mitigating through low carbon technologies like nuclear and renewables is cheaper than doing carbon removal. Carbon removal is, and is known to be by everyone who has actually read anything about the topic, extremely expensive. Large scale carbon removal also faces massive feasibility constraints.
Mark Bahner
Jul 31 2018 at 11:22pm
What is your estimate of the cost per metric tonne of CO2 avoided for a new nuclear power plant in the United States versus a new or existing natural-gas-fired combined-cycle power plant?
What is your estimate of the cost per metric tonne of CO2 avoided for a new photovoltaics power plant in, say, New York State, versus a new or existing natural-gas-fired combined-cycle power plant?
I don’t think you know nearly as much about the subject as you think you do! Have you ever read any of the results of the research on the cost of carbon capture via ocean iron fertilization by Dr. Hauke L. Kite-Powell of Woods Hole Oceanographic Institution? (That’s essentially a rhetorical question. I can tell by your statements that you haven’t.)
JFA
Aug 2 2018 at 10:47am
Before this becomes too heated: Mark, the supposition of David’s post is that if geo-engineering is a cheaper way of reducing climate change, then that should be the go to policy. Sadly, David (despite claiming to provide an argument against a carbon tax) only provides a hypothetical argument against the carbon tax.
This is where some numbers would come in handy. I am not an expert on the various cost of alternatives. I wish John had provided some numbers on the cost of mitigating vs. geo-engineering. I also wish you would provide estimates on the cost of mitigating vs. the cost of geo-engineering. Given that you guys seem to be acquainted with the literature, why don’t both of you provide ranges of cost estimates (because any serious study will certainly have ranges of the cost) and then a productive conversation can be had. This is something that David should probably have done if he actually wanted to live up to the title of the post.
Here’s what some useful evidence might look like. For the carbon tax, provide estimates on the extent that will encourage switching to more efficient or “greener” technologies. Include the cost of switching and the benefit coming from the reduction in carbon usage. For carbon capture geo-engineering, include cost per ton of carbon capture (and for reference, provide the estimate of the per ton benefit of reducing carbon). For all geo-engineering alternatives, include the various risk and the expected cost of those risk.
Otherwise, everyone is just talking out of… well you know what they’re talking out of.
Mark Bahner
Aug 3 2018 at 4:10pm
A heads up to the wonderful folks at Econlog. I will be responding to JFA’s comments. My response will probably approach or break records for length and number of hyperlinks. (He wants “numbers”? I’ll give him “numbers”! ;-))
So I’m certain the spam check software will hold my comments for “moderation.” I promise my comments will be moderate…except with regard to length and number of hyperlinks.
Best wishes,
Mark
Mark Bahner
Aug 3 2018 at 4:50pm
Probably too late. 😉
Yes, I’m well aware of that. Your statement would be better directed to John Halstead, who was the one who insisted that, “Mitigating through low carbon technologies like nuclear and renewables is cheaper than doing carbon removal. Carbon removal is, and is known to be by everyone who has actually read anything about the topic, extremely expensive.” (As an environmental engineer with more than 25 years experience, much of it related to climate change, the “…is known to be by everyone who has a actually read anything about the topic…” was particularly annoying to me.)
Yes, that’s why I asked John Halstead to provide some specific numbers. I’ll be happy to provide my own numbers, but I can provide a short summary of the results of the numbers: “They’re complicated.” A bit longer summary would be: “They’re expletive complicated.” I can give you numbers that are all over the map. And all the numbers would be controversial. That’s legitimate technical controversy, from both sides of every number.
Heh, heh, heh! Omigod, that would take about a lifetime!
