The Socialism Implicit in the Social Cost of Carbon

09/01/2009

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Burning fossil fuels creates so-called “external costs” because it contributes to ongoing climate change. This is a fancy way of saying that when I burn such fuels, other people become worse off than they would be otherwise, because I have increased the odds that they will suffer damages from anthropogenic global warming (AGW). This both seems unfair, and means that we will burn more fossil fuels than would seem to be socially optimal. It seems obvious to many people that we should therefore tax fossil fuels in order to prevent this. This is termed a Pigovian tax, and is sometimes referred to as “internalizing the externality”, or taxing fossil fuels to reflect the “social cost of carbon”.

It’s not so obvious to me that this is good idea. To implement it would be little more than a re-labeling of the kind of comprehensive planning that Hayek attacked sixty years ago.

Over at the Daily Dish I try to explain why.

I appreciate the effort to argue about these things using data, facts and reason.

Is it fair to say the following? Shorter Manzi: AGW will only hurt a little, whereas proposed solutions will hurt a lot, therefore we should do nothing (governmental).

Some questions occur to me:

1) Decreased economic activity (projected @ -3%) doesn’t necessarily capture the full negative impact of AGW, does it? It’s been pointed out elsewhere, but the worst is going to be borne by the 3rd world (which doesn’t have much economic clout). I’m explaining this badly b/c I’m rushing, but basically: isn’t there a moral argument to be made here, in addition to the self-preservation argument?

2) Is it possible that by internalizing the cost of carbon (or trying to, albeit imperfectly) the distortion in the market may result in technological innovation and the various goodies that come with it? Or is that really a pipe dream?

3) It seems to me that cleaner air & water (side benifits, I would think, to cutting down on things like driving gas-burning cars and using coal power plants for electricity) are worth something too, even if it wasn’t for AGW. Don’t you?

Again, good post.

— Rob in CT · Sep 1, 09:03 PM · #
Welcome back!

“This action creates social cost in the form of AGW. But it also creates other social costs, such as, for example, local air pollution, congestion, noise and increased risk of accidents for others. Why would we privilege a unit of social cost created by AGW over that same unit of social cost created by any of these other effects? If I die from cancer because I inhaled some of your fumes or I die from flooding because of increased global temperatures, I am in each case equally dead.”

1) This doesn’t strike me as in conflict. If anything, it should encourage us to to enact a carbon tax, no? (I understand you follow it up with the social-surplus benefits of burning carbon, but I think you want that to be able to stand alone since you bring it up later.)

2) It’s obvious why we privilege it – I can choose to not drive daily, which I do, paying a surcharge to live close to public transportation. I can choose to have a job where I work from home, etc….I can’t choose to not live on Planet Earth. As opposed to a noisy neighbor, I can’t expect people born in the 3rd world 50 years from now to Coasian bargain with me, and the transaction costs of moving Bangladesh to Canada are much higher than me moving next to a BART stop.

— Mike · Sep 1, 09:07 PM · #
I agree that knowing the precise amount of a socially optimal carbon tax would be difficult or impossible to determine, but I’m not sure where that gets you. Does that mean the current gas tax is therefore exactly right? Or that it should be eliminated? If not, why not?

At the end of the day this is more a naked assertion of a burden of proof than an argument: “You must accept that we will not change anything unless you are able to perform the following impossible calculation with exactitude.” I don’t see why anyone would feel obliged to accept that as a premise for trying to figure out what a better (if not perfect) public policy would be.

Nor is the flip to this argument — “If you are so sure there should be a carbon tax, how do you know the gas tax shouldn’t be $5000 a gallon?” — particularly threatening. “That just seems way too big and would never happen” is a perfectly sensible response.

— alkali · Sep 1, 09:23 PM · #
- This might be a case where the “negative” Hayekian argument (planners lack information to make rational decisions) works, but the “positive” Hayekian argument (markets transmit decentralized information to relevant actors) does not (because of the externalities argument.) Based on your debate with your imagined interlocutor, I take your position to be that in such a situation we should
a) if the negative externalities aren’t too high, side with Hayek;
b) if the negative externalities are too high to ignore, go with Pigou (and behave as if positive externalities do not exist because, just as in a we behave as if negative externalities don’t exist; in both cases we avoid an unbearable epistemological burden while still living in a tolerable society)
c) if we are radically ignorant of externalities, side with Hayek because the precautionary principle is impractical.

