Sophistry 101

This is the same kind of analysis that says it’s economically better to kill a thousand peasants in Burma than to fire one successful trader in Manhattan. (Yes, that’s glib and unfair, but it seems to me strictly true. Mostly I was infuriated by the “simple matter of programming” assumption in the first paragraph.)

The Reality-Based Community: Cap and Trade: what matters, and what doesn’t

Here the analysis meets a fork in the road. If we choose the GHG charge path, we need to decide how much to charge, which means we have to know the marginal cost of a unit of emission at current emission levels. After a while, emissions will go down, and the charge might get lower; eventually things settle down at the right level.
This charge will generate a lot of revenue, and a completely different analysis applies to what it should be spent on. It’s not as simple as it looks to argue that it should be spent on environmental programs or even GHG reduction, for example. It’s an interesting question, but the subject of another post. With a carbon charge, we’re done.

(B1) If we decide to go down the cap and trade route, we have to determine the “right” amount of global warming gases society should emit. To know this, we need to know the benefits of every possible level of emissions relative to where we are now, and the economic cost of getting to each of those levels. The right amount is where the cost of reducing more is greater than the benefits. Note that to get a cap right requires a lot more information about the world than to get a carbon charge right, and the information we need (costs of compliance) is the kind of thing firms tend to be prickly about disclosing and likely to flat-out lie about.

This analysis would be all very well if we knew the marginal cost of a unit of emission at current emission levels. But we don’t. We know that X amount of additional carbon in the atmosphere will lead to Y amount of warming (where Y is pretty uncertain), and we have some idea that Y amount of warming will do Z net present value of damage to the global economy, where Z depends enormously on discount rates, risk premiums, possible alternative responses and (here’s where the dead peasants come in) how we value economic activity and resources in different parts of the world. That valuation can be done in a bunch of ways that give wildly different numbers and that have wildly conflicting moral valences. If you do it purely by GNP-per-capita, for instance, then lost economic activity or assets in countries that are already rich count for far more than lost economic activity (including lost lives) in countries that are currently poor. Figuring out just how to do the valuation might be technically tractable, but I doubt that it’s politically tractable.

Once you’ve done that valuation, you still have to work back through the uncertainties in the economic effects of some amount of warming to the amount of atmospheric carbon responsible for that warming, and then back to the amount of carbon emission responsible for that much atmospheric carbon. Now you have your global marginal cost of carbon emission, with only a few intractabilities and some huge uncertainty, and you can set your tax rate. Let’s set it at the top of the uncertainty band, just because, well, to do otherwise would be too risky. Sure.

But wait, that’s a global marginal cost. The effects of climate change vary across regions, so some people will be getting taxed/charged at a rate that signals them to cut back more than they need to to avoid bad local effects, while others will be getting charged at a rate that signals them to cut back less. Oh, and the peasant thing rears its head again: pretty obviously people in rich countries will have a much easier time paying the carbon charge than people in poor countries. Fixing this while not subsidizing huge additional emissions or stomping on economic development will be a mess as well. A pure carbon charge, we can see, requires all kinds of information that may be even theoretically impossible to develop, plus information that people will do their best to lie about, plus information that is not information at all but a possibly-intractable series of moral and political choices.

So let me give a deceptively glib version of the argument for cap-and-trade: We know how much CO2 we want in the atmosphere to keep things not too far from the status quo ante (which seems to have been pretty OK for the global economy and human life). We know, within reasonable uncertainties, how much emission there can be to meet that goal. Now with cap-and-trade, you issue permits for that many tons of CO2, auction them off, and you’re done.


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