Before I’d do that, I’d like to point out that any carbon tax of any amount imposed in the U.S. alone is going to have essentially zero effect on global temperatures over the course of the 21st century. Why? Because temperatures aren’t going to rise very much anyway, and because the U.S. contribution from now until 2100 will be a trivial amount of that modest rise. A best guess for the temperature rise over the course of the 21st century might be 1.8 degrees Celsius (essentially corresponding to the RCP 4.5 scenario). The U.S. contribution to emissions is currently about 15% and will unquestionably decline as a percentage of global emissions over the course of the century. So even if U.S. emissions were cut to zero tomorrow, it would reduce global temperatures by less than a quarter degree Celsius in 2100, versus the U.S. not trying to reduce emissions at all. That’s less than the year-to-year variation in global temperature. There are people (e.g., The Breakthrough Institute, Roger Pielke Jr.) who advocate trying to make green energy technologies cheaper, rather than making fossil fuels more expensive. I agree with that philosophy. If, for example, photovoltaics and/or wind are cheaper than fossil fuels in places like China and India, then they’ll switch without any need for political pressure (which won’t have any effect anyway).
But I’ll attempt to start answering your questions (not necessarily in order):
1) The “…benefit coming from the reduction in carbon usage…”.
People attempt to address this by calculating the “social cost of carbon” (“SCC”). I’m too lazy to explain if you don’t already know what it means. But some values are: a) The CBO quotes others and estimates the SCC as “about” $21 per ton of CO2 in 2010, expressed in 2007 dollars (https://www.cbo.gov/publication/44223#section6). Table 1 of this document (https://www.researchgate.net/publication/274097089_Monetary_valuation_of_the_social_cost_of_CO2_emissions_A_critical_survey) gives values ranging from $6 per ton to $106 per ton. Some estimates of the SCC are actually negative…particularly for increases in temperature less than 2 degrees Celsius (https://object.cato.org/sites/cato.org/files/serials/files/regulation/2016/4/regulation-v39n1-4.pdf). And if the warming of the 21st century triggers a significant release of methane from hydrates in permafrost, the SCC could well be many hundreds of dollars per tonne of CO2. (No reference for that, so you’ll have to trust me on that.)
2) On the effect of carbon taxes on switching to “greener” technologies…are you asking for the United States? Japan? The EU? Africa? China? India? The world? My point is that all those answers would be different, depending on how expensive (or inexpensive) “greener” technologies are compared to fossil fuels in all those countries. And the kicker is that “greener” technologies (particularly photovoltaics and batteries) are rapidly coming down in cost, compared to fossil fuels. So the numbers could be dramatically different in only 5-10 years.
And that would take another lifetime! More briefly (than a lifetime):
a) Carbon capture ala the chemical means proposed by David Keith and others has been estimated at $600 per tonne of CO2, while other estimates range from $94 to $232 per tonne (http://www.sciencemag.org/news/2018/06/cost-plunges-capturing-carbon-dioxide-air). I used an extremely conservative estimate of $1000 per tonne of CO2 removed, and demonstrated that the people of the year 2100 should have no extraordinary difficulty returning the concentration of CO2 in the atmosphere down to the pre-industrial concentration of about 300 ppm, if the people of 2100 choose to do so (http://markbahner.typepad.com/random_thoughts/2013/04/global_warming_is_not_irreversible-1.html ) .
b) Carbon capture via ocean iron fertilization…a possibility that seems particularly interesting to me: Some estimates have been as low as $2 per tonne of CO2, and other estimates as high as $457 per tonne of CO2 (https://www.researchgate.net/publication/264437659_A_method_for_estimating_the_cost_to_sequester_carbon_dioxide_by_delivering_iron_to_the_ocean). Oh…and ocean iron fertilization will either provide fine fishing for all or create the greatest ocean “dead zone” ever seen by man.
So…there are some numbers. I reported (with a little bit of editorializing :-))…you decide.
Best wishes,
Mark
JFA
Aug 5 2018 at 1:04pm
Looking forward to it. If you emailed David, maybe he would post it as its own separate blog post.
JFA
Aug 6 2018 at 8:37am
Hey Mark
Thanks for the numbers. Maybe John could provide some numbers related to the carbon tax (if he’s still reading this) and mitigation. Given the numbers you presented, it looks like geo-engineering alternatives have cost in ranges that are much higher than the SCC estimates, so that’s probably not the way to go for now, especially since there are possible systemic risks to tinkering with the environment.
