The man who is arguably the most credible progressive expert on economics has begun to seriously weigh in on the clean energy and global warming bill (see Krugman: Climate action “now might actually help the economy recover from its current slump” by giving “businesses a reason to invest in new equipment and facilities”).
In today’s column, “The Perfect, the Good, the Planet,” he argues for the bird in the hand:
If we’re going to get real action on climate change any time soon, it will be via some version of legislation proposed by Representatives Henry Waxman and Edward Markey. Their bill would limit greenhouse gases by requiring polluters to receive or buy emission permits, with the number of available permits — the “cap” in “cap and trade” — gradually falling over time….
So is Waxman-Markey — whose language was released last week — good enough?
Well, Al Gore has praised the bill, and plans to organize a grass-roots campaign on its behalf.
[Note: I can mostly confirm that there will be a grassroots campaign on behalf of this bill by an organization associated with Nobelist Gore.]
I’m with Mr. Gore. The legislation now on the table isn’t the bill we’d ideally want, but it’s the bill we can get — and it’s vastly better than no bill at all.
Then Krugman explicitly addresses both the issue of a carbon tax and too many free permits.
First, however, let me note that, my response to Hansen’s dissing of cap-and-trade has generated discussion on the blogosphere — see the many links in Dave Roberts’ post at Grist, “Cap-and-trade vs. carbon tax: a bird in hand is worth two on Alpha Centauri.”
I would also note that ExxonMobil prefers a carbon tax (see here), and as the Miami Herald notes, “Republican lawmakers back carbon tax (yes, that’s right),” and so does our old friend Roger Pielke, Jr (see here), but that isn’t entirely news to CP readers (see “Finally, Roger Pielke admits he supports policies that will take us to 5-7°C warming or more“).
Still it must make any pro-tax climate science activist wonder a little how flawed and/or politically infeasible a carbon tax must be for it to be embraced by the country’s top deniers and delayers.
Here’s what Krugman has to say about it:
One objection — the claim that carbon taxes are better than cap and trade — is, in my view, just wrong. In principle, emission taxes and tradable emission permits are equally effective at limiting pollution. In practice, cap and trade has some major advantages, especially for achieving effective international cooperation.
Not to put too fine a point on it, think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions, as opposed to letting factory owners with the right connections off the hook. By contrast, it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels.
Krugman is more concerned about the allocations, although not for the reason you might think:
The more serious objection to Waxman-Markey is that it sets up a system under which many polluters wouldn’t have to pay for the right to emit greenhouse gases — they’d get their permits free. In particular, in the first years of the program’s operation more than a third of the allocation of emission permits would be handed over at no charge to the power industry.
Now, these handouts wouldn’t undermine the policy’s effectiveness. Even when polluters get free permits, they still have an incentive to reduce their emissions, so that they can sell their excess permits to someone else. That’s not just theory: allowances for sulfur dioxide emissions are allocated to electric utilities free of charge, yet the cap-and-trade system for SO2 has been highly successful at controlling acid rain.
But handing out emission permits does, in effect, transfer wealth from taxpayers to industry. So if you had your heart set on a clean program, without major political payoffs, Waxman-Markey is a disappointment.
Yes, the allocation is a disappointment to many, including me. But the pro-allocation forces had the political mojo. And so we move on.
Still, the bill represents major action to limit climate change. As the Center for American Progress has pointed out, by 2020 the legislation would have the same effect on global warming as taking 500 million cars off the road. And by all accounts, this bill has a real chance of becoming law in the near future.
Woo-hoo (see “Pollution cuts in 2020 from House clean energy bill equal to taking 500 million cars off the road — and double that in 2030“)!
So opponents of the proposed legislation have to ask themselves whether they’re making the perfect the enemy of the good. I think they are.
After all the years of denial, after all the years of inaction, we finally have a chance to do something major about climate change. Waxman-Markey is imperfect, it’s disappointing in some respects, but it’s action we can take now. And the planet won’t wait.
Precisely.
Later in the week, I’ll discuss in more detail how I reconcile my climate science realism with my climate politics realism, but the bottom line is that in my analysis, failure to pass the bill essentially eliminates the chance we have to stabilize anywhere near 450 ppm, whereas passing the bill gives us a solid, oh, 1-in-5 chance of doing so (and maybe more).
