Cap'n Trade: 'Entrepreneurs run the system, not bureaucrats.'

Departmental colleague, forestry/environmental/climate change economist, Nobel peace prize recipient (he was one of approx. 2,000,000 people on the IPCC panel that won the Nobel with Al Gore), Opie Taylor lookalike (see picture at the right), and all-around good guy, Professor Brent Sohngen, had a featured editorial in the Columbus Dispatch on Saturday.  Here's what he said--and I agree:

In recent months, the phrase cap and trade has become synonymous with climate-change legislation -- and not always in a good way. This is unfortunate because cap and trade is one of the most effective tools we could use for climate change. Cap and trade worked well to remove lead from gasoline and to reduce sulfur dioxide in the atmosphere. Cap and trade should be allowed to work for CO{-2} as well.

Read on...

The real issue with the Waxman-Markey climate-change bill, which passed the House of Representatives in the spring, is the scale. That bill calls for large industries to reduce their CO{-2} emissions by 42 percent by 2030. That's astonishing, and there is just no simple or cheap way to make those cuts in a 20-year period. With or without a cap-and-trade program, places like Ohio, whose residents get 85 percent of their electricity from high-CO{-2} emitting coal, would have to make massive changes to achieve the goals of Waxman-Markey.

Both sides of the political spectrum seem to believe we can mitigate climate change for almost nothing. On the left, green-jobs advocates believe that a new high-tech energy infrastructure will just emerge from nothing, employing all those people displaced by our current economic malaise. On the right, politicians demur that we simply need to invest in bio-energy and nuclear power to reduce our carbon emissions. Neither of these sides is willing to own up to the costs of their proposals. Green jobs, bio-energy or nuclear power will emerge on a large scale only if we choose policies that encourage new investments in them.

Taxes on dirty energy, like coal or gasoline, could spur new investments in green energy. When oil prices were high in 2004-2007, average people drove less, took public transportation and biked more. Over time, people began shifting to more-fuel-efficient cars. Taxes work, but they are hardly politically acceptable.

Subsidies are costly and ineffective, although politicians of all stripes like them. Ethanol is a prime example. We have long had subsidies for ethanol, but despite the persistence of the subsidies, ethanol remains a small part of the U.S. fuel mixture. Subsidies seem free, but they are not, and, worse, they are not very effective at achieving results.

Renewable portfolio standards for alternative energy, which require a certain percentage of a utility's power generation to come from alternative energies, have been widely embraced in recent years. But they do not work either. Iowa, for example, introduced renewable portfolio standards in the early 1980s. Between 1990 and 2005, the CO{-2} emissions of Iowans grew 1.4 percent per year. Ohio just introduced a standard last year, but our emissions grew 0.6 percent per year from 1990 to 2005. Renewable portfolio standards do have one effect, though: They raise energy prices. As a result, we pay more for our energy, but we get very few benefits.

Research-and-development policy funnels money into research to create new energy sources that emit little or no CO{-2}. Some research may find methods to engineer Earth's atmosphere to nullify the effects of our carbon emissions. Research and development is promising; however, it requires taxpayer investment, and the taxpayers ultimately leave government in charge of choosing winners and losers. Our government does some things well, but it is not well-suited to making choices about which technologies to commercialize.

In contrast, cap and trade actually has been effective, and it has been politically acceptable. Cap and trade puts incentives in place, and then lets the market, not government, choose where to invest. Money will flow to the most economically attractive alternatives. Entrepreneurs run the system, not bureaucrats.

As the debate over climate-change legislation continues, politicians will demonize cap and trade. They are wrong to do that. The real issue is whether we should cut CO{-2} emissions at all. The science is clear that we should, but the economics is clear that we should cut only 4 percent to 6 percent by 2020 and perhaps 15 percent by 2030. The economics is also clear that we should include a cap-and-trade program and some research-and-development spending, but none of the other policies. The alternative, of course, is a hodgepodge of ineffective policies that cost a lot and buy very little CO{-2} reduction.

Brent Sohngen is a professor in the Department of Agricultural, Environmental and Development Economics at Ohio State University.

Comments

[odograph]

Both sides of the political spectrum seem to believe we can mitigate climate change for almost nothing. On the left, green-jobs advocates believe that a new high-tech energy infrastructure will just emerge from nothing, employing all those people displaced by our current economic malaise. On the right, politicians demur that we simply need to invest in bio-energy and nuclear power to reduce our carbon emissions. Neither of these sides is willing to own up to the costs of their proposals. Green jobs, bio-energy or nuclear power will emerge on a large scale only if we choose policies that encourage new investments in them.

