David R. Henderson  

Murphy on Global Warming Policy

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Using a standard cost/benefit approach, the policy recommendations generated by stipulating unacceptable "tipping points" appear very inefficient. For example, the current Waxman-Markey bill pending in Congress requires an 83-percent reduction in U.S. emissions (relative to the 2005 base level) by the year 2050. Yet, most models show that if the whole world were to adopt such an aggressive target, the costs would far outweigh the benefits. The latest calibration of Nordhaus's "DICE" model indicates that such strict cutbacks would yield more than $15 trillion in net costs, that is, costs net of benefits. The other models (which use CBAs) studied by the IPCC show similar results.

This is from Robert P. Murphy, "The Economics of Climate Change." In his article, Murphy takes as given that global warming is real, it is caused by humans, government policy can reduce global warming, and government can be trusted to do the efficient thing. He still concludes that the policies being proposed today are too extreme from a straight cost-benefit viewpoint. He then goes on to relax the last assumption about government, introducing some basic public choice.

Read the whole thing.


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COMMENTS (19 to date)
El Presidente writes:

So, here's the problem. Anthropogenic emmissions of CO2 stay in the atmosphere longer than the average lifespan. If we don't do intergenerational accounting then we don't capture the real chemical and biological effects of our actions. It's nice to say we should shorten our time horizon because we could do a lot of good stuff in the mean time, but that only works if we collectively value the welfare of our children and grandchildren lower than our own, or if we believe the prognostication that innovation will make cheap solutions to our problem so we needn't be concerned about our behavior. If innovation cannot be hastened, this makes SOME sense. If it can be, this is less reasonable. Who's to say that innovation won't respond more favorably to increased incentives? You brag on them when we discuss marginal tax rates, but they are somehow ineffectual here? Until we know what the cheapest viable solution will be we cannot claim that it will be too expensive now or less expensive later. We can only say that we are more or less committed to promoting the resolution of this problem sooner rather than later. We are arguing about priorities more than accounting.

Dr. T writes:

I believe that the climatological predictions of anthropogenic global warming and polar ice cap melting are nonsense. However, if we posit that such warming is likely, then we should study Netherland. Building dikes around coastal cities would be much cheaper than drastically decreasing the burning of carbon-containing substances. The Netherlanders accomplished this well before the Industrial Age, so it should be much easier today.

El Presidente writes:

Dr. T,

What would you do to prevent the tropics from becoming deserts, anything?

David R. Henderson writes:

El Presidente,
Your criticism about not doing intergenerational accounting certainly doesn't apply to the Murphy article.
David

El Presidente writes:

David,

Certainly, it does.

However, many economists argue that it is nonsense to theorize about the "correct" rate of discount to apply to potential future benefits from curbing emissions today. Like it or not, the market gives us actual real rates of return on investments, and these rates are much higher than the theoretical rates that Stern uses.

The justification for using actual market interest rates is simple: We can help future generations either by "investing" in fighting climate change or by investing in traditional assets and bequeathing more wealth (of a conventional form). It would be silly to forfeit potential consumption today, in the form of tighter emissions cutbacks, if our descendants would perceive a greater benefit from our channeling those savings into more traditional investments that would make them wealthier.

This "ramp" occurs because distant climate damages are heavily discounted for the first few decades, and because of technological improvement over time, which makes emission reductions relatively cheaper if they are postponed.

As famed physicist Freeman Dyson has mused, future generations will likely have far cheaper means of reducing atmospheric concentrations of carbon dioxide, if the more alarming scenarios play out.

In the climate change debate, people often forget that under all but the most catastrophic scenarios, the future generations who will benefit from our current mitigation efforts will be much richer than we are.

I read the whole thing, as instructed. The thrust of the article is, "Not so fast." That, combined with the life of CO2 in the atmosphere, is why the intergenerational accounting piece matters and why its absence imbues a sort of shortsightedness and self-importance to the reasoning. If it was approached from a Rawlsian perspective (i.e. veil of ignorance) it would probably pan out differently. That is, if we could not tell whether we were the present generation or a future generation, we might not be so enthusiastic about heavily discounting future problems. In light of our recent struggles, the intermediate "conventional" benefits seem more suspect as well. This only passes for intergenerational consideration if you are sympathetic to Murphy's fundamental beliefs and conclusions. I am not. So, to me, it is a dismissal, not an embrace. If this is accounting, it's accounting Arthur Andersen style.

