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Growth and Climate

Ryan Avent's picture
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  • Nov 2, 2010

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The Economist’s review of Roger Pielke Jr’s new book reads:

The dilemma is that policies to reduce carbon-dioxide emissions have so far been singularly unsuccessful. Mr Pielke expresses the essence of this failure as what he calls the “iron law” of climate politics: “When policies focused on economic growth confront policies focused on emissions reduction, it is economic growth that will win out every time.”

It’s a pithy little law he’s got there, and it sounds pretty darn insightful. The implication is that emission reductions are destined to be political failures. If humanity is to overcome the challenge of global warming it must come up with policy solutions that allow people to avoid this choice, either by making emission reductions growth-inducing or unnecessary. And the further implication is that the right policy mix focuses not on emission reductions but on research, growth, and adaptation.

But as nice and neat as that thinking seems, it runs into two little obstacles. First, what are these growth-emission trade-offs we’re talking about? We understand that demand for goods (like, say, carbon-intensive energy) may be very inelastic in the short run but quite elastic in the long run. If we increased the price of coal by 50 cents a ton next year, no one would notice. If we increased the price by $1 a ton the year after that, again, no one would notice. Then $2 per ton the year after that? The changes would be too small to be economically harmful. But over time, if increases went on in that fashion, the change in relative prices would lead to emission reductions. And if people knew ahead of time what the changes would be, they could invest beforehand and increase the rate at which demand became more elastic. There need not be any trade off between growth and emission reductions.

The second problem is the more interesting one — voters are more than happy to opt for growth-reducing policies in other circumstances. They’re often eager to do so; sometimes they outright demand them. If the argument is that people are cold growth-supporting calculating machines and that’s why they dislike emission reduction plans, well, that’s a bad argument.

What are better arguments? Well, one might rephrase the law thusly: “When policies advantageous to moneyed interests confront policies focused on emissions reduction, it is the moneyed interests that will win out every time.” This is a controversial idea in some corners of the punditocracy, but I’m not sure why. Powerful industry groups oppose emission reduction rules and have consistently worked for the defeat of climate legislation. Industry groups have spent billions of dollars on lobbying efforts and advertisements to achieve these ends. Now either they were getting something for their money, in which case the modified law above is right, or they were throwing their money away, in which case we may as well tax away those dollars and invest them in green technology or transit or education or something.

Once you’ve tweaked the law in this more honest fashion, the policy recommendations go in interesting directions. Specifically, we find that we need to make emission reductions either interest group pleasing or unnecessary. The latter means growth and adaptation investments, same as before. The former means juicy subsidies which, not coincidentally, our legislative system seems to be pretty good at producing. These policies are more costly and less effective than the “bad for growth” policies economists recommend. When you follow the logic where it leads, rather than where Roger Pielke pretends it goes, you discover that the better emission rules aren’t impossible because of some iron law of voter rationality but because (at least in part) the system is pretty disgustingly corrupt.

Now the other good argument is that the American voter is behaving rationally. He or she sees that the direct benefit to him of climate legislation is going to be pretty small — maybe too small to notice. He or she may suspect, not unreasonably, that while climate rules may be growth enhancing on net, the distribution of costs may be spread unevenly, such that not every household enjoys net benefits. Meanwhile, the whole corrupt system thing going on in the first good argument may sour them on the entire effort to put together policies that maximize benefits while minimizing costs. They may figure that even if a good policy is available in theory, Washington will screw it up, and the end result will be a bunch of corporate welfare, higher taxes, and jobs shipped to China. It’s one thing to pay more to give your granddaughter a healthier world to live in. It’s another to pay more to enrich ethanol producers and manufacturers willing to move production to other countries.

The bottom line is that Pielke has this wrong; the failure of climate legislation is not about a conscious choice by the American voter to take growth over environmental sustainability. It’s about the inability of the American political system to deliver something comprehensible, with a credible cost-benefit ratio, to voters.

(That, and the climate skepticism. You can’t ignore that, obviously. But voters are also skeptical of trade liberalization, and governments have nonetheless managed to slowly hack away at trade limits over the past 70 years.)

I’m prepared to admit that economists have been less than helpful in their constant advocacy of carbon pricing, to the exclusion of all else. Even if it’s an elegant and efficient policy, it’s not necessarily an intuitive policy to most voters. For students of human behavior, economists are often dreadfully ignorant of the way actual humans behave. My (still evolving) view is that Pielke is wrong, and efforts to make climate fixes look like free lunches are unlikely to be any more successful than Waxman-Markey. Instead, I think climate rules need to move forward one step at a time, and each step of the way voters need to be clear on the price and what it gets them. Want to tax something? Tea party revolution aside, that’s doable. But people don’t want to hear about how that tax is reducing their incentive to use carbon. They want to know what their money is buying. So tell them! Let them purchase something with their carbon tax!

And so on in that vein. Politicians have been running from costs. That’s the wrong approach. Hang the costs on benefits like a price tag.

One other behavioral observation. Economists  — and I, as well — have observed public reluctance to accept various efficient tax schemes and endeavored to come up with clever ways to buy off the losers. It’s like, hey, we can design a congestion pricing scheme in which everyone is made better off, simply by refunding a portion of the revenues to etc. Increasingly, I think this strategy, while efficient from a politico-economic standpoint, is doomed to fail. Voters, it seems, look at deal cutting like this and see funny business. They don’t want to hear that they were made better off by bank bailouts. What they see is some decidedly shady doings which rewarded people who didn’t deserve to be rewarded. It’s often irrational to be moralistic about economic choices, but humans are humans.

I may be kidding myself in thinking that simpler and less-bargained policy choices would play any better with the public. It may not matter since the interests that control critical political choke-points demand to be bought off. But I wonder. I wonder if it isn’t worth experimenting with radical honesty. Man, even if it failed it would be pretty refreshing — cleansing –to try, wouldn’t it?

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