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Poor Robert Samuelson received a lot of abuse from bloggers for arguing that a greenhouse-gas cap-and-trade system, such as the one under consideration by the Senate, would be inferior to a carbon tax. Samuelson argues that cap-and-trade advocates pretend that cap and trade would not impose (short-term) economic costs on people, when in fact it would—just as a carbon tax would—by raising the cost of greenhouse-gas-emitting energy sources. Samuelson also argues that a tax system would be less vulnerable to lobbying and congressional misspending than a cap-and-trade system would:
Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down. It wouldn't permit satisfactory economic growth. But if we're going to try to stimulate new technologies through price, let's do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable. If environmentalists still prefer an allowance system, let's call it by its proper name: cap-and-tax.
The critics pounce on Samuelson for the second point. As Ryan Avent puts it (to an approving blogospheric chorus):
Yowza. As any economist worth his or her salt will tell you, a cap and trade plan with auctioned permits is essentially identical to a carbon tax. That also happens to be exactly what Barack Obama is proposing. So, another way for Samuelson to have written this column would have been to title it, "Barack Obama has a good plan to reduce carbon emissions."
Samuelson is definitely confused: He argues that a cap-and-trade system is inferior to a carbon tax and that the two systems are the same. But his main point—that people don't want to call a tax a tax—is right. Don't believe me? Remember this exchange?
GIBSON: I'm sort of sorry Chris Dodd isn't here because he's talked a lot about a carbon tax in this election. Al Gore favors a carbon tax.
None of you have favored a carbon tax. Is it a bad idea, or is it just so politically unpalatable that you guys don't want to propose it?
RICHARDSON: Can I answer?
You know, I was energy secretary. It's a bad idea. Because, when you have a carbon tax, first of all, it's not a mandate. What you want is a mandate on polluters, on coal companies, on those that pollute, to reduce greenhouse gas emissions by a certain target. ...
Furthermore, a carbon tax, that's passed on to consumers, that's passed on to the average person, that's money you take out of the economy.
So it's a bad idea. ...
GIBSON: Senator Obama?
OBAMA: Well, I agree with Bill that I think a cap-and-trade system makes more sense. That's why I proposed it: because you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level.
Now, what you have to do is you have to combine it with a 100 percent auction. In other words, every little bit of pollution that is sent up into the atmosphere, that polluter is getting charged for it.
Not only does that ensure that they don't game the system, but you're also generating billions of dollars that can be invested in solar and wind and biodiesel.
I do disagree with one thing, though, that Bill said, and that is that on a carbon tax, the cost will be passed on to consumers, and that won't happen with a cap-and-trade.
Under a cap-and-trade, there will be a cost. Plants are going to have to retrofit their equipment. And that's going to cost money, and they will pass it onto consumers.
So here's Bill Richardson—the former secretary of energy!—implying that a cap-and-trade system, unlike carbon tax, doesn't pass on any costs to a consumer. Obama, to his credit, corrects this error. But Obama surely knows, like Ryan Avent, that his cap-and-trade system is equivalent to a carbon tax. So why does Obama say otherwise?
Whatever else one might say about Samuelson's column (which I mostly disagree with), his main point is that politicians are trying to hide the short-term costs of a climate law by avoiding the "tax" word. (Whether or not "environmentalists" are, or not, I'm not so sure.) Perhaps, the best that can be said is that the public will be confused whether politicians use the term "tax" or "emissions permit." The public understands neither of these terms—at least, not in the context of climate regulation—and won't receive much help from their leaders anytime soon.
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The Boxer-Lieberman-Warner climate bill is being debated in the Senate: This is important stuff—the first real attempt in the United States to regulate greenhouse-gas emissions. Does the bill make sense?
Its main purpose is to create a cap-and-trade system, and there has been a recent debate in the blogosphere about whether a cap-and-trade system is better or worse than a carbon tax. The issue is probably moot: For no doubt political reasons, a cap-and-trade system is the only system on the table. But it is worth understanding the difference between the two.
