Email subject line of the day

It just hit my inbox:

“Climate Change added you as a friend on Facebook…”

I blame Tim Haab.

The G8 solves climate change once and for all

Assorted links

Sometimes I wish the internet would slow down. There is just too much interesting stuff out there.

1. I don’t think I would want Bryan Caplan as a neighbor, since he seems to think pissing on my front steps is A-OK. Mike Moffatt snaps back.

2. Quiz time! See if you can spot all of the errors in this horribly glib Megan McArdle post on emissions permit allocation. Bonus points for citing previous CT posts that provide rebuttals in the comments.

3. RealClimate puts concerns about the global warming impacts from flat screen TVs in perspective.

4. “Free” roads — available for only $2.22 in gases taxes per gallon! What a steal!

5. Free Exchange is hosting a discussion on global inflation this week. Many interesting comments on the rise in energy and food prices.

6. Speaking of the food crisis, here are some sensible policy recommendations, starting with the no-brainer (and non-starter) idea of making U.S. food aid cash rather than crops.

7. I discussed the G-8 summit last week while guest-blogging at Free Exchange. Leaders at the summit have pledged to cut greenhouse gas emissions by 50% from current levels by 2050. Cue muffled laughter.  Addendum: Creative ambiguity — whether the 50% cut is from current or 1990 levels was left undefined.

Link from this week’s Economics Focus

This week the Economist’s Economics focus column addressed competitiveness concerns in the context of carbon mitigation. The article cited a paper from RFF and if, like me, you did not notice the sidebar titled “Websites”, you might not know where to find the relevant article. So here’s a link to that work from the RFF report “Assessing U.S. Climate Policy Options” by Morgenstern, Aldy, Herrnstadt, Ho, and Pizer. If you’re interested, check out Dick Morgenstern’s other issue brief on related policy options here.

The link for the broader report, which I imagine Daniel will consider to be the eldest sibling of his future human children, is here.

Note: as the RA that worked on the Pew paper cited by the column, I’d like to point out that it’s humbling to have a year of your life summed up in one sentence.

Today in TV on the internet

Today’s E&ETV broadcast has coverage of last Wednesday’s event here at RFF:

Beyond the emissions reductions goals of a future U.S. climate policy, how should legislation encourage the development of technology and strengthen global partnerships? During today’s E&ETV Event Coverage of a recent Resources for the Future event, a panel of climate experts discusses the broader objectives of a domestic climate policy. Panelists include, Ray Kopp, senior fellow and Climate Policy Program director at Resources for the Future, Nigel Purvis, visiting scholar at Resources for the Future, Linda Cohen, professor of economics and associate dean for research and graduate studies at the School of Social Sciences, University of California-Irvine, and Bob Simon, Democratic staff director of the Senate Energy and Natural Resources Committee.

The panel discussion at the end of the video (after the three panelists give individual presentations) is particularly interesting. The panelists had a broad range of backgrounds and perspectives, and their insights about each others’ areas of expertise are illuminating.

The session that E&ETV covers here is actually the last of three sessions from an event on designing federal climate policy. The RFF webpage has coverage of all three sessions, including both video and slides from the presenters. I recommend Jake Jacoby’s presentation from the first session, and Howard Gruenspecht’s comments in the second, particularly the last 5 minutes of his presentation and his input from the panel discussion.

Finally, if you’re curious about what the top of my head looks like from behind, you can see it on the bottom-right of the E&ETV video (just left of their logo). I was up front keeping time for the speakers.

Master disaster

This discussion about near-Earth objects reminded me of a point I heard Robert Pindyck make recently. It will probably sound obvious to all you Bayesians out there, but I don’t think I had heard it expressed so succinctly before.

The point was that in a world with multiple catastrophic risks, our concern about any one individual risk should not be measured by the independent probability of that catastrophe. Rather, we’ve got to discount each of the individual risks by the probability that one of the other catastrophes will wipe us out first.

Thus if we are very likely to be killed off by avian flu in the next century we should be much less worried about climate change.

I noted previously that critics of Easterbrook’s article like this guy want to dismiss asteroid impacts out of hand and focus on climate change. The irony in this discussion is that if we had a reliable method of diverting near-Earth objects — something that seems likely to be quite cheap — we would then be more worried about climate change, not less.