Maybe I'm not on one of those sides ... but I always thought the strength of the carbon tax was that it put the choice to pay or change behavior right up front.

I've in turns called for, and bemoaned the lack of interest in, lifestyle change.

(still reading)

[odograph]

Who said this, Tim or Brent?

As the debate over climate-change legislation continues, politicians will demonize cap and trade. They are wrong to do that. The real issue is whether we should cut CO{-2} emissions at all. The science is clear that we should, but the economics is clear that we should cut only 4 percent to 6 percent by 2020 and perhaps 15 percent by 2030. The economics is also clear that we should include a cap-and-trade program and some research-and-development spending, but none of the other policies. The alternative, of course, is a hodgepodge of ineffective policies that cost a lot and buy very little CO{-2} reduction.

The "economics are clear" that there should be no lifestyle change?

I think that might be something else disguised as economics.

[Tim Haab]

Odo,

My mistake. The post is a replication of the column. I missed the indentation of the stuff after the jump (now fixed). Those are Brent's words, with which I agree.

I contend that most lifestyle changes are a reaction to economic conditions and not vice versa.

[odograph]

I contend that most lifestyle changes are a reaction to economic conditions and not vice versa.

Riiiight, and a carbon tax makes an economic condition, right down at the personal level. That's what we should be looking for.

It seems that the "both sides" dilemma from the section I first quoted is hung up on this. "Both sides" want to shield the consumer from change while also changing carbon emissions.

That simply ain't gonna work.

[Matt]

4-6% and then 15% by 2030? From what baseline? 2005? 1990? And Tim, you agree with that? I must have wasted my time all those years in science courses since economists have the answers. W-M's endpoint was to put us in a place the IPCC said was only a 50-50 shot! I don't see how you get to an 80% reduction (1990) by 2050 if you're only at 15% by 2030. And I sure don't know how the economics can be clear when the science isn't clear what level of destruction we risk. Uncertainty in the science seems like it would yield even greater uncertainty in the economics. It seems unwise to gamble with the future in such a way. I couldn't disagree more with last paragraph; there are so many effective policies and gains to be had that are being left on the table that would reduce CO2 that it's disheartening.

[odograph]

Consider ... somebody, call him Joe, takes a vacation every year in Hawaii. He flies, and incurs services there. Carbon prices go up, airfares go up, and he decides to hike the local trail (euphemism or not). He's changed his lifestyle, but perhaps had as much or more fun.

Now, back to the "both sides" paragraph. Per that, the "green-jobs advocates believe that a new high-tech energy infrastructure will just emerge from nothing" to give him a low Hawaii airfare, while the "politicians demur that we simply need to invest in bio-energy and nuclear power to reduce our carbon emissions" to give him a low airfare.

Indeed, "Neither of these sides is willing to own up to the costs of their proposals."

The only people willing to "own up" are those who back a carbon tax, let the chips fall where they may.

[Jack Schieffer]

I think it's important to recognize that there are several types of costs. One type is the cost of using different types of energy, say solar instead of coal for electricity. Consumers can keep doing what they're doing, but they pay a higher price for it. A second cost is when people change their behavior, choosing the next-best alternative when their preferred behavior is prohibited (or too costly due to a tax, etc.) Even though they don't end up paying the tax, there's still a cost.

Looking at Odo's story of Joe. If Joe would have as much or more fun hiking the trail, why isn't he doing that already, instead of flying to Hawaii every year? Probably because, in his eyes, going to Hawaii is better in some way (i.e. hiking is less fun).

I think that owning up to the costs of a proposal (carbon tax, in this case), requires recognizing that lifestyle changes are a cost. If it takes a tax (rather than simply telling him how wonderful the trail is) to get Joe to switch, then that change in behavior is costly.

[Bok Globule]

Unfortunately it seems to me that the lobbyists/special interests are still exerting more power over the issue then the real experts.

Eventually the science will motivate true action (I hope), but it is already too late to avoid highly destructive climate change through carbon emission reductions alone. The stark fact is that with two decades of "action" on this issue, the world emits more CO2E than it did 20 years ago. We're still going in the wrong direction.

I'm afraid what will happen is that one or more national governments will panic when the climate gets really bad and go the geo-engineering route. May the Flying Spaghetti Monster help us.

That said, those of us that are aware of the issue though face a moral obligation to act accordingly if possible. My carbon footprint is already much lower than average, and I'm moving to a large city with good public transportation shortly and will be ditching my 10 year old car entirely.