If you don’t start moving, you just never get anywhere.
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I’ll be very interested in that reconciling. It’s something I’m struggling with. Adam of Get Energy Smart Now had a good post on his struggles with this yesterday
http://getenergysmartnow.com/ 2009/ 05/ 16/ time-for-the-bully-pupit/
I’m having the same feelings. I think if this passes without much more weakening it will be about a third of the way to what the US needs to do by 2020. It probably goes about half as far as could potentially be done in a idealistic situation without a radical change in public attitudes that made climate change as important an issue as the economy is now and made people willing to accept immediate lifestyle changes and higher taxes that for the most part did not get offset. That would have to happen to stabilize below 2C and 450.
In the end if the bill reduces emissions from baseline levels and doesn’t cause dramatic harm to low income people I don’t see how anyone can in good conscience oppose it with the stakes so high. I think it is clear that even a slightly weakened ACES will result in US emissions coming down to about 1990 levels or slightly below by 1990. We probably need 40 percent below to avoid the worst consequences but in the current climate that is not achievable and killing this bill will not lead to us getting a stronger bill later on.
I think you’ve got the balance right and I’d love to hear more. We’ve got t o support it, because even in the worst case it is far better then BAU but we also need to fight as hard as possible to get it closer to climate realities.
Waxman-Markey is an extremely complex document. It has large numbers of mechanisms, limits, allowances, etc., which will interact with each other in unpredictable ways that will be framed by individual, corporate and public sector behaviour.
In my view such a machine should be simulated to see whether it is likely to achieve the desired effect before unleashing it on to the statute book. Does anyone know if this has been done?
This is why I would argue that we need a much simpler piece of legislation – based around a no-loopholes rock-solid cap on coal, oil and gas, one that reduces year on year. This would give the market a simple clear signal and it would respond in a simple, predicatable way – by raising the price of all things carbon and encouraging all forms of non-carbon renewable energy generation.
Maybe Waxman-Markey will eventually mutate into something effective. Lets hope so.
[JR: Try reading the Clean Air Act or Clean Water Act some time. This is a silly argument. It's a complicated issue that touches every aspect of life. If you like simplicity, stay away from politics.]
I don’t understand economics.
But yes, the climate won’t wait.
The headline here on CP goes right to the juicy bit – super big economist supports cap and trade over carbon tax – but sadly, it’s not at all the focus of the article.
Is it really easier to track carbon output in china and tie it to legitimate carbon credits than it is to track carbon output and tie it to tax payment? Do we want to choose our policy because it would be the best global policy? (not that we don’t, as with before – it’s just a question that I want an answer for!
I’d love if we could get an expansion of the logic and evidence for cap and trade. My gut tells me that a carbon tax would be easier, because it could be implemented on the level of fuel production and importation, which is quite centralized, rather than the very distributed fuel burning. But, Paul Krugman tends to be a guy worth listening to.
An imperfect, meager bill would not be objectionable if it provided an evolutionary path toward something better. My concern with W-M is that it may lock us into imperfection and mediocrity. For one thing, it might undermine and nullify states’ and local jurisdictions’ efforts to achieve additional emission reductions more in line with climate science. What would be the point of any kind of unilateral local action if the national, economy-wide trading system is going to offset and effectively nullify any additional emission reductions?
Both carbon tax proponents (e.g., Charles Komanoff, James Hansen) and cap-and-trade apologists (Joe Romm, David Roberts, Krugman, etc.) seem to be more intent on keeping the policy debate polarized than on finding a sensible middle ground. In particular, a price floor applied to auctioned allowances would provide many of the same benefits of a carbon tax, preventing the kind of price erosion and collapse that has characterized prior trading systems. If allowances are selling at the floor price, then supplementary actions by individuals or local jurisdictions would result in additional emission reductions — they would not simply translate into lower carbon prices and higher emissions elsewhere.
Rather than using a price floor, W-M relies on banking, which requires sufficient overallocation to provide a pool of cheap allowances that can be banked. The theory of banked allowances is that they might be needed to hedge against price spikes. But in contrast to a price floor, which takes unneeded allowances off the market, banked allowances will eventually get used whether they are needed or not. What banked allowances really do is provide a hedge against more stringent future regulations, which will be needed to achieve mid-century emission targets.
