Environmental Economics

Grist: "This conservative economist makes the case for a carbon tax"

I quit reading the Grist a long time ago because they don't heart ("hate" is a very strong word) economists. But, they might be falling in love with one of them:

N. Gregory Mankiw is, if not a household name, a dorm-room one. His Principles of Economics textbook is the standard for most college intro-to-econ courses, with more than a million copies sold. A professor at Harvard, Mankiw teaches the university’s most popular undergraduate course, Econ. 10.

He’s also well known in Republican circles. President George W. Bush named him chair of the Council of Economic Advisers in 2003, and in 2006, Mitt Romney brought on Mankiw as an economic adviser, a role the economist played throughout Romney’s 2012 presidential bid.

But though he calls himself a conservative — “I want limited government,” he explains — Mankiw advocates a carbon tax, a position notably at odds with all of the current GOP presidential candidates. He articulated his reasons in a recent New York Times op-ed, “The Key Role of Conservatives in Taxing Carbon.”

We called him up to get his perspective on the rift over climate change among Republicans, and his advice on how to sell a carbon tax to conservatives. ...

Q. Why a carbon tax and not a cap-and-trade system?

A. A carbon tax is much simpler. In cap-and-trade, one of the issues becomes: how do you allocate those permits for carbon emissions? A fully auctioned cap-and-trade system is very, very close to a carbon tax. But in practice, people who write the bills often don’t auction [all the permits] off, and [politicians] start using these permits to start paying off particular constituencies politically. That means that you’re basically pricing carbon, but you don’t have the revenue that you can use to reduce people’s taxes.

...

Q. Elon Musk is an advocate of a carbon tax, with the idea that it could catalyze the cleantech industries, and possibly be a job-creation engine.

A. Again, I wouldn’t push a carbon tax as a huge job creator. Some jobs will be created, some jobs will be destroyed. Some industries will grow, some industries will shrink. I don’t think the overall economy’s going to boom.

via grist.org

There are a number of questions with a lot of great answers (e.g., regarding climate science: "I can read the consensus of scientists, so I take that as a given and go on with economics.") I've excerpted only two, on familiar themes. One answer I agree with and one I don't. 

I don't agree on the preference for a carbon tax over cap-and-trade with the reason being that politicians will enjoy passing out free permits. This is comparing an ideal carbon tax, with no tax breaks, with a politicized cap-and-trade. I see nothing about politics to suggest that a carbon tax will be immune to enjoyment of politicians passing out tax breaks.

And I most definitely agree that a carbon tax will not create jobs. 

"If China Can Do It, Why Not Us?"

Rachel Cleetus:

Starting in 2013, China began to pilot carbon cap-and-trade programs at the sub-national level. The pilot programs now extend to six cities (Beijing, Chongqing, Hangzhou, Shanghai, Shenzhen, and Tianjin) and two provinces (Guangdong and Hubei). The experiment has had some encouraging results, and (together with lessons from the EU ETS, California, RGGI, and other carbon trading regimes) provide the real-world experience needed to design a national system to limit emissions in a cost-effective way. China’s INDC announced earlier this year signaled the country’s intention to use carbon pricing to help meet its goal of peaking CO₂ emissions by 2030, if not earlier.

China’s work on carbon pricing and cutting pollution has included dialog with the EPA and with the state of California. There are clearly a number of details that still need to be figured out, and opportunities to improve upon the pilot cap-and- trade programs. But the significance of China’s announcement that a national cap-and-trade program will be launched in 2017, along with other measures, cannot be underestimated.

via blog.ucsusa.org

Apologies to everyone who retweeted this after I prematurely posted it!

Democrats prefer command and control and subsidies over carbon pricing

I read this naively, hoping that there would be an introduction of carbon pricing:

Senate Democratic leaders on Tuesday plan to unveil a measure intended to signal their full-throated support of President Obama’s aggressive climate change agenda to 2016 voters and to the rest of the world.

The Democrats hope that the bill, sponsored by Senator Maria Cantwell, of Washington, the top Democrat on the Senate Energy Committee, will demonstrate a new unity for the party on energy and climate change, and define Democrats’ approach to global warming policy in the coming years.

The measure would establish as United States policy a reduction of greenhouse gas emissions by 2 percent each year through 2025 — a cut even larger than the target set by the Obama administration. ...

But the Democratic measure lacks the one policy that most experts say is essential for addressing planet-warming pollution: a price, or tax, on carbon. The idea is to make it more expensive to burn fossil fuels and to drive the market toward energy such as wind and solar. ...

