Friday, July 3, 2009

More Musings on Climate Change

. Friday, July 3, 2009

I've recently had a couple of posts on climate change that have focused on what the U.S. can and should do to prevent climate change from occurring, and how much it would cost. While I didn't actually come out and say that it would be foolish for the U.S. to act unilaterally, I expressed skepticism that there are positive economic benefits from doing so (while acknowledging that there may be strong normative reasons that outweigh the dollars and cents). Matt Rognlie has also been blogging on this topic, and ends a recent post with an audacious claim:

It's easy to dismiss carbon policy because it "won't make a difference." But I have never seen anyone making this argument appropriately deal with the economic, moral, and political issues I've discussed here.

I think he's completely wrong about that; following the release of the Stern report there was a lot of talk in the blogosphere and elsewhere about the economic and moral concerns, and the international and domestic political aspects are a common topic. Still, if Rognlie thinks there is a void, perhaps I can fill it. Rognlie's economic, moral, and political claims can be summed as follows:

1. Economic: Demand curves do not slope downwards outside the U.S.

2. Moral: The U.S. will be guilty of mass murder and planet rape if it does not act, unilaterally or otherwise.

3. Political: International cooperation (including the BRICs and other developing countries) will be easier to achieve if the U.S. takes the first step without reciprocation.

Let me first say that I don't completely disagree with Rognlie's argument, but I enjoy playing Devil's Advocate and I don't think the case is quite as straightforward as he makes it out. I'd like to start with the claim that the U.S. has a moral responsibility to curb its emissions. This judgment is supported by Arthur Pigou's concept of externalities, wherein some economic actions have costs that are not directly borne by the party engaging in the economic activity. The classic example is of a firm that pollutes as it manufactures its goods: the benefits of production are captured by the firm, but the costs of the pollution are spread throughout the whole society. At a glance, this framework seems to capture climate change perfectly: the industrialized world enriches itself by emitting carbon into the atmosphere, but the costs of those actions are spread throughout all of the world.

The narrative gets murkier when we look at specifics, however. The logic of externalities depends on being able to identify the offenders and the victims. After all, who are the polluters in this case? Historically, it has been the entire industrialized world. And who are the victims? The unindustrialized world. In other words, every country that has the means to pollute does pollute, because pollution is a by-product of economic growth, and the countries without the means to pollute are desperately trying to gain them. So all that we can say is that the industrialized world is more efficient at doing what everyone is trying to do: generate economic growth. But if everyone is seeking the same outcome, then is it morally appropriate to castigate the ones who achieve it more successfully? True, outcomes have diverged, but preferences have not. This suggests that the logic of externalities may not be the most appropriate way to think about climate change.

Now that China -- a developing country -- is the world's greatest polluter in absolute terms, and other developing countries are also increasing their pollution, the moral calculus shifts further. India and Russia, two other of the BRICs, are also in the top 5 emitting countries and developing countries were responsible for 73% of the increase in emissions in 2004 (and that ratio has surely increased in the last 5 years). As the developing world becomes responsible for a larger and larger share of emissions, then who are the victims? Well, all of us. But if there is a preference-choice to be made between growth and a clean environment, it seems that all countries, not just the greedy West, have made the same decision. To say it more technically, as Larry Summers did in his infamous "LDCs should pollute more" memo, the income elasticity of environmentalism is very high, so it is very unlikely that the developing world will choose conservation until they reach a high level of economic development.

Of course, the moral argument might be swamped by more pragmatic problems. Even if we settled the question that the West should do more to curb emissions, we are left with figuring out how it can be done and the economics of energy do not support an equilibrium with lower global energy consumption. To see why, suppose the developed world reduces its energy consumption significantly to combat climate change: the reduced demand for energy will lower the price, the reduced price will cause the developing world to increase the quantity of energy demanded until the price is bid back up to equilibrium. In other words, reducing MDC demand will increase LDC demand. This may be fine in egalitarian terms -- it's essentially a wealth transfer from the richer countries to the poorer countries -- but the environmental effects will be nil. In fact, they could be negative: as incomes in the developing world increase, their demand for energy will also increase which could lead to greater overall consumption of energy.

So we're left with the political problems. Rognlie claims that if the U.S. acts now, then getting cooperation from the Chinese and Indians will be easier to achieve a few decades hence. Perhaps. Perhaps not. That is unknowable. But even if China and India (and Russia and the petrostates) are more amenable to a reduction of carbon emissions in the future, that doesn't necessarily change the economics discussed above, or the political difficulties that have always been present. In 2040 the rapidly-rising economies may be in Indochina, or Africa, or Latin America and they may be reluctant to give up their rising incomes in order to combat climate change. And at all points in this chain we are faced with the common collective action problem: enforcement is essentially impossible, so defection is highly likely. The politics of this are just as gloomy as the economics.


More Musings on Climate Change
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