Yesterday, Paul Krugman blogged about the economics of environmentalism and alternative energy, trying to twist the argument in his favor by claiming that there simply are not the incentives in place to attract investors into alternative energy industries. Writes Krugman, “If you seriously believe in markets, you should believe that given the right incentives — namely, putting a price on emissions, through either a tax or a tradable permit scheme — the economy will find lots of ways to emit less.” Believe it or not, Krugman is trying to address free market economists, or — as he puts it — economists who believe in the “magic of the market”. He suggests that those who are really pro-market should support the legislation of taxes and permits to regulate emissions.
Krugman’s case, though, is either misleading or incomplete, and fails to actually address the reasons why free market economists oppose tax and permit schemes. Namely, by putting a limit on emissions you also limit production, because the level of emissions is related to the degree of productivity. Of course, the ratio between emissions and production can be changed in favor of production with the introduction of new technologies, but new technologies themselves can only be invented and invested into after a sufficient degree of capital accumulation has taken place. By limiting productivity you are, in effect, limiting the ability to invest. In this sense, emission caps — in whatever form they are legislated in — are counterproductive.
Krugman rightly points to historical advancements that have made machinery more efficient, such as steam engines. Krugman suggests that emissions regulations will incentivize greater advancement. But, not only does limiting a firm’s productivity make it more difficult to introduce new technologies to increase efficiency, but the incentive was already there. Emissions represent waste, and there is always an incentive to reduce waste. Waste is a cost; the cost is foregone production (waste is capital goods that did not go into the produced product, similar to how heat is the “waste” product of energy conversion). That is why more efficient engines have been produced, and why factory waste has decreased over the past two hundred years.
Finally, even if you could “incentivize” (read ‘force’) companies to invest in alternative energies, the fact is that you are “incentivizing” the company to invest along a line that they originally deemed less worthy. In other words, they are forced to invest in lines deemed second best (or worse) to the investment they would have completed otherwise. This represents economic waste, or a cost, in the form of opportunity cost (the difference between the value of the original investment and the value of the whatever-best investment [X1-Xn]).
I do not intend on commenting on the legitimacy of any of the anthropogenic global warming theses. I am not a scientist, nor have I read enough to even remotely qualify me as someone with an educated opinion. But, even conceding the argument that anthropogenic global warming is real, Krugman’s argument is not persuasive. I think the incentive to reduce waste already exists, and I think that historically we have seen this incentive put to use. We should not forget about the incentives which could be put into place if there was a private legal system that evolved around the protection of property; that is, if the market process tended towards a greater internalization of the costs of pollution.
George Reisman, in Capitalism, discusses this a bit, pointing to how much cleaner our air, streets, and water systems are compared to two hundred or one hundred years ago, largely thanks to technological advances. I think people like Paul Krugman simply refuse to see the market process as it really is. They start with assumptions that clearly favor their positions, even if they are not grounded in reality, and go from there.
This is not my biggest problem with Krugman’s argument, though. I think there is a serious lapse in economic and theoretical honesty in his writing. Even if Krugman is unwilling to budge regarding incentives, he should admit that his “solution” would come with a production cost. He should come out and say that his case basically amounts to utilitarianism, where he thinks a loss in production is worth the environmental effects his policy is expected to have (for society as a whole). Instead, he tries to catch free market economists in an “aha!” moment by leaving out the majority of the details — details that do not favor his reasoning.
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“Krugman’s case, though, is either misleading or incomplete, and fails to actually address the reasons why free market economists oppose tax and permit schemes. Namely, by putting a limit on emissions you also limit production, because the level of emissions is related to the degree of productivity.”
I think this characterization is fair for permit schemes, but not for taxation schemes. A tax would merely explicitly price carbon (presumably to reflect expectations regarding warming/pollution damage). Presumably if we are worried about anthropogenic warming (as Krugman seems to be), then a key concern might be that by the time the costs of pollution are translated to the market, the damage will already be done. A carbon tax seems like an attempt to inject this cost into the market before it’s too late.