The Cantwell bill would direct the United States to use its leadership to secure commitments from other countries to cut emissions. The measure would require electric utilities to increase energy efficiency by 20 percent from current levels by 2030. It would also extend tax credits for electric utilities that use wind and solar power, increase spending on research into energy-efficient trucks and factories, and enact policies that would make it cheaper for consumers to invest in their own solar power.

via www.nytimes.com

Translation:

• "require electric utilities to increase energy efficiency" = command and control
• "extend tax credits" = subsidy
• "make it cheaper for consumers" = subsidy
• "increase spending on research" = subsidy

The combination is surely to be more costly, i.e., less efficient, than carbon pricing (i.e., a carbon tax or cap and trade).

Wagner on Mankiw: climate shocked!

Gernot Wagner, author of Climate Shock, put it this way on facebook about the key role of conservatives in taxing carbon:

 

 

Mankiw: The Key Role of Conservatives in Taxing Carbon

Because conservatives heart climate policy? 

This summer, a friend sent me a remarkable headline from The Seattle Times: “ ‘Green’ Alliance Opposes Petition to Tax Carbon.”

My initial thought was that this doesn’t make sense. It is like reading “Democrats Rally to Cut the Minimum Wage” or “Republicans Unite to Hike Income Taxes.”

But the political debate in Washington State is a case study about why smart environmental policy is so hard to enact.

First, some background. ...

Environmentalists in the United States would do well to look north at the successes achieved in a Canadian province. In 2008, British Columbia introduced a revenue-neutral carbon tax similar to that being proposed for Washington.

The results of the policy have been what advocates promised. The use of fossil fuels in British Columbia has fallen compared with the rest of Canada. But economic growth has not suffered.

What is most noteworthy, however, is that the policy was championed by a right-of-center government that did not previously have close ties to the environmental movement.

It was a Nixon-goes-to-China moment: Gordon Campbell, British Columbia’s premier, had more credibility by acting against type. Because of the government’s conservative credentials and its commitment to make the policy revenue-neutral, it brought along the crucial support of the business community.

Could such a situation happen in the United States? Right now, it is hard to imagine, as many of the Republicans vying for the presidential nomination pander to the deniers of climate change. But the experience of British Columbia suggests that this attitude could change.

This brings me back to my friend, Yoram Bauman, who sent me that headline. He is an environmental economist and stand-up comedian (yes, an unusual combo). He is also one of the leaders of the effort in Washington State to pass a carbon tax. He has been working tirelessly to build support.

Based on his experiences, he has a message for environmental activists: “I am increasingly convinced that the path to climate action is through the Republican Party. Yes, there are challenges on the right — skepticism about climate science and about tax reform — but those are surmountable with time and effort. The same cannot be said of the challenges on the left: an unyielding desire to tie everything to bigger government, and a willingness to use race and class as political weapons in order to pursue that desire.”

Yoram Bauman is a funny guy, but this time he is not joking.

via www.nytimes.com

Despite its foreboding title, this article was sailing along fairly well. There is a lot that environmental groups seem to get wrong about environmental economics, sure enough. The opposition in Washington state seems particularly misguided. The article was sailing along fairly well until it got partisan. I think the appropriate place for it to end is with this line: "But the experience of British Columbia suggests that this attitude could change." Or, maybe, it should have ended with "Yoram Bauman is a funny guy." And note that the the Washington state carbon tax initiative that Yoram is working on "... is a widely endorsed bipartisan solution that will cut pollution, reduce other taxes and create jobs" (emphasis added). Did Yoram just take the bi out of partisan?

I don't really understand how one can say that the Republican Party is where efficient climate policy will happen. It certainly won't come out of the current Senate. A large amount, 62%, of the variation in the recent Senate votes on whether humans significantly contribute to climate change depend on ideology and political party (in expected directions). Also, consider this:

From the Daily Caller (a politically conservative news and opinion website):

Senate lawmakers passed an amendment Thursday that would block the federal government from taxing carbon dioxide emissions, a popular idea among Democrats to fight global warming.

Four Democrats joined Senate Republicans in backing the amendment to the 2016 budget bill introduced by Sen. Roy Blunt, a Missouri Republican. The amendment would create a reserve fund that would prevent the government from taxing carbon emissions from emitting entities, like power plants or refineries.

“Once again, a majority of Congress has spoken out against a carbon tax,” Oklahoma Sen. Jim Inhofe, chairman of the Environment and Public Works Committee, said in a statement after the vote.

And this. The Republican Party platform has gone from endorsing cap-and-trade (2008) to opposing any sort of climate policy (2012):

Over the past four years, the Republican Party has undergone a fairly dramatic shift in its approach to energy and environmental issues. Global warming has disappeared entirely from the party's list of concerns. Clean energy has become an afterthought. Fossil fuels loom larger than ever. And one way to see this shift clearly is to compare the party's 2008 and 2012 platforms.