As a manager, I think of it this way: Do I want to spend more of my resources fighting a bigger problem later or less of my resources fighting a smaller problem now? That changes things a little bit, don't you think? The tricky part is when I, as a manger, have the privilege of saying, "Let them deal with it after I'm gone." That's irresponsible to say nothing of the compounding expense it generates over time. If we are not interested in shifting our production activities for greater than the span of a lifetime while we sort it out later, we ought to be more careful about what we do now. It sounds as though we're saying, "I'd really like to do the right thing, but the wrong thing isn't expensive enough . . . yet."

MikeP writes:

So, here's the problem. Anthropogenic emmissions of CO2 stay in the atmosphere longer than the average lifespan. If we don't do intergenerational accounting then we don't capture the real chemical and biological effects of our actions.

No, here's the problem. Tangible and intangible capital stay in society longer than the average lifespan. If we don't do intergenerational accounting, then we don't capture the real wealth effects of rash government actions to curb global warming.

Even the IPCC SRES expresses the tradeoff in the difference in world per capita income between the A1 scenario and the more environmentally conscious B1 scenario. Essentially, we are asked to decide for our descendants a century hence whether they would prefer a world 2 to 4 degrees Fahrenheit cooler or a world with 60% greater income.

It is the height of arrogance and a spectacularly irresponsible squandering of our progeny's inheritance to spend a third of their wealth today without absolute certainty of what we were buying with it.

Not to put to fine a point on it, but the Rawlsian choice may well be between the poorest people in 2109 starving and the poorest people in 2109 having to spend some of their earnings on an air conditioner.

El Presidente writes:

MikeP,

Our ability to forecast atmospheric outcomes is far superior to our ability to forecast economic outcomes simply because one is wholly dependent upon physical processes and the other is dependent upon far more irregular interactions between sapient individuals and the institutions they nurture. I don't discourage our efforts to make informed forecasts of economic outcomes, I simply assign higher uncertainty to the economic growth forecast than to the climate change forecast. I understand your argument full well. I don't understand the willingness to make things worse before we make them better. If growth is reduced at any point in this progression as severely as it was during global conflicts and plagues of the past then we still get the climate change but we miss out on the forecasted income. Upping the ante doesn't seem like a wise move because it paints us into a corner. How do you value options?

If, on the other hand, we should happen upon a better solution, a cheaper solution, a more inovative solution that will give us more benefit at less cost, then this becomes an easier choice for both of us. Why not incentivize R&D or model alternative tax structures that might change the type and quantity of energy we consume? David is fond of touting the power of incentives to influence individual behavior. If we aren't willing to back that up as though we mean it, there are a few other policies we should reexamine. Bottom line, the argument in favor of waiting boils down to one thing: oil and coal are cheap. If they were more expensive we would change our minds. When they are more expensive we will change our minds. Will it be too late if we should happen to wait that long? If we live for our lives alone, then we will have worked ourselves into a predicament that cannot be solved in the space of a lifetime. We will be faced with the prospect of making an investment that we will NEVER benefit from. There won't be any point in doing it except for posterity's sake, and that seems wholly insufficient to many of us now. Now tell me, how frequently do markets produce investments from which the participants themselves will NEVER see benefit? Such a return period is quite rare, wouldn't you say? If we aren't willing to adjust incentives, this problem will solve us, not the other way around.

MikeP writes:

El Presidente,

First and foremost, if the higher predicted economic growth does not materialize, then neither does the higher CO2 emissions nor the most worrisome climate change.

The IPCC SRES are inputs into the climate models. Without the high economic growth predicted by the A1 scenario, the threat to the climate simply is not there.

Second, you ask how I value options. I value them very highly. I am sure that each of the world population of 2100 who make $30,000 1990 dollars more per year because we chose the A1 route rather than the B1 route will also value all the options they have for that money -- be it to mitigate climate change damages or, much more likely, to pay for something they at that time find more pressing.

Third, if there is a relatively easy technical solution, it will be found even more easily in the future if and when climate change proves to be a problem. If there is not a relatively easy technical solution, it won't be found with exorbitant government tax and subsidy.

Finally, I think that the greater threat to humanity's wealth and the world's future is a global trade war -- perhaps evolving into a global real war -- due to diverging carbon tax regimes. That this does not factor into climate change proponents' thinking with any probability at all is disconcerting, is it not?

El Presidente writes:

MikeP

First and foremost, if the higher predicted economic growth does not materialize, then neither does the higher CO2 emissions nor the most worrisome climate change.

According to a Nobel Laureate in chemistry I heard lecture, this is not exactly true. We don't have to grow by one unit of output for our current behavior to doom us. It is true that increasing output accelerates the CO2 buildup if we continue to use the same energy sources with the same intensity. We are already putting CO2 into the atmosphere at a faster rate than it can naturally be flushed out of the atmosphere. I'll let you argue with him if you like.

