A perfect, green world

By Megan McArdle

More broadly, Econospeak's post seems to suffer from a subtle version of a fallacy that Will Wilkinson pithily summarized:


In the real world, the mind works like this, and this can lead to all kinds of problems. And in an extremely unrealistic abstract model of government action, its agents can easily and objectively identify problems and act to effectively solve them. So, let’s have the ideal government solve the problems of nonideal cognition.


It sounds stupid when you put it that way, doesn’t it? The trick is figuring out how to work with real minds, using real governments!

. . . so how are you going to do it? Most real government institutions are at least as kludgey and means-ends inconsistent as real minds are. “Silly, your sock won’t open that can of spinach! So try your pillow instead, because a model exists in which pillows are can-openers.”



In an ideal world, Econospeak says, cap-and-trade and carbon taxes may be functionally identical; the government will simply keep raising the price on the tax until it hits the carbon target. But in this vale of tears, where we have but the crumbly clay of humanity to work with, this doesn't function so well:

The real wonder here is that Mankiw could make such an elementary economics error as to suggest that taxes and cap-and-auction are “effectively” the same. In an uncertain world this is false. From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice. By controlling the number of permits we control our most important impact on the earth’s carbon budget, but allow prices to wander. By setting a tax we control the price but allow the amount of pollution to wander. That’s a big difference: you might say, given the gravity of what is at stake, that it’s the difference between ecological responsibility and irresponsibility.



See, the government can't be trusted to target the correct emissions level with a tax. That's why we should have the government target the correct emissions level with permits . . .

A more realistic model assumes that any American government will, to a virtual certainty, be more generous with either its tax or its credits than [Me + anyone to the left of Bill Clinton] would like. Under that scenario, a tax develops obvious benefits: it provides some mitigation even if permitting is excessively generous. Witness the recent debacle in Europe's greenhouse market where everyone issued too many permits and the price collapsed.

It's also politically and administratively more difficult to exempt special interest groups from carbon taxes than from cap-and-trade. Carbon taxes are also, obviously, much easier to levy on transportation than a cap and trade system, if for no other reason than that it obviates lengthy wrangling about fuel efficiency and which producer should buy the permits for the end-consumer.

His next point reinforces this sort of charming "Welcome to my alternate universe. Do you like what I've done with the fairy rings?" kind of naiveté about political debate that would be utterly delightful in an author of children's books, but is slightly worrying in someone talking about economic policy.


Both taxes and permits create the same problem. If one country takes stringent action of either sort and another doesn’t, producers in the less-green country get a competitive advantage. If you have a permit system, they don’t have to pay for the permits; if you have a tax system, they don’t have to pay the tax. What to do? There have been mumblings from Europe about a green tariff to offset these differences, which makes sense to me. This is a discussion we need to have no matter what system we put into place.

Mankiw doesn’t seem to have paid attention to the global debate about climate equity. In the long run, there is no defensible argument against allotting each of the planet’s residents the same carbon “space”. In the short run, the rich countries start out with more because they can’t cut back to the sustainable level immediately without causing themselves and everyone else grave harm. But they also have an obligation to take action first and more aggressively since it is the accumulation of carbon in the atmosphere that causes the problem, and us industrialized types have been adding to this accumulation for a hundred years or more. Kyoto was a bumbling attempt to implement this ethical framework; hopefully we will do it better in the future.

The reason we need global action is that it is a global problem. Countries that fail to act free ride off of those that do. This points to the need for a stronger climate treaty, but no such treaty would try to tell countries what methods they should use, only what results they should be held to. So Mankiw’s discussion of taxes vs permits in the global context is confused and, in the end, irrelevant.



See how neatly the last paragraph paraphrases Mr Mankiw, all while giving off the impression that the author thinks they are disagreeing? More worryingly, see how Mr Dorman confuses a moral discussion with a policy one?

It isn't that morality has no place in politics; obviously, one does not make policy without some moral vision one is trying to fulfill (the Chait exception noted, as always). But bold moral propositions such as "everyone should get the same carbon allotment", even if they are true, are not really very helpful here. People in developing countries don't take up the same carbon space as people in western countries, and it's not clear that even they would be better of if we equalized the distribution. Their economies are less carbon efficient, which means they get less bang for each barrel of scarce resource they consume; they benefit quite a bit from western inventiveness; there are massive transaction costs to trading; and large numbers of them live in kleptocratic governments that would simply destroy the value represented by permit ownership, just as they have destroyed the value of foreign aid. Moreover, major governments like China are not trustworthy partners in such a cap; the (not unrealistic) political perception is that they would abide by it until they hit the cap, and then they would break the cap. That's a huge problem, since China would probably it the cap pretty quickly.

But also, even if this is the thoroughly and completely correct way to look at it, the American public isn't going to look at it this way; they're going to get angry at any plan which they see transferring economic growth from them to foriegners. Saying they oughtn't to look at it this way is likely to work just about as well as saying they oughtn't to smoke. And calling these considerations irrelevant is sheer silliness.

This article available online at:

http://www.theatlantic.com/business/archive/2007/09/a-perfect-green-world/1978/