I am all for entrepreneurship in the carbon reduction market. There are huge pent-up resources just waiting to really get the ball rolling - all that is lacking (for a bafflingly long time) is a market signal to catalyze action.

[Joshua Corning]

Unfortunately it seems to me that the lobbyists/special interests are still exerting more power over the issue then the real experts.

How are "Cap'n Trade: 'Entrepreneurs" not lobbyists/special interests but those who oppose cap and trade are?

Guys I like = Entrepreneurs

Guys I don't like = lobbyists/special interests

Guys who use a double standard = hacks

[Bok Globule]

Joshua, to be clear:

The issue: climate change mitigation;
The experts: climate scientists (not green industry entrepreneurs);
The lobbyists/special interests: those monied interests with no/limited understanding of the science pushing for the status quo.

There is no double standard in my post, and if you had bothered to read it carefully in the first place, you would have recognized that without need of my follow-up post.

[odograph]

Looking at Odo's story of Joe. If Joe would have as much or more fun hiking the trail, why isn't he doing that already, instead of flying to Hawaii every year? Probably because, in his eyes, going to Hawaii is better in some way (i.e. hiking is less fun).

A behavioral economist might have a different answer than a classical one. Maybe Joe keeps at that Hawaii vacation out of Status Quo Bias.

Or why do some people weigh 250, watch tv each weekend, rather than weighing 150 and go surfing? Is it higher reward and utility in inactive obesity?

(I recognize that lifestyle changes may represent costs, but I don't know why that should be true in general or on average. I don't think everyone is making perfect decisions now.)

[odograph]

(That probably wasn't the best example, but I really feel this idea that "all individual market choices are optimal" is a "just-so story." It explains everything, but only by ignoring a great deal.)

[odograph]

Besides which (classic triple post), if we do have to reduce CO2 emissions, putting that carbon price right out there for Joe to see gives him the ultimate choice.

He gets to decide if it is Hawaii at higher cost, or a hike at less. It is maximum personal choice, and maximum economic efficiency.

Green subsidies or energy subsidies ("both sides" above) try to hide that from Joe, with a subsidized (one way or the other) jet fare that hides the carbon impact at the margin implicit in his fly-or-hike decision.

[brent sohngen]

Odograph, It seems from your comments we agree that carbon taxes on transportation fuels and cap and trade for big industries would give incentives for Joe or anyone else to "do the right thing"?

Matt, Waxman-Markey is US only. It doesn't get us anywhere near an 80% reduction in GLOBAL emissions you recommend. Personally, I prefer to target the quantity based on damages, like you indicate. We should have carbon prices in the market equal to the present value of future damages, suggesting a price of $11-13/tCO2 in 2020 and $17-20 in 2030.

[UMDAREC]

Bok:

I'm glad you and your fellow urban bus-riders are so superior to the rest of us--it must pain you deeply to have to interact with those of us who haven't yet experienced the carbon rapture.

For the record, the above comment has no place on this comment board and neither does any of the ad hominem you lobbed in your second post. Play nice or stay home. I mysef had to read your post twice to understand your point; I may not yet fully grasp it.

My underlying point is the following: you like scientists who "understand" the issue, but seem to reserve utter spite for anyone else (entreprenuers, economists, Joshua, emitters...). You've decided to make lifestyle changes and that is great. My guess is that you're doing it because it makes you happy (ie.e, satisfies your "moral obligation"), and that you are genuinely concerned about the prospect of climate change.

For those of us who don't enjoy taking the bus (or can't--it's simply not an option for many of us), would a little price change offer a compelling incentive? I know I'd react. You seem to want me to think like you do, move to an urban center, and get rid of 18 year-old auto. I'll get real stubborn if you try to change my thinking. But if you let me react to some exogenous prices, I (and Joe, and odo, and everyone else) will make the decision that makes us happy. We may or may not all go to Hawaii anyway. That's where economics has an insight.

If you get a cabal of scientists to instruct people in what they must do to avoid climate change, my guess is that a) you'll have huge economic costs and no concept of tradeoffs/opportunity costs inherent in the policy proposals, and b) a riot, which may well result in the scientists enduring grievous physical harm.

A few takeaway observations:
1) lobbyists and monied interests are funded by people with high opportunity costs
2) scientists could exert greater influence on decision-making, but Popperian science does not thrive on accord and media-friendly talking points
3) entreprenuers are people who are good at helping people help themselves
4) economics offers some valuable insights for anyone interested in orchestrating behavioral change by people, and ignoring those insights may result in sub-optimal performance, just as economists who ignore basic climate science are apt to get the underlying tradeoffs incorrect.