Krugman’s point is that given appropriate costs, the free market is expected to be quite good at generating improvements. This seems obviously true and in keeping with much of the thinking on Mises. Whether that’s the right thing to do is, as you say, a utilitarian question. But it does seem that many here would agree with the primary thrust of his argument – namely that if we put a price on carbon, the free market will find ways to produce much less carbon in a very effective manner. I think it’s clear that such pricing would reduce emissions faster than the natural “inefficiency” pressure would.
Rory,
I think your last sentence is absolutely correct, but doesn’t really sum up the entire issue. Ultimately, we can’t really calculate what the price of damage will be at some point in the future, because we don’t really know what the extent of damage will be or how this damage will really manifest itself. So, for all we know, the price imposed through taxes can be completely arbitrary (and it probably is); it may be based on a model that is likely to change a few years from now.
I think it’s also worth considering that you may not really need the damage to manifest itself in order for it to be factored into production costs. That is, if we had a system that did not protect major firms from property damage liabilities. If the firm expects an increase in production costs (for example, in expectation of a rise in lawsuits for property damage), the firm is likely to factor this into present and intermediate investment decisions. This incentive alone would cause a gradual reduction in emissions output, if the firm believes that there is a direct connection between emissions output and property damage (and the firm has an incentive to investigate, since the potential costs are supposedly “very high”).
So, ultimately, the case against Krugman, in this respect, is that the cost he is willing to enforce on the present market is not based on any realistic calculation of what the cost will actually be (and if he thinks that emissions output will either remain the same or rise, when in fact it is probably more appropriate to assume that they will gradually fall [per capita], this will be a further inaccuracy in his accounting model).
Another benefit of the gradual presentation of future liabilities is that it won’t cause an immediate cap on productivity. In other words, firms will continue to be just as productive (or even more productive over time), allowing them to re-invest part of their profits into increasing efficiency (which increases wealth output and decreases waste output).
Fwiw, I can agree with the argument that the present system protects the firms against some of their liabilities. I am all in favor of eliminating this form of protectionism (and all forms of protectionism, but I just want to focus on this issue specifically). But, as I argue in this response, I think that this method of dealing with future liabilities is much better than the all-out emissions cap method, because it allows the cost to be spread over a period of time. If you force the costs all at once, you may inhibit the firm’s ability to reduce emissions down the road.
I find your argument much more persuasive than the one presented in the post. If we properly set a tax on emissions to reflect the externality then we are decreasing production but that is appropriate as such pollution is effectively an infringement on other’s rights. However, properly setting the tax is a non-trivial problem and in fact it can be argued that it is intractable.
Well, I think one of the major problems with a tax that deals with C02 emissions is that we really don’t know if firms emitting CO2 are infringing on other people’s property rights or not. A firm might calculate expected future liabilities based on the belief that this may be a future problem (and spend some time researching the possibility), but this is effectively a question of ignorance (uncertainty) regarding the future.
A tax won’t even go to the right people. It’ll involve transfer costs, and won’t go to its victims but will rather be absorbed by the government for its agents own purposes. Moreover, it’d constantly need to be changed to reflect alterations in market data. Better to just fully enforce property rights and allow the market to generate outcomes endogenously, than to try play god and guess where prices “should” be.
The recent carbon tax in Australia is evidence of this – the tax only affects 500 companies with the majority of “carbon polluters” exempt entirely. The 500 companies affected are all going to receive massive transfer payments as “compensation”, along with “poor” households. There’s a mismatch between tax revenue and “compensation” of something like $10bn.
The government also used the tax legislation as an opportunity to create new bureaucracies to funnel taxpayer dollars to their friends through and further interfere with and control markets – bureaucracies such as the Clean Energy Finance Corporation; Climate Change Authority; Energy Security Council; Clean Energy Regulator; Land Sector Carbon and Biodiversity Advisory Board; and Australian Renewable Energy Authority, all of which now have billions of dollars and thousands of staff at their disposal.
Regardless of what the science shows, an ideal economically “efficient” carbon tax cannot be successfully implemented by any government. The public choice school has clearly demonstrated that self-interested political actors will skew it in such a way that the outcome will always be worse than if nothing at all was done.
