Category — Carbon Tax

In this month’s article at EconLib, I provide an introduction to the economics of climate change, and discuss some of its major controversies. Follow the above link for the full story, but in a nutshell here are the main issues:

(1) The Discount Rate. Economists give wildly different estimates of the “social cost of carbon” and hence the “optimal” tax on an additional unit of emissions.  These differences are not primarily due to the assumptions about climate systems or human vulnerabilities to warming. On the contrary, the main difference between, say, the policy recommendations of the Stern Review (very aggressive) and William Nordhaus’ DICE model (very moderate) is that Stern uses a very low discount rate, while Nordhaus plugs in an estimate of the market’s rate of return on capital.

Efforts to mitigate greenhouse gas emissions impose large, upfront costs on the economy (in terms of forfeited potential output of goods and services), while the benefits will not accrue until decades in the future (in the form of avoided climate change damage). Thus, the lower the interest rate used to evaluate present and future events, the greater the perceived net benefits of mitigating emissions.

(2) Modelling Uncertainty. One of the most popular lines of attack against the conventional carbon-pricing models concerns the treatment of uncertainty, or how they handle small-probability worst case scenarios. [Read more →]

Longtime MasterResource readers know of Chip Knappenberger’s post on the negligible climatic effects of unilateral adherence to Waxman-Markey. Across the board, the response from supporters of Waxman-Markey was not to deny Knappenberger’s calculations, but rather to insist that the U.S. had to show leadership. The (perhaps unspoken) premise was that if the whole world adopted the steep emission cuts proposed in Waxman-Markey, then the climatic benefits would clearly outweigh the economic costs.

In an earlier post, I tried to show that this view is simply false. According to the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4)–the very document showing the “consensus” on the physical science basis of manmade climate change–the best estimates of climate change damages do not justify the aggressive limits contained in the current Waxman-Markey bill.

Then in a follow-up post, I documented that a recently released summary paper from Resources for the Future (RFF) reached the same conclusion: Using standard cost/benefit analyses, the peer-reviewed literature cannot justify the aggressive emission cutbacks in Waxman-Markey. In order to justify the bill’s 83% cut (relative to 2005 levels) by 2050, proponents must stipulate that there are climatic tipping points beyond which it is too dangerous to proceed. But the actual expert models of the global economy and climate system cannot themselves spit out these “tipping points” as the efficient policy choices. (In general, many proponents of aggressive government action have repudiated cost/benefit analysis altogether when it comes to climate change policies.)

In the present post, I want to show the contradictions in Paul Krugman’s recent advocacy for Waxman-Markey, and then comment more generally on the implications of a cost/benefit result. [Read more →]

An article in today’s Houston Chronicle, “Debate Flares over How to Cut Greenhouse Gas Emissions,” compares the relative merits of a carbon tax and cap-and-trade. We will be hearing a lot about these two approaches in the weeks and months ahead.

But the Chronicle article did not consider the other major alternative: neither a tax nor a cap-and-trade program. [Read more →]