Consider the SO2 program: Would CAIR have been required if the program had set a price floor at a level comparable to initial price expectations, rather than relying on banking? In view of the EPA’s pains in getting CAIR implemented, how is it that W-M can be expected to evolve toward adequately stringent emission targets?
A price floor wold be most easily implemented in the context of an allowance auction, which legislators and lobbyists perceive to be tantamount to a “tax”. In fact, an auction (or a tax, for that matter) is fully compatible with free allocation — the main difference is that regulated firms would get the cash value of their allowance allocation (from auction or tax revenue) rather than the allowances themselves. (Case in point: the Swedish “Refunded Emission Payments” program for NOx regulation.) Whether or not auction revenue is applied toward free allocation, an auction would help to ensure market liquidity as well as allowing for a price floor.
If allowances — or auction revenue — must be freely allocated, then why not include new energy sources in the allocation (with the percentage cut for clean energy being based on generation output)? At the outset of the program there would be few, if any, “new sources”, so industry would initially see very little cost impact. But the marginal incentives for substituting clean energy would immediately be the same as if the full carbon price were applied to all emissions, with no free allocation.
What is most objectionable about W-M is its inane unimaginativeness.
Can someone explain to me how we can “stabilize anywhere near 450 ppm”, or indeed stabilize at all? To stabilize implies zero net emissions. Our current trajectory takes us to 450ppm in about 30 years – maybe sooner if emissions keep rising and positive feedbacks kick in.
Same argument but more so for people that bandy about the idea of stabilizing at 350 ppm.
Legislation needs to be far, far stronger and applied globally to meet these goals. W-M won’t come close so lets stop pretending it will.
[JR: Who is pretending it will?]
High time Dr. Krugman started talking about climate change. I have been haranguing him for some time. I live near Princeton and have a daughter there as a student and see the campus on a regular basis. The “Ivy League” is being fast destroyed by climate chaos. It is visible to anyone who cares to observe that our ecosystem is quite simply, adapted to an environment that prevailed 150 years ago, and millennia before that. Umm, we are in a new climate.
You can’t pretend to be an economist, any more that the related story in a few JR posts back from national security experts, retired military guys, and not factor in to your analysis of economy or security – minus the effects of climate change.
Add the assessments of the experts to what insurance companies project for the future and we should be able to overwhelm the deniers with the avalanche of data that inform the discussion.
We are (OH, I could put in so many unfamily friendly expletives here) very much in trouble if we don’t collectively, globally, rapidly, begin a whole new EPOCH of sustainable responsibility.
Otherwise of course we could just all go extinct with all the other species we are murdering.
I strongly agree with Ken above on why we should have a price floor. It is hard to blame W-M for being unimaginative though, it is very to find a serious discussion about price floors in the peer-reviewed economic literature since 1976 (but Roberts, M. J., Spence, M., 1976, ‘Effluent Charges and Licenses under Uncertainty’ is well worth reading). Most of the discussion on hybrids between cap-and-trade and carbon taxes has been about schemes with price ceilings.
I agree with Krugman that cap and trade has major advantages in terms of achieving international cooperation. This is the main reason why I support cap and trade. However, because carbon dioxide is more or less a stock pollutant, it has often been argued that setting a tax level will be more likely to reduce emissions by an appropriate amount. I therefore disagree with Krugman that setting a tax is equivalent in principle to having tradeable permits, because of uncertainty.
A cap and trade system with a price floor has the same advantages to emissions trading when it comes to international cooperation; it also has the same advantages of carbon taxation (and is probably superior to carbon taxation) when it comes to managing uncertainty.
Echoing Eric, above, I’m stumped by Krugman’s statement that it would be hard to verify Chinese (or anyone else’s) taxes but easy to verify their total emissions. Can someone explain? Both sound about impossible to me.
While I agree with Krugman on CAT vs. tax, I’m also puzzled about his assertion that verifying emissions would be easier, or even doable.
China produces nearly all of the coal they burn, so the world can’t even get a good handle on their actual consumption, and then calculate their emissions from that number. I doubt we could do much better on their oil and NG use.
This is the big problem I see in any international agreement: Verification. I’ve been saying for some time that we’re likely headed toward a period when scientists will say that based on the growth in atmospheric CO2 from year N to N+1, world emissions must have been X, which is larger than the sum of all the reported country-level emissions. How do we figure out who’s lying with enough certainty to impose trade or other penalties?