Disaster

Several bloggers that I like and respect are mocking this Gregg Easterbrook piece about asteroids in the June Atlantic Monthly. But I am going to go against the grain and defend the article.

First off, however, I’ll acknowledge that the headline tag — “The odds that a potentially devastating space rock will hit Earth this century may be as high as one in 10.” — is overblown.* This has been the subject of the most vigorous objection (see Brad DeLong) so in this sense the critics are right. But I’d argue they’re missing the forest for the trees: the specifics of Easterbrook’s argument may be oversold, but the question he poses in the second half of the headline tag — “So why isn’t NASA trying harder to prevent catastrophe?” — is exactly the right one to ask.

The critics miss two key things: First, the ‘expected value’ calculation for an asteroid impact could show a very large cost indeed, even if the vastly most likely outcome is no cost at all (i.e., no asteroid). And second, we must consider both benefits AND costs… if preventing asteroid impacts is very cheap, it may well be worth doing.

Regarding the first point, let’s do a simple back-of-the-envelope calculation. We’ll assume the value of a statistical life (VSL) is a (very conservative) $1 million. An asteroid impact that killed 100,000 people would thus cost $100 billion. Easterbrook’s tagline seems to imply that in any year there is about a 1-in-a-1000 chance of such an event, which would imply we should be willing to spend $100 million per year for “asteroid defense”. This would be true even though there was a 90% chance we’d reach 100 years in the future and that money would have been a total waste every single year. Meanwhile, an expert in Easterbrook’s article thinks the whole asteroid diversion thing could be done for $400 million — total.

Now you may disagree with the numbers in my example (e.g., you think such an event is far less likely) but the specific example is not the real point. The important intuition is that one large catastrophe can dominate your expected value calculation.

Of course the actual calculation you would want to do is a full expected value calculation — the sum of all possible futures (their probabilities times their costs). This means counting up all the very likely worlds with no asteroids, the very unlikely worlds with asteroids that wouldn’t be so bad, and the one-in-50-million type asteroids that could cause mass extinctions. But just dismissing the problem out of hand because it hasn’t wiped us out yet strikes me as irresponsible.

The second mistake some critics have made is comparing asteroid impacts to other types of disasters without considering whether we have leverage over these disasters and what this leverage costs. This guy, who mercilessly shreds the article, is quite guilty of this:

Easterbrook is panicked by the thought that maybe-once-a-century event like Tunguska could occur over the negligible percentage of Earth’s surface which is covered by dense cities. He writes:

The blast had hundreds of times the force of the Hiroshima bomb and devastated an area of several hundred square miles. Had the explosion occurred above London or Paris, the city would no longer exist.

A comparable destructive energy can be expected from a good-sized hurricane or typhoon, which have a tendency to strike coastal areas, a popular location for cities. … Or, if you don’t like that analogy, you can also get a much larger, and similarly rapid, yield from an 8.0+ earthquake, of which we get about one a year. Localized disasters of this sort happen hundreds or thousands or times more frequently than similarly-powerful asteroid/comet impacts, and yet somehow we don’t characterize them as the deadliest threats ever.

… There have been extinctions of large numbers of species in Earth’s history - we have an idea of when they happen, and how big they are - and some of them may have been precipitated by some kind of catastrophic extraterrestrial impact. How does this threat compare with the expected results of human-caused climate change?

The widely-accepted science on global warming, much like the highly speculative situations Easterbrook is fantasizing about, would have similar effects on the planet - mass extinction, starvation, disease, and massive physical destruction. According to a 2004 study in Nature, mid-range estimates for global warming could cause the extinction of 15-37% of all plant and animal species. The last extinction event which even approaches this magnitude was 33.5 million years ago, which may or may not have had something to do with some kind of extra-terrestrial impact. Sixty-five million years ago we have a mass extinction likely caused by the impact of one (or many fragments of an) asteroid, wiping out perhaps 30% of all species. Before that, we have to go back 200 million years. So, a survey of the last 200 million years tells us that at most we have extinctions from all causes on the order expected from global warming every 60-70 million years.

