A perfect, green world

24 Sep 2007 08:30 am

More broadly, Econospeak's post seems to suffer from a subtle version of a fallacy that Will Wilkinson pithily summarized:

In the real world, the mind works like this, and this can lead to all kinds of problems. And in an extremely unrealistic abstract model of government action, its agents can easily and objectively identify problems and act to effectively solve them. So, let’s have the ideal government solve the problems of nonideal cognition.

It sounds stupid when you put it that way, doesn’t it? The trick is figuring out how to work with real minds, using real governments!

. . . so how are you going to do it? Most real government institutions are at least as kludgey and means-ends inconsistent as real minds are. “Silly, your sock won’t open that can of spinach! So try your pillow instead, because a model exists in which pillows are can-openers.”

In an ideal world, Econospeak says, cap-and-trade and carbon taxes may be functionally identical; the government will simply keep raising the price on the tax until it hits the carbon target. But in this vale of tears, where we have but the crumbly clay of humanity to work with, this doesn't function so well:

The real wonder here is that Mankiw could make such an elementary economics error as to suggest that taxes and cap-and-auction are “effectively” the same. In an uncertain world this is false. From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice. By controlling the number of permits we control our most important impact on the earth’s carbon budget, but allow prices to wander. By setting a tax we control the price but allow the amount of pollution to wander. That’s a big difference: you might say, given the gravity of what is at stake, that it’s the difference between ecological responsibility and irresponsibility.

See, the government can't be trusted to target the correct emissions level with a tax. That's why we should have the government target the correct emissions level with permits . . .

A more realistic model assumes that any American government will, to a virtual certainty, be more generous with either its tax or its credits than [Me + anyone to the left of Bill Clinton] would like. Under that scenario, a tax develops obvious benefits: it provides some mitigation even if permitting is excessively generous. Witness the recent debacle in Europe's greenhouse market where everyone issued too many permits and the price collapsed.

It's also politically and administratively more difficult to exempt special interest groups from carbon taxes than from cap-and-trade. Carbon taxes are also, obviously, much easier to levy on transportation than a cap and trade system, if for no other reason than that it obviates lengthy wrangling about fuel efficiency and which producer should buy the permits for the end-consumer.

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