With Many Ways to Look at Climate Change Economics, Initial Assumptions Are Key

When Paul Krugman weighs in on anything, people listen. Princeton professor, New York Times columnist, and more recently, Nobel Prize in Economics laureate, Krugman's C.V. shines unusually brightly even in the firmament he inhabits.

When he says, let's do something about climate change, people—pundits, politicians, powerful people—listen. This is good, because we’re running out of time. And when he says, in the pages of the NYT Sunday Magazine, that we can limit climate change through "drastic cuts" in CO2 emissions “without destroying our economy,” people listen too.

Almost every serious commenter, in fact, agrees, in the broadest terms, with Krugman’s analysis. But people fight over semantics, and fights over semantics are always fights over politics.

While there is widespread agreement, according to Krugman, 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,” people argue over “how fast we should move, whether major conservation efforts should start almost immediately or be gradually increased over the course of many decades.”

In the course of his argument, Krugman parries several objections. The main one is cap-and-trade vs. a carbon-tax based approach to carbon emissions. Both effectively create a tax, one indirectly, through the price of carbon permits, the other directly, through an economy-wide tax. But the former has more loopholes than the latter. The problem, which Krugman doesn’t lay out, is that Americans hate taxes, and riddle them with exemptions and exceptions.

As Krugman asks, “The question is whether the emissions tax that could actually be put in place is better than cap and trade.” The answer, plainly, is no.

Krugman goes on to the core of his argument: “What we need 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.” He places to the side the issue of altruism, and non-market-based incentives—massive command-and-control systems, for example, except in extenuating circumstances—for example, he advocates cutting off coal burning. Put aside most objections to his objections for the moment, with one caveat: the largest mega-corporations, Wal-Mart, for example, are structured internally on command-and-control systems. Wal-Mart’s 2009 revenue was over 400 billion dollars.

This is feasible. But it will impact growth. As Krugman writes, “One recent review of the available estimates put the costs of a very strong climate policy — substantially more aggressive than contemplated in current legislative proposals — at between 1 and 3 percent of gross world product.” Waxman-Markey, he notes, would have only very small impacts on US GDP, between “0.03 to 0.09 percentage points,” according to the Congressional Budget Office (Waxman-Markey was rejected by James Hansen on account of it doing nothing to arrest climate change and much to neuter the movement to arrest climate change).

Such estimates mean very little without serious delineation of what, for example, “very strong climate policy” means. But they do serve to grapple with conservative talking points to the effect that climate change abatement will be ruinous for the economy. It won’t.

Can't assume growth

Krugman goes on to sharply dispel arguments about the costs of action versus the costs of inaction. He rightly finds this debate offensive. As he puts it, the “risk of catastrophe, rather than the details of cost-benefit calculations, makes the most powerful case for strong climate policy.” That said, that argument is over the route forward. Here is where Krugman starts maneuvering on treacherous, and arguably unstable, terrain.