An equally big problem with China is that much of the coal they consume is to run factories and provide feedstocks for goods we buy in the West. They would claim that the emissions belong to us not them.
Still – it is easy to verify. Just count the full container ships as they arrive and the empty ones as they leave.
I am sorry to disagree with Krugman whom I appreciate very much.
The objection against cap and trade is that the individual efforts to cut one’s own CO2 emissions have no consequences on the CO2 emissions of the earth but the only consequence is that this CO2 saving decrease the cost of the CO2 quota (the basic rule of the market; something more available is less expensive!).
The huge effort we will have to perform the cut of our CO2 emission (divide by 4 for France, by 6 or more for USA) cannot be achieved if the individual efforts are not on board.
This objection is crystal clear and I would like to know your response to it, and Krugman’s.
Regards.
Years and even decades ago, a lot of skeptics and deniers were huge fans of cap and trade. It was the “market way”. Now that it is possibly coming soon, they aren’t fans, and are watering it down seriously. If a serious carbon tax were proposed, they would oppose it as well, though they still might favor one with a trivial price. Using Exxon’s support for a carbon tax to criticize carbon taxes when last I read they call for $5/ton, is not serious reporting.
W-M will do very little practically to slow the momentum for increasing climate change any time soon, and soon is all that matters given the approaching tipping points. It’s main value is that it breaks through a political barrier that has seemed quite solid until recently. If breaking that barrier makes for greater possibilities in the near future, it will be worth it. Maybe it would be better to wait till 2010 if we can get qa better bill. But maybe W-M will also get us a better bill.
This is interesting
http://energytomorrow.org/ Energy_Rhetoric_vs_Reality.aspx
Scatman — Not very. Just another apologist for some special interests.
I am sad to see that on this blog there is no one supporting cap and trade who can answer to the objection 4 messages above (the individual efforts will only decrease the price of the CO2, not the total amount emitted, which would be a stupid outcome).
How can you imagine that cap and trade will limit our consumption of gas for our cars by any manageable quota? The only way such a limit will occur is by the rise of the gas price. Instead of the price rise being trigerred by the variation of a CO2 market, it would be much more clear and pretictable that this rise will be charted by a tax ramp up (the oil price having its own variations).
[JR: That is why 1) Obama has adopted aggressive fuel economy standards and 2) the Waxman-Markey bill has a big push toward plug-in hybrids and electric cars. That said, it is peak oil that will drive down oil consumption, not climate legislation. I have blogged on that previously.]
Joe, thank you for responding, but sorry, I think your answer is very weak
1) Every IPCC specialist (and even you in this blog) told us that we cannot rely on the peak oil to solve our GW problem: the CO2 concentration will rise to 1000ppm and even higher if we drill (baby) all the oil and coal sleeping under our feet.
[JR: Not correct. Even Hansen is relying on peak oil to deal with conventional oil in his 350 ppm strategy, as I've blogged. My response was a strictly about peak oil dealing with oil, not CO2.]
2) The fuel efficiency of car is NOT a guarantee to cut the fuel consumption; people will also have to drive less (or at least not to drive more), and the price signal will be needed for this purpose (and will bring financial ressources to struggle GW and help poor people)
[JR: This point contradicts your point #1. Peak oil is what gives you the price signal. BTW, you seem unaware that American shave been driving less for a few years now, even before the huge price spike.]
You surely have blogged on this previously, but even if it will harm you, it woud be greatly appreciated to re open the topic.
I still hope that a smart president as Obama will get this right and engage his country on the right solution as proposed by people like Jim Hansen or Tom Friedman (your advertiser in chief!)
Regards.
noob here. I’m concerned about non compliance penalties for the CO2 allowances. Reading section 723. 723(a) says if you don’t own enough allowances to cover your CO2 creation, you need to pay 2X the current market value of the allowances. I guess that is sufficient incentive, but I don’t know for sure.
However 723(c) says if the company fails to pay the penalty, then the Administrator sets up a repayment scheme that is 1X the current market value. The Administrator can determine if this is to be payed the next year or over a series of years.
Perhaps I’m misreading subsection (c) and the repayment must be from available alllowances, in which case we still have a cap in place (as has been discussed above), but I wanted clarification. Anyone have a good handle on this language?
If there is a better forum for this question, please let me know.