Common Tragedies

Thoughts on Environmental Economics

Here’s Larry!

Posted by Daniel Hall on November 1, 2007

It’s Larry Summers week on CT! In an interview with The International Economy he was asked about the intersection of global warming, trade, and industrial policy. I found it interesting that he focused very much on the collective action aspect of the problem relative to his comments earlier this week. Perhaps this is not too surprising considering the respective outlets (interview on international political economy versus forum on domestic climate policy). There is overlap though, particularly on international competitiveness and intertemporal risks and tradeoffs. An excerpt of his response is below the fold:

…With respect to global warming, it is very hard to know which way it will move. In no other public policy issue that I’ve been engaged in has the gap between the rhetoric and the concrete action been as large. While there is tremendously visionary rhetoric about the complete transformation of economies and the like, the reality is that all of the discussions of global warming have to date resulted in only very small differences in patterns of energy use relative to business as usual.

The future for emissions reduction is much less clear. If the European Union was not able to impose penalties on countries that failed to meet budget deficit targets, with all the history of comity and cooperation that existed in Europe and all the direct control that governments have over their finances, it is going to be profoundly difficult to reach enforceable agreements. … While I have no doubt that the science is entirely clear about the very large risks of unchecked accumulation of greenhouse gases, and while there is increasing rhetorical and political commitment in many countries, I think that the task of reaching viable international agreements is a formidable one that many underestimate.

There is a strong tendency in political life to respond to political difficulty by simultaneously lengthening the horizon and escalating the strength of the commitment. When I hear politicians talk about reducing greenhouse gases by 50 percent relative to benchmark by 2030 or 2050, I sense this tendency making itself felt. It would be much more impressive if meaningful actions were undertaken that would change patterns of energy use through either taxes or regulatory instruments with measurable impacts three or five or seven years from now.

There hasn’t been enough reflection yet on the interactions between the global warming issue and international trade. The point is frequently made in the United States that it is not fair for the United States to take on binding commitments with respect to greenhouse gases if other major countries do not take those commitments. There’s certainly some force to that argument. But there is a stronger related argument that if such commitments are undertaken by the major industrial countries and not by other countries, there’s the prospect that they will not have any effect on the overall level of greenhouse gas emissions because the production of energy-intensive goods will simply migrate to the countries that are not constrained. … The world has so much difficulty now enforcing codes on subsidies or measures of protection. How is it going to undertake the formidable task of looking at the overall structure of energy economies and judging when there are unfair subsidies?

Much more of interest in the full interview, including the subprime housing crisis, central banking, and other moral hazards.

H/T: N. Gregory Mankiw.

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