The argument for action on climate change
Jim Manzi summarizes his case against action on global warming on the Cato website. Cato also published responses from Joe Romm and Indur Goklany; a response is pending from Shellenberger & Nordhaus. On American Prospect, Ryan Avent also weighs in, saying that Manzi’s argument is the "most sophisticated argument against comprehensive carbon regulation that you’ll ever see" (though Avent disagrees with it obviously).
Manzi’s work on this subject is certainly clever. In another world I’d have quite a few things to say about it, but I’m leaving Monday (er, today) for Las Vegas — and the following Monday for Denver, and the Monday after that for St. Paul. This month promises to be insane and unfriendly to blogging on non-travel-related subjects. So here’s the sketchy version.
Manzi’s argument has three pieces:
- The impacts of climate change on global GDP are likely to be modest, "on the order of 3 percent of global GDP in a much wealthier world well over a hundred years from now";
- the benefits of carbon regulation, even in theory, are modest;
- in the real world, international carbon regulation would be riddled with side deals, special favors, and loopholes sufficient to render the net benefit negative.
Ergo: carbon regulation doesn’t pass the cost-benefit test. (Manzi instead recommends R&D modeled on DARPA.)
Piece no. 1
Romm goes after No. 1 by arguing that the IPCC is more dire than Manzi describes, and almost certainly conservative given the science that’s emerged since the last report.
Avent notes that global GDP is a poor measure. A good chunk of Africa could be completely wiped out with fairly insignificant impact on global GDP.
I would argue (or in the present case, wave my hands) that even pure GDP estimates are conservative. The idea that resource wars, famines, or mass migrations in other parts of the world will leave the growth of rich countries merrily unimpeded is unlikely, particular insofar as developed economies remain dependent on the supply of fossil fuels from hostile or autocratic states. A itemized list of costs doesn’t necessarily capture system effects.
Piece no. 2
Manzi’s go-to guy on economics is William Nordhaus, whose DICE is one of many computable general equilibrium (CGE) models that serve to frame the debate in national policy circles. (The debate over Lieberman-Warner saw models from the EPA, the EIA, NAM, and the Heritage Foundation used as supporting evidence.)
I talked to several economists about these models a few weeks ago and without exception they heaped scorn on the use they’re put to. Even Douglas Holtz-Eakin, former head of the CBO and an authority on econometric modeling, says that the models are no good as predictive tools. For one thing, they offer qualitatively different results based on tweaks of a few key assumptions. Manzi mentions discount rate, the value we put on future people’s welfare, in this case future generations — the Stern Review, which counsels drastic action, is basically Nordhaus with a different discount rate. How much should we value our grandchildren’s welfare relative to our own? It’s ultimately normative — or as Holtz-Eakin puts it in economic terms, "insoluble."
Others argue that CGE models don’t capture the technology-forcing benefits of price signals. Skip Laitner, formerly of EPA and now with the ACEEE, has for years been arguing that CGE models fail to account for the full benefits of investments in efficiency.
Others I talked to questioned the whole CGE enterprise. Economist Frank Ackerman offered this analogy:
They say economists suffer from a case of physics envy. In a sense these models are very much based on 19th century physics. Physics now has a subtler and more complicated view of the world, but economics has enshrined a model based on equilibrium thermodynamics of the late-19th century. If you remember what your physics teacher told you about the ideal gas law, where little atoms go around bouncing into each other exchanging energy until they all reach the same temperature — a model of a competitive markets in which people go around trading this and that until they all reach the same uniform temperature of happiness — the similarity is not accidental.
The thermodynamic version of the model doesn’t have any normative significance, but the economic version does
UCLA economics professor Matthew Khan summarizes: "To be honest, these CGE models are crap."
The argument is not just that the models are wrong — though they have an almost perfect failure rate (see: cost of acid rain trading program). It is that they are directionally wrong: they overstate the costs and understate the benefits of environmental regulations. So-called "bottom up" studies, which gather data on actual business and civic efforts, show that a great many emission reductions have "net-negative cost." That is, they’re profitable. See McKinsey for this stuff.
Piece no. 3
The assumption Manzi makes is that you start with a theoretically pristine tax and watch it get corrupted by politics and bled dry by enforcement costs. I think that’s the wrong way to look at it. To assume that everyone’s going to be relentlessly trying to cheat is just to assume that meeting higher GHG emissions standards is always and everywhere an economic drag. It’s castor oil poured down developing countries’ throats by the wealthy West.
But why assume that? Smart countries (states, cities, businesses, people) will use higher standards as impetus to innovate. GM hired lawyers, Toyota hired engineers. Narrow CBA of the Manzi school probably supported GM’s strategy. Toyota chose leadership.
As of now, some 28 states have joined together in regional carbon trading systems in the U.S. — they want the first mover advantage. Now they are linking up to the European system. Even the Chinese are making interesting noises. A global carbon market is growing no matter what the U.S. Congress does, the only question is how competitive the U.S. will be in it.
What business leaders in the U.S. crave is predictability. They know carbon regulations are coming. I’ve heard more than I can count say they’re perfectly willing to meet any standard, they just want to know what it is. They want to start making big investments in R&E but are leery of doing so in the absence of a clear regulatory environment. Lots and lots of money is going to flood into this sector when a clear price signal is established.
Manzi mocks the notion that China will be guilt-tripped into signing carbon policies just because the U.S. does. But that’s the wrong way round. China will want to sign them when we do. What businesses in the U.S. will start doing is innovating the markets and technologies for clean, sustainable development. China wants those same markets and technologies — it is already choking on its fumes; people are rioting. It just doesn’t want to go first and make the huge initial investments in deploying at scale and bringing costs down. It wants the U.S. and Europe to lead.
Energy is a $6 trillion global business, "the mother of all markets" as John Doerr says, and over the next century it’s going to flip from 85 percent fossil fuels to almost entirely renewables, for reasons climate-related and otherwise. There is mind-boggling money to be made.
That’s why I don’t understand Goklany’s distinction between mitigation and sustainable development, as though we’re choosing between them. They are one and the same. Sustainable development means not going the fossil fuel route in an age of rising demand, constricted supply, and the consequent uncontrollable, unpredictable price fluctuations (not to mention climate change). It means leapfrogging to high-efficiency, economically resilient self-sufficiency based on inexhaustible sources of domestic energy. Manzi is right that "wealth and technology are raw materials for options," but it is sustainable growth that will provide wealth and technology to support broad, enduring prosperity. Pricing carbon is not a permanent drag, it’s a stimulus toward a transition that will eventually render it unnecessary and anachronistic. I’ll bet money it happens in my lifetime.