Krugman on carbon tax

In a recent post, Paul Krugman notes that there are simpler alternatives to a carbon tax that might get the job done. Though I don’t take too much issue with the principle – that there are other ways to reduce carbon emissions than a tax, the argument itself lacks content.

Krugman:

That said, there are reasons Econ 101 may not be right here. There is some evidence that consumers aren’t hyper rational when it comes to conservation, that they may pass up conservation opportunities even when it would save them money — and in that case rule rather than prices may be the right way to make them change. And to the extent that we’re talking about innovation, the Econ 101 case says nothing at all: the efficiency case for carbon pricing is about making best use of existing technology, not about providing incentives to develop better technology.

[The importance of a carbon tax] depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.

And what I gather from reading various analyses of our prospects is that we’re closer to case #2 than to case #1: the problem of limiting climate change isn’t all that complex. End coal-burning and you’ve gone a significant way; a few other big things get you another substantial part of the way. Yes, comprehensive carbon pricing would be best, but it’s not the sine qua non of effective action.

There are many problems here. The argument doesn’t examine, or even make any indication of caring about, price. There is a price at which consumers don’t care, and a price at which they do. People aren’t rational about keeping the lights on because it doesn’t cost anything to keep the lights on. And that excludes the possibility that the irrational consumers actually have a rationale behind avoiding conservation opportunities that a researcher thought was cost-effective. Econ 101 also tells us to trust revealed preference.

More importantly, there’s a troubling circularity to the logic:

1. Carbon taxes are better than the alternative because we can’t observe the tastes and preferences that drive the demand for carbon.
2. But coal creates a lot of carbon, so lets ignore our initial premise and get rid of coal.

One might note the nonchalant way in which Krugman talks about “[ending] coal-burning” or “putting a quick end to the practice of burning coal to generate electricity”. If it was so easy we probably would have done it already.

There are problems. Some states are far more coal reliant than others. Some states need far more energy for winter heating. Some states are rich while others are poor. Some states have citizens more concerned about nuclear fallout. The entire point of a tax is to attempt to solve these issues in a more effective way than command and control.

The argument could be that “carbon tax is politically impossible whereas command and control is not” but that’s not the argument Krugman is making. To somehow suggest that we can isolate one important source of carbon and achieve most of what a carbon tax solves begs the entire question. It would be akin to noting suggesting “greenhouse gases seem to drive climate change – we could get bent out of shape over a greenhouse gas tax or just put a quick end to using carbon to move around and heat our houses”.

To the extent “a few big things get you a substantial part of the way”, each of the “few” things is going to suffer the same initial problem of command or market that it was intended to solve, or is actually going to be so large and complex that it can’t be effectively implemented. That’s not to say that banning coal can’t reduce emissions, but that’s obviously not the bar given that “Do whatever Somalia is doing is also a pretty good way to reduce emissions.” It’s also hard to check that the marginal users of coal increase net carbon impact. It’s hypothetically possible that coal growth is driven by electric cars which are may be net negative. Banning coal doesn’t help here. It’s also very possible that I’m wrong which is a perfect example why Econ 101 is actually fine and this isn’t a uniquely good candidate for control.

Furthermore, while it’s true that the Econ 101 case isn’t as much about innovation as it is about shifting supply and demand, it’s difficult to separate the two since innovation is a necessary component of the argument to begin with. Most people aren’t suggesting that we should become poor to end carbon emissions. Rather that with the right incentives innovation will fill some of the gap. Nor is the line between existing resources and future innovation so clear. It’s probably true that if investors with skin in the game put more money into clean technology, it will improve. The carbon tax just changes the calculus of whether that might be worth it.

 

There’s absolutely no way to know “whether we’re closer to #2 than to #1” without some sort of market incentive to test the claim. If all carbon was coal, claiming that we should ban coal obviously won’t work and we would need to figure out how to get there. Which would only return the original question.

I’m not saying that Krugman said something particularly offensive – that there may be conditions under which simple control gets the job done – but that this is always the case and not uniquely special in this situation. There needs to be some consideration of price, cost, and distribution – none of which find any attention in the column.

It’s also a moral question. If the government decides that we should reduce carbon emissions, we should be free in our execution of that plan. A vegetarian can choose not to start eating steak instead of buying government mandated lightbulbs and paying too much for heat. A commuter can choose to walk instead of drive instead of turning off the Christmas lights. It would be appallingly immoral to prescribe a set of values that we must use to achieve a certain goal.

Nothing in this column was incorrect per se. Everything was trivially true (“taxes aren’t the only way to reduce carbon output”), required some sort of a magic wand that begs the question (“end coal”), or suggested a false sense of confidence in what we know (“In my post favoring the effectiveness of limited measures I note that I’ve gathered this to be true”) even though the impossibility of knowing such is the premise of a tax to begin with.

Krugman probably knows this and may have been trying to motivate a broader point. Unfortunately the idiot politician that cites a Nobel Prize winning economist in a new “ban lightbulbs initiative” probably won’t call to ask.