Krugman On A Green Economy

http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html

Sooner or later we all have to get serious about what will create a better environment for future generations. Whether or not we agree about global warming, or the pace of global warming, bad things will happen if we don't come up with incentives to reduce pollution.

We have attached an article where Paul Krugman debates what to do economically about improving the environment. Basically, he asks and answers the question: is it possible to make drastic cuts in greenhouse gas emissions without destroying our economy? Like the debate over "climate change" itself, the debate over climate economics looks different when looked at closely: "In fact, once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists 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."

The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own businesses within the new limits. Over time, sulfur dioxide emissions from power plants were cut almost in half. So, an approach like that can work.

While Krugman wants to separate "climate economics" from "climate science", he takes time to point out that there is enough evidence to support global warming severe enough to ultimately transform the Southwest United States into a permanent dust bowl over the next few decades. We agree.

The bottom line is that while climate change may be a vastly bigger problem than acid rain, the logic of how to respond to it is much the same: "What we need are market incentives for reducing greenhouse-gas emissions - along with direct controls over coal use - and cap and trade is a reasonable way to create those incentives."

Restricting emissions would slow economic growth (and, of course, the right wing elements are quick to point that out) but not by much. The Congressional Budget Office (CBO), relying on a survey of models, has concluded that Waxman-Markey "... would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 and 0.09 percentage points." That is, it would trim average annual growth to 2.31%, at worst, from 2.4%.

And, of course, there is "China." For those who think that taking action is essential, the right question is how to persuade China and other emerging nations to participate in emissions limits. Krugman's suggestion that cap-and-trade systems could be set up to work in China and the United States with trading between companies in both countries is a reasonable approach: "By setting overall caps at levels designed to ensure that China sells us a substantial number of permits, we would in effect be paying China to cut its emissions."

Ah, but what if the Chinese (or the Indians, or the Brazilians) do not want to participate in such a system? Then, that's what "carbon tariffs" are for: "A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods." The WTO has already produced a study that suggests carbon tariffs would be legal under international trading rules. And, remember here, Krugman's Nobel was based on his work in international trade and comparative advantage.

As for the scientific incentive to "act", Krugman points to Harvard's Martin Weitzman who argues that there is a significant chance of "utter catastrophe" and it is that chance - rather than what is most likely to happen - that should dominate cost-benefit calculations. Weitzman argues, and Krugman agrees, that the risk of catastrophe, rather than the details of cost-benefit calculations, makes the most powerful case for strong climate policy.

Assuming all of the above is reasonable, the issue here in the United States is do we have the political will to make it happen? Senators Kerry, Lieberman, and Graham plan to introduce legislation later this month that puts together a compromise proposal for climate action. We'll see where it goes.