That’s not really the point of Pigovian taxes. The point of such taxes is to price the externalities in order to integrate those costs. It’s not about compensating the victims. So while that may be a valid criticism, the proponents of CO2 taxes are not saying this tax will compensate victims. (Well, most are not saying that)
Additionally, the unknown costs that emitters are paying for are not being returned to those who are bearing the costs, but are sent into general government coffers, which are not overwhelmingly used to compensate the “victims” of the alleged actions. The alleged victim is the nebulous, faceless “society” and government decides that this nebulous concept is its ward and collecting the reimbursement is its proper role. A taxing or permitting scheme ignores those actually victimized by the activities in favor of paying for programs that distort the medical system, provide poverty creating retirement benefits, and blow up people in other countries.
I really like your response, J. Murray. All these programs are supposedly going to benefit the public, but rarely, if ever, are the taxes or fees levied used to benefit anyone but the government program responsible for levying the tax or fee.
I second Ms. Woods’ approval of Mr. Murray’s observation. It’s merely the creation (or expansion) of a government “industry.” It’s reminiscent of recent news in which munincipalities all over the U.S. completely ignored insurance companies’ advice that lengthening–even only slightly–the “yellow” of the traffic light signal would substantially reduce accidents at intersections (and save lives). Quite contrarily, the tendency has been, nearly everywhere, to reduce duration of the yellow signal (because it aids in generating many more revenue-producing tickets and fines for running the red).
There can be no doubt that the U.S. has, somewhat gradually, become a semi-fascist state.
Ironically, I’d bet that wind & solar would be closer to free market feasibility without state subsidies by now. The state dumps money into sycophantic suck-ups like G.E., FirstSolar, etc and thus enables them to buy up too large a share of the electrical engineers and others involved in developing technology. Obviously this stifles innovation and competition, but it also misdirects the goal of the corporation; such companies (looking at you here, GE!) are too concerned with winning government contracts, grants, and subsidies and too unconcerned with consumer demands.
That’s highly unlikely. There’s no real incentive for solar energy to be particularly viable yet. Solar panels are highly subsidised and they’re still not particularly competitve.
Speaking about solar panels, my uncle is an agricultural engineer (assistant professor at la Politécnica de Madrid) and he told me that there is evidence of solar panel farms in Murcia (I believe) having an adverse effect on the region’s weather patterns. I haven’t been able to either confirm or deny his story though.
Gil: whether it’s likely or not is anyone’s guess; we can never be very sure about the “likelihood” of something happening in the future ’cause we’re stuck with present knowledge and technology for forming the basis of our mullings. The real and important point is that whatever risks and costs exist are undertaken by those doing the imagineering–without burdening any of the rest of us.
The atmosphere is inherently the hardest “common” to privatize, and as such the traditionnal libertarian solutions do seem to come up short with regards to air pollution (global warming or others). As such, pricing carbon emissions and letting companies trade for them is probably the closest to a free trade solution that I can see, altough it would necessitate government enforcement.
Of course, the individual who would invent a process to recycle the so called greenhouse gases into a valuable commodity would become a multi-billionaire multiple nobel prizes winning superstar. With an IP regime or not
Point taken, but does it require privatization of the atmosphere? Surely, if pollution (whatever pollution we want to discuss) is harmful, the effects won’t manifest themselves only in the atmosphere. So, where conflict would arise is regarding the harmful consequences of pollution on things people can better claim ownership on (such as themselves or their property). And, if a relationship between atmospheric pollution and tangible negative side-effects can be proven, then this could probably be used against the company in a lawsuit (whether in our current legal system or in a private legal system).
Quite true, and especially so in cases of locally emitted pollutants with direct results (such as smelters paying for repairs to the paint of dwellings and automobiles in downwind communities). However, in a case of global warming, for example, or any large scale emissions/effects, the effects would be the result of the sum emissions of every emitter in the world, or a large geographical aera, in proportion to their part of that sum. Pricing the emissions directly achieves basically the same result, only without the heavy legal system.
Of course, the price to set itself is problematic and virtually impossible to define prior to seeing the actual damages done.
I don’t see why a decentralized solution is necessarily worse than a tax. Sure, it may be more difficult from the perspective of a “central planner”, but for the individuals involved it’s not any more complicated and it’s actually more rewarding (since the person who is harmed is actually paid — see J Murray’s post above). Also, like I say in a response above, the greatest influence of possible future liabilities is the idea that the company will factor them in before they become reality as a means of avoiding them.
