Pricing Emissions is the Wrong Solution

“The greenhouse gas problem is not a pollution problem, and if you apply pollution thinking you will come up with bad policies.” A criticism of Paul Krugman’s NYT article

by Ian Angus

The cover story in the April 5 New York Times Magazine is “Building a Green Economy,” by noted economist Paul Krugman. Rather than the paean to non-polluting industries you might expect from the title, Krugman has written a useful summary of the current thinking of mainstream liberal economists on how “to make drastic cuts in greenhouse-gas emissions without destroying our economy.”

Krugman rejects right-wing claims that any serious attempt to cut emissions would lead to economic disaster.

“once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change — one that limits carbon emissions by putting a price on them — can achieve large results at modest, though not trivial, cost.”

He offers a very clear explanation of the case for putting a price on emissions — essentially that higher prices for emission-intensive products will cause consumers to choose greener alternatives, forcing businesses to use their creativity to reduce their emissions.

The emissions price could be set either through a direct carbon tax or by a cap-and-trade system. Krugman concludes that the latter is the only real option, not because it is objectively better, but because “there is no reason to believe that a broad-based emissions tax would make it through Congress.”

Like every other advocate of cap-and-trade, Krugman cites the example of the successful US effort to reduce sulfur dioxide emissions.

“The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own business within the new limits. Sure enough, over time sulfur-dioxide emissions from power plants were cut almost in half, at a much lower cost than even optimists expected; electricity prices fell instead of rising. Acid rain did not disappear as a problem, but it was significantly mitigated. The results, it would seem, demonstrated that we can deal with environmental problems when we have to.”

A similar plan for CO2 and other greenhouse gases could achieve the same results, he argues. The only issue is whether to raise the price of carbon rapidly, as British economist Nicholas Stern proposes, or gradually, as proposed by conservative Yale professor William Nordhaus. Given what he sees as a small but real danger of catastrophic climate change if action isn’t taken soon, Krugman leans towards a fast implementation.

Krugman’s article worth reading, if only because it explains the views of most contemporary capitalist economists very clearly, in terms a non-economist can follow easily. If you’ve ever puzzled over the arcane language of cap-and-trade, this is a good place to start.

But that doesn’t mean that he gets it right. His deep-seated ideological commitment to capitalism as the only reasonable economic system blinds him to the dangers — to the planet and all of its inhabitants — of leaving the global warming solutions to the tender mercies of corporate creativity.

Past experience has shown that the preferred corporate response to measures such as carbon taxes and trading is not new technology but creative accounting — lying about their emissions, or shifting the emission-intensive parts of their operations to places that have less strict regulations. The most important result of the European Trading System and Kyoto’s Clean Development Mechanism has been not lower emissions but new forms of corporate fraud.

If the corporations can’t cheat their way out, they will use their political clout to weaken the rules, create exemptions, block enforcement and more. It’s rare to find a liberal politician who won’t bow to lobbying when corporations threaten to lay off workers or move overseas (or cut campaign contributions) if they don’t get their way.

The wrong problem

But even if lobbying fails and fraud is prevented through some massive international monitoring system, emissions pricing will be the wrong way to go because it addresses the wrong problem.

This vital but little-understood point is made very well in an article by Peter Dorman, published this week on Real World Economics, a blog for articles by economists who reject neo-classical orthodoxy.

Although it is politely titled “What’s Missing in Paul Krugman’s Climate Economics Primer,” Dorman’s article is actually a powerful critique that undermines Krugman’s most basic assumptions. All of his criticisms are important, but to my mind the most devastating is the following counterintuitive but entirely convincing argument.

“The greenhouse gas problem is not a pollution problem, and if you apply pollution thinking you will come up with bad policies.

“This is a problem for economists, since they have all been trained to see environmental problems in terms of pollution. You will see in Krugman’s article, for instance, a comparison between the climate crisis and the problem of acid rain. Acid rain was due to, among other causes, sulfur emissions from industrial smokestacks. A cap and trade system was set up to limit the amount of these emissions, and the acid rain problem has been ameliorated. Drawing on this experience, Krugman advocates cap and trade for carbon. If carbon were a pollution problem he would be right, but it’s not.