I have a couple of responses to this:

1. Yes, earthquakes and hurricanes are more likely than asteroid impacts but we don’t have a good way of stopping or diverting them. (Not that we shouldn’t be researching this.) This means we must either pay the (very large) opportunity costs of not inhabiting hurricane- or earthquake-prone areas, or pay the costs of building more resilient infrastructure and rebuilding destroyed infrastructure. (Anyone remember what Hurricane Andrew cost? Maybe we shouldn’t have rebuilt Florida but the fact that we did gives you at least a hint about the opportunity cost.) Paying for asteroid defense, by comparison, looks cheap.

2. Yes, climate change is far, far more likely to be a problem than asteroids but you have to compare the proper counterfactuals. For asteroids we are talking a world with a very tiny risk of asteroid disaster versus a basically identical world ($400 million is nothing) with zero risk of asteroid disaster. For climate change, unfortunately, we are talking about a world perhaps warmer by 6-8 degrees Centigrade versus a world that is perhaps only warmer by 3-6 degrees but where we have literally spent trillions of dollars to do this. There is no free lunch. This doesn’t mean I don’t think some level of climate protection could well be the best lunch we ever buy, but let’s be honest about what we’re spending and what we’re getting.

My ultimate point is that the article has value because it highlights our screwy priorities when it comes to spending money on space. Why does almost all our $17 billion NASA budget go to getting humans in orbit and bases on the moon and Mars? We need a more Earth-centric NASA. It could be doing far more good developing enhanced Earth monitoring systems — satellite data is going to be invaluable to understanding climate change in the next century — and yes, protecting us from space debris. Anyway, I think Easterbrook’s article is thought-provoking and you should read it.

*Although I’d suspect Easterbrook would fall back on the definition of “potentially”.

Assorted links

1. The Lieberman-Warner bill dies in the Senate. The vote represents a “giant step forward” according to one sponsor.

2. Ryan Avent is a real live journalist now.  Here’s a new piece about the lack of political leadership on public transit issues.

3. The carbon footprint of food — buying local may not be the answer after all.

4. Pay by the pound — the future of air travel?

Equity, efficiency, and (long run) equivalence

You knew, dear readers, that the econoblogosphere has been arguing vociferously the last few days about carbon taxes versus cap and trade and to what degree they are equivalent, didn’t you? It seems Robert Samuelson started the entire thing with a grumpy tirade about cap and trade on the editorial pages of the Washington Post. Ryan Avent criticized it, and then things blew up. Here is Tyler Cowen, Mark Thoma, and Brad DeLong with more, another response from Ryan, and there are many further links at these posts if you want more. The short story is that only Tyler comes to Samuelson’s defense; everyone else agrees that while there are differences they are not the ones Samuelson “identifies” since he actually spends his time whinging about regulation of any kind at all. (Brad DeLong makes this point most clearly.)

I have been on the sidelines the entire time, partially because I have been very busy with my actual life, partially because I already covered this, and partially because I am consciously trying to avoid this malady. But I could not let this statement from Arnold Kling pass without comment:

In theory, you can make cap-and-trade equivalent to a tax. What I worry about is that under cap-and-trade Congress is very unlikely to have a pure auction of permits. Instead, permits will be given to favored industries. The equivalent under a carbon tax would be to set different tax rates for different industries, with favored industries getting anywhere from a partial exemption to a full exemption to a negative carbon tax, or a carbon subsidy.

Wrong.

Giving allowances away for free in a cap-and-trade system and giving (full or partial) exemptions in a carbon tax system are not the same thing. But why not? They seem so similar, don’t they? Some particular industry or firm gets favorable treatment — either free permits or lower tax rates — and this makes them more profitable, right? Why aren’t they equivalent? Briefly, because one system (cap-and-trade with free allowances) equalizes the marginal cost of emissions, while the other (carbon taxes with exemptions) does not.

Once you establish a cap-and-trade system, every regulated entity within that system will have an identical incentive to reduce emissions. The incentive will be the market price for allowances. And this incentive will be the same for all firms regardless of how allowances are initially distributed. Even if firms get allowances for free, they will still face an opportunity cost for emissions.

