Krugman on climate economics

Nobel Prize-winning economist Paul Krugman has written an excellent introductory article on climate and environmental economics, for The New York Times: Building a Green Economy. The piece is a combination of a non-technical introduction and a kind of literature review. His basic thesis is:

In fact, once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change — one that limits carbon emissions by putting a price on them — can achieve large results at modest, though not trivial, cost. There is, however, much less agreement on how fast we should move, whether major conservation efforts should start almost immediately or be gradually increased over the course of many decades.

I agree that the latter disagreements exist, and I agree with Krugman that what we know about the climate system justifies aggressive action to reduce and eventually eliminate greenhouse gas emissions. In particular, the non-trivial danger of catastrophic outcomes is a strong justification for precautionary action.

The article includes a concise explanation of Pigovian taxes, of which carbon taxes are a sub-category:

What Pigou enunciated was a principle: economic activities that impose unrequited costs on other people should not always be banned, but they should be discouraged. And the right way to curb an activity, in most cases, is to put a price on it. So Pigou proposed that people who generate negative externalities should have to pay a fee reflecting the costs they impose on others — what has come to be known as a Pigovian tax. 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.

Note that as discussed here before, such taxes may be technical mechanisms, but they do not eliminate the need to make ethical choices. Just because a company has been burning coal for decades doesn’t mean it has the right to continue doing so, particularly as new information on why its use is harmful comes to light. By the same token, it is not an ethically neutral choice to say that people who have enjoyed a clean river have the right for it to remain unpolluted. There are many bases on which claims can be made: historical precedent, need, prior agreements, overall welfare, etc. Economics alone cannot provide a solution.

The article also covers cap-and-trade systems, and the ways in which they are similar to and different from carbon taxes; the importance of whether permits are auctioned or not; how even strong mitigation policies would only cost 1-3% of the global domestic product; the importance of major emerging economies taking action; carbon tariffs as a way of encouraging that; the sustantial costs of inaction; the signicance of catatrophic risks (“it’s the nonnegligible probability of utter disaster that should dominate our policy analysis”); a non-mathematical discussion of discount rates; and the status and prospects of climate legislation in the United States.

In short, the article touches on a great many topics that have been discussed here previously, and generally reaches rather similar conclusions to mine and those of most of this site’s commentors. One slightly annoying thing about the piece is that is discusses temperatures using the idiotic Fahrenheit scale, but I suppose that is to be expected when writing for an American audience. Another strange thing about the article is how Krugman fails to mention any of the co-benefits that accompany moving beyond fossil fuels: from reduced air and water pollution to lessened geopolitical dependency.

One of the best things about the piece is how is openly recognizes the seriousness of the problem we are addressing:

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.

Too many recent journalistic accounts and government announcements have affirmed the strength of climate science, without elaborating on what that means, and the type and scale of actions that compels.

The piece is probably worth reading for anybody who doesn’t feel like they have a basic understanding of environmental economics, and their relation to climate policy.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here. View all posts by Milan