The Emperor's New Cap-and-Trade Clothes
Patrick Appel at The Daily Dish has put up two more responses from readers to my post on costs and benefits of Waxman-Markey.
I’ll focus first on one important point that they both made. The first says:
[W]e all understand that if China and India and all the other big emitters stay on sidelines, it is wasted effort. So, the stated “benefits” of Waxman-Markey, looked at in this way are of course near zero.
The second says:
Manzi is largely correct on his central point: Waxman-Markey’s emissions targets, if adopted only by the United States, will likely lead to a net economic loss for the United States, because the avoided temperature increase will be so small.
So before we move on, let’s note that my critics all seem to agree that if Congress passes this law, and we do not subsequently get agreement by the rest of the world (i.e., parties that Congress can not compel) to also reduce emissions, then the Waxman-Markey bill will create net economic losses for the citizens of the United States. Apparently everyone already knew this, but I guess I like to emphasize the obvious.
The first correspondent goes on to say:
…not all leading economists working on this issue think it will cost a lot (in terms of economic impacts). It won’t be free, but it is not going to drag the economy down. Every analysis I’m aware of shows some reduction in overall economic growth of at most a percent or two – the baseline continues to grow. So rather than being 100% wealthier by set date, we are only 98 or 99% wealthier.
I provided a link to specific present value calculations for this trade-off under the assumption for global agreement in my post. I guess if you want to wave your hands and say that “a percent or two” of U.S. economic growth is no big deal, you’re free to do so. I think that’s a whole lot of money.
The second makes explicit the point that the essence of this proposal is to impose large economic costs on American taxpayers for the sole purpose of providing a negotiating advantage in getting the rest of the world to do the same. He starts by saying that if we could structure such a global deal that I would agree that “it looks pretty god”:
However, if W-M becomes a model for the rest of the world, it starts to look pretty good, even by Manzi’s own standards.
This is not correct, at least by “Manzi’s own standards”. As per the first several paragraphs of my post, I believe strongly that such a global deal would not create expected net benefits for the world as a whole, never mind for U.S citizens. I won’t repeat that entire part of the post, but will just refer back to it. This correspondent suggests my “own math suggests I’m wrong”. He doesn’t explain why this is so, other than by referring to somebody else’s analysis. Once again, I linked directly to the research document that substantiates my claim that the global NPV benefits of an optimal emissions mitigation program has an expected value equal to 0.2 percent of future global consumption. As far as I can see, this analysis remains unchallenged. My argument is that we will never have such an optimal system in the real world, and that economic drag created by non-optimality will create costs that are much larger than 0.2% of future consumption. This argument also seems to me to be unchallenged. The fact that another party has done some other calculations that I have not reviewed, endorsed or deployed doesn’t really seem to me to address this argument.
So let’s review the overall bidding, at least as I see it:
1. Everybody agrees that if Waxman-Markey becomes law, and it does not lead to a global, binding and enforced agreement to severely reduce global greenhouse gas emissions, then it makes U.S. taxpayers worse off economically.
2. I have presented an economic argument that even if such a global agreement were achieved it would accomplish in the best case a net increase in NPV of global consumption of 0.2%, and a practical argument that it would almost certainly reduce global economic welfare. These specific arguments remain undisputed.
3. Those who argue that Waxman-Markey would lead to a global agreement have provided no evidence that it would have this negotiating effect, and are presenting what is, at best, a pretty idiosyncratic negotiating premise that by giving away our leverage as one participant in a collective action problem we will somehow increase our ability to get others to sacrifice on our behalf.
I definitely wouldn’t agree to 1. Tighter control of GHG might provide incentives into a different set of technologies than we otherwise would have researched. I think the last few years have demonstrated that the marketplace does a questionable job of deciding which investments will be most productive for the country as a whole decades from now, and not a particularly great job of deciding what’s profitable for themselves in the long term. Otherwise, it’s hard to imagine so much borrowing to pay for larger houses and consumer goods rather than new technology and infrastructure. That’s not to say the government won’t make plenty of mistakes as well, but at this point a clumsy hand guided by vague intuitions might be better than the invisible hand guided by short-term gain alone.
I’d also like to add a counter-point to 3. I’m not sure the benefits of unilateral W-M are limited to the climate. If we’re pushing for new kinds of inspections on the arms control front, for example, other countries aren’t going to take our concerns very seriously when they pay a disproportionate share of the costs of AGW, while we enjoyed a disproportionate share of the benefits of carbon emission. There’s a whole range of bargains on terrorism, disease, WMD controls and trade, and continued malfeasance on the carbon front might make things harder across the board.