It may seem difficult to believe now, but back in 2008, the Republican Party's platform (pdf) had a long and detailed section on "Addressing Climate Change Responsibly."...

The 2008 platform went on to call for "technology-driven, market-based solutions that will decrease emissions, reduce excess greenhouse gases in the atmosphere, increase energy efficiency, mitigate the impact of climate change where it occurs, and maximize any ancillary benefits climate change might offer for the economy." ...

Skip ahead to 2012, and the GOP platform takes a markedly different tone. That section devoted to climate change? Gone. Instead, the platform flatly opposes "any and all cap and trade legislation" to curtail greenhouse gases. It demands that Congress "take quick action to prohibit the EPA from moving forward with new greenhouse gas regulations." 

I would be delighted if the current Republican Party became the Republican Party of 2008. While you can cherry pick and find Republicans who are concerned about climate change (and one presidential candidate), I think "the key role of [most] conservatives" is to change the minds of Republican leaders about climate policy. However, I am not optimistic given what seem to be current litmus test Republican issues: "skepticism about climate science and about tax reform."

Stavins: Cap-and-trade vs the alternatives (throwback Tuesday)

From Waxman-Markey days (2009):

Rob Stavins strongly reinforces my view that the incentive-based climate policy comparison is not as simple as carbon tax advocates promote (Cap-and-trade vs the alternatives):

The Hamilton Project staff concluded in an overview paper (which I highly recommend) that a well-designed carbon tax and a well-designed cap-and-trade system would have similar economic effects.  Hence, they said, the two primary questions to use in deciding between them should be:  which is more politically feasible; and which is more likely to be well-designed?

The answer to the first question is obvious; and I have argued here that given real-world political forces, the answer to the second question also favors cap-and-trade.  In other words, it is important to identify and design policy that will be “optimal in Washington,” not just from the perspective of Cambridge, New Haven, or Berkeley. 

In “policy heaven,” the optimal instrument to address climate-change emissions may well be a carbon tax (largely because of its simplicity), but in the real world in which policy is developed and implemented, cap-and-trade is the best approach if one is serious about addressing the threat of climate change with meaningful, effective, and cost-effective policies.

Read the whole post, but my take away is that Stavins believes a carbon tax would be environmentally ineffective as a result of exclusion of important sectors of the economy and taxing carbon at too low of a rate.

via www.env-econ.net

This still strongly influences my thinking in 2015. 

Carbon tax vs cap-and-trade (again)

@aguanomics why are carbon taxes more viable worldwide?

— John C. Whitehead (@johnwhitehead81) August 17, 2015

And we went back and forth a bit from there. Recognizing that the twitter is a lousy way to communicate, David went to the blog:

One week ago, I tweeted that the Pope (!) should push for carbon taxes instead of cap and trade. In response, John Whitehead (a busy environmental economist and blogger) said "why taxes?" The following tweet exchanges were neither satisfactory nor complete, so here's a post.

Before I get into David's post it might be useful to review where I stand on the issue. In terms of addressing climate change I think that a carbon tax and cap-and-trade are 1a and 1b policies. Given that this is almost a tie, command and control policies are a distance third. As the title suggests, my perception is that many economists feel that they need to choose their favorite policy instrument and then denigrate the other. I don't understand this sort of behavior. It is like preferring chocolate to vanilla, preferring vanilla to nothing and then arguing how much better chocolate is to vanilla. You sir, will get nothing and like it!

A long time ago I did the principles level analysis of carbon tax vs cap-and-trade and found that there is little to distinguish the two. Both can achieve the efficient level of emissions reduction. Both can generate the same amount of revenue. Both provide incentives for dynamic efficiency (i.e., firms have an incentive to cut abatement costs). There is little to distinguish between the economic outcomes. 

Now, on to the David's post. After a review of both policies David provides three reasons to prefer carbon taxes:

Carbon taxes are:

1. Easy to assess (charged at source/point of entry)
2. Predictable and adjustable
3. Sources of revenue to the national treasury (or refunds to citizens)

Considering just the economics (which is what we as economists should be mostly doing), a carbon cap is also predictable and adjustable. Price floors and ceilings can be used to make the market price less uncertain. Cap-and-trade with auctioned permits (e.g., RGGI) can generate just as much revenue as a carbon tax. 

Then David asks and answers:

So why do so many politicians like cap and trade over carbon taxes? They can:

1. Claim big reductions based on (imaginary) baselines that have been capped.
2. Give permits to favored industries (attracting corruption).
3. Say that industry is doing something without spending money.