“However, in a case of global warming, for example, or any large scale emissions/effects, the effects would be the result of the sum emissions of every emitter in the world, or a large geographical aera, in proportion to their part of that sum. Pricing the emissions directly achieves basically the same result, only without the heavy legal system.”
Um, since it requires a regulatory system to a) estimate the pricing (which I won’t even grant it can do) b) enforce these “solutions” and c) won’t even transfer the funds to the actual victims, I don’t see why this is so. Moreover, why could a non-state system not achieve the same result by simply considering emissions above certain levels to be property right violations? The emissions -will- be priced anyway since they -are- wasteful and incur the threat of legal action, and in some areas where pollution thresholds are particularly low (and the polluter is a latecomer) the price might be particularly acute. it might be hard to price for alleged events like AGW, but courts could always just award a slight premium when quantifying damages due from pollution to account for this. The net effect of decentralised solutions will be to reduce overall emissions over time, but not in the blunt, ad hoc way the government would do it.
A simpler solution: Emitting pollution into the atmosphere is an infringement on other people’s property. Ban all emissions.
Everybody owns the air on, and that flows through, their property. If they are damaged by someone polluting their air, that’s aggression and the polluter would have to pay damages.
http://mises.org/daily/4453/Regulating-Caveman-Technology
My contention is that carbon emission is a benefit. Global warming is a benefit – higher crop yields. Therefore, using Krugman’s argument the government should subsidize carbon “polluters”!
What else but a free market could produce better pollution control technology? Government can’t produce anything ex nihilo. Of course, the “right incentives” provided by government is no free-market solution. Enforcing property rights is the only free-market solution.
Ya know, if ya can’t measure the harm, how harmful can it be???
If you want to see the damage done by the government subsidizing emerging technology, you need look no further than the ethanol subsidies – subsidizing something that otherwise would be uneconomic removes the incentive to look for better technologies that would be economic.
Which is another way of saying the guy is NO economist.
This very important fact is nevertheless totally ignored by the environmentalism crowd. Krugman and others suffer the sin of impatience; they consider market solutions as either too slow in coming or driven by ugly self-interest. Their issue with markets is not only a teleological one, it’s also rooted in aesthetics. The market is yucky [for them] because people are self-interested and dirty and gooey… Yeech!
Instead, planning is pleasant; there’s clear purpose and clear goals, an achievement [no matter how elusive in the end.] People like Krugman are thus irremediable and hopeless romantics.
This:
“This very important fact is nevertheless totally ignored by the environmentalism crowd. Krugman and others suffer the sin of impatience; they consider market solutions as either too slow in coming or driven by ugly self-interest. Their issue with markets is not only a teleological one, it’s also rooted in aesthetics. The market is yucky [for them] because people are self-interested and dirty and gooey… Yeech!
Instead, planning is pleasant; there’s clear purpose and clear goals, an achievement [no matter how elusive in the end.] People like Krugman are thus irremediable and hopeless romantics.”
Wins.
Old Mexican:
Couldn’t have said it better meself–except I’d have added that, like most “romantics,” they seem to have a significantly lower knowledge of (or regard for) the truth.
Like most of these self-centred planners of everyone else’s affairs, Krugman is romantically involved with himself.
Sione
“Emissions represent waste, and there is always an incentive to reduce waste. Waste is a cost; the cost is foregone production[.] That is why more efficient engines have been produced, and why factory waste has decreased over the past two hundred years.”
We are evolved from organisms that evolved using the waste product of photosynthesis. It is a good job the there was not the equivalent of idiots like Krugman railing against organisms producing horribly corrosive pollution in the form of oxygen, otherwise we would not be here to discuss this point. (OK – “a good job” is a value judgement).
Walt D.
I have no specific quantitative knowledge of the matter but will go out on a limb to say I think you’re not understanding the relationship (oxygen/carbon dioxide) quite properly. Nor do you know what would be the relationship between the two in our same world without living things
or what is was before any life began.