— Consumatopia · May 21, 06:02 PM · #
Consumatopia:
As usual, both excellent points. Let me take them one at a time.
1. I addressed this idea at some length last year here. Start with the section that starts with:
I go into this a lot in the upcoming National Review article that I mentioned in the first post.
To think about why this would be difficult to accomplish, imagine a crude analogy. There is a very imperfect chemotherapy cure for a specific kind of terminal cancer with a low survival rate and terrible side effects. Would your approach be to tax the chemotherapy in the hope that this would stimulate a new treatment, or would you fund reserach at the NIH? I’d do the latter. Ironically, given that you are attacking market allocation of capital, you want to use markets to solve this problem. I’m actually to your left on this narrow part of the issue.
2. I agree that we are playing 3-dimensional chess here, and we have a negotiating porfolio with China et al that extends beyond this one issue. This is why I always tried to hedge on my language here by saying things like “our most obvious negotiating leverage” and calling it an “idiosyncratic” negotiating strategy and so on.
The thing about this argument is that we’re now not looking to a primary effect (we emit less CO2 and the direct avoidance of harm is greater than the direct loss in consumption); we’re not even looking to a secondary effect (we accept a net direct loss of consumption, but this will increase our odds of negotiating a secondary agreement that, even in combination with the direct net loss, leads to a net-net increase in consumption); we’re now arguing the teritary effect (this will, as a part of all our relationships with the developing world, including disarment agreements, trade agreements, currency valuation debates, and so, sufficiently change our goodwill so that the net incremental benefit from goodwill acorss all these agreements will add up to more than the net direct cost to us of this bill).
Now, I don’t think this is a crazy argument, but I don’t believe it. (And I sure don’t see anybody in the public spehere arguing for it on this basis.) As a simple thought experiment, ask yourself if we were to take the net direct loss in consumption implied by this bill and assume we could increase our total foregin aid budget by this amount, which do think would buy us more goodwill? (I’m not arguing that these are necessarily alternatives; that the political process might aloow one just becuase it will allow the others, etc., but simply trying to dimension the costs versus the inherently judgmental estimate of the value of goodwill to us across a range of negotiating issues).
— Jim Manzi · May 21, 07:30 PM · #
A percent or two of economic growth is an aggregate number, whereas the consequences of global warming are usually comprehended as specific events, even if they can be expressed as aggregates. That may be why cost/benefit does not have much of a part in a lot of people’s thinking on this issue.
— Aaron · May 21, 07:31 PM · #
Aaron:
If I understand your point, I agree that academics’ attempts to compare costs to benefits can become excessively formal, and thereby obscure the real issues. But in the end, it’s hard for me to imagine a rational basis for deciding whether or not to implement a cap-and-trade system that does not attempt to address what economic costs and benefits we should expect it to produce.
— Jim Manzi · May 21, 07:38 PM · #
1 more or less convinces me. I kind of suspect that for cultural reasons and ecological sustainability reasons other than carbon that even if AGW doesn’t happen we’ll still want to change how we use existing technologies rather than completely rely on new technologies to save us, but that’s getting way OT.
On 2, there was that Krugman piece arguing that we’d want carbon tariffs on China in the future. Right or wrong (and in this case we’d agree wrong), if we’re tempted to think this way about other countries, other countries will likely be tempted to think that way about us.
And I think you underestimate what a problem this could become. If there’s flooding in Indonesia, someone there starts a rumor that this is America’s fault, and there’s actually a kernel of truth to that rumor, that could seriously blow up into something scary. I’m not certain that the difference in good will lost by ongoing participation in destruction can be made up for by handing out dollars and paying for clean technologies. You can’t always write a check to make a narrative go away.
— Consumatopia · May 21, 08:25 PM · #
Consumatopia, if this is true . . .
. . . then W-M isn’t going to make the flooding less likely. Furthermore, if the flooding happens, our passage of W-M isn’t going to make the rumors less likely, either: if bad things happen, people will want a villain; we’re a convenient villain, universally known, universally mistrusted; worst of all, we actually bear a lot of the responsibility, and many in our own culture aren’t shy about shouting this unfortunate fact from the rooftops (in law we call this a statement against interest, and it always comes in).
W-M doesn’t decrease the odds of bad things happening to other people, and it won’t inoculate us from blowback if other people want to blame us. If you can’t make rumors go away with a check, you certainly aren’t going to make them go away with a bill.
