Knowing and Making

I should have known better than to read this article by Joss Garman of Greenpeace ( Obama's new fear is a cleaned-up China ), but having done so I need to respond to this point: In Cancun, European leaders were often left on the sidelines, with little new to offer beyond their 20% emission cut, agreed in 2008. This carbon target is now insufficient to make Europe a player in the clean tech markets – a 30% target is the minimum needed to drive private sector investment into the sector. This assertion seems to be supported by no evidence whatever. Why would a 20% emissions cut not be enough to drive private investment in green tech, but a 30% cut would? For that matter, why would Europe's emissions targets even be a major influence on private investment - presumably if there's a market in the US and China, European companies will still want to capture a share of it? After 19 years on the Internet, I shouldn't be all that outraged that someone published an unsubstantiat...

Given the low political chances of any effective climate change reform coming out of Congress in the next few years, I was pleased (and surprised) to see this projection  from the US Department of Energy: ...the level of carbon dioxide emissions in the United States will remain below the rate of 2005 for the next 15 years even if no new restrictions are imposed. That's stunning. And gives us hope that ordinary supply and demand might do at least part of what politicians can't seem to: reducing demand by increasing the price of carbon.

Consumerology reports a study by David Hardisty, Eric Johnson and Elke Weber at Columbia which randomly offered participants various choices between different pricing options for airline tickets. The main distinction was between a surcharge described as a "carbon tax" and an identical charge described as a "carbon offset". The tax was unpopular - no real surprise. But when people were asked if they supported making the carbon offset mandatory - which is of course exactly equivalent - the response was highly favourable (around 2 points more positive on a scale from -3 to +3). Not only was the "mandatory offset" more popular, but it was regarded identically by Democrats and Republicans. The tax, on the other hand, was strongly disliked by Republicans while Democrats made no distinction between taxes and mandatory offsets. Thus the entire effect appears to be due to Republicans' attitudes to tax. This is an example of a well-known cognitive bias ca...

Most economists are inclined to agree with Greg Mankiw that a high tax on carbon, reflecting the best estimate of its social cost, is the best way to mitigate the effects of carbon emissions. [ Edit : In this posting I consider a carbon tax to be roughly equivalent to cap-and-trade - of course there are differences but my point applies to both mechanisms ] In theory, this should encourage the right mix of reduced growth in consumption, development of energy-efficient technology, and compensation to those affected by climate change. Economic theory says that the market will respond in the most efficient way to a tax which fully reflects the external costs of the activity (known as a Pigovian tax after economist Arthur Cecil Pigou who was an early proponent of the concept). In particular, it should not be necessary for the government to subsidise research into green technologies - they might pick the wrong ones, and they will probably end up wasting more money than the market would if...

Hal Varian in the WSJ (via Mark Thoma and Marginal Revolution) has touched on a topic I have been thinking about for a while: how is the fiscal stimulus best spent? On consumption or investment? There are essentially two tools available for the stimulus: tax cuts and government spending. And there are five main sources of demand in the economy: private consumption, private investment [optionally divided into business and residential investment], government consumption, government investment and exports. I am not going to address all ten combinations, but focus on private investment - should we promote it, and if so, which are the best tools to do so? I am a priori neutral between tax cuts and spending; tax cuts are good because they let people allocate spending by efficient private choice; spending can be good if it achieves public goods that are not best purchased in the marketplace. My intuition, like Hal's, is that private investment is important. But is there a clear argument...