Krugman: Tiny economic growth reduction smarter than gambling our planet's future

An extended, thoughtful, informed Paul Krugman essay explains why we must urgently and substantially cut back our greenhouse emissions and presents the very happy news that reducing emissions won’t be expensive at all:

Just as there is a rough consensus among climate modelers about the likely trajectory of temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough consensus among economic modelers about the costs of action. That general opinion may be summed up as follows: Restricting emissions would slow economic growth — but not by much. The Congressional Budget Office, 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 to 0.09 percentage points.” That is, it would trim average annual growth to 2.31 percent, at worst, from 2.4 percent. Over all, the Budget Office concludes, strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise.

And what about the world economy? In general, modelers tend to find that climate-change policies would lower global output by a somewhat smaller percentage than the comparable figures for the United States. The main reason is that emerging economies like China currently use energy fairly inefficiently, partly as a result of national policies that have kept the prices of fossil fuels very low, and could thus achieve large energy savings at a modest cost. 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.

Krugman tells us to ignore right-wing talking points about how expensive reducing emissions would be because their numbers are false:

[C]onservatives abandon all faith in the ability of markets to cope with climate-change policy because they don’t want government intervention. Their stated pessimism about the cost of climate policy is essentially a political ploy rather than a reasoned economic judgment. The giveaway is the strong tendency of conservative opponents of cap and trade to argue in bad faith. That Heritage Foundation broadside accuses the Congressional Budget Office of making elementary logical errors, but if you actually read the office’s report, it’s clear that the foundation is willfully misreading it. Conservative politicians have been even more shameless. The National Republican Congressional Committee, for example, issued multiple press releases specifically citing a study from M.I.T. as the basis for a claim that cap and trade would cost $3,100 per household, despite repeated attempts by the study’s authors to get out the word that the actual number was only about a quarter as much.

He suggests a workable carrot-and-stick approach to bring China and other nations along:

Imagine setting up cap-and-trade systems in China and the United States — but allow international trading in permits, so Chinese and American companies can trade emission rights. 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. Since the evidence suggests that the cost of cutting emissions would be lower in China than in the United States, this could be a good deal for everyone….

Suppose that China refuses to reduce emissions, while the United States adopts policies that set a price of $100 per ton of carbon emissions. If the United States were to impose such a carbon tariff, any shipment to America of Chinese goods whose production involved emitting a ton of carbon would result in a $100 tax over and above any other duties. Such tariffs, if levied by major players — probably the United States and the European Union — would give noncooperating countries a strong incentive to reconsider their positions.

And he says the most powerful argument for taking quick, decisive action is that we’re currently hitting the accelerator toward uncertainty and potential catastrophe:

We’re uncertain about the magnitude of climate change, which is inevitable, because we’re talking about reaching levels of carbon dioxide in the atmosphere not seen in millions of years. The recent doubling of many modelers’ predictions for 2100 [from about 4.5 degrees of warming to 9 degrees] is itself an illustration of the scope of that uncertainty; who knows what revisions may occur in the years ahead. Beyond that, nobody really knows how much damage would result from temperature rises of the kind now considered likely.

You might think that this uncertainty weakens the case for action, but it actually strengthens it. As Harvard’s Martin Weitzman has argued in several influential papers, if there is a significant chance of utter catastrophe, that chance — rather than what is most likely to happen — should dominate cost-benefit calculations. And utter catastrophe does look like a realistic possibility, even if it is not the most likely outcome.

Posted by James on Thursday, April 08, 2010