If you establish a carbon tax system with different tax rates for different sectors, however, firms will face varying incentives to reduce emissions. This will end up making some firms or sectors work much harder to reduce emissions (those with the higher tax rates) and others work less hard. This will have (at least) two unfortunate effects: one is that society will get less bang for its buck now — fewer emissions reductions for the money it spends than it could have done if marginal tax rates were equal. The second problem is that over time the existence of differing marginal tax rates will tend to push economic activities into sectors with low tax rates and away from those with high tax rates. Both these effects mean that the system is less efficient than it would have been if marginal carbon tax rates were equal across the entire economy.

Economics students will recognize this as the classic distinction between equity and efficiency. How allowances get handed out matters a lot for the distributional (equity) effects of the policy, but doesn’t affect the efficiency. Exemptions and carve-outs in a tax system, however, make the program less efficient. (The actual carbon tax policy equivalent to free allowances would be lump sum rebates of tax revenues, while leaving marginal tax rates equivalent.)

In my mind this difference is important, and constitutes a public choice argument for cap and trade. In order to get any climate policy passed you are realistically going to have to make a lot of political side deals. With cap and trade the natural side deal is to give away allowances. This may not be fair, and it may be ugly, but it at least leaves us with a system that is efficient, and this is very important when thinking about policies that will likely be in places for several decades. With taxes, however, the natural side deal is exemptions. And once full or partial exemptions get established in a carbon tax code I doubt they will go away. That might not look too problematic today but the inefficiency will just get larger and larger over time and by 2020 or 2040 we will be very unhappy we have a system that has inefficiently squeezed economic activity into certain sectors. Better to give up some equity now in exchange for a system that is built for the long haul.

How sausage gets made

This chart is amazing.

Source.

Question of the day

If we really can create new, high paying jobs with government policy, and if voters really think this is a good thing to do, then why do the advocates of such a policy need to hide behind the auspices of tackling global warming?

As Kevin Doyle recently wrote on Grist, “the drumbeat of interest in green-collar jobs just keeps getting louder.” Too loud, in my opinion. I say this not because I hate green collar jobs (I work in one, I think), but because I’m concerned first and foremost with tackling climate change, and fear that this ill-considered, possibly misleading rhetoric about green jobs could end up doing more harm than good. I’ve written about the encroachment of the “make work bias” on environmental policy before, so I’m not going to repeat everything here (For more info, John Whitehead has been the most consistent and cogent green jobs skeptic. See here, here, and here for starters). Instead I’ll just list the causes of my apprehension about the viability of a marriage between jobs and climate change. Thoughts on all the arguments/ questions in this post would be appreciated.

1. Creating jobs isn’t categorically desirable. Daniel summarized Bryan Caplan’s point on this issue in my previous post.

You want to create jobs? Just ban all modern farming equipment and force everyone to grow their own food. Rather than 5 people being able to grow the food for every 100, it will take 90…. This would create millions of jobs, but I don’t see many voters getting behind this one.

2. Green jobs <> new jobs. Far too often green jobs advocates take evidence that climate policy will increase employment in a given sector, and report it as if this translates into a net increase in jobs economy wide. In reality, ex ante, it’s unclear what the net effect would be. Today’s Wonk Room report on the new PERI/ Center for American Progress study is a good example. The researchers actually only looked at the workers/ industries that would benefit from climate legislation. Ideally, assuming you thought employment was a relevant metric, this would be compared to the cost to workers who would be harmed by the same policies.

The fact is that some workers will lose their jobs once we put a price on carbon. If they didn’t, the policy wouldn’t be working. Now we can almost certainly offset these costs with targetted training and transfer programs, but the short run effects on jobs is ambiguous, which is why it’s dangerous for advocates of tackling climate change to tie these two issues so closely together. Which brings me to my final point.

