Paul Krugman has a climate change article coming out in the NYT magazine this weekend. Mostly I think this is an excellent summary, but I do have a few comments. In reverse order through the article:
So what I end up with is basically Martin Weitzman’s argument: it’s the nonnegligible probability of utter disaster that should dominate our policy analysis. And that argues for aggressive moves to curb emissions, soon.
At the heart of the economics of climate change are issues of uncertainty and discounting, and IMHO neither of them can be resolved. (Translation: Cost-benefit analysis is never going to give us a solid answer.) For example, Weitzman’s uncertainty issue is IMHO fundamentally related to the St Petersburg paradox: How much would you pay to play a game in which you flip a coin until it comes up heads and then (if this happens after n flips) you win $2^n ($2 for H, $4 for TH, $8 for TTH, $16 for TTTH, etc). It’s easy to show that the expected value here is infinite, meaning that there’s a logical argument to be made for paying $1 million—or even much, much more—to play this game. Similarly there’s an argument to be made for paying $1 million to avoid being on the opposite side of the game (i.e., having to pay $2 for H, $4 for TH, $8 for TTH, $16 for TTTH, etc). The problem is that this doesn’t seem terribly reasonable, so climate-related discussions based on similar low-probability/high-risk outcomes are IMHO not going to produce an intellectually satisfying resolution.
A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods.
Wow, this is going to be really hard to calculate.
We’re not talking about a few more hot days in the summer and a bit less snow in the winter; we’re talking about massively disruptive events, like the transformation of the Southwestern United States into a permanent dust bowl over the next few decades.
I confess that I’m not aware of this research, and at times Krugman is a little too alarmist for my taste. (There’s a ton of uncertainty about how much temperatures will rise under business-as-usual and how bad this would be for human society.)
The simplest version of a Pigovian tax is an effluent fee: anyone who dumps pollutants into a river, or emits them into the air, must pay a sum proportional to the amount dumped…. Even today, Pigovian taxes as originally envisaged are relatively rare. The most successful example I’ve been able to find is a Dutch tax on discharges of water containing organic materials.
For some reason Krugman fails to mention the best idea in the world: revenue-neutral tax shifting, which involves increasing taxes on carbon and decreasing taxes on payroll, income, etc. (The basic economic idea—supported by economists of all political stripe, as evidenced by Greg Mankiw’s Pigou Club—is to have higher taxes on things we want less of and lower taxes on things we want more of.)
PS. There’s a successful implementation of a revenue-neutral carbon tax in British Columbia that deserves much more attention. (Part of what I do in my comedy life is tour the world and try to get folks interested in adopting similar policies; last night I was in Birmingham and presented the outlines of a proposal for Alabama.)