Would US Climate Mitigation Efforts Matter? Yes, If They’re Done Right
A recent post by David Bailey and David Bookbinder on the Niskanen Center blog Climate Unplugged addresses a common Conservative criticism of unilateral climate mitigation efforts by the United States or other developed countries. As the critics point out, emissions from developing countries are expected to grow so rapidly that even if the US or EU reached zero carbon, it would reduce global temperatures in 2100 by only a few one-hundredths of a degree.
Bailey and Bookbinder acknowledge that developed countries cannot do the job by themselves. However, they argue that our mitigation efforts are not wasted, since US leadership is needed to induce others to act in concert:
Without the industrialized countries acting to—as the developing nations would say—put their own houses in order, it is impossible to believe that developing countries will act on their own. Action by the industrialized nations is thus necessary in order to secure the required collective action, while being insufficient on its own.
They make a valid point, but I would like to add that in order to maximize the effectiveness of US leadership, we need to pursue the right kind of mitigation policy. A comment on the Bailey-Bookbinder post by the Cato Institute’s Chip Knappenberger explains why. Knappenberger agrees that that unilateral US emissions reductions have little if any direct impact. He says that their purpose, instead,
is to attempt to spur technological innovation and set an example as to what can be done to reduce emissions—with Americans serving both as the experimenters and the guinea pigs. It is not the climate impact of our experiment that is of any significance, but instead it is the tools that we may develop in attempting to achieve major emissions reductions. For the only truly effective course of action we have available to us in attempting to control the future course of global climate is to tell the rest of the world what to do and how to do it.
What we see here is that there are two mechanisms by which unilateral US efforts could induce others to act in concert, one diplomatic and one technological. The two have different implications for the kind of policy that would be most effective.
The diplomatic mechanism depends primarily on a demonstration of will. “We will ban incandescent lights!” “We will burn food to power our cars!” Such actions are effective not because of what they actually accomplish, but because they are painful. They represent the classic negotiating tactic of holding your hand over a flame to show that you have the strength of will to fulfill a promise or carry out a threat.
The technological mechanism requires more finesse. Its objective is not to demonstrate a willingness to absorb pain, but to minimize the short-term pain required per unit of actual mitigation. That is why economists almost universally favor price-based mitigation efforts like carbon taxes or cap-and-trade over command-and-control strategies like light-bulb bans or ethanol mandates.
Price-based policies produce pervasive pressure across a broad front. Rather than mandating specific mitigation methods, they spur innovators to tinker with energy saving technologies that bureaucrats have not thought of yet. For example, how do we know in advance that hybrid, all-electric, or hydrogen cars are more cost effective than a series of small changes that squeeze more mileage out of conventional gasoline engines? We do not.
My wife and I found that out last year when we went shopping for a plug-in hybrid, and came home instead with a gasoline powered, three-cylinder, one liter, turbocharged, Ford Fiesta that gets the same 45 miles a gallon as a hybrid but at a $10,000 lower up-front price. Right now, the government subsidizes plug-ins through tax credits but holds the price of gasoline as low as possible. Ending the subsidies and raising the price of gasoline, economists argue, would increase the sales of Fiestas and reduce those of plug-ins, saving as much gasoline (or more) at a lower total cost.
The Fiesta is just one of unknowably many examples where a price-based policy could spur innovation and energy efficiency. Who knows which ideas might emerge as winners? Long-distance trucks powered by compressed natural gas? Improved storage technology to better integrate solar and wind power into the grid? Modified farming practices to cut the need for annual plowing? If it pays off, someone will invent it, and people will use it.
There is a real risk that a hands-in-the-flame approach might even backfire. Rather than copying our actions, other countries might simply decide to free ride on our carbon reductions. In contrast, with a price-based approach, the free riding effect operates in reverse. Once new technologies are invented in countries with high energy prices, science and commerce will quickly spread them around the globe, even to countries that have kept their prices low.
In fact, this is already happening. It’s no coincidence that the super-efficient gasoline engine in our Ford Fiesta was designed and built in Germany, where gasoline costs seven dollars a gallon, yet here it is in our driveway in Michigan. Think of how much more rapid the process would be if the US became a leader in efficiency-oriented pricing policy instead of a free rider.
