Wednesday, September 12, 2007

Freakonomics on Climate Change

A New York Times blog called Freakonomics, lead by economist Stephen Leavitt, who write a polular book with the same name, has an interesting post today about what some economists think should be done about Cliamte change.

Here is the explanation for the post:

We have blogged occasionally about different pieces of the global-warming puzzle see here, here, and here), and we touched on the subject briefly in a New York Times Magazine column. It is an extraordinarily interesting issue, to say nothing of its importance and complexity, in part because there are so many foundational economic principles at play: not just supply and demand, but the presence of externalities, unintended consequences, etc. We will address a couple of those issues in our next Magazine column, which comes out this weekend.

Ben Ho, an assistant professor of economics at Cornell’s Johnson Graduate School of Management and former energy and transportation economist for the White House Council of Economic Advisers, offers these thoughts:

It should be obvious that for any problem, some solutions are more effective than others. Despite what some fearmongers may have you believe, it is not the case that anything we do to reduce greenhouse gas emissions is worth the cost. We could, for example, ban all oil and coal use worldwide. That would halt emissions, but few would believe the resulting economic fallout in terms of poverty and starvation to be justified. Economists have estimated that any policy intervention that costs more than about one penny per pound of carbon dioxide saved is probably not cost effective. (As a point of comparison, burning a gallon of gasoline emits about 20 lbs. of carbon dioxide.) If saving a gallon of gasoline will cost you more than 20 cents in time or effort, there are better uses of your time that would do more to combat global warming. Policy makers should heed the same guideline.
Another crucial point on which most experts will agree is that the U.S. will account for only a tiny fraction of emissions in 2050. Chinese greenhouse gas emissions have already surpassed those of the U.S. Recent E.P.A. estimates suggest that in order for global carbon dioxide emissions to stabilize, three quarters of future reductions would have to come from developing countries like China and India. Many advocates argue that a carbon tax or carbon cap in the U.S. would lend the U.S. the moral authority to persuade the rest of the world to follow. However, history has shown that moral authority alone is insufficient to cause countries like China to act against their own interests.

Colin Camerer, professor of business economics at Caltech, has a different take:

Climate warming is certainly the mother of all externalities, both global and intergenerational. It is also a perfect storm of behavioral economics phenomena: the culprit has no face. . . .

One argument which I have found surprisingly absent is the apocalyptic version of Pascal’s wager: if there is a genuine strong change, we should move swiftly to combat it, and if there isn’t, swift movement to cut carbons would not be so bad (it could spur innovation, etc.). If you think the evidence is unclear, that’s not an argument to do nothing unless the evidence will become clearer soon — which it won’t. As such, your view is still an argument for doing something nowm because the cost of a false alarm is small and the cost of a missed threat is large. Big reforms are like an insurance policy: you pay insurance for peace of mind, but you also hope your money is wasted, and there is a small irreversibility from having sacrificed up front.
Voluntary demand-side reduction at a large international scale won’t work. Besides the problem of free-riding, people (and countries) who are helpfully cutting back get annoyed when others aren’t. You see this clearly in lab experiments on contribution to public goods in “commons dilemmas” — people help out at first, then get mad that others aren’t helping, and express their anger by not helping. One useful tool is a serious carbon tax (choose your favorite number, double it, hope for something in between, and find a politically popular way to earmark some of the revenue to R&D that won’t be supplied privately).
Even better is an international permit trading system (and yes, it should be international, since local systems won’t equalize the cost across countries). Get past the moral indignation of issuing licenses to pollute. Firms and governments that will pollute will do so whether you like it or not, but at least a trading system rewards the good guys. Trade-able permits also put a sharp price on the value of reducing carbon, which is a good way to monetize the valuation of carbon-reducing technology, and hence to make the value of innovation clear and encourage it.

There are comments by many other economists and business leaders--a a fairly wide ranging set of ideas--here.

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