Monday, October 28, 2013

Krugman part 2: you can get pretty far just by regulating coal

Eli's excerpted Krugman's book review of Nordhaus below, but there was one other part of the review that especially interested me:

[Nordhaus] more or less ridicules claims that climate change isn’t happening or that it isn’t the result of human activity. And he calls for strong action: his best estimate of what we should be doing involves placing a substantial immediate tax on carbon.... 
Why is putting a price on carbon better than direct regulation of emissions? Every economist knows the arguments: efforts to reduce emissions can take place along many “margins,” and we should give people an incentive to exploit all of those margins.... The answer is, all of the above. And putting a price on carbon does, in fact, give people an incentive to do all of the above....

And yet there is a slightly odd dissonance in this book’s emphasis on carbon pricing. As I’ve just suggested, the standard economic argument for emissions pricing comes from the observation that there are many margins on which we should operate. Yet as Nordhaus himself points out, studies attempting to analyze how we might most efficiently reduce carbon emissions strongly suggest that just one of these margins should account for the bulk of any improvement—namely, we have to sharply reduce emissions from coal-fired electricity generation. Certainly it would be good to operate on other margins, especially because these studies might be wrong—maybe, for example, it would be easier than we think for consumers to shift to a radically lower-energy lifestyle, or there might be radical new ideas for scrubbing carbon from the atmosphere. Nonetheless, the message I took from this book was that direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing—not as good, but not bad.

And this conclusion becomes especially interesting given the current legal and political situation in the United States, where nothing like a carbon-pricing scheme has a chance of getting through Congress at least until or unless Democrats regain control of both houses, whereas the Environmental Protection Agency has asserted its right and duty to regulate power plant emissions, and has already introduced rules that will probably prevent the construction of any new coal-fired plants. Taking on the existing plants is going to be much tougher and more controversial, but looks for the moment like a more feasible path than carbon pricing.
(Emphasis added.)

The Republican Party has consistently opposed market mechanisms to help the environment, forcing us to use regulations instead or let the environment go to pot. Some times regulations work better than others, but it would be helpful if the Republicans just gave the market a chance.


Anonymous said...

Regulate coal?

Market economics have beat you to the punch.

Loretta Lynn

Andrew Dodds said...

Replace Coal with Nuclear; get rid of perhaps 40% of emissions.

Virtually impossible to achieve by market mechanisms, because it's a matter of long term capital costs, and markets just don't see far enough ahead. Reasonably simple for governments which currently have extremely low long term borrowing costs.

Yeah, broken record, I know.

My take on carbon taxes (amongst other market-based approaches) is that they are simply not required, because of the nature of the system. We *know* what technology we have available, or is within an easy step. No matter how many market forces we try to use, these options will remain the same. Indeed, Loretta Lynn shows a perverse outcome that's possible.. we may cheer the replacement of Coal with Natural gas - on a local scale, US coal production has not shrunk - but the reality is that these CCGT plants represent decades of future emissions now locked in.

The secondary problem with carbon taxes - something which academic economists seem willfully blind to - is the political impact. Here in the UK, energy prices are already in political football territory; carbon taxes, immediately passed on to consumers in the first instance, would therefore be wildly unpopular as well as extremely regressive. I'd also add that fuel duty in the UK is the closest analog to a serious carbon tax (ie well over 100%) that I am aware of, and at best it's reduced fuel consumption by half over several decades, this being a mixture of miles driven and fleet economy.

So.. Carbon Tax. If the question was 'How do we reduce emissions by a few dozen percent over the next few decades, paid for by those least able', it would be a great answer.

Scatter said...

"carbon taxes, immediately passed on to consumers in the first instance, would therefore be wildly unpopular as well as extremely regressive."

Would you consider a carbon tax regressive if the revenues were distributed equally across the population as a dividend?

Given that the top income decile uses something like twice as much gas and electricity as the lowest decile and travels four times as far, we'd see quite a hefty transfer of wealth from the wealthy to the poor going on under such a scheme.

Andrew said...


In theory, yes.

In practice.. the practical reality is that for individuals to reduce emissions, they have to invest. A dividend is unlikely to supply the capital to do this, whilst reducing the pressure due to increased energy bills.

And politically, we've now got to sell both carbon taxes AND a dividend scheme.

I see it as a problem caused by the dominance of economics in political discourse. We are simply not allowed to consider any solution that is not a market or derivative thereof. For example, the solution 'Government undertakes a project to develop and build a fleet of Th-Breeder reactors to decarbonise the grid' is not allowed. Not for technical reasons, but simply because it does not involve markets.

There is an interesting analogy with Evolution here: There is a vast 'phase space' of creatures that evolution cannot reach (Wheeled creatures being obvious, but it goes down to the biochemical level). Because Nature insists on ONLY using evolution, this phase space cannot be explored. All creatures are based on their parents and have to survive to reproduce. Markets are similar - companies have to survive right now. Both processes are excellent at reducing inefficiency and adapting to near field changes, but generally poor at radical or directed change.

Russell Seitz said...

There is so much coal in circulation that you can get pretty far- as much as a half a Wedge, just by regulating its composition.

Just as tar sand bitumen oil is a far cry from aliphatic sweet crude, the highest hydrogen high volatile deposits area long way from anthracite in the freaction of their energy that comes from hydrogen rather than carbon.

EliRabett said...

Except that the way that coal is mined today, broken up at the face to move it better in small chunks you lose a lot of the volatiles.

You can, however, do some good by fracking the seam and capturing the released gases.

raypierre said...

Yes, let's say it all together, 1,2,3...


(But gotta keep an eye on tar sands, too, since they represent a pretty big carbon pool)

Obama needs to take ownership of the war on coal. There's not even much downside to it, since there are really very few jobs in coal, and not much constituency for it. Some say that it's not the jobs that count, but the cheap energy, but when you factor in health and environmental consequences (even leaving out global warming) coal tends to come out with negative value. So it's not even cheap energy.

Brian said...

As long as people keep thinking that it's asthma that killed Junior and don't think about coal, they'll still like their cheap energy bill.

I think the best political shot after Obama will be not in the general presidential campaign but the Democratic primaries. There, an anti-coal candidate might write off wins in Ohio, Virginia, and North Carolina to clean up delegates in California and New York. Just watch for backsliding afterwards.

And yes, Obama's got a great opportunity right now.