Why Conservatives Should Love a Carbon Tax, and Why Some of them Do. (First part of a three-part series covering the conservative, progressive, and libertarian cases for a carbon tax.)
27 Responses to “Would US Climate Mitigation Efforts Matter? Yes, If They’re Done Right”
As a retired CIA economic analyst, I always enjoy the Econ Blog. FYI, I had a (very small) part in the Agency's analysis of the 1973 oil price hike–we badly underestimated the impact because the elasticities of supply and demand turned out to be far higher than we (or anyone else) knew. In the 90s I worked a bit on environmental issues and was thoroughly persuaded by William Cline's "The Economics of Global Warming" (1992) that it was a problem requiring action. Later, in 2011, he wrote "Carbon Abatement Costs and Climate Change Finance" for the Peterson Institute, arguing that the costs were manageable–staring at maybe 2/3 of one percent of global GDP, and rising to 1.6 percent, or something like that. Advocating for CO2 emission limits–preferably with a carbon tax–is my secondary avocation in retirement, after marijuana legalization (not necessarily more important but certainly more achievable in my lifetime).
Carbon tax and legal canabis. A man after my own heart!
"Ending the subsidies and raising the price of gasoline, economists argue, would increase the sales of Fiestas and reduce those of plug-ins, saving as much gasoline (or more) at a lower total cost."
Fair enough, but the Fiesta is itself a result of command-and-control policy. A major reason that the European model is sold in the US is because of higher CAFE standards. And European countries have an implicit CO2 price of gasoline far higher than most are proposing, yet still have fuel efficiency regulations higher than the US: http://www.washingtonpost.com/blogs/wonkblog/wp/2… .
I still think a carbon price is best, but there are legitimate arguments that mandates drive technical innovation (and get reduced/repealed if they are too costly, see the ZEV mandate in California) and that subsidies (beyond just R&D) are necessary to demonstrate new tech. That said, they can certainly cause more harm than good, and seem to generally be quite regressive.
Yes, your point is valid. The high energy price in Europe and the CAFE standards in the US can be additive. I would simply argue that CAFE standards on both sides of the Atlantic would be better still, and the US performance in terms of cost of mitigation per unit of CO2 would be lower if we replaced both CAFE and ethanol mandates with a tax having the same net carbon effect.
Most of this line of thinking strikes me as out of contact with how the real world works, and amounts to trying to argue the rest of the US should join in a kind of pointless masochism.
Large parts of the world resolutely ignore US institutions and behavoirs which are quite non-controversial compared to AGW. Things like freedom of speech, a reasonable effort at universal education, freedom of movement, a court system of reasonably good quality, free elections.
Given that many countries, including some great powers, resolutely refuse to engage in some or all of these indubitably excellant things, why do we expect anybody to follow, or be in any way impressed by, the highly questionable things?
Given the large swaths of the Earth where "government" can't regulate or control slavery, terrorists, large scale drug trade, or tribal violence, why do we expect it would be possible for them to impose carbon controls even if they wanted to?
It *IS* true that new and improved energy technologies can change the game, but they can do so if and only if (a) they are workable in a wide variety of circumstances, (b) are cheaper!!!, (c) are widely distributed and not choked by export restrictions.
(a) is actually very difficult – all sorts of tactics that work in the very well developed US or Europe won't work well in many developing nations.
(b) you can talk about externalities until the sun goes cold, people have finite resources, accounted for as finite money, and cheaper wins
(c) could plausibly be managed with credible policy – but could also be credibly botched by various protectionist or security oriented policies.
You write, "Most of this line of thinking strikes me as out of contact with how the real world works."
What do you mean here by "this way of thinking?" If you mean the view expressed by B&B, that if the US unilaterally "gets its house in order" then other countries will follow and do likewise, then I agree with you. Many countries are, as you say, very badly governed and pay zero or less attention to issues like the environment (even the local environment that poisons the air and water in the cities where their own elites live) and energy efficiency (even though energy subsidies,etc, bankrupt their governments and threaten the power base of the same local elites).