Perhaps one could add a subsidiarity principle in which we do not attempt to calculate externalities but instead allow local communities to arbitrarily choose preferences through “purely political management of society based on relative power,” (I think this is what we do for airport noise pollution.)

— Aaron · Sep 1, 10:30 PM · #
Rob in CT:

Thanks for the compliments.

That’s a fair summary, subject to the caveat that I’ve proposed some specific gov’t technology investments.

Some prior essays keyed to your (excellent) questions:

1. http://theamericanscene.com/2008/06/17/scientific-american-and-climate-change-i-distributional-ethics

2. An excerpt from this essay: http://theamericanscene.com/2007/11/30/why-i-oppose-a-carbon-tax

So, once we clear away the underbrush, we can see that the case for a carbon tax is really that it would be a hedge against the risk that actual damages from warming will be worse than current projections. Would it be a smart investment?

To evaluate this, start with the observation that the primary purpose of such a tax is not to encourage conservation per se, but rather to induce the development of new technologies that can de-link economic growth from damaging accumulations of atmospheric carbon dioxide. Increasing the price of carbon would cause some direct reduction in fossil-fuel consumption (e.g., biking to work instead of driving), and get more people to use some pre-existing technologies (e.g., efficient light bulbs), but these effects would be limited: Hairshirts are not enough. We would have to develop new technologies that use energy more efficiently, emit less carbon per unit of energy, remove carbon from the atmosphere, and/or reduce the harm done by carbon dioxide. The real costs of a program to address global warming are crucially dependent on how much time and money it would take to develop and diffuse these technologies, plus the incremental costs per unit of energy (if any) they would impose once deployed.

Seen from this perspective, many aspects of the carbon-tax debate become clearer. Carbon-tax advocates pay lip service to the naïve idea that the developing world will impose large carbon taxes if we just “lead by example.” Of course, under the reasonable assumption that the relevant technologies will be developed primarily in the U.S., EU, Japan, Canada, and Australia, it doesn’t really matter that much whether the developing world introduces these taxes, or fails to do so for a long time. The global crusade is a smokescreen: The goal is to tax the use of carbon in the developed world. Further, in spite of the fact that most analyses indicate that the optimum theoretical carbon tax should be quite low for a number of years, most advocates want to push for as large a tax as possible, as soon as possible, in order to force industry to create new technologies quickly. The pain of the tax is the whole point, and, to this way of thinking, more pain means more gain.

This would probably “work,” in that it would spur new technological development; but it would be insanely expensive. It’s hard to predict accurately the costs of such a program, but it would certainly start at hundreds of billions of dollars in the U.S. alone. In practice, the reality is that no matter what happens in the future, the tax would almost certainly not go away for many years, and it would be almost politically impossible to somehow trade away other taxes to keep the total tax burden unchanged.

Of course, there are other ways to try to stimulate the development of the required technologies. One obvious approach is to have the government fund technology development directly. I have proposed just such a research program in this magazine (“Game Plan,” June 25, 2007). Even if it had a controlled funding mechanism, it would, like all such programs, be rife with inefficiencies. But consider that the cost of such a program could be single-digit billions per year — a tiny fraction of the costs of imposing a large U.S. carbon tax. You could be massively inefficient, and still be far better off.

3. Yes.

— Jim Manzi · Sep 2, 12:58 AM · #
Mike:

Thanks.

My point in building out in “concentric circles” from AGW externalities to other negative externaties of burning fossil fuels to positive externalities to externalities from other energy sources to all externalities was that there is nothing magical about AGW. What we care about are the costs (people die, economic growth suffers, etc.). In order to argue that out of all these nearly infinite number of externalities that we could tax carbon I think that one has to argue simething like either (1) AGW has such a huge costs, that as a practical matter we should focus on it instead of just about everything else, or (2) that we should be charging taxes (positive or negative) on lots and lots and lots of activities. I was then trying to show that (1) is factually incorrect, and (2) either leads to tyranny if implemented seriously or (much more likely) is used as a rhetorical tool by political elites to seize resources and power.

— Jim Manzi · Sep 2, 02:47 AM · #
Aaron:

Thanks. I think that your subsidiary principle is right down the middle of the pike on “c”. Competing local “rule sets” in the face of uncertainty is central to practical libertarianism (in my view). I’m working on a book that hits on this.

