My Letter to the Economist on Climate Change
posted by Nate Oman
I recently sent the following letter to the editor of the Economist magazine:
Dear Sir,
In your most recent Lexington column you reiterated the Economist’s long standing preference for a carbon tax rather than a cap-and-trade system for dealing with global warming. Your preference has always puzzled me. The Economist is quite right to insist that providing market incentives is a better way of controlling carbon emissions than command-and-control style regulations. However, I have yet to see you make the case for carbon taxes.
A cap-and-trade system assumes that the government can set the optimal level of emissions and then lets the market determine the price of carbon. A carbon tax assumes that the government can determine the costs that emissions impose on society, price those through a tax and then lets the market determine the overall level of emissions. Another way of putting this, is that a cap-and-trade system assumes that scientists can determine the optimal level of carbon given the mosterously complex phenomena of the global climate. A carbon tax, in contrast, assumes that economists can determine the costs that carbon imposes on society given the monsterously complex phenomena of the climate’s effect on the economy.
Other than your publication’s name, I am at a loss as to why you believe that the scientists are at a disadvantage to the economists. Indeed, given the heroic intellectual feats that either policy demands, I’m at a loss as to which group of scholars has the edge. Sadly, I suspect that we actually don’t know.
Nathan Oman
February 6, 2010 at 10:28 am
Posted in: Contract Law & Beyond, Economic Analysis of Law
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Responses (3)
Ken Rhodes - February 6, 2010 at 11:08 am
I would submit that Mr. Oman understates the case, by overestimating the power of anybody to determine the “optimal” level of anything.
Rather, one might say this: The carbon tax allows the government to set some taxation level, and hope the market will act through economics to regulate the emissions levels appropriately. OTOH, the cap and trade approach lets the government set *some* level of emissions, then allow the market economics to adjust the price accordingly for that level.
What we know, I believe, is that *nobody* (economist OR scientist) knows either an “optimal level” for emissions OR an “optimal level” for taxation, so the cap and trade approach allows us to regulate directly, rather than indirectly, that which needs regulating, and allows the economics of the marketplace to do what it does best, which is not regulation, but rather, price-establishment.
A.J. Sutter - February 6, 2010 at 7:57 pm
I agree with Nate that scientists are probably better positioned than economists, especially since the earth system doesn’t care whether we make a profit or not. I also agree with Ken about the depth of ignorance. But how can one say that a cap-and-trade system is better than a cap-only system, for example? Under one proposal, cap-and-dividend, all emissions permits would be auctioned, 75%-80% of the proceeds would be dividended back to individual consumers to help offset the higher prices that would result from the auction, and the remainder available for other government uses. Permits would not be tradeable, any more than building permits are.
While I’m agnostic about C&D, C&T has more holes than just economic ones. The SO2 emissions situation that’s the poster child for C&T is more ambiguous than it’s usually presented as being. Not only are the impacts of SO2 emissions local, rather than global like those of greenhouse gases, but the earlier studies that claimed SO2 emissions have followed an inverted-U “environmental Kuznets curve” seem not to be reproducible by more sophisticated statistical methods. The curve, moreover, seems to be cubic, i.e. N-shaped — i.e. emissions don’t continue to decline with continued economic growth. So the efficacy of C&T seems rather an article of faith, as long as per capita GDP growth remains a priority.
Green Girl - February 15, 2010 at 1:38 am
Global Warming and Climate Change is the biggest environmental issue that we face these days. the long term effects of these environmental changes to a nations economy is quite damaging. there would be a shortage in food supply as well as on water supply too ….
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