The main point of my post here is that we need a different way of thinking, one based on economic mechanisms that do not depend on good will on the part of government, but rather, depend on economic incentives that affect private decisions. The case in point here is energy efficient technology which, if truly efficient, will be cheaper, and if cheaper, will spread (although I agree it will spread less rapidly to countries like Egypt, India, Indonesia, etc. that perversely subsidize high energy consumption through consumer-level fuel subsidies). But even there, the new technologies will come in packaged as part of more efficiently designed cars, TVs, whatever.
I apologize for my sloppiness.
I mean that any gesture which is "symbolic", or "hand in the candle", as well as any gesture that doesn't have very broad consensus support, is (a) unlikely to matter and (b) very very unlikely to persuade the rest of the world of anything.
Your second paragraph I totally agree with, my only concern being that various political arrangments may prevent the wide distribution of such technologies.
I also fear that technologies that work really well in the US won't work well in say Kenya or India, because they may only work so well with lots of really sound infrastructure around them.
Yes, you are right, I read often that developing countries need different technologies. For example, I know that some big players (Gates Foundation, maybe?) are working on things like mitigation of soot from home cooking fires.
By the way "price based policy" may be sound economic thinking, but it strikes me as poor political economy thinking.
In particular, as we've already seen in WA state, an attempt to impose a "carbon tax" ignored Boeing (maker of very good but carbon spewing jets) and was CLEARLY not intended to be revenue neutral. That idea can't even pass its introducing party, so the next proposal was a similar tax, 2/3rd of which would be passed back to favored groups – mostly timber interests – as a kind of spoils to buy support.
All of this presented as a noisy counterpoint to a gasoline tax, which of course is at least a broad tax on actual carbon emitters.
In short, if we call it a gas tax it's not righteous enough, if we call it a carbon tax all pretense of revenue neutrality goes out the window and giant cronyism follows it in, and both cases we impose a burden on most of WA while giving tax breaks to Boeing and in effect their Union members.
None of this looks anything like the sorts of carbon taxes various credible economists propose, and no real tax ever will.
This seems to me like simply a counsel of despair. You are saying that there is no point for economists to identify bad policies and describe potentially better alternatives because our political system is so corrupt that the better policies will never be implemented.
In contrast, it is my view that if we never go to the trouble of pointing out what is wrong and how it might be set right (or at least our views on the matter, knowing that others may differ about what is wrong and right), then we, by our silence, or our expressions of cynicism, are giving it license to carry on as usual. We then become part of the problem.
I am guilty of the counsel of despair, and will try here to be more helpful.
(The recent carbon tax debate in WA is really troubling to me.)
If we concede that reducing carbon fuel consumption is a goal (not all agree, but take it as given) then a straightforward and simple pricing mechanism is a great way to produce efficient improvements.
My despair is that government is incapable of such a mechanism.
So What Do We Do Instead?
I think the real challenge for economists is to find a mechanism which doesn't change the size of the public sector, doesn't change the balance of power between parties, isn't an instant lightening rod for opposition. And also doesn't punish some isolated part of society ("the rich", or "big oil" , or "the west", or "the rust belt")
My despair would be dispelled by a mechanism that I could believe would work in the real world, both in the 1st world and the developing world.
Yes, I agree that the WA carbon tax example is discouraging. So was Waxman-Markey, which, if I recall, departed far from the idea of a price-based policy, especially by having a mechanism to shield residential electric from any effect of carbon pricing, therefore eviscerating the conservation incentives that were the very essence of the concept to begin with.I don't know what your magic bullet policy is. Some people are talking about so-called “fast track” climate policy that aims at warming agents, for example, soot and methane, which allegedly have higher payoffs and are not such political lightning rods. I'm planning a post on that notion, soon.With regard to the political track, have you ever looked at the Niskanen Center blog linked in the post? The people at the Niskanen Center, who appear to be savvy about inside-the-beltway politics, think that selling a carbon tax is not hopeless. They would welcome your participation in the discussion, I think.
I was very impressed with Jerry Taylor's recent interviews. And Citizen's Climate Lobby (IMO mostly left wing but somewhat bipartisan) has done a lot of lobbying for a revenue-neutral carbon tax. But despite a carbon tax having the endorsement of several conservative think tanks and conservative economists such as yourself, no Republican in Congress seems willing to even consider it.
