Growth and Climate

The Economist’s review of Roger Pielke Jr’s new book reads:

The dilemma is that policies to reduce carbon-dioxide emissions have so far been singularly unsuccessful. Mr Pielke expresses the essence of this failure as what he calls the “iron law” of climate politics: “When policies focused on economic growth confront policies focused on emissions reduction, it is economic growth that will win out every time.”

It’s a pithy little law he’s got there, and it sounds pretty darn insightful. The implication is that emission reductions are destined to be political failures. If humanity is to overcome the challenge of global warming it must come up with policy solutions that allow people to avoid this choice, either by making emission reductions growth-inducing or unnecessary. And the further implication is that the right policy mix focuses not on emission reductions but on research, growth, and adaptation.

But as nice and neat as that thinking seems, it runs into two little obstacles. First, what are these growth-emission trade-offs we’re talking about? We understand that demand for goods (like, say, carbon-intensive energy) may be very inelastic in the short run but quite elastic in the long run. If we increased the price of coal by 50 cents a ton next year, no one would notice. If we increased the price by $1 a ton the year after that, again, no one would notice. Then $2 per ton the year after that? The changes would be too small to be economically harmful. But over time, if increases went on in that fashion, the change in relative prices would lead to emission reductions. And if people knew ahead of time what the changes would be, they could invest beforehand and increase the rate at which demand became more elastic. There need not be any trade off between growth and emission reductions.

The second problem is the more interesting one — voters are more than happy to opt for growth-reducing policies in other circumstances. They’re often eager to do so; sometimes they outright demand them. If the argument is that people are cold growth-supporting calculating machines and that’s why they dislike emission reduction plans, well, that’s a bad argument.

What are better arguments? Well, one might rephrase the law thusly: “When policies advantageous to moneyed interests confront policies focused on emissions reduction, it is the moneyed interests that will win out every time.” This is a controversial idea in some corners of the punditocracy, but I’m not sure why. Powerful industry groups oppose emission reduction rules and have consistently worked for the defeat of climate legislation. Industry groups have spent billions of dollars on lobbying efforts and advertisements to achieve these ends. Now either they were getting something for their money, in which case the modified law above is right, or they were throwing their money away, in which case we may as well tax away those dollars and invest them in green technology or transit or education or something.

Once you’ve tweaked the law in this more honest fashion, the policy recommendations go in interesting directions. Specifically, we find that we need to make emission reductions either interest group pleasing or unnecessary. The latter means growth and adaptation investments, same as before. The former means juicy subsidies which, not coincidentally, our legislative system seems to be pretty good at producing. These policies are more costly and less effective than the “bad for growth” policies economists recommend. When you follow the logic where it leads, rather than where Roger Pielke pretends it goes, you discover that the better emission rules aren’t impossible because of some iron law of voter rationality but because (at least in part) the system is pretty disgustingly corrupt.

Now the other good argument is that the American voter is behaving rationally. He or she sees that the direct benefit to him of climate legislation is going to be pretty small — maybe too small to notice. He or she may suspect, not unreasonably, that while climate rules may be growth enhancing on net, the distribution of costs may be spread unevenly, such that not every household enjoys net benefits. Meanwhile, the whole corrupt system thing going on in the first good argument may sour them on the entire effort to put together policies that maximize benefits while minimizing costs. They may figure that even if a good policy is available in theory, Washington will screw it up, and the end result will be a bunch of corporate welfare, higher taxes, and jobs shipped to China. It’s one thing to pay more to give your granddaughter a healthier world to live in. It’s another to pay more to enrich ethanol producers and manufacturers willing to move production to other countries.

The bottom line is that Pielke has this wrong; the failure of climate legislation is not about a conscious choice by the American voter to take growth over environmental sustainability. It’s about the inability of the American political system to deliver something comprehensible, with a credible cost-benefit ratio, to voters.

(That, and the climate skepticism. You can’t ignore that, obviously. But voters are also skeptical of trade liberalization, and governments have nonetheless managed to slowly hack away at trade limits over the past 70 years.)

