Thinking About Cap And Trade, Ctd

by Patrick Appel

A reader writes:

I took the time to go to the Manzi post, and then clicked through a bit further.  There are several problems with his piece.

First, he quotes Knappenberger's analysis of the impact of Waxman-Markey on future temperatures.  The temp changes brought by Waxman-Markey are minuscule because Knappenberger assumes that ONLY the US acts to reduce emissions.  Everyone in the debate thoroughly understands that if this were to happen Waxman-Markey would be a waste of time.  Further, even when Knappenberger says he’s going to look in 2nd post at what happens if the world follow us, guess what – no impact on temps.  Why?  Because he continues to leave out the developing world because basically everyone knows they won’t do anything!  Again, we all understand that if China and India and all the other big emitters stay on sidelines, it is wasted effort.  So, the stated “benefits” of Waxman-Markey, looked at in this way are of course near zero.

Second, not all leading economists working on this issue think it will cost a lot (in terms of economic impacts).  It won’t be free, but it is not going to drag the economy down.  Every analysis I’m aware of shows some reduction in overall economic growth of at most a percent or two – the baseline continues to grow.  So rather than being 100% wealthier by set date, we are only 98 or 99% wealthier.

It looks to me as though this story was done in terrific hurry (it happens), or Manzi intentionally has set up a strawman in effort to support an agenda.  Either way, very unfortunate.

Another reader adds:

Manzi is largely correct on his central point: Waxman-Markey's emissions targets, if adopted only by the United States, will likely lead to a net economic loss for the United States, because the avoided temperature increase will be so small.

However, if W-M becomes a model for the rest of the world, it starts to look pretty good, even by Manzi's own standards.  Chip Knappenberger estimates that, if the whole world were to adopt the targets in W-M, global temperatures would be about 2.4 degrees Celsius lower in 2100 than they otherwise would have been.  (This is a much larger effect -- perhaps 12 times larger -- than if the United States were to go it alone.)  Remember, Manzi says that a 4 degree increase in temperature will lead to a loss of 3 percent of global economic output.  Thus, by his own math, a worldwide W-M program would avoid a loss of 1.8 percent in global economic output.  This number is more than twice the EPA's estimate of the cost of W-M in 2050 (0.8 percent in consumption).

In other words, if the whole world were to adopt the emissions reductions in W-M, it appears that it would pass a benefit-cost test.

Manzi sort of addresses this issue in his original post.  He correctly claims that it's "loading the dice" in favor of W-M to assume that the rest of the world -- particularly Asia, upon whom truly beneficial climate mitigation depends -- will follow the U.S.'s lead.  But what if they do? Manzi argues that, "even if the whole world were to enact similar restraints on emissions, the cost / benefit economics would still not be compelling."  His own math suggests he's wrong.

Moreover, Manzi ignores perhaps the most fundamental economic point of all: emissions of greenhouse gases impose external costs, which, to maximize economic welfare, need to somehow be addressed.  The best way to address these externalities is by putting a price on carbon through a carbon tax or a cap-and-trade system.  (This is Econ 101.  It's the same underlying rationale for imposing a gas tax.)  Certainly, one can argue about what the carbon price ought to be.  $10 per ton?  $20?  $80?  And one can certainly make a compelling argument that W-M (though its emissions targets) places too high a price on carbon.  But no good economist would argue that the optimal price is no price. 

I wonder what Manzi thinks the proper price ought to be.