Rep. John Delaney has proposed a carbon tax to help fund corporate tax cuts: http://www.aei.org/events/carbon-taxes-practicali…
Also talking about letting states implement carbon tax in lieu of the Clean Power Plan: http://thehill.com/policy/energy-environment/2069…
^Just realized the second link is from a year ago. Hasn't made any headway.
Thanks for the links
I would like to point out that command and control strategies can be less painful than price-based strategies in the case of market failure. Your own "painful" example of banning the incandescent bulb is actually a painless- even profitable- case in point.
Using an incandescent bulb costs $2-$10 dollars a year depending on usage. This caps the benefit to the consumer of adopting more efficient technology at a fraction of that; the market failure arises because a few dollars a year is not sufficient to get most consumers to adopt new technology in the place of perfectly functional technology.
In the case of CFLs, the new technology was also inferior in a number of ways, but the ban led to accelerated innovation to make CFLs better and increase the availability of efficient halogen and LED alternatives. I do not believe a price based strategy such as a carbon tax could have raised electricity prices enough to enable market forces to accomplish these changes without at least a doubling of electricity prices. I think you'll agree that a doubling of electricity prices would have been much more painful than the bulb ban.
I do get your point that consumers sometimes need a "nudge" to adopt technologies that have a payoff. However, the nudge of command-and-control is often clumsy and counter productive because it is one-size-fits all.
For example, you say, "Using an incandescent bulb costs $2-$10 dollars a year depending on usage ". I would correct to say $0.01 to $10 depending on usage. Your $2 assumes about 100-200 hours per year at typical electric rates. What about the light in your guest-room closet? The one in your crawl space? Do you really need a $7 LED bulb there? It might take 100 years to repay itself. And what about your favorite lamp that gave enough light to read with one 100 watt bulb, but since there is no such thing as a 100-watt-replacement LED yet, you can't really use it any more? And what about your bedside reading light, where you need a warm-tone bulb, because reading with blue light (as from LEDs) before sleeping is very bad for your sleep cycle?
These, of course, are the trivia of daily life. When you get to CAFE standards, the penalties are really big. The high-CAFE car uses less gas per mile, but gives you zero incentive (or reduces the incentive) to move closer to work or use public transportation or car pool. So you need other nudges to accomplish those, e.g., transport subsidies, zoning regs, dedicated carpool lanes, etc.
Sorry, I sort of like prices. But nudges are OK in their place, too, provided they complement market signals rather than trying to supplant them or even nudging in exactly the opposite direction.
Yes, nudges are imperfect, too, but you have failed to address the point that a price signal (in terms of electricity prices) would not have worked as well or would have been incredibly painful.
This is especially true because the "pain" in your example is pretty painless or nonexistent.
The light in the closet or crawlspace can be a CFL, which cost less than $2 these days, and light quality does not matter in this context. And you won't have to replace it anyway, since it won't burn out if you don't use it.
You favorite lamp can use a halogen, same with your bedside reading light. http://www.lampsplus.com/products/72w-equivalent-…
I'm with you on CAFE standards, though, but that's because it's an example of regulatory capture and a bad law, and the car market is more efficient. Recall that my point was that command and control is better in cases of *market failure*.
We agree that when the market works, price signals are better.
That said, it might have been possible to design a better price signal to improve lighting than the command and control approach. Perhaps a $0.05/Watt tax on all light bulbs, with the revenue used to reduce other taxes. That would make a 100W incandescent cost $5.25, a 25W CFL cost $2.25. Then you'd still be buying CFLs for your closet, but you might splash out $5.25 for those important reading lights. (The 100W equivalent halogen (72W) would cost about $6.)
So I agree with you that a carefully designed price signal can work well, but not just any price signal. Doubling electricity prices would not have been enough to get much movement on lightbulbs.
This is an interesting subject and could develop into an entire post. A few more comments:
1. Yes, the halogen replacement bulbs have nice light, and I use a couple for reading lamps. However, notice the they typically (the one you link is an example) save only 25-30 percent on electricity, so the savings and payback is much lower than with CFLs (which everyone now hates) or LEDs (nicer but more costly). Again, the command-and-control approach is clunky because it treats halogens and CFL/LEDs equivalently, although the energy savings are vastly greater with the latter.
