Wednesday, December 2, 2009

Thoughts on Global Warming, Broken Windows, and Emissions Taxes

Yesterday, TC at MR had some interesting thoughts on "good versus evil thinking" about the Climategate issue. To summarize, he basically says that there is a chance that the people (who, in this case did something somewhat dishonorable) were acting with good intentions at heart. In other words:
One response is: 1. "These people behaved dishonorably.  I will lower my trust in their opinions." Another response, not entirely out of the ballpark, is: 2. "These people behaved dishonorably.  They must have thought this issue was really important, worth risking their scientific reputations for.  I will revise upward my estimate of the seriousness of the problem."
One other thought I have is, to look at the other side of the debate over climate. What if views and opinions are not only unfounded in rigorous scientific methodology, but are also inconsistent? What credibility do we owe them? For example, some opposers of "green job creation" liken the problem to the "Parable of the Broken Window" by Frederic Bastiat. It's a reasonable comparison in the sense that subsidizing the cleanup does marginally incentivize polluting behavior. This is precisely why most mainstream economists recommend a pollution tax over a cleanup subsidy. A cleanup subsidy (paying for the shopowner to fix the window) creates a moral hazard, or more simply, a modest incentive to produce in sectors that create the mess (break more windows). Two things: one, to accept the parable, you must admit that damage has been done (to the environment); and two, the next question is how to implement the proper incentive mechanism.
In the case of the broken window, the optimal mechanism is to tax (punish, fine, etc.) the breaker of the window above and beyond the simple replacement cost. In the case of the broken environment, it would be appropriate to "punish" firms (and consumers who buy those goods for that matter) that do most harm to the environment. The least discriminatory way to do this might be a carbon tax, but cap and trade has its advantages, too.
I've discussed these options before, and all else equal, the cap and trade auction is probably the most efficient. But there is another twist to things that I recently considered, which is, "How do we charge domestic carbon emitters without implicitly subsidizing foreign emitters?" Not only might it discriminate against domestic producers, but it might even result in more worldwide emissions - emissions intensive production may get offshored to an even greater extent to countries that allow even dirtier modes of production than previously occurred in the US. Thus, I am increasingly leaning towards a carbon tax, which could be levied against the carbon content of all goods sold (domestically produced or imported - cumulative of the carbon emitted in-transport). It lacks the elegance of an auction, but without an international trading block for emissions it is the next-best option.
But this sort of punishment (tax) on vandalizing the environment is not what the "broken window gang" argues for. In fact, they argue against both strategies. In other words, they argue against punishing window-breakers and against compensating shopowners (the future generations who are likely to be impacted by environmental degradation). In doing so I do not really see much benefit of the doubt that can be granted to the opposition. I can think of two scenarios. Either: one, they deny the science of climate change, and thus will construct any convenient argument to oppose it, without actually admitting their state of denial; or two, they do not think climate change is an important issue. I do not think that the first is the case because I think that most of the "broken-windowers" acknowledge climate change. Maybe there is a face-saving third alternative, but I'm skeptical.

1 comment:

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