3. We don’t need to talk about “green jobs” in order to pass comprehensive climate legislation. Both parties’ candidates for the fall support cutting carbon emissions substantially in the coming decades (although, in typical “maverick” style, McCain appears to oppose many of the steps necessary to achieve this goal). Economists of all stripes are in almost universal agreement that rising carbon emissions are the result of a market failure, and that this failure can be corrected by pricing the right to emit. The EU, which is far more concerned with labor outcomes than the US, is about to enter the second phase of its carbon trading program and ten northeastern states are slated to begin capping and trading electricity sector emissions next January (RGGI). While Lieberman-Warner will probably die (which, in my opinion is a good thing), there are a host of other, much less flawed, bills being worked up in both Houses as I write this. It took a long time, but we’ve come this far knowing that truth and scientific evidence where on our side. Lets not compromise all the progress we’ve made by writing green checks our policies can’t cash.

Climate policy as diplomacy

Ryan Avent has been doing a lot of good blogging about cap and trade recently. Today he assesses the political environment — the combination of near certain defeat for the Lieberman-Warner bill this summer with likely election returns this fall — and argues:

Congress is almost certain to be more Democratic next year, and the White House will be more friendly to climate bills whoever the president is (but substantially more so if Obama is the victor). … Democratic leaders are watching now to see how their opponents plan to fight, so that next year, they’re prepared to use their majority to effectively counter opposition en route to a truly good climate bill.

I thought this was a bit optimistic about how smoothly Democrats would operate next year, a point I made (rather sarcastically) in the comments.

In response, Ryan offers up a pitch-perfect response:

Ah, but you failed to take into account the fact that Obama is going to CHANGE WASHINGTON WITH CHANGE WE CAN BELIEVE IN YES WE CAN.

This is still making me chuckle after repeated reads.

I happen to agree that among the presidential candidates Obama would get a climate bill with the least amount of political wrangling and infighting. But relative to what? There is going to be pork all over the floor before this thing gets done and that is just the facts. The domestic political machine has to run its course and President Obama is not going to be able to strong-arm Congressman Dingell into rolling over on Detroit or Senator Reid into greenlighting Yucca Mountain.

So why do I think that Obama could get a bill with less partisan hackery even while I’m pessimistic he’ll do much to change Washington? I think it’s because I view Obama as being most concerned among the candidates about America’s standing in the world and with reaching out to our partners. Having America perform an about-face on climate policy could be a key part of a broader diplomatic strategy of engagement and cooperation. This could then put indirect pressure on Congress to deliver a well-designed bill.

In the end I guess I am agreeing that Obama does have the best chance of getting legislators to work with him on climate policy but I am positing a different channel through which this works.

I think the challenge he will face if he chooses this strategy is to simultaneously be realistic about the domestic policy constraints he faces and not promise allies things that he cannot deliver, while at the same time having a clear set of goals that do indeed signal American leadership on global climate policy along with concrete strategies for how he is going to get people on board with his goals.

Roundtable discussion of upcoming Lieberman-Warner debate

Those interested in the politics of the climate policy bill are advised to point their browsers to E&ETV at 11 am EDT today. Via ClimateWire:

As the Senate prepares to take up the Senate emissions bill this week, many key provisions are expected to spark heated debate. During today’s exclusive E&ETV/ELI Special Event, NRDC’s David Doniger, Senate EPW Committee’s Andrew Wheeler, Pew’s Manik Roy, and Bracewell & Giuliani’s Scott Segal give their perspectives on the upcoming floor debate. The panelists address prospects for the bill, likely amendments, key floor fights and potential ramifications of the Senate’s debate over the bill.

Link to the coverage is here.

Update (12:08 pm EDT): “Today’s E&ETV/ELI special event will air early this afternoon. We apologize for any inconvenience.”

Today’s worst person in the world: Stephen F. Hayward

Somehow I missed Stephen Hayward’s Wall Street Journal Editorial on “The real cost of tackling climate change” a month ago (oh yeah, I missed it because it was on the Wall Street Journal editorial page). I was made aware of it last week though, when Environmental Capital dropped this little nugget of disinformation into a post on rising US emissions,

As Steven Hayward of the American Enterprise Institute noted last month in the WSJ, those residential emissions represent a high standard of living: flat-screen TVs, tumble dryers, and ubiquitious air conditioning. Trimming America’s emissions enough to meet the targets politicians preach, Mr. Hayward wrote, will mean putting U.S. household energy-consumption on par with Haiti and Somalia.