2. Why pick on lighting, anyway? It is only 11% of residential electric use. A price signal hits everything. Yes, of course you can have (and do have) separate command-and-control standards for refrigerators, TVs, etc., but talk about a clunky approach! Not to mention the economics of it–I would wager (without checking, of course) that you have a wide variation in kWh saved per dollar of capital costs across the various appliances.
3. The trouble with your light bulb tax is that it taxes bulbs equally regardless of how much they are used. The nice thing about an energy tax is that it taxes in proportion to use.
4. Finally, let me politely object to your use of "market failure" when referring to the effect of energy taxes. Why do we want to call it a "market failure" if raising the price of something has only a small effect of demand? You are using the term market failure when you are just pointing to low elasticity of demand. Elasticity of demand for residential electric power appears to be around -.2 to -.3, i.e., a 10% increase in electric rates would save 2 to 3 percent of use. Who is to say that is the wrong number? It is not as if the price increase had no effect, it just "fails" to have as much effect as you would like.
To talk about market failure, you need to compare the effect of the price increase to something. My comparison is this: If the price you pay for electricity is less than the cost, including generating costs plus environmental costs of harm to other people through pollution, then you have something you can meaningfully call a market failure. If you have a command-and-control rule that imposes costs that are greater than the harm done by pollution per unit of energy saved, then I think you could call that a "government failure."
Good points, Ed. I think we're agreed on most of this. A few quibbles below:
1. Agreed on the limited savings of halogens, but my point was that the "pain" from the loss of high wattage incandescent is limited by the availability of halogens. People who would not have switched without the command and control approach are not going to be complaining that halogens do not save "enough" compared to their old bulbs.
2. I'm picking on lighting because you brought it up as an example in your post. So I turn the question back to you: Why did *you* pick on lighting? I'm not picking on CAFE because I agree with you that that is an example of bad command and control.
If you'd like another good example, I will point to building energy codes. Here, an agency problem leads to the builder/landlord not making clearly economic upgrades, so it makes sense to nudge them along with building codes.
3. I disagree. Bulbs are only taxed when they are replaced. Little-used bulbs are seldom replaced, so they are taxed less. Perhaps the tax could be refined to take bulb life into account.
4. I used the term "market failure" when there is a clear economic benefit which the market fails to capture. In the case of an investment in CFLs, a $1-$2 bulb often has an IRR greater than 100% in relatively high usage light sockets. If you would like to call this a "highly inelastic market" or something like that, I'm OK.
I'll rephrase my point: there is a case for command and control in favor (or in conjunction with) price signals in highly inelastic markets. In elastic markets, price signals are clearly better.
Yes, you're right, we've narrowed the agreement to close to nothing.
(1) I agree, building codes are a better example of market failure. Theoretically, we should say the builder ought to be able to sell the building for more by including any cost-effective upgrades, but there is a problem: It is hard or impossible for the buyer to verify. For example, how could the buyer practically check to see how much insulation there is in the walls or roof? Better to have the assurance of a building inspector looking at it. (I suppose that in an ideal libertarian world, we could say that a builder would hire a reputable independent certification company to check on things like insulation that could only be observed before the building was complete, but I tend to doubt the realism.) So maybe we could agree that the case for command and control increases when there is no practical way for consumers to make an informed choice even when they have the will to do so.
(2) In the case of light bulbs, there is really no problem with making an informed choice if you want to. I can see only two real reasons for consumers NOT to buy them. (BTW I have a house full of LEDs, with a few halogens where light quality is critical and some old incandescents in the closets.) One reason is that they are too lazy to make the needed calculations or make the needed purchases. But laziness can be a rational choice–economizing on personal executive capacity, if you want to give it a fancy name. The other reason is that people may have a much higher perceived cost of capital than economists use when calculating the payoff to light bulbs. Many people operate on a cash flow constraint that they can only break by expensive forms of borrowing, like credit card debt, paycheck loans, etc. In that sense, the same thing is driving the light bulb choice as drives people to buy breakfast cereal in smaller packages to meet their grocery checkout cash constraint. Buying cereal in larger boxes also has a very high internal rate of return, but I doubt that many people think that would justify a command-and-control regulation that outlawed small cereal boxes.