Mark Bahner
Aug 9 2018 at 1:28pm
A couple of points:
I only presented the costs for two of the many forms of carbon removal. Options such as stratospheric aerosol injection may be lower…but they’re also likely to have more adverse side effects.
I only presented estimates of the *global* social cost of carbon (SCC). The estimates of SCC for specific countries may be much lower. For example, the SCC considering only costs (and benefits) for the United States may be as low as $1-6 per metric ton of carbon:
https://www.washingtonpost.com/news/energy-environment/wp/2017/10/11/new-epa-document-reveals-sharply-lower-estimate-of-the-cost-of-climate-change/?utm_term=.54b2dcb9cb1f
Mike Sproul
Aug 2 2018 at 11:31pm
Here’s one kind of carbon removal that is fairly cheap: Let plants do the work of removing CO2 from the air, then bury the plants in landfills.
David Henderson
Jul 31 2018 at 10:12pm
John,
I do recall some criticisms of that section of SuperFreakonomics, but I recall not finding them persuasive. I would appreciate your linking to the ones you found most persuasive.
nobody.really
Aug 1 2018 at 4:40am
Guys, guys, guys–
I bet we could get 100% agreement on the idea that the optimal response to climate change is to adopt some amount of reductions in CO2 emissions, and some amount of adaptations OTHER than reducing CO2 emissions.
So here’s the challenge: Can we think of some policy, or collection of policies, that would move us toward that optimal mix? Pigouvian taxes (such as a carbon tax) have the advantage of providing incentives to reduce whatever activity is taxed without dictating precisely HOW to achieve those reductions; this harnesses the power of creativity and innovation. But Henderson’s key insight is that a carbon tax would fail to incentivize adaptation, and thus could lead to a sub-optimal outcome. I haven’t read anyone to dispute Henderson’s claim.
I don’t mean to disparage a discussion of the state of research into various strategies for both adaptation and CO2 reduction. But that discussion will swamp the policy discussion. Moreover, the lessons will be transitory as there will (I hope!) always be new developments in this research.
So I’d vote for focusing on the policy question: How can we identify the optimal mix of adaptation and CO2 reduction at any given point in time? How can we identify that optimal mix in a dynamic world in which new discoveries will constantly change the relative merits of different strategies? Finally, how can we create incentives to get society to adopt this optimal (and ever-shifting) mix of policies?
One person’s perspective, anyway….
nobody.really
Aug 1 2018 at 5:08am
A point of clarification, for what it’s worth: Does a strategy for extracting CO2 from the air fall into the “CO2 reduction” category or the “adaptation” category? It depends on your framework.
Henderson’s essay critiques the working of a conventional CO2 tax–which I understand as a tax on CO2 emissions. He argues that the tax would cause people to shift away from CO2-emitting activities, but would not create a comparable incentive for adaptations other that reducing CO2 emissions. Within that framework, strategies for extracting CO2 from the air would fall into the “adaptation” category.
But we might imagine a tax (and subsidy) mechanism on behaviors that changed the net amount of CO2 in the atmosphere. Such a mechanism might give the same incentive for reducing CO2 emissions by 1 ton as for extracting 1 ton of CO2 from the atmosphere, which arguably would be more appropriate than the standard CO2 tax. But it still wouldn’t give comparable incentives for other adaptations, such as strategies to reflect more sunlight back into space. In this framework, CO2 extraction might fall into the “CO2 reduction” category.
(See–aren’t policy discussions more fun than those icky science discussions? Well, it’s kind of you to pretend….)
Mark Bahner
Aug 1 2018 at 3:01pm
If the “some amount of reductions in CO2 emissions” includes “no reductions beyond those that could be achieved by stopping or reducing existing subsidies for fossil fuels,” I could agree.