Carbon taxes are harder to manipulate or dodge.

So, quickly we have moved away from economic theory and into politics (sigh). These three seem to flow from the assumption that a cap-and-trade policy will undoubtedly be characterized by the issuance a large number of too many free permits. The flip side is that a carbon tax is likely to be set too low. I could easily assert that carbon taxes are easy to manipulate or dodge. Politicians could give carbon tax breaks to favored industries (attracting corruption). Is there anything in the historical record to suggest otherwise? All of these are political problems and not problems with incentive-based policy, per se.

Another Q&A with David:

But what about driving international improvements in efficiency, etc? Well, I think that theoretical promise has failed due to (1) terrible accounting for permits (e.g., failure of the "clean development mechanism") as well as (2) lots of anger over sending money abroad to get few useful results.

I guess the Kyoto Protocol had some problems, eh? My guess is that a carbon tax would not be immune from implementation problems (but I may be naive).

And David's conclusion:

Thus, I have doubled down in my support for carbon taxes (many prior posts) because they can be...

• Imposed within nations
• Used to fund national projects (or given back to citizens)
• Increased when other countries put them into place
• Easily integrated into business and personal decisions affecting emissions

Except for the third bullet, which I don't understand, these are all so true. And yet, I'm doubling down in my support for cap-and-trade (along with a carbon tax) because they can be:

• Imposed within nations
• Auction revenue can be used to fund national projects (or given back to citizens)
• Easily integrated into business and personal decisions affecting emissions

I'm also doubling down on my assertion that economists are too quick to fall into the carbon tax vs cap-and-trade trap. I think that most of economists prefer either incentive-based policy to the command-and-control or no policy status quo. 

Here is David's "bottom line":

Let's get real. Carbon taxes can reduce emissions, cheaply ($0.40/gallon!), under real political constraints.

I'm left thoroughly unconvinced that a carbon tax is so far superior on economic grounds that economists should strongly favor it. I'm also unconvinced that cap-and-trade is uniquely prone to implementation problems and uniquely ripe for corruption. My bottom line:

Let's get real. Cap-and-trade can also reduce emissions, cheaply, under real political constraints.

There are currently on-going policy experiments that provide evidence to support both bottom lines. 

Practical politics?

Tim found this update from Greg Mankiw:

Update: Responding to my post, John Whitehead writes, "The standard textbook treatment of a Pigouvian tax is agnostic on what happens to the revenue."

He is right, of course. So let me clarify. I was trying to make a point not about textbook economics but about practical politics.  Here are two propositions:

1. The tax system should be shifted in a Pigovian direction.
2. Government should be larger.

These are largely unrelated claims. Logically, one can believe both, neither, or only one of them.  In my view, it much easier to make the case to many voters, especially those on the right, for proposition 1 than for proposition 2.  As a result, if you strongly believe in proposition 1 and are trying to put together a coalition to make it happen, marrying it to proposition 2 is not the best move.

I'm no expert in practical politics. Indeed, I have no idea how I would advise a politician how to answer this Republican debate question: “I want to know if any of [the candidates] have received a word from God on what they should do and take care of first?” When a word from God is an important issue isn't it a little bit ridiculous to wonder what God would advise on Pigouvian tax revenue? 

But I'll take a stab at broadening the menu of practical political options. First, I'd say that presenting your counter argument with the vague "Government should be larger" and a "carbon tax needs to be evaluated on its own merits and should not be a stalking horse for a broader, big-government agenda" is not a signal that you are an unbiased advocate for more efficient environmental policy. Here is how Wikipedia explains big government:

Big government is a term generally used by conservatives and libertarians to describe a government or public sector that they consider to be excessively large, corrupt and inefficient, or inappropriately involved in certain areas of public policy or the private sector. 

So, we might assume that to Mankiw "big government" is a pejorative term. In other words, an increase in government revenue is a bad thing. I don't think that this is necessarily the case. There are at least two situations that I can think of that might be inconsistent with increased government revenue being a bad thing. The first is that the U.S. government is currently running a budget deficit. Increased revenue could be used to fund the existing size of government and shrink the deficit. Even Mankiw (in 2006) mentioned that increased revenue would be a good thing (however, the notion was gone in 2007). 