(2) The case for command and control when an "uneconomic" decision is in fact an "economic" decision when you include the cost of executive capacity is even stronger, assuming that there are negative externalities involved, as is the case with energy consumption.
Yes, a person may be rationally choosing to not expend limited executive capacity in exchange for long term savings, but the exact same can be said about applying price signals. If we think it is worth forcing the expenditure of executive capacity by applying a price signal, why is that better than forcing the expenditure of executive capacity with a ban?
The light bulb ban has the effect of forcing everyone to expend executive capacity in order to choose a new light bulb for each application (LED, CFL, or halogen?) but this is a one-off cost, borne fairly equally across society, and all of society benefits from the reduced negative externalities. Once the individual is forced to expend executive capacity in this manner, there will be an added benefit of increasing elasticity and making existing or new price signals more effective.
Regarding high discount rates and living paycheck to paycheck, this is a much stronger argument against price signals. In fact, it is the first argument we often hear against most price signals, and it usually goes: "How can we justify making people who are already hurting pay more?"
There should be a hurdle rate for the IRR of investments which we force with command-and-control techniques, but when those investments exceed that hurdle rate, we can honestly say that we are helping the poor by forcing them to make high IRR investments. I would suggest that an IRR hurdle rate of 50% should be sufficient to make this claim, since it is higher than most poor people's cost of funds. Command-and-control techniques may be appropriate in lower IRR cases, but this will need to be decided on a case-by-case basis.
OK, (1) is out of the way. Several interesting points in (2) that I will think about.
At one point you say, "How can we justify making people who are already hurting pay more" (actually, you don't say that, you say that many people say it). Important point. I wrote about it at length a couple years ago in this post: When Does "It Will Hurt the Poor" Outweigh "It's Good for the Environment?" http://www.economonitor.com/dolanecon/2012/02/24/….
I understand that this is not quite the dilemma you pose, since you are (I infer) looking for something that is good for the environment without hurting the poor, but many of the points I raise in that earlier post are still relevant.
By the way, there is another interesting aside here. You said "the command-and-control approach is clunky because it treats halogens and CFL/LEDs equivalently, although the energy savings are vastly greater with the latter."
While this is widely believed to be true, the numbers do not support the assertion. I googled "60w equivalent LED" and "60w equivalen CFL" and got a 800 lumen Cree LED using 9.5 W and a 840 Lumen Philips CFL using 13w. Correcting the wattage to adjust for luminosty, we would have a 12.4W, 800 Lumen CFL.
So the energy savings for the LED is 50.5 W, compared to 47.6 for the CFL- only 6% greater. Although it is widely considered to be true, energy savings do not justify replacing CFLs with LEDs. The advantages of LEDs are
– cold temperature performance
– durability, especially in applications with vibration
– no mercury
– color (CFLs are vastly better than they used to be, and LEDs are far from perfect.)
– instant on (although this depends on the fixture- I have 2 LED fixtures in my house which are slower than most CFLs)
This is mostly beside the point, but it does argue for any policy designed to reduce energy usage to treat CFLs and LEDs fairly evenhandedly, as the current ban does and as most price signals would. Halogens, of course, are another matter. The ban is clunky in this regard.
I think I read that post at the time. I agree with that, too.
I believe the argument "How can we justify making people who are already hurting pay more?" is really a red herring, designed to elicit an emotional reaction against a proposed policy and keep people focused on the story of imagined people and away from the big picture. As long as the policy in question is a good policy and improves societal outcomes, we should not worry so much about the poor's ability to cope with that particular policy, and worry more about the poor's ability to cope with being poor.
Although you mostly refer to price-based policies in that post, the arguments do not rest on the assumption that the policies are price based, just on the assumption that the policies in question are good policies. My point above was that that this (mostly emotional) argument is much easier to make against a price based policy than it is against a command & control policy.
Which is why we have low gas taxes and jerry-rigged CAFE standards.
Now that you've reminded me of just how weak the "hurting the poor" argument is, I think my comments about hurdle rates should be adjusted. If we need to use a hurdle rate beyond the simple standard "Is there a greater societal benefit from this policy than from our other policy options?" it can probably be a lot lower than 50%.
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