— Jim Manzi · Sep 2, 02:54 AM · #
Hey, let’s go ahead and gamble with the future of the Earth. It’s not as if it’s the only place we have to live or anything. If we turn out to be wrong about global warming, and it causes catastrophic ecosystem disruptions, then hey, capitalism will invent warp drive and spaceships and let our species colonize other planets, right?

Yes, by all means, let’s pretend that if we screw up planet Earth, we can just declare ecological bankruptcy and get a big government bailout to fix everything.

What? You mean our planet isn’t like Wall Street? We can’t just wave a magic wand, erase all the problems and restart with a clean balance sheet?

— Travis Mason-Bushman · Sep 2, 02:57 AM · #
alkali:

Hopefully I addressed your issues in my prior response to Mike.

— Jim Manzi · Sep 2, 04:33 AM · #
Thanks for the answers to my questions. It seems you agree there is a moral component to this, you think tech innovation spurred by carbon taxation is a pipe dream (massively inefficient) and you agree that cleaner air & water is worth something.

That doesn’t add up to “do nothing” to me. It may be a difference in how we weigh the values of the aforementioned moral argument and clean air/water side-benifits. The moral argument is simple and I don’t think I need to bother to get into it. The cleaner air & water part, though… I used to not be overly concerned with such things. I learned from mom & dad that environmentalists were wackos. But then I got a job with a major insurance company analyzing coverage issues in environmental claims. At this point I’ve seen hundreds of site investigations & cleanups. I know that the gas station down the street is probably leaking (or, even more likely, has leaked in the past) gasoline from its UST system. I know the drycleaners in the strip mall used to use Perc to clean the clothes and then discharged a bunch of Perc-laden wastewater down the sewer (and thence right on out of cracks and seams in the pipes, into the soil, and down into the groundwater). I know that landfills leak all sorts of nasty things. Chemical companies spill stuff when they load their trucks, and so on and so forth.

Just as importantly, I have an idea of what these things cost to clean up after they’ve happened. I think it’s worth considering that regulations or taxes that force pollution reduction may actually save a bunch of money on the back end via lower cleanup costs (which are typically borne by some combination of: a) the business that did the polluting, if solvent, c) the taxpayers, c) the business’ insurance company – this depends on lots of factors, ranging from policy terms, state laws, and of course solvency, and d) customers, such as in the case of a landfill that is leaking).

Shorter me: an ounce of prevention may be worth a pound of cure, because sometimes it’s really hard to yank a bunch of chemicals back out of a deep aquifer (and/or pay a bunch of money in damages to someone who got sick b/c they drank contaminated water).

— Rob in CT · Sep 2, 02:12 PM · #
Manzi – before you decided to talk about evolution and genetic algorithms on Sully’s blog, don’t you think it might have been a good idea to, you know, talk to a biologist and a computer scientist, first? Because basically nothing you’ve said on those subjects is actually true.

Here’s your first hint – tree-sorting algorithms aren’t genetic algorithms in any sense. Your second hint is that natural selection and random mutation aren’t globally optimizing, they’re only locally optimizing. That’s why 99.9% of the Earth’s biomass continues to be single-celled organisms.

— Chet · Sep 2, 04:54 PM · #
Jim – have you read any substantive literature on the expected external “costs” translated from loss of biodiversity due to AGW, or has this not been framed quantitatively? I suspect a great deal of the emotional desire for a carbon-tax/agressive AGW policy is ideological environmentalism (not that there’s anything wrong with that…)

— Matt C · Sep 2, 06:19 PM · #
Still waiting for Jim to explain why he can sound so certain about the expected economic impacts of global warming when the analyses he favors don’t take into account A) ocean acidification or B) the increased liklihood of geopolitical instability due to resource shortages. How DO you estimate the economic impact of a water war between India and Pakistan, Jim?

And, Matt C, I know you’re not trying to attack “ideological environmentalism”, but could you better deliniate where it ends and plain-vanilla concern for biodiversity, based on scientific research on the importance of biodiversity, begins?

— Chris · Sep 2, 08:52 PM · #
Chris:

Still waiting for Jim to explain why he can sound so certain about the expected economic impacts of global warming when the analyses he favors don’t take into account A) ocean acidification or B) the increased liklihood of geopolitical instability due to resource shortages.

I have relied upon, and referenced the formal IPCC assessment report for the damage estimates that I used.

— Jim Manzi · Sep 2, 09:51 PM · #
I have relied upon, and referenced the formal IPCC assessment report for the damage estimates that I used.

