Tuesday, December 8, 2009

Economists Are Not Climate Scientists, and Vice Versa

I have often lambasted economists and other social scientists who pretend to understand climate science as well or better than do climate scientists. This time, the shoe is on the other foot.

In yesterday's NY Times (here), climate scientist/doomsayer James Hansen published an op-ed in which he pontificated on climate policy, endorsing a carbon tax plan known as "fee and dividend" over "cap-and-trade." I have no problem with this as a matter of theory. In fact, in theory, I agree that an upstream carbon tax would work better than a cap-and-trade regime. But not for Hansen's reasons. He complains that a cap does not create any incentives to reduce emissions below the level of the cap, which is true. What he fails to understand is what Marty Weitzman showed us back in his famous 1974 article on "Prices vs. Quantities": a tax is really nothing more than a quota set at the point where marginal abatement cost equals the marginal cost of the tax.

The only real reasons to prefer a carbon tax over cap-and-trade have to do with lots of things Hansen does not understand, including relative elasticities of supply and demand, whether having certainty about the quantity emitted or the price (and uncertainty about the other) is more important to the policy maker, expected market distortions, relative administrative costs, and political feasibility. With respect to the last consideration, Paul Krugman (here) gets the final word against Hansen:

[W]e have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future. It’s just destructive to denounce the program we can actually get — a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time — in favor of something that can’t possibly happen in time to avoid disaster.

Put simply, climate scientists should stick to science, and leave to social scientists the job of designing and implementing policies in light of that science. This is not to say that climate scientists are incapable of contributing to policy discussions on climate change; but, just as social scientists should be modest about their role in climate science, so should climate scientists be modest about their role in climate policy. But modesty has never been James Hansen's strong suit.

2 comments:

  1. How does taxing a polluter reduce pollution?

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  2. By imposing a per unit tax on pollution emissions, the government imposes a cost for polluting on the polluter. The polluter has the choice of emitting the same amount and paying the tax or reducing the amount of pollution to avoid the tax. If it costs the polluter less to reduce emissions rather than pay the tax, it will do so. It is the job of the tax-setting body (usually Congress) to set the tax at a level that is predicted to lead to a certain desired amount of pollution abatement.

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