Third, if there is a relatively easy technical solution, it will be found even more easily in the future if and when climate change proves to be a problem.

"If and when climate change proves to be a problem", it will be too late to find a solution, if it's not bad enough to consider it a problem now. The solution must precede the worst of the symptoms in order to effectively treat the malady. Saying it will be cheaper later is appealing to blind faith. We don't know what the solution will be. Some things get cheaper with time (through technology and economies of scale and scope). Some get more expensive (through scarcity). What if the solution requires curtailing use of scarce and valuable inputs? Will the price of that solution increase or decrease over time as population and demand grow? A combination of effects is likely to occur, and we have no idea what that will mean for the price of the solution. I'm O.K. with uncertainty as long as we identify the risks to the forecast. If the price grows slower than output, then it will cost less as a proportion of total output later. We don't know whether or not that will happen because we don't have a specific remedy to begin analyzing. But, even if we did, only an increase in the price of fossil fuels (including by means of exhaustion) or the development of a cheaper alternative will make us change our current behavior. If there is no intervention, the later would probably eventually occur as a result of the former.

If there is not a relatively easy technical solution, it won't be found with exorbitant government tax and subsidy.

If the solution is more complex, why would it not be found through taxation and subsidy? Is innovation unresponsive to all incentives, or simply to incentives that violate our ideology?

MikeP writes:

We are already putting CO2 into the atmosphere at a faster rate than it can naturally be flushed out of the atmosphere.

So? I'm not saying that lower growth will scrub CO2 out of the atmosphere. I am saying that lower growth will pose a much reduced chance of yielding catastrophic results when compared to the already low chance of a high growth track.

The SRES B1 scenario predicts a 1.8°C rise by 2100, and the G8 just set a goal of 2°C rise. These are not considered terribly threatening, and if you want to reduce climate change much further, it will bear very high costs for very questionable benefits.

If the solution is more complex, why would it not be found through taxation and subsidy?

If there is no solution, then it won't be found by taxation and subsidy. If the solution is politically unfavorable or amenable to decentralization -- say like my bet of the most likely solution, industrial scale atmospheric carbon sequestration -- then it is likely not to get the favorable treatment that prospective solutions that centralize control or serve the politically powerful will get.

It is not an accident that biofuels got -- and continue to get -- rousing subsidies even in the face of environmentalist backlash. Nor is it an accident that Waxman-Markley is a giant hog of a bill that simply hands 85% of the government take to politically powerful energy companies.

Mark Bahner writes:

"Building dikes around coastal cities would be much cheaper than drastically decreasing the burning of carbon-containing substances."

It makes much more sense to develop a portable storm surge protection system that can be deployed anywhere within less than ~1 day.

http://markbahner.typepad.com/random_thoughts/hurricane_damage_mitigation/

Mark Bahner writes:

"That is, if we could not tell whether we were the present generation or a future generation, we might not be so enthusiastic about heavily discounting future problems."

No, we still would heavily discount PARTICULAR future problems. That's the problem with saying that society should spend money on reducing future climate change. It necessarily means that other potential future problems will receive less money, because money (at least right now)* is finite.

P.S. *It is probable that money in the year 2100 will not be, for all practical purposes, finite:

http://markbahner.typepad.com/random_thoughts/2006/07/why_every_singl.html

Mark Bahner writes:

"Do I want to spend more of my resources fighting a bigger problem later or less of my resources fighting a smaller problem now? That changes things a little bit, don't you think?"

That is not the choice that we face right now. The choice we face right now is whether to spend money on big problems right now, or to spend money on what some people claim will be a big problem in the future. (Most of these people who claim it will be a big problem in the future, by the way, are being financially rewarded for make the claim. So they're hardly providing objective opinions.)

The work of Bjorn Lomborg has been repeatedly duplicated. Global climate change is not anywhere near the top of what should receive our limited funding. There are much better (i.e., less costly) ways to make the world a better place.

El Presidente writes:

Mark Bahner,

I'm sympathetic to your argument. The problem I see is that it is not generally offered in good faith. It is offered as an excuse to not address climate change. The disingenuous invocation of Lomborgs arguments by congressional Republicans is so completely transparent that it is laughable. They didn't call Lomborg to testify so that they could enact his agenda. They called him to testify so that they could undermine the momentum building to address climate change. I don't think our resources are so limited that we have to exclude climate change from the agenda, but I like his reasoning and I support the many other suggestions he offered. If we want to get busy on his to-do list, let's get started. If we're using it as a safety position to avoid action and maintain the status quo, I call BS.