Imagine that there are only 10 people who engage in activities that cause greenhouse-gas emissions; perhaps they each burn one gallon of gas per year in their factories. We decide that, from the standpoint of the climate, it would be better if a total of nine, rather than 10, gallons of gas are burned per year.
We could achieve this goal in two ways. Under a cap-and-trade system, we issue nine permits to burn one gallon of gas. You have to own a permit in order to obtain a gallon of gas. Voilà: We have solved our problem. Only nine gallons of gas will be consumed.
Under a tax system, we make anyone who buys a gallon of gas pay a tax. Suppose that each of our 10 people is willing to pay different amounts for a gallon of gas—because they gain more or less from burning that gallon. For example, one person is willing to pay $4, one person is willing to pay $4.20, the third person is willing to pay $4.30, and so on. Suppose the untaxed price of gas is $4 per gallon. To ensure that only nine gallons are consumed, we set the tax at 10 cents. Now the $4-person won't buy any gas; the others will. Our goal is achieved.
So, the two approaches have the same effect on the climate. One involves setting a price floor; the other involves setting a quantity ceiling. Most economists prefer the tax approach, however, because if you get the tax slightly wrong, the social costs are likely to be lower than if you get the quantity limit slightly wrong. To see why, suppose that there is an emergency and it suddenly becomes important for all 10 people to have a gallon of gas. Under the tax system, the lowest-value user can simply pay the tax; under the permit system, one person is out of luck. (The story is a bit more complicated than this; see here; and anyway, a cap-and-trade system can be given safety valves that perform the same function.)
Brad DeLong thinks that the two systems have different distributive effects. But we can distribute however we want to. For the cap-and-trade system, we could auction off the permits, charge a low price, charge a high price, or give them away for free. If we sell them, we can give the revenue to whomever we want to give it to. We could even give the money back to the buyers minus the tax that they would pay under the tax system, in which case the distributive effect would be the same as that of the tax system that I described above. Similarly, under the tax system, we could take the revenue we collect and give it back to everyone we taxed except for the 10th guy who refrained from buying the gas—and we'd have the same distributive effect as that of the initial cap-and-trade approach.
Everyone seems to fear that under the bill's cap-and-trade system, Congress will give away the revenue to people who don't deserve it. Maybe so, but Congress could do the same thing if it imposed a carbon tax. Revenues from the tax have to go somewhere, after all. Some people want Congress to give away the permits for free so that it doesn't obtain revenues that it would then squander. But if the cap-and-trade system means anything, it means not everyone will get a permit who would like one. That means Congress will have to pick and choose among those to whom it gives permits, and again we have the same risk of abuse, including lobbying and favoritism.
If the permits are auctioned off, what should be done with the trillions of dollars that are raised? Lieberman would invest it in research into clean energy. That's a bad idea: The government has no insight into where the research dollars should go. The whole point of a cap-and-trade system or (equivalently) a tax in the first place is to get industry to make those research decisions so that the government does not have to. If it won't do enough, then fewer permits should be issued, which will increase the pressure to find alternative sources of energy. Robert Reich says give the money back pro rata to American citizens. But why do that? The government gets revenue in all kinds of ways-say, by auctioning off the spectrum or by licensing lands for grazing or by charging fees for green cards-and no one thinks that the money should be returned to taxpayers pro rata. People think that Congress should spend this money or, if spending is already adequate, tax people less. The cap-and-trade money should go into the Treasury with all these other sources of revenue. Taxes can be lowered, debt retired, or ordinary spending increased. Congress can misspend our money, but that is true whether it gets our money from incomes taxes or permit auctions. There is no reason to treat the revenues from these two sources any differently.
Aside from the uncertainty issue, which favors the tax system, there is no reason to favor one system over the other. They have the same environmental effects for (roughly) the same cost to the economy. We can redistribute wealth however we want, as we always can, system or no system; and whenever Congress acts, it can misbehave if it chooses to, and lobbyists will be involved, regardless of the type of law Congress ends up enacting. So why the enthusiasm for the cap-and-trade system? Something about the absence of the word tax in its name?
