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Can Mitigating Global Climate Change be a Free Lunch?

Matthew Stepp's picture
Center for Clean Energy Innovation

Matthew Stepp is the Executive Director for the Center for Clean Energy Innovation specializing in climate change and clean energy policy. His research interests include clean energy technology...

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climate change costs and paul krugman

Paul Krugman launched the latest salvo in the battle over the economics of climate change when he recently announced: “Saving the planet would be cheap; it might even be free.” Unfortunately, his pronouncement ignores critical nuances on policy and technology that lead him to the wrong conclusion that climate mitigation is a free lunch.

Historically, economists have haggled over the true costs of burning fossil fuels and the social cost of carbon, but Krugman’s assessment is a newer argument around the true benefits of decarbonizing the global economy. The basic idea is that stating climate solutions will ruin the economy are wrong and society will actually see a net benefit to a low-carbon economy in the long-term.

This narrative got its start when climate advocates latched onto an IPCC finding that under strict assumptions of policy, technology readiness, and technology deployment mitigating climate change would only cost between 0.04 and 0.14 percent of global GDP per year through 2100—a pittance compared to the potential costs of runaway climate change.

Except that advocates can’t ignore the underlying challenges for making this scenario a reality – for example, the IPCC finding is driven by the implementation of a global carbon price, which has already been determined as costly in the short-term and politically difficult, if not impossible. Failure to meet any or all underlying assumptions considered in climate economics studies jacks up the cost to the global economy. Calling climate mitigation “cheap” overlooks the very real and significant challenges for making mitigation truly affordable at all.

Krugman’s latest foray adds a new wrinkle to the debate: climate change mitigation is potentially cheap because of co- benefits, like increased public health due to less coal burning. Take one of his cited sources—the Better Growth Better Climate: The New Climate Economy report—a study supported by seven countries that commissioned leading economists, business leaders, and policy wonks to devise a new climate strategy. The report argues that if we factor in the health benefits of a low-carbon economy and reduced costs due to eliminating fossil fuel subsidies, the impact of climate policies like a global carbon price and higher cost clean energy zero out.

His other source—a new working paper from the International Monetary Fund—similarly argues that top emitting countries can implement higher carbon taxes without significant economic impact. The main co-benefit is a healthier population, but the catch is that countries need to use the carbon tax revenue to reduce taxes elsewhere.

Of course, even if these cost-benefit analyses holds true (the technical analysis behind the New Climate Economy report hasn’t been released yet), it’s obviously easier said than done. As many have argued already, eliminating fossil fuel subsidies is absolutely the right policy choice, but difficult to do particularly in developing countries that use oil subsidies to increase energy access and prop up domestic industries. The positive health impacts of climate mitigation are very real, but highly contested, difficult to quantify, and not factored into investment decisions at the country level. And the studies recommendations include policies like implementing carbon pricing, securing a global climate agreement, banning new coal power plants in developed countries, and accelerating urbanization—all politically and economically contentious recommendations in the United States and elsewhere.

So is mitigating climate change a free lunch? No, not really. There are very real short-term costs to transitioning to a low-carbon economy (politically, technologically, and economically) that can’t realistically be ignored.

For Krugman and others looking to convince policymakers to adopt a progressive climate strategy, rather than make spurious claims that climate mitigation is free, advocates and policymakers should be discussing how policy (in this country and others) can make it as cheap as possible. And the key way to lower the cost of climate mitigation is to continue lowering the cost of low-carbon technologies like wind, solar, nuclear, CCS, storage, energy efficiency, and bioenergy at or below the cost of fossil fuels through investments in technological innovation.

For its part, the New Climate Economy study prominently lists energy innovation policy as a critical tool for reducing climate mitigation costs (although this recommendation was ignored by Krugman), and the report advocates for tripling global research and development investments to ensure that a steady stream of new technologies and science breakthroughs continue entering the market and lower costs. It’s an area of climate policy that is vastly undervalued in the climate policy debate, so it’s important to note its prominence in the study.