P.S. Oh…I’d possibly also agree to taxes on non-CO2 emissions (especially particulate matter) from coal-fired power plants. Especially if they were accompanied by reduction/elimination of existing regulations for coal-fired power plants.
nobody.really
Aug 3 2018 at 7:36pm
nobody.really
Mark Bahner
Well, I tried to drain the swamp…. 🙂
Mark Bahner
Aug 3 2018 at 10:11pm
I think you think that greatly simplifies things. But they’re still tremendously complicated. For example, take a look at this graph:
http://markbahner.typepad.com/.a/6a00d83453d12c69e201b8d29a8698970c-popup
It’s a plot of per-capita GDPs for all the countries of the world. Each country is represented by two dots: the blue circles are “without climate change.” The yellow triangles are “with climate change.” (The “with climate change” is the midpoint of the temperature rise associated with the RCP 4.5 scenario, according to the IPCC AR5.) Both the x and y axes are logarithmic. The y-axis is the ratio of per-capita GDP in 2099 to the per-capita GDP in 2010 (in constant dollars). The x-axis is per-capita GDP in 2010 dollars.
Here are some key aspects:
There is not a lot of difference between “with climate change” and “without climate change” (the two regression lines are pretty close together, and in fact actually cross at one point).
In general, the countries that have the highest GDPs in 2010 (the countries on the right side of the x-axis) actually benefit from climate change. That’s because they are generally colder countries. So for those countries, their country-wide average social cost of carbon is actually negative (that’s for the midpoint temperature rise of the RCP 4.5 scenario).
The poorest countries in general are hurt most by climate change (because they tend to be hotter countries). However, they also tend to have a higher GDP2099/GDP2010 ratios. (That’s because poor countries like China and India tend to grow very fast as they “catch up” to richer countries.) So (this is not obvious from the graph) it turns out that poor countries in 2099 may in fact have greater per-capita GDPs than richer countries.
In no case is any country poorer (lower per-capita GDP) in 2099 than in 2010.
Sooo…what is the appropriate policy? Should the rich, cold countries with the negative SCC (that are richer with climate change than without climate change) have no limits on carbon? Or should they sacrifice for the benefit of “poorer” countries in 2099…even though those countries in 2099 might even have higher per-capita GDPs in 2099 than the rich countries in 2010?
nobody.really
Aug 3 2018 at 11:57pm
Cool graph; quite thought-provoking. Several questions come to mind.
Simple mechanics—Why logarithmic scale? Does using logarithmic scale alter the eventual slope?
2. I wonder if they could do the same analysis using MEDIAN GDP? I have anxieties about the future of the labor market, in a world of increasing automation. I hate to inject that complicated discussion into this complicated discussion, but current trends suggest a world of ever greater wealth in ever fewer hands. Combine that with a world in which India, China, N. Africa, and Central America are growing ever less inhabitable/habitable due to climate change, and we’ve got a mess—even if AVERAGE wealth has grown. (Do these models take climate-induced migration into account? ‘Cus if we’re struggling with migration today; what will tomorrow hold?)
3. Then there’s risk management. You say the graph you site was generated based on averages of averages. But the climate models also included estimates of 95th percentile outcomes, and they’re catastrophic. How much should those outcomes—unlikely, yet not inconceivable—influence our analysis?
4. Finally, there’s politics. What do you predict for the future of the Republican Party—in a nation that is growing less white by the day? Now take those same dynamics and project them world-wide: What will be the future of European nations/white people in a world in which the most numerous, and the most affluent, groups are not white? If we want to emulate the Republican Party, perhaps we could exploit our fading advantage and project an image to the world that we’re gonna live large at other people’s expense (even if the image is inaccurate). Alternatively, we could make a few conspicuous sacrifices on behalf of the developing world (even if the sacrifices are merely symbolic), in the hope that they might be willing to come to our aid in the future. It never hurts to have rich friends!
Mark Bahner
Jul 31 2018 at 1:51pm
A fine point on your fine point. I did not make any specific claim as to what could be said based Cook et al.’s original data. I merely added numbers to show David Friedman was indisputably correct…that Cook et al. could not claim their data showed that, “…over 97% endorsed the view that the Earth is warming up and human emissions of greenhouse gases are the main cause.”
So David Friedman is right. John Cook and his co-authors (constantly) lie when they claim that 97% of the abstracts they reviewed “…endorsed the view that the Earth is warming up and human emissions of greenhouse gases are the main cause.” (And the fact that John Cook is actually teaching Climate Science Communication at George Mason University blows my mind!)
