Posted by: bmeverett | May 4, 2009

Paul Krugman gets it wrong (again)


On May 1, Princeton economist and Nobel Laureate Paul Krugman wrote an op-ed in the New York Times entitled “An Affordable Salvation,” in which he sings the praises of “cap and trade” legislation. Krugman’s piece is most helpful to the climate change debate – it offers a concise list of the fallacies offered in support of policies that are at once ineffective and expensive.
Krugman starts off with the obligatory claim that those of us opposed to “cap and trade” are practicing “junk science.” Honestly, Paul. Science is a simple process. A clear and falsifiable hypothesis, in this case that man-made greenhouse gas emissions will cause catastrophic near-term temperature increases, is tested against empirical data. If the evidence doesn’t support the hypothesis, we discard it. Climate change advocates, on the other hand, believe that scientific questions are best settled by organizing conferences of scientists to determine the truth. Once the “scientific community” has spoken, the rest of us uneducated slobs should keep quiet and do as we are told. The problem here is that the scientific evidence in support of the climate change hypothesis is ambiguous. Climate clearly undergoes changes, but these changes are caused by a variety of factors, including variations in solar energy, ocean currents, cosmic rays, the orientation of the Earth’s orbit, volcanoes and others. To understand climate change, we need to understand the entire system, not just the potential impact of one variable.
In fact, the scientists who make up the UN’s Intergovernmental Panel on Climate Change (IPCC) don’t agree very much on climate science. The models used by the IPCC produce very different results even when using identical assumptions. What these people do agree on is the need for a major increase in government control over the economy – not a scientific question.
Krugman then claims that “…the best available estimates suggest that the costs of an emissions-limiting program would be modest, as long as it’s implemented gradually.” Maybe, but the issue is what we mean by “gradually.” Climate change advocates are telling us that quick and massive reductions are necessary. President Obama’s plan is to reduce greenhouse gas emissions by 14% versus the 2005 level by 2020 and 83% by 2050. Americans currently emit about 6 billion metric tons of CO2 per year, and those emissions are growing at around 0.5% per year. To meet the President’s goal, we would need to reduce emissions by about 115 million metric tons annually over the next 40 years, equivalent to taking 12 million cars off the road and building 8 new nuclear power plants every year.
The key to Krugman’s argument is his view that raising costs fosters technological innovation. That’s clearly true, but it’s dangerous to assert that any cost increase will automatically be matched by comparable technological innovations. Krugman argues that “a commitment to greenhouse gas reduction would, in the short-to-medium run, have the same economic effects as a major technological innovation.” Can we really make the economy grow by raising costs? Climate change advocates, including President Obama, love to point to the Apollo program as an example of what Americans can do if we put our minds to it. Suppose we were to encourage space travel by fining every American who did not travel in space $1,000 per year. Would this spur sufficient technological innovation to permit all of us to take our vacations on the Moon? I doubt it. There is a limit to what technological innovation can produce.
Krugman equates faith in technological innovation with faith in free markets. This argument is silly. Technology is limited by, among other things, the laws of physics. We have been working on fusion energy for over 50 years no, and we still have no idea how to make it work, despite an enormous economic incentive for success. You cannot teach a dog to fly by using the proper incentives.
The real problem with “cap and trade” is that the cost and performance differentials between our current energy sources and zero carbon sources are simply too high. Solar energy costs 10 times as much as coal-fired electricity. A tiny carbon tax, increasing gradually, is not going to close this gap. Wind power is closer – probably 4-5 times the cost of coal power. Both these energy sources, however, are intermittent – they come when nature gives them to us, not when we need them. In the absence of cost-effective electricity storage – technology we have been seeking for well over 100 years – solar and wind power require back-up fossil fuel plants, which further damages their already poor economics.
Nuclear has a fighting chance, but we cannot restart our civilian nuclear program until we have removed the political constrains on plant siting and spent fuel storage. According to the DOE’s Energy Information Administration, the US currently has 100 billion watts (GW) of nuclear capacity accounting for 11% of our total electricity generating capability. By 2030, the EIA projects an additional 14 GW of nuclear power, partly offset by the retirement of 4 GW. The share of nuclear power in our electricity industry would actually decline from 11% to less than 10%. We could do better, but most environmental groups would be strongly opposed to a resurgence of nuclear power.
The dilemma of any carbon tax, whether it’s a direct tax or a “cap and trade” is that the tax cannot be set at a level that will simultaneously reduce greenhouse gasses by any meaningful amount and allow the US economy to grow at a healthy pace. The President’s proposed tax works out to about $14 per ton of CO2 – the equivalent of around 10¢ per gallon of gasoline. We learned over the summer of 2008 that it takes a gasoline price increase 20 times that amount even to begin to change consumer driving and vehicle buying habits. Even at this low tax level, however, the President expects to collect $650 billion over eight years. Whatever differences of view we have on climate change, we can all agree that the worst outcome is a policy that costs a lot of money and does no good.
One final comment on Krugman’s piece. He argues that the economic impact of auctioning emissions permits can be at least partly offset by rebates or tax reductions. Good luck. Once the Congress gets its hands on a source of revenue, they never let go. It’s far more likely that our federal government will use cap and trade revenues to support increased federal spending. Whenever Congress decides it needs more money and has squeezed as much from income and payroll taxes as it can, it will “discover” that carbon is in fact more costly than previously thought and increase the tax. For those of us who aspire to US membership in the EU, this would be a great future. For those of us who believe in individual liberty and limited government, “cap and trade” would be another blow.

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Responses

  1. Hi, interesting post. I have been thinking about this issue,so thanks for sharing. I will definitely be coming back to your site. Keep up the good work

  2. Solid web site: Will definitely visit soon.

  3. Neat site. Hope to visit soon!


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