Needless to say, this quote sounded pretty dubious. I was hoping it was just hyperbole, but after reading the op-ed and thinking about it for 1.5 seconds, it became clear that this statement is both mistranscribed and innacurate. Unfortunately, the op-ed author, Mr. Hayward, appears to have intended both errors. In his apocalyptic rant about the implications US carbon emissions by 80% by 2050, Hayward uses carbon consumption and energy consumption interchangeably. This has the (intended?) effect of making the reader believe that cutting carbon emissions by 80% means cutting energy consumption by 80%. It doesn’t. What the op-ed actually said was that such a cut would put emissions on par with Haiti and Somalia, not energy consumption, but clearly Keith Johnson fell for the bait, and posted the latter.

Slight of words aside, Hayward’s claims are poorly substantiated and thus predictably erroneous. He justifies his ridiculous assumption that kilowatt hours are perfectly correlated with carbon emissions with one solitary sentence, “It is unlikely that renewables – wind, solar, and biomass – can ever make up more than about 20% of our electricity supply.” Well, if you say so.  Nevermind the fact that the EIA’s most recent annual energy outlook has renewables growing to over 16% of generation in that time frame under most conservative of assumptions, assuming no national carbon policy, no national RPS, and no extention of the PTC beyond this year. And just disregard the DOE’s recent study which shows we can get 20% of our electricity from wind alone by 2030. And forget about the fact that California is on the verge of enacting a 33% RPS by 2020…….

The Boxer amendment

The amended version of the Lieberman-Warner bill is out. The headline change is the revised cost containment provisions, referred to collectively as “emergency off-ramps”.

The main change is the addition of an annual “Cost-Containment Auction”. Each year from 2012 to 2027 there would be a pool of allowances which would be available for sale at a predetermined threshold price. The pool of allowances is pulled from future allocations in 2030 through 2050. The total size of the pool is 6 billion metric tons — about one years’ worth of allowances early in the program — with only a fraction of this total pool available in any given year. Allowances sold through the auction would have to be made up in the 2030 to 2050 period. And the price of these allowances — oh, the ever-important price — would be between $22 and $30 in 2012. The exact figure would be set by the President, and it would then rise by 5% over inflation each year beyond 2012.

This mechanism is sometimes called a “reserve”. It is essentially a quantity-limited safety valve. There are two main differences compared to a traditional safety valve. First, there are a limited number of extra allowances, so potentially the number of allowances demanded could exceed the available pool. Once the entire reserve is sold then allowance prices could still go higher than the threshold price. Second, the reserve allowances must be “paid back” in the future in the form of lower emissions caps, and so the total emissions across the entire policy period remain the same. Note that there is a spectrum with these policies that goes from certainty about price (safety valve) to certainty about emissions (pure cap), with the reserve trying to fit in between.

My first impression of this change is that it is a positive one. I have much more that I could — and may — say about this in future, but for now let me just say that I view the core question of the climate change policy debate as, “What is the price of emissions?” The fundamental political negotiation is thus one that is about price. In this regard I view any change that makes this negotiating price more explicit and transparent as a step in the right direction.

For those who want more information about cost containment in general — and reserves specifically — I cannot recommend this webpage highly enough. It’s the coverage of the event on cost containment that was held at RFF a couple months ago. In particular watch the video of the presentations by Billy Pizer, who gives an overview of cost containment, and Brian Murray, who makes the case for a quantity-limited safety valve.

Here’s a summary of some of the Boxer amendment changes from Kate Sheppard at Grist, and a couple of her previous posts.

Some motherly advice on deficit reduction

Over on EconomistMom, Diane Lim Rogers notes that economists of all political and ideological stripes appear to support pricing carbon, which, by itself, amounts to increasing taxes. She then muses that part of the appeal comes from the fact that a carbon tax is an efficient tax, and the revenue could go towards alleviating other less efficient taxes. In particular, Rogers’ main interest is in deficit reduction. Now as I noted in the comments, it seems pretty unlikely (at least in my reading of the current political climate) that deficit reduction will garner much, if any, of America’s newly created carbon permit pie. My guess is that it’ll be eaten up by some combination of giveaways to industry (a la McCain), giveaways to the people (a la Boyce and Riddle), and spending on R&D (a la Joseph Romm). These three spending options all have obvious political constituencies, but it wasn’t obvious to me who the deficit reduction constituency is (except the unborn, who, for obvious reasons, don’t seem to carry much political clout). Nevertheless, deficit reduction is obviously a reasonable option, so I decided to check out the Brookings Paper Rogers links to.