P.S. Though I never explicitly wrote what could be said from the Cook et al. 2013 Environmental Research Letters paper, here would be one possibility:
“We reviewed abstracts that potentially had opinions on global warming, and judged them to be in 7 categories. Here are the number of abstracts in the various categories:
(1) Explicit endorsement with quantification = 64 abstracts.
(2) Explicit endorsement without quantification = 922 abstracts.
(3) Implicit endorsement = 2910 abstracts.
(5) Implicit rejection = 54 abstracts.
(6) Explicit rejection without quantification = 15 abstracts.
(7) Explicit rejection with quantification = 9 abstracts.”
“Therefore, of the 4,014 abstracts we reviewed, only 73 abstracts explicitly had a position on whether global warming is occurring and humans are the main cause. Of those 73 abstracts, 64 explicitly endorsed the proposition that global warming is occurring and humans are the main cause, and 9 abstracts explicitly rejected the proposition that global warming is occurring and humans are the main cause.”
Of course, that accurate assessment of their results probably would not have gotten John Cook his position at George Mason University, would it?
P.P.S. For nerds who are interested in even more details on this matter:
http://markbahner.typepad.com/random_thoughts/2014/05/citizen-scientists-of-the-world-seriously-the-emperor-is-naked.html
LK Beland
Aug 1 2018 at 4:10pm
By “geo-engineering”, do you mean affordable carbon removal?
If so, a well-designed carbon-pricing plan will work. Simply assign reimbursable tax credits for carbon-removal. Carbon emitters pay the tax and carbon removers get the credit. As long as the carbon tax/credit are slightly above the marginal cost of removing the last ton of CO2 consistent with the policy objective, then it works–with minimal dead-weight loss.
On the other hand, if “geo-engineering” refers to some other way of lowering global temperatures, then we need to estimate the “carbon-warming-potential-equivalent” of that technology, and assign it a reimbursable tax credit consistent with that estimate.
Mark Bahner
Aug 1 2018 at 6:32pm
Yes, and if it’s stratospheric aerosol injection to lower global temperature that ends up destroying the ozone layer and killing us all, someone should pay for that. 😉
https://www2.ucar.edu/atmosnews/news/942/stratospheric-injections-counter-global-warming-could-damage-ozone-layer
wd40
Aug 2 2018 at 11:35am
David,
Let us start with the low-transaction cost situation considered by Coase. First consider the case where there are only two parties involved: the polluter (carbon producer) and the pollutee, Assume that the pollutee has the right to no carbon. Then the parties will arrive at an optimal contract. The polluter will be charged for the cost of pollution to the pollutee (including mitigation by the pollutee). This is known as a liability rule and would be based on optimal behavior by the pollutee. If market transaction costs are high (say because there are many polluters and many polluters) but the total cost is the same as in the two person case, then the Pigovian tax can in principle mimic the liability rule. Note that both the Pigovian tax and the liability rule are more sophisticated (mainly because they are based on optimal behavior) than the simple rules considered by Buchanan. There are however different wealth outcomes just as there are different wealth outcomes when the rights are initially allocated to the polluter instead of the pollutee).
Now go back to the two party case and consider the possibility that a carbon scrubber is possible. The polluter will have an incentive to buy it (if it is cost effective and the cost to the polluter to purchase it is not greater than the cost to the poluttee). The optimal contract (liability rule ) will be adjusted to reflect this possibility. If the market can solve the problem in the low-transaction case, then the government can in principle solve the problem in the high transaction cost case. Of course, the government can only do an approximation since it does not know the true values to the parties (cap and trade works somewhat better in this regard).
David Henderson
Aug 4 2018 at 6:47am
wd40,
You wrote:
True. But it won’t solve the problem with the carbon tax, which, recall, is the point of this post. The purpose of a carbon tax is to reduce carbon usage. As I said in the post, that may not be the low-cost solution. I don’t dispute that if two people get together in a two-person world, they can reach an optimal solution. That is not what’s going on in a 7-billion person world.
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