— Sargent · May 21, 08:59 PM · #
Consumatopia – Re: carbon tariffs on China.
If you could get carbon tariffs worked into GATT, or if you could impose carbon tariffs without a devastating trade war without amending GATT, then that, IMHO, might have some impact on global warming. (Or not, depending on your assumptions).
Still, as Jim points out, it doesn’t make sense to give away one of our own bargaining chips before we get some agreement worked out that includes the third world.
— J Mann · May 21, 09:09 PM · #
I question cost/benefit analyses on this issue conducted solely in monetary terms. A loss of some amount of future growth in production/wealth is certainly an important consideration but it weighs properly neither the potential loss of fresh water and agricultural capacity (such a calculation goes far beyond monetary terms) nor the non-monetary costs to human flourishing that the carbon economy extols irregardless of climate change.
— forestwalker · May 21, 09:13 PM · #
forestwalker:
It’s an entirely valid point, and outside the scope of the analysis. I was trying to evaluate the economic (in the narrow sense) costs vs. benefits (from avoided AGW damages) to a US citizen of this proposed legislation.
We sometime do things which cost us money. The reason I thought this was a rleevant post is that I couldn’t find anybody who had done this more formally (which is what I’d really like to see).
— Jim Manzi · May 21, 09:28 PM · #
One more thing re: the Waxman-Markey bill will create net economic losses for the citizens of the United States.
This a job for Thomas Frank, no?
— Sargent · May 21, 09:46 PM · #
Furthermore, if the flooding happens, our passage of W-M isn’t going to make the rumors less likely, either: if bad things happen, people will want a villain; we’re a convenient villain, universally known, universally mistrusted;
I don’t think it’s clear that we’ll be quite as much the center of attention mid-century that we are today, either in carbon emissions or clout. If China continues growing in both, and if they become the boogieman of future carbon negotiations the way we were when we pulled out of Kyoto, then they might take the flack instead of us.
— Consumatopia · May 21, 09:53 PM · #
…a pretty idiosyncratic negotiating premise that by giving away our leverage as one participant in a collective action problem we will somehow increase our ability to get others to sacrifice on our behalf.
This just occurred to me, but even after passing W-M we could still threaten to repeal W-M and that would give us as much leverage as we would otherwise have had.
— Consumatopia · May 21, 09:58 PM · #
Re: repealing W-M as a threat: that’s an interesting thought. I suppose, a future republican administration/congress would be ideal to play the bluff (at least I hope it would be a bluff! you never know..) in negotiating this in the future. Or even a more conservative dem caucus/leadership.
— jackal · May 22, 12:40 AM · #
I don’t agree with your assertion that a global effort to control CO2 emissions would be welfare reducing, quite the opposite. You bring up one cost benifit analysis, but there have been many, and most reach the conclusion that costs of inaction far outweigh the costs of abatement(See the Stern Study, or a cursory look at google scholar)
Reading through the study you quoted, it doesnt seem that it’s model attempts to model things such as ocean acidification or damage from higher wind speeds(Wind stress on buildings is propportional to the cube of wind speed, so this is more significant than it seems). The paper barely talks about it’s model or assumptions at all, despite it’s great length, I’ll check the code for clarification, but it seems likely to me that it’s result is an outlier.
Of course, talking about global action requires global cooperation. But the idea of holding off implementation of a Cap’N‘Trade bill as a “bargaining chip” is absurd. Game Theoretically, the international situation can be viewed as a ultimatum-game: The developed world offers a way to split the surplus raised from curbing carbon between itself and the developing world, and the developing world accepts or rejects it, if the developing world rejects, nobody gets anything.
The key to winning an ultimatum game is to be able to issue credible threats of irrationality. In this respect, the developing world trounced us “If we accept a deal our citizens consider unfair, we might killed and civil war ensues” vs “Our right wing parties will gain vote-share”
So the equilibrium is clear, some “fair” deal will be reached that gives developing countries an outsized portion of the regulation-induced surplus, implicitly paying third world countries not to pollute.(Imagine something like allocating carbon credits to countries on the basis of population and allowing international trading.)
From this point of view, the more carbon we burn, the more we will have to pay China to cut emissions later. And of course , the standard argument about technology spill-overs from cap’n‘trade will make it cheaper for other countries to act with us.
Bar that, funding some terrorists to blow up oil refineries would do wonders to as an alternate way to restrict carbon usage by the rest of the world.
— David Shor · May 22, 09:25 PM · #