I’m prepared to admit that economists have been less than helpful in their constant advocacy of carbon pricing, to the exclusion of all else. Even if it’s an elegant and efficient policy, it’s not necessarily an intuitive policy to most voters. For students of human behavior, economists are often dreadfully ignorant of the way actual humans behave. My (still evolving) view is that Pielke is wrong, and efforts to make climate fixes look like free lunches are unlikely to be any more successful than Waxman-Markey. Instead, I think climate rules need to move forward one step at a time, and each step of the way voters need to be clear on the price and what it gets them. Want to tax something? Tea party revolution aside, that’s doable. But people don’t want to hear about how that tax is reducing their incentive to use carbon. They want to know what their money is buying. So tell them! Let them purchase something with their carbon tax!

And so on in that vein. Politicians have been running from costs. That’s the wrong approach. Hang the costs on benefits like a price tag.

One other behavioral observation. Economists  — and I, as well — have observed public reluctance to accept various efficient tax schemes and endeavored to come up with clever ways to buy off the losers. It’s like, hey, we can design a congestion pricing scheme in which everyone is made better off, simply by refunding a portion of the revenues to etc. Increasingly, I think this strategy, while efficient from a politico-economic standpoint, is doomed to fail. Voters, it seems, look at deal cutting like this and see funny business. They don’t want to hear that they were made better off by bank bailouts. What they see is some decidedly shady doings which rewarded people who didn’t deserve to be rewarded. It’s often irrational to be moralistic about economic choices, but humans are humans.

I may be kidding myself in thinking that simpler and less-bargained policy choices would play any better with the public. It may not matter since the interests that control critical political choke-points demand to be bought off. But I wonder. I wonder if it isn’t worth experimenting with radical honesty. Man, even if it failed it would be pretty refreshing — cleansing –to try, wouldn’t it?

Comments

  1. Matt Rognlie says:

    Keep in mind that exclusively carbon pricing is only the optimum in a simple economic model that doesn’t include endogenous technological change. When you try to model innovation (which inevitably involves massive learning externalities), the optimal policy generally involves a mix of carbon pricing and directed subsidies.

    A simple but effective paper in this vein is The Environment and Directed Technical Change, by Acemoglu et al. The authors apply a model of directed technical change they developed several years ago to environmental issues.

    The key insight is that a carbon tax has two effects:

    (1) Discouraging carbon consumption.
    (2) Promoting innovation in clean energy.

    There is a certain optimal level of (1) that we should pursue, but lacking any other means to accomplish goal (2) we would push the carbon tax above its optimal level for (1) to account for the externalities in clean innovation. Directed subsidies can be a much more efficient way to promote technological development without over-penalizing carbon consumption (which drives a lot of the economic costs).

    Of course, deciding what to subsidize is not so simple, and brings all kinds of hairy political economy complications. But there are still massive possible benefits from this approach: relatively cheap solar subsidies, for instance, can drive technological development in that sector much more cheaply than pushing up carbon prices (which would have to be *really* high to make solar power worthwhile).

    This is all to say that I don’t think your characterization of a carbon tax as the solution favored by all economists is quite right. Certainly it is a key component of any good carbon policy, but the optimality of nurturing clean industries above-and-beyond the incentives provided by a carbon tax is implied by pretty much any model that accounts for innovation.

  2. Ryan-

    Thanks for the comments, but you badly mischaracterize my book in this post in several ways (obviously, you haven’t read it).

    1. In the book I call for a small, but predictably rising carbon tax, very much as you describe.

    2. I argue that we do not have to build in a trade-off between economics and the environment, very much as you write here.

    Your “critique” actually echoes my arguments. You say of my views, “When you follow the logic where it leads, rather than where Roger Pielke pretends it goes . . .”

    Who is doing the pretending here? I am pretty surprised to see you writing a critique of my book when you obviously haven’t a clue as to what it says. Perhaps a re-write is in order?

    Many thanks,

    Roger Pielke, Jr.