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Eric, thanks for your post on the "natural disasters" op-ed. (Can it really be that someone surnamed Blow is the Times' new storm reporter?) It leaves this takeaway:
As often as not, so-called "natural disasters" owe the latter word as much to acts of human agency as anything else. Floods and wildfires and mudslides do seem worse than ever because there are more people and buildings on flood plains, mountains, and hillsides than ever. That answer should mark the beginning, not the end, of discussion.
It's easy to understand why a profit-seeking developer would build in fragile areas. Easy, too, to understand why someone would buy there—it seems every California wildfire story includes an interview with a homeowner who'd been attracted by the relatively lower prices of new houses far from city center and who knew nothing of the fragility of the area. What's not easy to understand is why policymakers permit ever more construction in such areas; that's a question deserving more examination in this country.
As for countries outside the United States, the problem often is more acute. Regions threatened by the expected consequences of climate change include places like the densely populated Mekong Delta. Putting into place policies that will avert disaster there is an act that human agents ought now to undertake.
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A scary graph appeared on the New York Times op-ed page on Sunday. It seems to show a profound acceleration in the rate of natural disaster in the United States and the world. In the words of its author, Charles Blow:
According to the Center for Research on the Epidemiology of Disasters, there have been more than four times as many weather-related disasters in the last 30 years than in the previous 75 years. The United States has experienced more of those disasters than any other country.
Blow continues:
Who do we have to thank for all this? Probably ourselves.
Last year, the Intergovernmental Panel on Climate Change issued reports concluding that "human influences" (read greenhouse-gas emissions) have "more likely than not" contributed to this increase. The United States is one of the biggest producers of greenhouse-gas emissions.
However, his source—the Centre for Research on the Epidemiology of Disasters—states the obvious problem with Blow's figures, one that Blow neglects to mention to his readers: that reporting has greatly improved over the decades. As one of its reports notes, the annual number of earthquakes appears to have increased over the decades, but no one thinks that earthquakes are caused by climate change. What has changed is the quality of earthquake-monitoring systems, the reliability of government records, and so forth. (While it is true that the incidence of hurricanes has increased over the last few decades, there remains a great deal of scientific controversy about whether this trend will continue.) The pre-1970 data, which are responsible for most of the dramatic rise in the graph, are probably worthless.
There is another data artifact that drives Blow's graph, one that is also well-known in the scientific community. The main reason for the increase in the number and costliness of natural disasters in the United States, and probably in other countries as well, is that people have been moving to the most vulnerable areas—the coasts (especially Florida and California)—and building expensive structures there. CRED defines a natural disaster as an event where 10 or more people are reported killed, 100 people or more are reported affected, a declaration of a state of emergency occurs, or a call for international assistance is made. Obviously, all these criteria are more likely to be met when a hurricane, earthquake, or other natural disaster occurs in a highly populated area than when it occurs in a sparsely populated area.
This is not to deny that some extreme weather events—droughts and flooding, for example—may be connected to climate change. It's just to point out that there is a difference between reporting the facts and scaring people with misleading statistics. Blow is right to worry about climate change and to urge the United States to join international efforts to curb greenhouse-gas emissions. But he misuses the data to make this point—despite CRED's repeated warnings about reporting and data problems—and as a result, he misses the main implication of the data: that the United States and state governments should regulate construction in coastal and other vulnerable areas more strictly. This is much more important in the short run than a climate treaty, as the benefits of a reduction in greenhouse-gas emissions won't be felt for decades. As CRED says in the report cited above, "Disaster data—handle with care!"
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The solution—"technology"—seems not to have occurred to anyone else. See here:
The science and technology of genetic engineering are not yet ripe for large-scale use. We do not understand the language of the genome well enough to read and write it fluently. But the science is advancing rapidly, and the technology of reading and writing genomes is advancing even more rapidly. I consider it likely that we shall have "genetically engineered carbon-eating trees" within twenty years, and almost certainly within fifty years.