Adam writes:
Finally, I think that the greater threat to humanity's wealth and the world's future is a global trade war -- perhaps evolving into a global real war -- due to diverging carbon tax regimes. That this does not factor into climate change proponents' thinking with any probability at all is disconcerting, is it not?

This is what I've been thinking. Assuming the hypothesis is true (that CO2 emissions will lead to catastrophic warming) I can't see any scenario that will reduce CO2 emissions enough short of open warfare. Limiting carbon emissions is a prisoner's dilemma and emerging nations, like India and China, won't give up their cheap electricity without a fight. No one seems to be willing to add the costs of the inevitable war to the balance sheet.

Mark Bahner writes:

Hi,

"I'm sympathetic to your argument. The problem I see is that it is not generally offered in good faith."

Arnold Kling has written before about Type M (Motive) versus Type C (Consequence) arguments.

I don't remember him writing this (and I'm too lazy to check), but a Type M argument is actually essentially an ad hominem argument. It contains a logical fallacy. It says we should ignore arguments because (we think) the person is bad (had bad motives). But arguments should be judged on whether they are true of false, not whether or not they are made in good faith.

"The disingenuous invocation of Lomborgs arguments by congressional Republicans is so completely transparent that it is laughable. They didn't call Lomborg to testify so that they could enact his agenda. They called him to testify so that they could undermine the momentum building to address climate change."

Perhaps they called him to testify "to undermine the momemtum building to address climate change" because they thought the "momentum building to address climate change" was going to involve an absolutely mind-boggling waste of resources (e.g. William Nordhaus' estimate that lowering emissions by 83 percent by 2050 will involve expenses in excess of benefits of $13 trillion)?

I just throw this question out because you've indicated you're persuaded by motives rather than consequences. ;-) As I wrote earlier, what the Republicans' motives were really isn't important. What's important are the consequences.

The solution to the Republicans' "bad motives" in inviting Lomborg is to reply, "OK, we agree with Lomborg. (If the people do indeed agree.) Now, we want to see action to implement the recommendations Lomborg made. Here is a bill that we think will cut X (e.g., malaria deaths) in half in the next decade. We trust all Republicans will vote for it."

P.S. Oh, I see "malaria" is actually #12 on the list:

http://en.wikipedia.org/wiki/Copenhagen_Consensus

So presumably what might be counter-proposed by opponents of Republicans would be micronutrient supplements (vitamin A and zinc), which was #1. Or "heart attack acute management," (#11) which looks to be one of the few that clearly would benefit people in developed countries, as well as people in developing countries.

P.P.S. You've conceded a sympathy to "my argument." I'll concede a strong support to taxing pollution, as opposed to taxing income. But I support taxing *real* ;-) pollution, much more than I support taxing CO2. If we want to really improve the environment, we should be taxing particulate, sulfur dioxide, nitrogen oxides, and mercury from coal-fired power plants, not CO2. And tax the water and solid waste pollution from coal mining.

P.P.P.S. Again, since you're interested in motives (not to bash you over the head with that ;-)), in the interests of full disclosure, I'm an environmental engineer. If the U.S. were to switch from taxing income to taxing pollution, I would probably benefit. (I'd also probably benefit if global climate change became the "central organizing principle" of society.)

Mark Bahner writes:

"I can't see any scenario that will reduce CO2 emissions enough short of open warfare."

If liquid fluoride thorium reactors can be made to produce electricity for a retail price of under 4 cents a kWh in the next 20-30 years, that would go a long, long way towards eliminating any future CO2 problems.

http://left-atomics.blogspot.com/2008/05/benefits-of-liquid-fluoride-thorium.html

But it doesn't look like the world is on a pace to do that.

El Presidente writes:

Mark Bahner,

But arguments should be judged on whether they are true of false, not whether or not they are made in good faith.

That's fine for the argument, and I have conceded as much. What about the action?

Mark Bahner writes:

"What about the action?"

What about the action?

I can understand how politicians of a conservative/libertarian philosophy would support Bjorn Lomborg's argument that money would be better spent on items recommended by the Copenhagen Consensus (e.g. micronutrient supplements) rather than on reducing CO2 emissions, but would also support the argument that U.S. taxpayers should not be compelled to spend money for the micronutrient supplements (that are going to Africa and other parts of the developing world).

The first step towards doing the correct thing is to identify what the correct thing is. Bjorn Lomborg has attempted to do that (with the Copenhagen Consensus). His "reward" from the left has mostly been contempt.

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