Remember that, although, in the photosynthetic process, plants use carbon dioxide and liberate oxygen, the process is dependent on the UV rays of our sun, so, as a rough guestimate, take place only during about half the time each day, more or less dependent on the season. But those same plants (including the vast mass in the seas) are, like animals, breathing (or, more correctly, respiring–combining available gaseous oxygen and stored carbon (produced by photosynthesis)–to support their metabolism–on a 24-hour-a-day basis.
As I said, I don’t have a good idea of the relative magnitudes of these phenomena. But I do wonder a bit when the environmentalists groan about all the “greenhouse gas” produced by human agricultural effort and, at the same time, bemoan the loss of similarly-producing flora in the form of forest/rain forest.
more capital is needed for clean production than dirty, taxes slow the accumulation of capital
If any time someone pays money for something, we call this a market, then the government could charge people for letting them live. Say, pay $20 a month and we won’t kill you. There’s a market, according to some people.
With all these 100 degree plus temperatures you’d expect the environ mental retards to be coming out of the woodwork prattling about man made global warming. Not a peep. What is happening? Could it be that Barack Obama and his predecessor have been so successful in destroying capitalism in the US that they have declared victory and moved on?
I’m not entirely well read on recent news regarding global warming, but there may be an internal recoil due to the recent uncovering of “dirty science” involved in AGW research (the invention and manipulation of data, especially). I don’t remember exactly, but I recall reading about inconsistencies in temperature changes over the year, as well.
The last Item I saw was trying to explain the lack of measurable global warming over the past decade by increased soot pollution coming from china.
So I guess that means… back to coal?
http://www.theonion.com/video/in-the-know-coal-lobby-warns-wind-farms-may-blow-e,20876/
I am new to Mises, and I love what I am learning about economics from everyone from the scholars and the posters. The author of the article said,
“I do not intend on commenting on the legitimacy of any of the anthropogenic global warming theses. I am not a scientist, nor have I read enough to even remotely qualify me as someone with an educated opinion.”
To which I say, that never stopped our buddy Al Gore, who is neither a scientist or accurate in his assumptions about climate change.
Climate change is the greatest hoax to ever be promulgated in our time. A great one hour movie that you can you-tube is called, “The Great Global Warming Swindle.” This movie explains it much better than I can. However, in a nutshell:
First what you need to understand is the make up of the Atmosphere. 95% is Oxygen, Nitrogen and other gases. The remaining 5% is made up of greenhouse gases. 95% of that 5% is water vapor. Water vapor is by far the most important greenhouse gas. CO2 plays a minimal role in our ever changing climate (which is what climate has always done, from ice ages to warm periods) and is also why it is measure it parts per million. CO2 is not a pollutant, it is plant food and plays an integral part of our life cycle on this planet.
According to the ice core data from Vostok, there have been periods on earth where there has been 3, 6 and 10+ times as much CO2 as there is today and according to the temperature record, the temperatures don’t reflect what the (jaded) computer models predict should be the temperatures in relation to CO2. As a mater of fact they found that there was a reverse relationship between temperature and CO2. Al Gore shows in his film how temperature and CO2 graph on top of each other, but if you look closely at the graph you will find that the temperature went up 1st then 200 to 800 years later the CO2 followed. It should be the other way around if CO2 is suppose to drive climate. True science does not support any of their theories.
Now I am not against being responsible stewards of the planet, but this hoax is being perpetrated for 2 reasons power and money. With carbon credits as a new currency, it is predicted that the carbon credit trade world wide will be multi-trillion dollar market. Trading hot air will make a lot of the rich a lot richer at the expense of common man.
A great website I have found that’s specific purpose is to counter the misinformation of the climate change crowd is : http://scienceandpublicpolicy.org/
The above website is sponsored by: The Science and Public Policy Institute
I have no affiliation with the Science and Public Policy Institute, however I have had a some very positive interactions via email with the founder Robert Ferguson.
I invite you to investigate for yourselves. It won’t take long for you to realize that Al Gore isn’t a climate scientist, he just plays one on TV.
Cap and Trade would put government in the business of controlling the climate. Hmmm. Let see. How is it doing controlling its own budget?
Ned
Answer: Not at all well.
Now, what is the prize I have won for getting the correct answer!