Carbon-eating trees could convert most of the carbon that they absorb from the atmosphere into some chemically stable form and bury it underground. Or they could convert the carbon into liquid fuels and other useful chemicals. Biotechnology is enormously powerful, capable of burying or transforming any molecule of carbon dioxide that comes into its grasp. Keeling's wiggles prove that a big fraction of the carbon dioxide in the atmosphere comes within the grasp of biotechnology every decade. If one quarter of the world's forests were replanted with carbon-eating varieties of the same species, the forests would be preserved as ecological resources and as habitats for wildlife, and the carbon dioxide in the atmosphere would be reduced by half in about fifty years.
Climate scientists and other spoilsports predictably charge Dyson with bad science—as though it were such a big deal to replace a forest half the size of the United States with carbon-eating, liquid-fuel excreting trees that haven't yet been invented. (Perhaps the trees could also be designed so that they can give directions to lost hikers.) Rather than carping about the details, the critics should stop and ponder the implications of Dyson's optimism about technology for all the other problems that the world has not yet been able to solve.
If we think of all the complex, expensive, and not very effective treaty regimes that already exist for solving multiple problems—nuclear proliferation, the depletion of ocean fisheries, the destruction of the ozone layer, war, international terrorism, trade protectionism, etc.—we immediately see that all of these problems, like global warming, could be more easily addressed with a technological advance than with regulation. Why, for example, should we try to improve treaties that govern fisheries when it would be simpler and easier to await biotechnological advances? We have already glimpsed the future in Woody Allen's prescient movie Sleeper, which shows gigantic bananas—able to feed entire villages!—being grown on a farm. If gigantic bananas, why not gigantic fish? It ought to be easier to catch a single 1,000-foot-long tuna than hundreds of small tunas. If the gigantic tuna could be genetically engineered so that it can breathe air, it could be grown organically on carbon-neutral farms; perhaps it could graze on carbon-eating grasses and be endowed (unlike cows) with a greenhouse-gas-neutral digestive process. Oceans, meanwhile, would be left undisturbed. We could also invent nuclear weapons that can't cross borders without presidential authorization, chemicals to fix the ozone hole, and an army of genetically engineered humanoid fighters to kill terrorists and other bad guys. All we need is technology—the more, the better!
Meanwhile, we could solve virtually all of our environmental problems though the simple expedient of genetically engineering human beings to be 4 inches tall. "Biotechnology is enormously powerful," says Dyson, so why not? Four-inch-tall people would consume fewer of the world's resources, ensuring sustainable development for the benefit of our tiny descendants living thousands or even millions of year in the future. Four-inch-tall people would need much smaller automobiles, which would have correspondingly higher fuel efficiency. Because of the smaller mass of automobiles, collisions will have less destructive effect, and thousands of lives per year would be saved. To be sure, the reduction in mortality would put a strain on our planet's resources—fewer traffic deaths mean more people eat more food and consume more fossil fuels—but people could be engineered to have a reasonable, sustainable lifespan and to have no more (tiny!) children than necessary to keep the size of the population constant. If Dyson is right that technology will solve the problem of climate change, why stop there? Technology ought to be able to solve all our less serious problems as well—no need to adopt regulations in treaty or domestic law.
Sourpusses think that every new technology just creates new problems for which regulations are needed. Isn't the coal-fired power plant just a kind of technology? However, if I understand the logic of Dyson's argument correctly, we should expect still-newer technology to solve whatever problems that soon-to-be-old new technology creates. If carbon-eating, liquid-fuel excreting trees self-combust, causing the world's largest forest fire, we can try again with carbon-eating, liquid-fuel excreting trees that incorporate miniature sprinkler systems.
Here's a prediction. One hundred thousand years from now, a wise and prosperous race of 4-inch-tall, carbon-neutral people, whose atmosphere has been scrubbed clean by forests of carbon-eating, liquid-fuel-excreting, fireproof trees that give directions to lost hikers, will look back at us with bemusement and pity, wondering why we troubled with climate treaties, lawsuits, cap-and-trade programs, and other expensive, unnecessary sacrifices, all for their benefit, when we could have lived it up and left technology to clean up our mess.