  3. Skip says:

    “And if people knew ahead of time what the changes would be, they could invest beforehand and increase the rate at which demand became more elastic.”

    So you think that companies, seeing an impending doom caused by exponential increases in a carbon tax would increase their expenditures ahead of time developing new technologies? Given your reformulation of the “iron law”, wouldn’t those corporations instead just invest money in developing politicians to end the economically crushing taxes?

  4. Luis Dias says:

    I think it’s pretty damn embarrassing to make a critique of a book only to have the very author come here making the obvious observation that the OP didn’t even read what he’s criticizing, and making huge mischaracterizations. Nice way to make yourself look credible, mr Ryan.

    I mean, wow.

  5. Sam says:

    My real problem with the iron law formulation is that it is so high-level and imprecise as to be more of a political science guiding principle than a law of any type. To quote from The Climate Fix (p. 46), here is the first mention of the law: “However, if there is an iron law of climate policy, it is that when policies focused on economic growth confront policies focused on emissions reductions, it is economic growth that will win out every time.” The next lines go: “The iron law of climate policy reflects a powerful ideological perspective that is broadly shared. Society could have evolved around a different ideological commitment, and may yet in the future. Nevertheless, as a deeply ingrained ideological commitment, the iron law will never be easy to displace.”

    So I have made peace with discussions around the iron law (and moving on to more precise and interesting topics than semantic debate) by understanding it thus:

    1) The ‘iron law’ is not a law, it is a guiding principle that may change as values change.

    2) As such, this principle says that there are limits to the costs that people are willing to pay to mitigate climate change. It also says that societies value economic growth. Both of these seem quite obvious, but they are accurate, and even though obvious the implications of these two imprecise principles are in action in all the political debates around carbon and climate policy.

    3) The iron law is imprecise, and has potential rule-of-thumb policy value, but no economic predictive value.

    4)The iron law does not address other potentially critical issues around winners and loser of climate policies that have nothing to do with overall economic growth, but rather who will enjoy the fruits of that growth. For example, a $100/tonne tax on carbon dioxide emissions that was entirely refunded to taxpayers would discourage carbon emissions, but not necessarily reduce GDP growth noticeably. How would Peabody Coal react to that proposal? We already know. How would the political system respond? We already know. The iron law only addresses one aspect of getting climate policy implemented, and perhaps not the most critical one in some cases.

    5) Dr. Pielke, Jr., will occasionally get very enthusiastic, and write something like this (Yale e360): “The “iron law” thus presents a boundary condition on policy design that is every bit as limiting as is the second law of thermodynamics, and it holds everywhere around the world, in rich and poor countries alike.” This analogy is flawed – the second law is not likely to change with human values, the “iron law” may. Presumably as well, that amounts that people WOULD pay are different in rich and poor countries, even if they do have limits, so the “iron law” is not particularly rigorous, but again more of a guideline.

    However, setting that distracting formulation aside, The Climate Fix is worth a look. RPJ is quite facile with the facts around the environment/energy/economy discussion, and I learned some new things from the read. Of particular importance is the clear re-statement of how large this problem is, how difficult to address, and how current policies are clearly not getting the decarbonization accomplished. There are some analogies that I am not fond of, and the re-hashing of the climate science debate seems a bit of a distraction for a forward-looking policy discussion, but on whole it was worth the time, elucidating many of the challenges and potential solutions in the energy/environment/economy nexus.

  6. AMac says:

    #1 Matt Rognlie –

    > The key insight is that a carbon tax has two effects:

    > (1) Discouraging carbon consumption.
    > (2) Promoting innovation in clean energy.

    The First World already sees

    (3) Offshoring energy-intensive industries to developing countries.

    Would a carbon tax accelerate that? (I think so.)

    Would it be good, bad, or neutral? (Bad for the country experiencing the disinvestment, I think.)

    Have advocates of carbon-tax schemes worked out policies that take this into account? (I don’t know.)

  7. MNPundit says:

    I think a more fundamental question is how we can provide for a growing population WITHOUT growth. Can we REALLY make it all up via efficiency?