February 24, 2019

TAX WHAT YOU DON'T WANT:

Want a Green New Deal? Here's a better one. (Editorial Board,  February 24, 2019, Washington Post)

ASK PRACTICALLY any climate scientist whether humanity must cut greenhouse-gas emissions, and you get an emphatic yes. Ask practically any economist how to do that as cheaply as possible, and the answer is equally emphatic: put a price on carbon dioxide emissions with a carbon tax or a cap-and-trade program.

Pollution pricing is not untested theory. It is the policy that ended acid rain, ahead of schedule and more cheaply than projected. Following that success, it was long assumed that pricing carbon dioxide would be the centerpiece of any ambitious plan to slash emissions. Yet Republicans never embraced the market-based idea, even though conservative economists admit its appeal, because they never accepted the need to act at all. Some environmentalists, meanwhile, are increasingly wary of carbon pricing. The Democrats' Green New Deal, which is noncommittal on the policy, reflects the accelerating drift from the obvious.

Yet neither the science nor the economics has changed. It is still imperative to act. And carbon pricing is still the best first-line policy.

Theory and practice confirm this unassailable point: If it costs more to pollute, there will be less pollution. Taxing all fuels according to their carbon content would send a price signal to every business and every consumer. Habits that pollute would become more costly. Changes that reduced pollution -- generating cleaner electricity, buying more efficient appliances, weatherizing homes, investing in smart thermostats -- would become more desirable.

A high-enough carbon price would shape millions of choices, small and large, about what to buy, how to invest and how to live that would result in substantial emissions cuts. People would prioritize the easiest changes, minimizing the costs of the energy transition. With a price that steadily rose, market forces would steadily wring carbon dioxide out of the economy -- without the government trying to dictate exactly how, wasting money on special-interest boondoggles.

Here's an example. The Intergovernmental Panel on Climate Change found last year that an average carbon price between 2030 and the end of the century of $100, $200 or even $300 per ton of carbon dioxide would result in huge greenhouse-gas emissions cuts, could restrain warming to the lowest safety threshold of 1.5 degrees Celsius and would almost certainly prevent the world from breaching the traditional warming limit of 2 degrees Celsius. In contrast, U.S. biofuels policy, a sad example of nanny-state inefficiency, costs $556 to $618 in 2010 dollars to abate one ton of carbon dioxide, according to the Organization for Economic Cooperation and Development in 2013. With its array of green subsidies and mandates, the government is overpaying for too few emissions cuts in too few sectors of the economy. [...]

But even carbon pricing would not be quite enough. There are places where the price signal would not come through or be effective. In those circumstances, the government would have to do more.

For example, economists know that companies that invest in research and development do not get rewarded for the full social value of their work. Others benefit from their innovations without paying. Consequently, firms do not invest in research as much as society should want. On clean energy, that would be true even with a price on carbon emissions. The government should fill this research gap. It would take only a small fraction of the revenue a carbon pricing system would produce to fund a much more ambitious clean-energy research agenda. Basic scientific research and applied research programs such as ARPA-E should be scaled up dramatically.


You seldom hear Russ Roberts completely flummoxed on his Econ Talk podcast, though it's nearly always when his libertarianism comes into conflict with his faith and or reality, as here where he just can't process the fact that ARPA-E returns value.

Posted by at February 24, 2019 5:32 PM

  

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