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Pricing Emissions: Political Will Needed

Bill DiBenedetto | Monday April 26th, 2010 | 0 Comments

Paul Krugman, the 2008 Nobel Prize-winning economist and New York Times op-ed columnist, offers this riposte to those that say addressing climate change is too costly, too traumatic and too radical: We can afford to tackle climate change.

And we must do it.

Writing about Green Economics in the April 11 New York Times Magazine, Krugman says that the casual reader “might have the impression that there are real doubts about whether emissions can be reduced without inflicting severe damage on the economy.”

But the fact is, he continues, that once the noise generated by special interest groups is filtered out, “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.”

Krugman’s article talks about free markets, market-based approaches to addressing problems and the “negative externalities” that can emerge from economic activities. The latter point is resonant for the economics of reducing climate change.

“When there are ‘negative externalities’–or costs that economic actors impose on others without paying a price for their actions–any presumption that the market economy, left to its own devices, will do the right thing goes out the window.”

So what should be done? “Environmental economics is about answering that question,” Krugman says.

The article looks back to the acid rain debate of the 1970s and 1980s. Experience with that issue, eventually resulting in a cap and trade system in which power plants could buy and sell the right to emit sulfur dioxide, “suggests that market-based emission controls work.” Over time under that system sulfur-dioxide emissions from power plants were cut almost in half and at a “much lower cost than even optimists expected; electricity prices fell instead of rising.” Acid rain did not disappear, but it was mitigated significantly.

The result from the acid rain experience demonstrates that “we can deal with environmental problems when we have to,” Krugman says.

Just about any economist, even a certified liberal like Krugman, recognizes that free market trade and commerce, market approaches and capitalism in 2010 are based on self-interest.

So any serious solution to climate change “must rely mainly on creating a system that gives everyone a self-interested reason to produce fewer emissions. It’s a shame but altruism must take a a back seat to the task of getting such a system in place,” Krugman says

The moral arguments against cap and trade – for example that it’s wrong to let polluters buy and sell the right to pollute or that in a cap-and-trade world, individual acts of virtue (such as buying a hybrid vehicle) only frees up emissions permits for someone else–have some validity, according to Krugman, but “altruism cannot effectively deal with climate change.”

The bottom line? Krugman says that while climate change is probably a “vastly bigger” problem than the problem of acid rain, “the logic of how to respond to it is much the same.”

What is needed are “market incentives for reducing greenhouse-gas emissions – along with some direct controls over coal use – and cap and trade is a reasonable way to create those incentives.”

Once the conclusion is reached the next questions are: Can we afford it? Equally important, can we afford not to?

“We can afford to do something about climate change” Krugman says, because the risks and the costs of doing nothing are too great.

Yes, achieving cooperative global action on climate change is “complicated and tendentious” and likely will remain so. “Yet the problem is not as intractable as you often hear. If the United States and Europe decide to move on climate policy, they almost certainly would able to cajole and chivvy the rest of the world into joining the effort. We can do this.”

The risks of climate catastrophe, while uncertain in both timing and magnitude, “rather than the details of cost benefit calculations, makes the most powerful case for strong climate policy. Current projections of global warming in the absence of action are just too close to the kinds of numbers associated with doomsday scenarios.”

There is broad agreement among environmental economists, according to Krugman, that “we need to put a price on carbon emissions, that this price must eventually be very high but that the effects from this policy will be of manageable size.”

No one said shifting to a new energy-saving economy that leaves fossil-fuel to the dinosaurs will be fast, painless or easy. Krugman’s article acknowledges this and is a strong and reasoned call to action. “It would be irresponsible–it’s tempting to say criminally irresponsible–not to step back from what all too easily could turn out to be the edge of a cliff.”

So once that thought is accepted–and it should be–the debate should focus on the pace and the timing of action.

Krugman concludes that it’s the “nonnegotiable probability of utter disaster that should dominate our policy analysis. And that argues for aggressive moves to curb cargo emissions, soon.”

That said, the immediate prospects for climate action are not promising from a political perspective.

If political support for climate change revives, the economic analysis and justification is ready: “We know how to limit greenhouse gas emissions. We have a good sense of the costs–and they’re manageable.

“All we need now is the political will.”


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