Economists' statement on carbon dividends

FT reports today that 3333 economists, including 27 Nobel Laureates and all four former Fed chairs, have signed the following statement:

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations. 

I.          A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary. By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future. 

II.         A carbon tax should increase every year until emissions reductions goals are met and be revenue neutral to avoid debates over the size of government. A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services. 

III.        A sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient. Substituting a price signal for cumbersome regulations will promote economic growth and provide the regulatory certainty companies need for long- term investment in clean-energy alternatives. 

IV.        To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system should be established. This system would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing. 

V.         To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in “carbon dividends” than they pay in increased energy prices.

This is the first such "statement by economists" that I have ever signed.  I believe that both major political parties are on the wrong side of this issue.  The Democrats are serious about global warming, but their idea of a Green New Deal will result in government micro-management of nearly the entire economy, millions of patronage jobs, and an unsustainable boost to federal debt.  The Republicans are not serious.

Fortunately neither party will be able to keep to their current positions.  A carbon tax provides both the opportunity for a political compromise that would actually work.  Given the right incentives, organizations will figure out the best path toward carbon neutrality.

How regulations can backfire on climate change

Oxford Professor Dieter Helm has a great recent NYT op-ed that illustrates the law of unintended consequences for regulations designed to reduce global warming.  Helm points out that although Europe has invested heavily in green technologies, it has made less progress in reducing carbon emissions than the US. 

The reason?  In the US we have cut down on coal and substituted natural gas.  Both are carbon-based but natural gas is much cleaner.  Europe has cut back on coal usage in its manufacturing processes, but because it is now importing more goods from China there is no net global reduction in coal usage.  Coal that would have been burned in Europe is now being burned in China.  Also some areas in Europe are cutting back on nuclear-generated electricity and are burning more coal.  Helm, like most economists, advocates a carbon tax that would apply regardless of the source. 

Which discount rate?

This week we introduced the concept of discounting in MBA 505.  We approached it strictly from a private sector perspective -- how do households and organizations compare a dollar today with one in the future.  Of course the same concept gets used in public policy analysis.  For instance an investment in workplace redesign to promote safety costs dollars up front but yields long-term benefits, so a discount rate is needed to valuate the future payoff. 

The choice of the proper discount rate can raise some complex issues, as illustrated in a current NYT blog post on climate change.  In 2010 economists, lawyers and scientists from a dozen federal agencies determined that it would be wise to use a consistent discount rate across the board.  After careful analysis and discussion, they settled on 3 percent.  At this rate a ton of carbon imposes a cost of $21 on society (pollution, global warming, etc.). 

This finding has been challenged by a study that argued the real cost was much higher -- $55 to $266.  Why were these numbers so much higher?  Simple answer, the authors used much lower discount rates between 1 and 2 percent. 

The issue boils down to how much value to be place on the welfare of people who have not even been born yet.  On the one hand, we would expect them to be much better off than we are and quite capable of paying for some carbon abatement on their own.  On the other, there is uncertainty about how severe the consequences of global warning might be (which might dictate larger investments in abatement now to prevent Manhattan from turning into another Venice) as well as the ethical issue of taking responsibility for the type of planet we leave to future generations. 

Ultimately politicians and voters will determine whether increased investments in carbon abatement are worthwhile.  Until the economy recovers, I would bet that more people would be using a 3 percent rate than a 1 percent rate. 

Interesting perspective on climate models

Over the last 100 years global temperatures have definitely been on the rise. So have greenhouse gas emissions. Theories have been developed linking the two. With greenhouse gas emissions on a steady upward trajectory as a larger part of the world joins the industrial age, soundfront lots on the coast might one day be oceanfront.

But climate models come in all kinds of different flavors and WSJ gave an interesting peak into their inner workings yesterday. The warming trend has flattened over the last 10 years, but the consensus among most climate scientists is that this is a mere blip before warming resumes. The models disagree on the role of such factors as changing ocean currents and cloud cover.

Why am I blogging about a discipline where I admittedly have zero technical expertise? One reason -- the parallel to economic models. Most macro models of the US economy use data that goes back 50-60 years; models for other countries go back much less because of data limitations. Models estimated over sustained periods of rising housing prices have difficulty predicting drops in those prices. Faulty models of housing were fed into models for financial markets and you know the rest of that story. It would be helpful to have a more open discussion about the uncertainty about climate forecasts in the coming months.

"Superfreakonomics" on global warming

The sequel to the best-selling "Freakonomics" by Chicago economist Steve Levitt and journalist Stephen Dubner is about to hit the shelves. Their last chapter deals with global warming, and apparently a major storm has broken out in the blogosphere over their conclusion that more attention needs to be paid to geo-engineering as a solution. Levitt and Dubner's blog on the NYT website summarizes their conclusions. For a critique, check out Paul Krugman's blog on the same website.

Handing out carbon-emissions permits

This piece about the consequences of giving away carbon-emissions permits just arrived from the Carey School of Business at Arizona State. It cites the research of Kerry Smith, who spent a good portion of his career here at NC State in the economics graduate program. Under the cap-and-trade bill passed by the House this summer, 85% of the permits would be given away. Proponents of this approach argue that this will save consumers money. Don't bet on it, says Professor Smith.