Here’s is the comment I left for Diane after reading her paper, in which I show my ignorance of public finance,

I’m curious about the distributional implications of using this revenue to pay down our national debt. In your paper, you say, “Even if one interprets the benefits of deficit reduction as distributed broadly across the current population, i.e., as a fixed dollar amount of benefit to each American, this benefit will be progressive relative to income (a higher percentage of a lower income).”

But why would one interpret the benefits this way? Wouldn’t the benefit be proportional to each person’s share of future taxation? And given that wealthier Americans have higher average tax rates and pay taxes on a much larger ammount of income, it seems to me that reducing future tax burdens would be really regressive.

Diane replied,

Rich, there are debates on this—what is the burden of budget deficits across the income distribution? (It’s easy to figure out the intergenerational burden, not so easy to speculate on the inTRAgenerational burden among rich vs. poor.) Obviously it depends on what we think the form of the future burden will take–higher taxes or reduced government services, or some combination of both. The more it’s higher taxes, the more it depends on how we think taxes would be raised. If taxes would be raised proportionate to the current (progressive) federal tax distribution, then you’re right, that would be a more progressive change, so reducing the deficit and avoiding such future tax increases would be a regressive change. In my paper I was making the assumption that the future tax increases and/or benefit decreases associated with deficits would be distributed fairly evenly across the population, which would mean that relative to income, avoiding deficits would be a progressive change

So there you have it. I’m not surprised to hear that the distributional implications of deficit reduction are highly dependent on how you assume future tax increases were going to be financed. Given this, the real question I have is not “Under what assumptions is deficit reduction progressive?”, but instead, “What are the most realistic assumptions we can make about where future deficit driven tax increases/ decreases are likely to come from?” I know this is basically unanswerable, but any evidence (even anecdotal) or hypotheses would be welcome. I’m currently working on a paper analyzing the incidence of US climate policy, and it seems to me that this is the million dollar question when it comes to deficit reduction.

Is there such a thing as a free lunch?

Yes, at least if you can be in DC at Resources for the Future on June 4:

U.S. Greenhouse Gas Emissions Reductions: What are the Opportunities, at What Price and Through What Policies?

A central question for U.S. climate policy is the opportunity and cost of greenhouse gas emissions reductions and the best approaches to achieve them. In December, McKinsey & Company and the Conference Board released a major report — Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? This analysis finds that 30 to 45 percent of forecast 2030 greenhouse gas emissions can be reduced at costs of less than $50 per ton of carbon dioxide equivalent — and potentially far less if sizeable energy efficiency gains are captured. Our panel will describe and discuss these findings and their implications for the current policy debate.

Wednesday, June 4, 2008
12:45 pm - 2:00 pm
A light buffet lunch will be available at 12:30 p.m.

Please RSVP by sending your contact details in an email to rffseminars@rff.org.

The McKinsey study that will be discussed has gotten a lot of publicity for suggesting that there are many large free lunches to be had in the energy and emissions arena — we can reduce emissions for negative total costs — particularly with energy efficiency projects. I will be there and am very curious to hear what one of the report authors says about the study.

Here’s a previous post from Rich on the McKinsey study.

Metaclesias* expounds on carbon permit auctions

In lieu of McCain’s recent climate change speech, Matthew Yglesias has written a couple of posts on the allocation of carbon permits under a cap and trade program. In the first post, he links to Ryan Avent and Kevin Drum, and states a fairly strong preference for auctioning permits (Obama’s plan) rather than giving them away (McCain’s plan). This is a position that CT has supported for a long time. However, in his second post, on what the government should do with the auction money it collects, Yglesias makes some curious statements. On the idea of using some of the money to promote clean energy, he says,

I’m not so high on the popular notion of plowing money into clean energy subsidies. For one thing, I think there’s very good reason to be dubious about the government’s ability to pick technologies effectively. For another thing, the mere fact of the auctioned carbon permits would constitute a large de facto subsidy to alternative energy sources so it’s not really clear that further subsidy is needed. Last, in a lot of ways the whole idea of subsidizing energy consumption goes against one very promising path, namely using less energy overall — lots of elements of current U.S. policy subsidize or encourage lavish energy consumption and that’s part of how we wound up in our current pickle.

