Carbon charge continues to confuse

The Economist letters editor went on holiday (or something) and let two missives into print that need a knuckle rap even though letters aren’t exactly a critical outlet for consequential policy analysis.  Both writers are articulate and thoughtful and one is a real live economist with a whole career under his belt.

They are also howlingly wrong about this: “First, a ‘one size fits all’ tax requires an impossible calculation of the average cost of reducing emissions over a given period of time.”  A carbon charge has lots of interesting problems and challenges (so does a cap and trade scheme, of course) but this is exactly, precisely, not one of them: its principal advantage is that to get it right, we only need to know the marginal damage from additional greenhouse gas releases at current levels, whereas to get a cap right, we need to know the whole marginal cost-of-carbonrelease curve and the cost of carbon reduction over the same range.  To set a cap at some level or another requires no knowledge whatever, but (as is easy to forget) the point of all this is to stabilize climate, not to have a policy.  The right cap is at the level where marginal cost of further reduction equals marginal benefit thereof, so we have to know where these lines cross and keep updating them (and adjusting the cap) as things change. The cost of reduction, in particular, moves quickly (down) as new policies like this induce technical and managerial learning.

To set a tax, we only have to know the marginal cost of carbon release at the level we’re at now, which is much less daunting (though as carbon releases fall, marginal damage probably also falls and the tax can be reduced some).

None of this means a carbon tax (I wish we could learn to call it a carbon charge, the price of using the air as a greenhouse gas dump) will solve everything. Some ways to efficiently reduce GHG emissions are market failures and require parallel government action (for example, to drive less I need not only shoes and a bicycle, but nice streets to walk on or a bike path (or a tram!) none of which I can buy without government help.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

5 thoughts on “Carbon charge continues to confuse”

  1. Jeez, if letters aren't for much, how about me sitting in my garret responding to blog posts? Reminds me of the old line, 'he's so ineffective, even his yawns aren't catching!'

    One of the letters said 'a cap-and-trade solution introduces a carbon ceiling and the price acts as no more than a useful barometer of how close we are to achieving that goal; prices will tend to zero as the requisite level of emission reductions is achieved.' I think this misses the nature of carbon emissions: one day, one week, one year is not the problem. It is our actions over time. And once you have put in place a carbon tax and the bureaucracy to collect it, if the tax one year yields too much, or too little, emission – you need simply to raise or lower it the next year. Iteratively, you get it right.

    The other letter pishtushed the idea that cap-and-trade systems are more vulnerable to capture by the polluters. It's hard to think how to respond better to this claim than to look at the roster of carve-outs (for agriculture, for making ethanol, for power generation) which have been thoughtfully inserted in the current bill. One could certainly make exemptions from tax to take care of Archer Daniels Midland, but they would be more conspicuous than the current cap/trade special provisions.

  2. We charge citizens to dump stuff in the landfill, why can't we charge them to dump stuff in the airfill?

  3. Because,

    1. The atmosphere isn't fenced off. Everybody has direct access.

    2. The government doesn't own it.

    Feh, it's a tax.

  4. > "To set a tax, we only have to know the marginal cost of carbon release at the level we’re at now"

    First of all, that's not even theoretically correct: the marginal cost of carbon release presumably changes with the amount of carbon releases. As our economy grows (and it will grow, at least if people finally take the advice of REAL economists, right?), it will drive greater carbon emissions for a given tax level, causing more damage than the taxes collect. (or were you saying any realistic carbon tax would doom our economy to shrinking forever?)

    But on a realistic note,

    Oh, that's all we need to know: not only a model of climate change robust enough to make specific predictions, but also a good enough model of the world economy to be able to predict exactly how the climate will affect the economy, in a quantitative way (with specific figures for marginal costs as a function of carbon emissions). With of course, simple monetary values for non-monetary costs. Nice to know we can do that instead of having to figure out a reasonable target for safe carbon emissions and the average cost of carbon reduction.

    By the way, have you heard the joke about the economist looking for his keys under the streetlight?

  5. Brett,

    Does the government own the landfill? If so, why?

    The government "owns" the land for the same reason it "owns" the air … because the government is the repository of our collective ownership of these common goods.

    Feh, it's a charge.

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