The second situation is when increased revenue is used to fund an efficient increase in a public good (when the benefits of the increase exceed the costs). I'm thinking, for example, that maybe an increase in the gas tax could be used to fund transportation system maintenance. It could be possible to build a political coalition around higher gas taxes and safer roads and bridges, right? The Pigou Club's Wikipedia page even mentions that some of the "elite" members are in favor of this option:

The Pigou Club is described by its creator, economist and blogger N. Gregory Mankiw, as "an elite group of economists and pundits with the good sense to have publicly advocated higher Pigovian taxes, such as gasoline taxes or carbon taxes." These pundits and economists often advocate lowering other taxes to keep the total amount of taxes collected the same, though many have also proposed dedicating the revenue to other worthwhile projects.

Second, Pigouvian taxes are not the only way to achieve an efficient regulatory outcome. An alternative is cap and trade:

... both a carbon tax and carbon cap-and-trade will achieve the same level of increased efficiency by achieving the optimal abatement level at the minimum cost. The only difference is the distributional implications. The cost to the firm is lower for carbon cap-and-trade. The government receives tax revenue with a carbon tax. Both policies are preferred over techological or output standards (i.e., command and control regulation).

It seems to me that one could put a coalition together around cap and trade with freely distributed permits. In that situation, rents would accrue to many low abatement cost firms while high abatement cost firms would suffer. As a practical political matter, it might be good to get the big money people on your side before you make the case to the voter-peons, right? You would think that this sort of efficient environmental policy plus practical politics would be favored by Mankiw, but no such luck. This is because they don't raise revenue:

But the history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.

Nat Keohane at EDF has a critique of Mankiw's argument against cap and trade so I'll just say that there is an alternative opinion. A here is an excerpt from a good summary of the practical political considerations from 2007, right before both presidential candidates Obama and McCain both came out in favor of cap and trade: 

In theory, both approaches aim to achieve the same result: by making it more costly to emit carbon into the atmosphere, the government would discourage the burning of fossil fuels, encourage producers to find alternative energy from renewable sources and prod consumers into using energy more efficiently. Each side can make a compelling case. So what’s the argument?

Many economists line up behind a carbon tax. They argue that it is the most cost-effective way to limit global warming emissions, that it provides a more predictable long-term price for energy producers of all kinds and that emissions trading schemes would be subject to manipulation by special interests. ...

Indeed, most politicians favor cap-and-trade, in part because it obscures the full cost of curbing carbon emissions. ...

Supporters of a cap-and-trade program argue that explictly raising carbon taxes high enough to make a serious dent in the output of global warming gases would be politically impossible.

But environmental advocates make a further argument. While they agree that cap-and-trade programs will lead to higher prices, too, they say that the only way to achieve support for an ambitious global warming agenda from both the general public and those within the energy industry is to guarantee that emissions will fall. ...

In just the last few weeks, the debate has heated up, so to speak, as both sides recognize that with both Republicans and Democrats agreeing that something needs to be done, their shared goal may be within grasp. That makes winning support for the right approach, as each side sees it, even more important.

So, considering the political atmosphere in 2007 and given the current state of affairs, that cutting income taxes is considered by many people as a panacea for many problems, I'm not convinced that Mankiw's Pigouvian tax and lower income tax coupling is an effort to build a political coalition. I think it is great that Mankiw is such a great proponent of Pigouvian taxes. I just wish he would lighten up on the persistent coupling. 

For the record, I would be in favor of either a carbon tax or cap and trade as an efficient approach to climate policy. I'm agnostic on what happens to the potential revenue because (1) there are three potentially efficient approaches and (2) we can get bogged down into mostly distributional issues and economists don't have a monopoly on their understanding of fairness. 

Follow-up: "Cap and trade began as a Republican idea"

There was some interesting discussion in the comments to this post. Brad DeLong says this:

Doesn't the name "Richard Schmalensee", member of George H.W. Bush's Council of Economic Advisers belong in this story somewhere, as the driver of market-friendly environmental protection policies in the U.S. government for four years? ...

While Schmalensee has written much on the acid rain program (e.g., Schmalensee and Stavins 2013), it took some digging for me to find something that gives him credit for its implementation. But I did find it. Here is footnote 33 from Stavins (2006):

References:

Schmalensee, Richard, and Robert N. Stavins. "The SO₂ Allowance Trading System: The Ironic History of a Grand Policy Experiment." The Journal of Economic Perspectives (2013): 103-121.

Stavins, Robert N. "Market-based environmental policies: what can we learn from US experience (and related research)?" in Jody Freeman and Charles, D. Kolstad, Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience: Lessons from Twenty Years of Experience. Oxford University Press, 2006.

Clean Power Plan: is "the cost ... justified by the public health benefits alone"?

Just checking on the Sunstein tweet, this is from EPA's Regulatory Impact Analysis (PDF):

The answer is yes. By 2030, the co-benefits are estimated to be about 3 times greater than costs (climate benefits are estimated to be 7 times the costs.