[odograph]

Brent, I think we all accept the economic idea that a carbon tax and a cap and trade system can be equivalent.

Where we disagree is not in economics, it is in political expectations. Cap and trade is seemingly politically acceptable, and some say go with it.

I dislike it because it defers Joe's conundrum. He hears cap and trade, and thinks the airline will deal with it. It's a rude shock when his prices start to rise. What's that? The carbon tax was defeated, right?

Witness also the coal-states battles to get free credits.

Maybe a carbon tax would be a harder fight, now, but it would also be the right fight. If we don't convince people that they have two options (pay more or use less) then we'll fail.

[odograph]

We seem to have moved off this idea:

On the left, green-jobs advocates believe that a new high-tech energy infrastructure will just emerge from nothing, employing all those people displaced by our current economic malaise. On the right, politicians demur that we simply need to invest in bio-energy and nuclear power to reduce our carbon emissions.

Though I could say that they both might "tilt" the cap and trade to achieve their favors.

[joshua corning]

if you had bothered to read it carefully in the first place

Oh i read it.

I am all for entrepreneurship in the carbon reduction market. There are huge pent-up resources just waiting to really get the ball rolling - all that is lacking (for a bafflingly long time) is a market signal to catalyze action.

Only entrepreneurs going after those "huge pent-up resources"....no special interests or lobbyist there right?

riiiiiggghhhht...

[Bok Globule]

Do people not read anymore?

UMDAREC: Note in my original post I said "act accordingly IF POSSIBLE". I have had a car for ten years because I needed one. It was NOT POSSIBLE for me to work and live without one.

Where I am moving, it IS POSSIBLE to live and work without one, and therefore I am selling it.

I am not a climate saint, and I'm the first one to admit that in western society, it is often impractical to lead a low-carbon lifestyle.

I am still searching for an ad hominem attack in my post. There was one, however, in Joshua's response where he said I was a hack for something I did not write.

My point was simple. Emissions are increasing despite increasingly severe warnings by climate scientists. In panic (e.g. food shortages, dramatic migration, associated wars, etc.), geo-engineering may be attempted by one or more countries in future. In the meantime, those of us THAT CAN lower our carbon footprint irrespective of worldwide government inaction on the issue, should do so. It is the responsible thing to do, but that doesn't mean that those that cannot to maintain there job should feel guilty for doing so.

By the way, I absolutely agree that there is a green lobby. But to insinuate that their influence is even the same order of magnitude as that of vested interests (say Exxon, that alone has a market cap of over $350 billion) is not a defensible claim in my opinion.

It is also a basic tenet of political economy, as you are no doubt aware, that a small yet highly organized group can exert more influence than a much larger, unorganized group. I think that is a contributing factor to decades of inaction on this issue. Is it the only factor? No, nor did I say otherwise.

Given the vociferous reaction here to a rather innocuous blog post, I have to wonder whether my passing reference to the FSM offended some people here. Wow, lighten up people.

[Bok Globule]

UMDAREC, I wanted to address your other points in a separate post.

I have already demonstrated (with more words than I had thought necessary) that I do not have spite for those that have a high carbon footprint because of their geographical location or occupation. I don't expect a carpenter to take the bus, for example. That is absurd.

As an aside, though I do think it is irresponsible for people to be living in 4,000 square foot homes and owning 3 SUVs, etc. It is not illegal, and I would never wish to make it so. It is a free country, after all. But it is personally irresponsible, in my opinion (provided you aren't doing something effectual to offset the corresponding emissions). And if you don't think so as well, then that is a fundamental disagreement we have, and let's leave it at that.

I am not a climate scientist, but I will trust their consensus opinion over a lobbyist any day. The consensus prediction continues to get more dire (objective observations point to accelerating warming beyond anything that was expected even 10 years ago). Even the US military is engaged in serious planning on how to cope with the strains brought on by climate change (food shortages, etc). This stuff isn't made up. If Joe has to forego his annual trip to Hawaii and take the bus more so that Florida isn't halved in 100 years, it seems like a worthy endeavour (both of these are bad examples IMO).

Again, I am not advocating totalitarian policies. I am strongly in favour of market signals through either cap'n trade and/or a carbon tax. And I am not diminishing the real costs to society that will entail.

Anyways, this has gone very far afield of what the original post was about so I'll leave it at that.