Thursday, January 14, 2010

Cap and Trade and global warming

 Everyone I know is too biased in one direction or another to give me a straight answer on what the actual data is that seems to suggest global cooling.
I've chronicled this on my blog a lot, but I'll restate it here: I believe in global warming, where we have no idea what the severity will be, but I'd also like to see accurate data and I'm skeptical of the massive government-driven taxes on the economy to try and deal with it (as opposed to funding science or implementing intelligent allocations of carbon credits that can't be done by a US government entity). This doesn't imply lack of preparation and intelligent, efficient anti-carbon measures - they are important - but it does imply that we should be careful about implementing them properly.
It's no different to nuclear war - nuclear war has a probability p (severity is a little clearer with nukes, while probability is a little less clear, but it's the same principle), so we take measures to avoid it. We don't institute authoritarian rule or remake the entire country/economy to avoid it, because that would be counterproductive... instead, we do our best to identify the threats and opportunities for improvement and deal with them as best we can, as rapidly as we can. Downsides? Done right, not many... we're more secure in other ways as well, even if we overestimate the possibility of nukes. (It's amazing to me that Democrats consistently seem to discount the possibility of a nuclear exchange when arguing against foreign intervention in places like Iran, while Republicans seem to discount the possibility of a climate bomb, where both are intrinsically identical types of problem).
Similarly, getting us off of foreign oil would lower the trade deficit (a good thing as long as government spending can come down with it to reduce inflation), make us more energy secure and independent and spur all sorts of unknowable innovation in the transport, distribution and manufacturing industries. It's a no-lose, done right. It's a big lose under a lot of other proposals - a lot of people assume the "trade" part of cap and trade would be frictionless and cause no deadweight loss, but that assumes a) perfect information, b) infinite management attention and c) most importantly, actors equally able to afford to buy or sell carbon credits. Misallocating the credits would be a very bad thing, and with our lobbyist congressional culture, they would be misallocated. This would have big implications for economic growth and R+D; going on a bad cap-and-trade program could significantly delay an actual workable scientific solution if it strips us of talent and money. Thus, I'm skeptical that cap-and-trade can ever work in the US as a piece of congressional legislation.
Again, ideally, you'd want the credits allocated more towards industries that can't easily switch from carbon-producing methods and have no lower-carbon substitutes (a lot of fertilizers and chemicals fall into this category, for example), so that industries with easy substitutable methods of production or industries that produce goods with lower-carbon substitutes are forced to have a lower carbon footprint with minimal economic impact. Each year, each carbon credit deflates (a right to produce 1 ton of carbon next year turns into a right to produce .98 tons of carbon, for example), so that all industries have an accelerating incentive to get off carbon as fast as they can develop good substitutes for current processes. The government could at any point increase the deflation of carbon credits to ensure that carbon prices never drop below some publicly announced and anticipated X (we'd need to prevent congress from re-inflating carbon credits, because it'd be too tempting in times of war or recession).
In this way, the lowest hanging fruit (patching up leaks in natural gas pipelines, or fixing leaky windows) gets attacked first, and it proceeds reasonably linearly towards more difficult carbon to eliminate. As each industry figures out an improvement,  it can sell its excess credits to industries who haven't found solutions yet but have deflating credits. This may require adjusting utilities rates for particularly persistent emitters who have no alternative, but that's something that hopefully states can deal with over time. This is one of a few simple cap and trade mechanisms.
However, the initial allocation is more critical than most theoretical economists would have you believe, and our lobbyist, highly partisan congress is probably incapable of dealing with it. A bad allocation strongly risks a situation where we reduce our carbon emissions not by improving our processes, but by simply raising the price and lowering supply of desirable goods made by weak producers who can't afford to deal with it - in effect, lowering consumption and prolonging recession in a big way. There also needs to be a credible way not to have wildly fluctuating carbon expectations as legislatures decide to relax or tighten emissions restrictions. It's a hard battle.

1 comment:

  1. Hey Trevor - Here's Rob Stavins' stuff on cap-and-trade. Some of it might be interesting...

    Cheers, BZ