How James Hansen gets cap-and-trade wrong
Climate scientist James Hansen has gone on the warpath against cap-and-trade. (See this op-ed in the NYT, among other recent examples.) Perhaps what’s most alarming is that, for all his intelligence, Hansen doesn’t appear to grasp even the basic elements of cap-and-trade systems.
In a blog post last weekend, economist Paul Krugman took him to task:
… today’s op-ed article suggests that he really hasn’t made any effort to understand the economics of emissions control. And that’s not a small matter, because he’s now engaged in a misguided crusade against cap-and-trade …
What the basic economic analysis says is that an emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap-and-trade, are essentially equivalent in their effects.
Krugman’s dissection of Hansen is smart and thorough. (If you’re swayed by Hansen, please be sure to read the entire thing.) While Krugman offers a more credible rebuttal than I can, there are three elements of Hansen’s op-ed that I think deserve more treatment.
First, Hansen alleges that the U.S. cap-and-trade program for acid rain pollution hasn’t been successful:
Sulfur emissions have been reduced by 43 percent in the two decades since. Great success? Hardly.
Because cap-and-trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate.
Okay, part of this is right: the cap-and-trade program did successfully reduced sulfur-dioxide faster and cheaper than anyone expected. (I think most people would call that a success.) But the rest is just wrong. The program was not designed to “eliminate” sulfur-dioxide emissions, just reduce them to the level specified by the cap. So the program did exactly what it set out to do. If Hansen thinks SO2 should be eliminated, he should be calling for a tighter cap — but that’s a question of policymaking, not a failure of the policy tool.
Hansen dings the SO2 program for not doing enough for public health because it continues to allow mercury and other pollutants. But the program wasn’t designed to reduce these things! So this is a little like criticizing cap-and-trade for failing to provide universal health care or free ham sandwiches. It’s just irrelevant. Hansen seems to wish that the U.S. had different policies than it actually has, but that’s hardly the fault of the policy instrument.
It’s also worth noting that Hansen ignores the other U.S. cap-and-trade programs, all of which have also been successful. Like, for instance, the program to reduce nitrogen oxides (a contributer to smog and threat to public health) as well as the other regional cap-and-trade programs designed specifically to mitigate health impacts. As it turns out, when cap-and-trade is directed at reducing health threats, it does so quite effectively.
For more on how the SO2 and NOx programs have worked, see my blog post, “How cap-and-trade markets work for acid rain and smog.”
Second, Hansen alleges that “Wall Street traders” will “fleece the public out of billions of dollars.” But this appears to ignore reality. To begin with, there are already two carbon cap-and-trade markets in existence. Neither has exhibited any form of market manipulation. And neither have any of the air pollution cap-and-trade programs.
For more on this topic, see my blog posts “How carbon markets work in Europe” and “How carbon markets work in the Regional Greenhouse Gas Initiative.”
Krugman’s response really gets to the heart of the matter:
Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing …
Things like this often happen when economists deal with physical scientists; the hard-science guys tend to assume that we’re witch doctors with nothing to tell them, so they can’t be bothered to listen at all to what the economists have to say, and the result is that they end up reinventing old errors in the belief that they’re deep insights. Most of the time not much harm is done. But this time is different.
Indeed, this inchoate fear of market-oriented climate solutions has given rise to a whole new genus of policy debate, much of which I believe is misguided. There’s more to say on the subject, of course, but for now I’ll simply point folks to the blog series I’ve been writing, “Cap-and-trade and the gaming question.”
Third, Hansen indulges in an astonishing exercise of wishful thinking. He attacks cap-and-trade for being influenced by lobbyists, for allowing offsets, and for not directing enough monetary benefit to the public. Of course, there’s a very good reason for these weaknesses: it’s because cap-and-trade is a real policy with a genuine chance of becoming law.
In this sense, cap-and-trade can be usefully contrasted with Hansen’s policy alternative (a fee-and-dividend system), which has essentially zero significant political support.
Quick tangent. Hansen has a rather peculiar perspective on how his idea might work:
Say you decide to buy a small, high-efficiency car … Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market.
Riiiight. My vehicle-buying frugality will inspire others to stop driving SUVs? I don’t even really know how to respond except to point out that it’s already much, much cheaper to buy a small, high-efficiency car. And I sincerely hope that our climate policy does not hinge on more of the same kinds of personal behavior incentives that we have today — because they are totally inadequate to the task before us. End of tangent.
Anyway, let’s imagine for a moment that Hansen’s idea did have support. Does anybody seriously think that an alternative policy would somehow be immune from politics? That lobbyists would hear Hansen’s policy idea and decide to stay home? That offset providers — little guys like the farm lobby — wouldn’t try to influence the bill? That polluting industries wouldn’t angle for loopholes?
Of course not. It’s nonsense to think that cap-and-trade is somehow uniquely susceptible to political influence. (I mean, holy smokes, has anyone seen the federal tax code?!) Ultimately, what we have with Hansen’s position is a failure to understand policymaking.
Look, I too wish that the Congressional climate legislation were purer, more skeptical of offsets, and more equity-enchancing. But mostly, I wish we had a policy platform that, even if imperfect, would mark a fundamental transition away from fossil energy while it allowed for improvements in the future. In other words, I wish we had a carbon cap in place.
This post originally appeared at Sightline’s Daily Score blog.