One clear takeaway from studies like New Climate Economy and the IMF working paper is that mitigating climate change isn’t the economic “Armageddon” climate skeptics make it out to be, especially if we do it right. But much more work is needed to cut clean energy costs further and across a broader swath of low-carbon technologies. Energy innovation policy certainly costs money in the short-term, but it is one of the best opportunities to cut clean tech costs and fuel rapid deployment. It’s time Krugman and like-minded advocates stop coming up with ways to paper over this fundamental fact. Like Germany climate economist Ottmar Edenhofer stated recently, “Climate policy is not a free lunch, but it is a lunch worthwhile to buy.”

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Roger Arnold's picture
Roger Arnold on Sep 30, 2014

I’m no authority on the subject, but I’ve heard that the carbon tax enacted in British Columbia has been working out well. A carbon tax need not be a net increase in costs to consumers and businesses. In the BC case, it was specifically mandated to be “revenue neutral”. It offsets other taxes and has stimulated the local economy and businesses, while providing natural incentives for efficiency and non-fossil energy resources. If that is true, it would seem to support the case the Krugman makes.

I do agree, though, that vested interests do have the power to derail sensible policies that threaten their positions.

Hops Gegangen's picture
Hops Gegangen on Sep 30, 2014

 

A carbon tax will be a net increase for people who consume a lot of fossil fuel, while a net decrease for those who consume less. That will encourage using less, which some of us see as a net good. But the U.S. in particular has a lot of people who greatly resent even the suggestion that they make any sacrifice for the common good.

Just look at the fuss over the phase-out of incandesent bulbs; some people went out bought boxes of them, and Tea Party politicians in Congress ranted about it. Last I heard, Glenn Beck was still going on about it.

On a larger scale, people who live in rural areas and drive a truck everywhere will pay a lot of tax, while people in urban areas who take mass transit will get a rebate. That will create resentment on a regional scale, which demagogues and politicians will be sure to enflame and take advantage of.

So decarbonization might be free or even beneficial overall, but there will be a cost to some. And the U.S. is a republic, not a democracy; the majority does not rule here.

 

Robert Bernal's picture
Robert Bernal on Sep 30, 2014

Thanks for mentioning nuclear. If solar really gets built up, what nuclear we have will be shut down because of the lowering of the basseload threshold. “Clean coal” will be built in its place at a cost slightly lower than new light water reactors because it will be made tto be somewhat load following. Thus solar will (in this case) reduce very little to no emissions. Germany has built up some 13% renewables and reduced 5% of their emissions.

The better way is to re-deveop a meltdown proof reactor with molten salt as backup storagee, too. That way, it could replace coal and natural gas required by solar and wind.

Lewis Perelman's picture
Lewis Perelman on Oct 3, 2014

Excellent analysis, Matt. The “don’t worry, be happy” argument made by Krugman and the reports he cites belong in what might be called the If-pigs-had-wings” class. That is per the old saying that “If pigs had wings they would fly.” But they don’t. So they can’t. And they won’t. You did a good job explaining why.

The invocations of BC’s carbon tax — such as Roger’s here — share the same flaw. They presume that different states are fungible: What (supposedly) works for BC should work for the world. But that makes no more sense than arguing that because hummingbirds can fly, ostriches and elephants can too. The reality is that BC is not a proxy for the US, nor even for Canada. BC’s peculiar social, political, and economic conditions are not found in many other places, if any.

In a comment in the third part of his report here on the political shortcomings of the carbon tax, Jesse Jenkins debunks the argument about BC as a precedent or model. After noting the BC annual carbon tax comes to only $125 per household, Jenkins explains:

$125/year is right in the middle of the $80-200/household per year range evidenced in the WTP research I surveyed in my paper. If you translated that $125/year to the average U.S. household, which emits ~34 metric tons of CO2 per year, that would be equivalent to support for a carbon price of just $3.68 per ton of CO2 in the U.S. So it seems like BC’s much higher carbon price is much more a function of the low carbon footprint per household in BC (due to very low CO2 from the power sector there) than it is the income tax cuts and rebates. (Although one could pessimisticly read the BC case as evidence that you need to more than fully offset the annual costs for an average household just to secure even that modest a WTP…).

In other words, BC’s carbon tax is hardly more than a symbolic gesture. It imposes little economic and thus political pain on its residents because their carbon emissions were already much less than is common in many other places, certainly than in the US. So what they are willing to pay (WTP) really isn’t costing them much.

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