“Without going into detail, recall that there is a massive, planetwide carbon cycle, with huge quantities of carbon continually flowing between the atmosphere, the oceans and terrestrial ecosystems. The flow of carbon from land and sea back up to the atmosphere is not the problem; it is part of the cycle. The problem is that humans are burrowing into the earth to dig up carbon sources like coal, oil and gas that have been sequestered for hundreds of millions of years. We are adding them to the carbon cycle, so that there will be more carbon everywhere, up in the sky and down on the earth’s surface.

“What this means is that it is an error to try to mitigate climate change by controlling the ’emissions’ of carbon from human actions. If the carbon has been dug up and added to the carbon cycle, it will find its way into the atmosphere no matter what we do. And the carbon we emit that came to us from the atmosphere and will simply return there is not the problem. This is a highly simplified version of the science behind climate change, and a longer account would explore the eddies and unevenness of carbon cycling, but it’s the right starting point.

“Once you see that the pollution paradigm is wrong, two conclusions follow immediately. First, what needs to be priced is not the carbon we emit, but the carbon that enters the cycle by being extracted from the earth. That doesn’t invalidate Krugman’s broad generalizations, but it does suggest important dos and don’ts about carbon policy. Don’t try to regulate the burning or other use of carbon on an industry-by-industry basis. Don’t try to micromanage personal behavior or industrial processes. Do keep carbon fuels in the ground, either by slapping high prices on their extraction, or directly restricting the amount that can be taken out.

“The second point is that the offset business, by which permits to extract fossil fuels can be set aside in return for promises to plant trees or improve industrial processes in other countries, is a ruse. It promises to make a lot of money for those in the right places, but it is antithetical to sound policy. Period.”

In short, our objective should not be reduce emissions, but to eliminate the stuff that causes emissions.

  • Leave the coal in the hole.
  • Leave the oil in the soil.
  • Leave the tar sand in the land.

That will require far more profound changes than are dreamt of in Krugman’s philosophy.

Posted in Carbon Pricing

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Gary Yeritsian
6 years 5 months ago

Ian, thank you for the clarification.

I also found this bit of analysis from Dorman, addressing how markets limit us to the role of atomized consumers – and the need for much more conscious, broad-based democratic coordination – very helpful: “A fundamental limitation to markets emerges in situations characterized by interactions between many individuals and institutions, so that two-by-two adding up is ineffective. An example is the role of cars versus trains in local transportation systems. Markets can do a reasonable job of adjusting the number and quality of cars to the preferences of buyers and the costs of producers, but they cannot coordinate a system-shift from mostly-cars to mostly-trains, since there are so many interactions that are at stake, like urban density, the locations of jobs and residential areas, etc. Markets tell us what people want, two at a time, based on what everyone else is doing, but they don’t coordinate shifts that make sense only if many do them at once.”

Mark
6 years 5 months ago

Thanks! I had read the J.B. Foster essay a while ago but the distinction did not register with me.

I could be off-base but I see a parallel with disposable packaging. The “environmental fee” on plastic pop bottles hasn’t really changed people’s consumption patterns. If they want soda pop, they have no choice but to pay the fee and take a plastic bottle or a can. The bottler doesn’t really care because the end-user pays the fee.

However, if the fee were levied on the initial production of the plastic or if plastic were rationed, everyone up the production chain would have an incentive to change their processes.

Gary Yeritsian
6 years 5 months ago

So you do not believe that a carbon tax is a worthwhile reform to fight for?

If so, it would seem that John Bellamy Foster disagrees: “The immediate, short-term response requires, I am convinced, a carbon tax of the kind proposed by James Hansen: a progressively increasing tax imposed at well head, mine shaft, or point of entry with 100 percent of the revenue going back to the population on a monthly basis.” (http://mrzine.monthlyreview.org/2010/foster240210.html)

Also, are you implying a distinction between a tax imposed at the point of extraction and one imposed at the point of burning/emissions production?

I raise these issues because your article may be seen as arguing that there is no point to struggling for reforms.

Mark
6 years 5 months ago

“First, what needs to be priced is not the carbon we emit, but the carbon that enters the cycle by being extracted from the earth.”

I’m missing a subtle or not-so-subtle distinction here. What is the difference between these two states of carbon? Aren’t the vast majority of human emissions from freshly burned fossil fuels?

Everybody knows that carbon extracted from the ground will be burned eventually. Wouldn’t the final, overall cost of fossil fuel be the same under both scenarios for an end user?

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