Sione
Sorry, Sione, you do not win the prize, which, btw, was 100 one-ounce Krugerrands. Fortunately, the contest has now ended without a winner. Your answer was not correct because “not at all well” fails to adequately express the total incompetence of government in its inability to accomplish anything positive without doing far more harm from the unanticipated–but only unanticipated by the idiots who “believe” in government in the sense that others believe in God–consequences. But thanks for entering.
On a more serious note, I have heard it reported that the US dollar is underpinned by the OPEC countries selling only for dollars. With that relationship becoming shakey and uncertain over the long term, would a world-wide CO2 trading system in US dollars be a way of shoring up a global reserve currency?
Sione
To the “the market will solve our problems because emissions are waste” people:
Yes, eventually, but the whole tricky thing about the environmental stuff is that the really bad things start happening AFTER the damage is largely irreversible.
To the “anticipation of risk will make the prices right”:
Markets *might* try to price that risk in ahead of time if the following conditions held:
1) The markets had an idea of the potential damage and incurred expenses (nope)
2) The individual actors had good reason to believe that their contributions to the problem could be meaningfully distinguished and acted upon by some suing (or otherwise damage pursuing) entity. (nope)
Given that neither necessary condition holds, and that the conditions together need not be sufficient, I see no reason to believe that the conclusion (realistic market pricing) will hold.
In his first post on this thread, Rory Charmichael commented,
“Presumably if we are worried about anthropogenic warming (as Krugman seems to be), then a key concern might be that by the time the costs of pollution are translated to the market, the damage will already be done. A carbon tax seems like an attempt to inject this cost into the market before it’s too late.”
Any effort by government to tax or regulate for the purposes of controlling the environment are bound to do more harm than good and have a tsunami of unintended negative consequences. My gosh, Rory, do you want to put the same bozos in charge of the climate who can’t even manage to balance the budget more than once every fifty years, and who we just watched with hilarity and unbridled contempt “manage” the (contrived Kabuki theater) debt-limit “crisis?” Just look at what they did to the climate and the nation’s energy resources with their insane subsidy of ethanol, which is universally recognized as a mighty blunder yet the gangsters are unable to repeal their idiocy before they further damage the earth’s environment and the nation’s food supplies.
And what makes you think that this gang of 545 legislators, presidents and supremes are capable of recognizing the costs of pollution before those costs are “translated to the market.” The market is comprised of everybody who buys, sells, refrains from buying or selling, which must comprise several billion people, and they know at least that many billion divided by 545 times (X) what the gang of politicos knows, or more precisely don’t know.
What does Krugman know? He’s a Keynesian. He worships the State as his god. He really believes that civilization cannot get along without the guidance of Big Brother. There is just no accounting for the weird theories of Keynesians.
RIRY: “To the “the market will solve our problems because emissions are waste” people:
Yes, eventually, but the whole tricky thing about the environmental stuff is that the really bad things start happening AFTER the damage is largely irreversible.”
How do you know that? And, so what? For entrepreneurs who are not hemmed in by statist regulations, no challenge is too great, no damage is irreversible.” That is a myth worthy only of statist cranks like Michael Moore or Al Gore. Long before or soon after anthropogenic warming becomes a problem, entrepreneurs will find a solution and perhaps even put it to work for society’s general welfare–if government will only let them. How do I know? I know by much better science than informs your conclusion that government can do something about global warming without making matters worse. What a joke! On my side I have the example of entrepreneurs producing virtually everything consumers (viz., mankind) have ever imagined and desired, whereas you have the example of the State producing nothing but forcible taxation, wars and unintended consequences.
Writes Krugman, “If you seriously believe in markets, you should believe that given the right incentives — namely, putting a price on emissions, through either a tax or a tradable permit scheme”
Illuminating. So Krugman’s definition of “markets” is “markets managed by central planning.” In other words, “markets” are simply a resource to be managed by central government.
This is sailing very close to Rand’s description of looters in “Atlas Shrugged”: Hank Rearden finally “gets” it when he sees a vision of a farmer with nothing to work with but bare rock being commanded by the looters to produce food. If he says he can’t, he’s clearly not being given the “right incentives”.
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