Auctioning carbon permits would definitely not consitute a de facto subsidy to alternative energy. It would represent the removal of a de facto subsidy to dirty energy, as emitters currently thrust the cost of their carbon onto society at large. As for his skepticism about the government’s ability to pick technologies effectively, this is theoretically correct, yet practically unhelpful. Just how inefficient is the government solution? Given the market failures associated with energy and climate change, is a private solution even possible? These are very complex questions, and the issue as a whole warrants more consideration than Yglesias gives it.

Matt’s quick dismissal of government energy programs is even more perplexing when you consider the spending he advocates in the final paragraph: invest in “productive infrastructure”. Seems to me that making investments in infrastructure aimed at adapting to a high cost energy environment would require basically the same foresight and faculties as investing in alternative energy. Now either Yglesias believes for some reason that we should only demand efficiency or “effectiveness” in energy investment but not infrastructure investment, or he simply knows something I don’t know about the government’s comparative advantage in the latter. Either way, writing off cheap clean energy in favor of adaptation to more expensive energy seems pretty rash.

* Evan and I were at a sangria roof party on Saturday night and I told him that I thought I saw Matt Yglesias at my favorite bar the night before (yes, I am that big of a dork. don’t worry, everyone else immediately made fun of me for recognizing, let alone gossiping about, other bloggers). As soon as I said this, some guy who had clearly been on the roof for a long time and had a lot more than just sangria interjected and said, “Who are you talking about? Metaclesias?” We tried to correct him but he just kept on saying “Metaclesias” in this grand voice over and over again, telling us that Metaclesias must be some obscure Greek philosopher. We were pretty relieved when he finally walked away, mutttering Metaclesias, but in hindsight the whole scene was pretty hilarious.

Assorted links

1.  The Lieberman-Warner bill has a rough road ahead.

2. CBO Director Peter Orszag testifies on infrastructure spending.  Ryan Avent summarizes.

3. Why isn’t transit a bigger part of the national discussion on energy/climate change/congestion?

4. The 230 MPG car.

Reforming carbon offsets, a continuing series

The World Bank Carbon Finance Unit has released its annual report on the state of the carbon market. The report summarizes the broader carbon market, with primary focus on two areas: the allowance market in Europe (the EU Emission Trading Scheme, or ETS) and the Clean Development Mechanism (CDM), the primary global offset market. As part of their discussion the authors note some of the criticisms and problems the CDM has faced, and recommend improvements. I’m going to focus on two of their critiques and one of their suggestions. I’m then going to synthesize these to argue that for some types of projects — particularly energy sector projects — we should move from an offset model to a straight subsidy payment model.

I’ve written previously about the problems with the CDM, including the idea that it is often tricky to measure when offsets are ‘additional’ since we can’t observe the counterfactual — a world without any carbon offsets.

The concept of additionality also becomes problematic when the baseline is unacceptable, or even perhaps immoral. The report authors write:

As clean energy projects begin to dominate the CDM, their developmental benefits are a lot more direct and visible than in the case of so-called “industrial gas” projects. Energy efficiency and renewable energy projects are now emerging as the most common type of CDM projects and this development should be encouraged. Many projects in Africa, likewise, have finally been transacted and this momentum too should be encouraged…

This has been a chief criticism of the CDM up until now. Most projects have been done in the more-developed poor countries — Brazil, China, India — while almost none were conducted in Africa in the first few years. And how could they be? If the ‘baseline’ is the absence of any grid-based electricity, how many emissions do you save installing a wind farm? An Africa with a renewable energy project is better than one without electricity at all, but it is hard to get support for it through the offsets market since there isn’t anything to offset. This is the first critique.