Jim, I’m not aware that any of the studies cited by the IPCC takes ocean acidification or increased geopolitical instability due to resource shortages into account for its economic analysis. In fact, haven’t you said as much yourself in the past, especially w/r/t ocean acidification?

— Chris · Sep 2, 11:57 PM · #
Wouldn’t this militate in favor of a quantity-based emissions reduction policy, a la cap-and-trade, instead of a price-based policy, like a carbon tax? Bracketing (for the moment) the question of whether reducing carbon emissions is worth the effort, it’s arguably easier to determine what is the acceptable level of carbon emissions, and then let the price of carbon fall in line, rather than try to determine the correct price of carbon beforehand.

— Isaac · Sep 3, 01:58 AM · #
—- I know you’re not trying to attack “ideological environmentalism”, but could you better deliniate where it ends and plain-vanilla concern for biodiversity, based on scientific research on the importance of biodiversity, begins? —-

Ideological evironmentalism begins when a person begins to cite dramatic changes in the ecosphere and/or losses/changes in biodiversity as causally related to man’s negative influence on the environment, when it is factually accurate that more species of plants and animals became extinct before the existence of man (and, more specifically, the industrial revolution) than during man’s presence on Earth.

This is not to say that man does not have an impact that may be causally related to environmental changes. Man has always had an influence on the planetary environment and biodiversity (the debate is about how much.) There is nothing “plain-vanilla” about trying to measure that influence, project it, even criticize it, so long as each task is based on empricical evidence and the experiments are rigorous and ethical. Jim Manzi is trying to further this cause, and I commend him for it. The people who oppose his analysis with “you can’t just measure GDP, what about the polar bears?” type of response are ideological – if they were not, they would try to quantify change/loss in biodiversity the same way we quantify human costs…something like GDP.

You may believe that the value of a species of fish or tropical bird is unquantifiable. Indeed, you may state that we as humans should prevent the extinction of any and all species of life currently on Earth because of the invaluable commodity that is life. The question is: how far are you willing to go, economically speaking, to achieve this goal? And is it even achievable?

— Matt C · Sep 4, 07:16 PM · #
Ideological evironmentalism begins when a person begins to cite dramatic changes in the ecosphere and/or losses/changes in biodiversity as causally related to man’s negative influence on the environment, when it is factually accurate that more species of plants and animals became extinct before the existence of man (and, more specifically, the industrial revolution) than during man’s presence on Earth.

It’s also factually accurate to say that the rate of those extinctions has dramatically been increased as as result of human activity. Is that “ideological environmentalism”, or just a reasonable objection to your misleading “fact”?

— Chet · Sep 4, 09:12 PM · #
Matt C-

Jim Manzi is trying to further this cause, and I commend him for it. The people who oppose his analysis with “you can’t just measure GDP, what about the polar bears?” type of response are ideological – if they were not, they would try to quantify change/loss in biodiversity the same way we quantify human costs…something like GDP.

Except… we don’t quantify human costs in GDP; not all human costs, at any rate. War, abortion, civil rights, torture… it might be interesting and perhaps even better to talk about these issues in terms of GDP, or even in a purely utilitarian calculus of whether society as a whole is better or worse off by allowing or disallowing these things, but it surely is the case that we argue about them more by talking about moral absolutes than about quantitative comparisons.

That being the case, why isn’t it just as meaningful, and reasonable, to do the same with environmentalism? I mean, yes, the Earth is a gigantic resource that we need to manage for ourselves and for future generations to come, and we can talk about cost/benefit tradeoffs in doing so. But it’s also our home, the only one we’ve got and perhaps the only one we’ll ever have. (The economics of space travel are not inviting.) Why shouldn’t we get just as emotional when talking about the planet and the health of the planet as we get patriotic when talking about the USA?

…it is factually accurate that more species of plants and animals became extinct before the existence of man (and, more specifically, the industrial revolution) than during man’s presence on Earth.

This is surely true, but it’s also surely true that you’re comparing literally billions of years of biological history with hundreds or thousands of years of human history – not a fair comparison. As far as I can tell, it’s also factually accurate to say that humans are directly causing mass extinctions that could potentially be on par with the extinction of the dinosaurs when all’s said and done. Is that ideological environmentalism, or reasoned discussion, in your view, Matt?

— Chris · Sep 4, 10:45 PM · #
Netzero, Jim, netzero. What happens to your analysis if it’s a netzero carbon tax?

— The Reticulator · Sep 7, 07:01 AM · #

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