Reihan Salam writes an incredibly disappointing, and boggling, blog post here, on his preferred strategies for dealing with climate change. Disappointing, because if Reihan, one of the best conservative writers out there, doesn’t get the logic of carbon pricing, then there’s little hope for some sort of conservative renaissance on climate change policy. Boggling, because Reihan is too smart a guy to get so many things wrong in such a short amount of time.
Let me start by addressing the main argument in his post — that carbon pricing will hurt American families, particularly those with low incomes. His starting point for this is recent research estimating inflation rates by income. Christian Broda and John Romalis recently made a big splash in the economics blogosphere with a paper demonstrating that between 1994 and 2005, prices rose faster for wealthier households, because the deflationary impact of trade was focused on the non-durable goods that make up the bulk of low-income household spending. It’s an interesting result, but also one that was significantly oversold by some trade defenders. For one thing, downward wage pressure and unemployment from trade are also focused on low-income households. For another, those households are unlikely to view these low prices as an advantage; it’s not as if they prefer spending so much money on non-durables. And for another, the deflationary impact of trade has essentially vanished. Low income households spend much of their budget on staples, like food and energy, and food and energy, you may have noticed, have been leading the recent inflationary charge.
Anyway, having begun his argument with this research, Reihan writes:
Once you factor in the carbon impact of shipping manufactured goods U.S., you see that the lifestyle of the rich really is in some sense greener. Massage therapy emits very little carbon into the atmosphere. So pricing carbon will have a disproportionate impact on the poor.
But this is mistaken. The rich don’t consume fewer non-durables than the poor, they just consume less as a share of their income. In practice, and unsurprisingly, the rich consume much, much more than the poor. They also consume a lot of carbon-intensive durable goods, like big houses and big cars. They fly more. They’re less likely to take public transit, and so on. According to the Carbon Tax Center, households in the richest income quintile in America spent over $3,000 on gas in 2005, while the poorest spent under $900. The rich are not greener.
But will the poor be disproportionately impacted by carbon pricing? The snarky answer here is to say yes, at an international level the poor will reap substantial and disproportionate benefits from carbon pricing, because they’re likely to suffer considerably from warming’s effects. A world in which America does nothing to curb emissions is not likely to be kind to Africa and South Asia.
But let’s stay focused on the domestic poor. Will they be harmed disproportionately? To the first order, yes. Energy will be more expensive, and since energy costs occupy a larger share of poor household budgets, they’ll pay proportionally more. But that’s not where the story ends. There are lots of third and fourth order effects that could make life cheaper and better for the poor, but the big weapon against regressiveness is some mechanism to return a share of the proceeds from carbon pricing to the people.
Reihan recognizes this and objects to it based on an argument made by Monica Prasad, who writes:
Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on.
Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation.
But Reihan misunderstands Prasad (odd given that he’s provided counter-evidence to his position in the very quote he uses). She doesn’t say that an effective carbon tax never generates revenue, or that revenue generated should never be returned to taxpayers. She simply suggests that in order to be effective, a carbon tax must continually be increased above the revenue maximizing rate — something politicians who commit tax revenue to long-term purposes are likely to avoid doing.
As Prasad notes, revenue can be used to assist in the transition, for research subsidies (as in Denmark) or for individual income assistance. There is no problem here.
Furthermore, a carbon tax refund is not the only way to price carbon and provide individual transition assistance. There are very good ideas circulating about the cap and dividend approach, for instance. Or, we could simply do our best to find the optimum carbon price and, in a totally unrelated action, make the tax code more progressive elsewhere or strengthen the social safety net. We don’t necessarily have to use carbon price revenues to help the poor.
A broader misunderstanding
It does seem that the real source of Reihan’s opposition to carbon pricing is the argumentation of Jim Manzi (and others), who have created an innovative conservative position on climate change — that it’s real, but that the most we should do about it is offer some research incentives. I originally hailed this as a positive step forward for conservatives, but I no longer feel that way. The position has become a rut in which the conservative wheel is now stuck, when it might have rolled on to better paths.
I have explained my disagreements with Manzi a number of times in the past. The key points are these: I think he misses the need to hedge against uncertainties and catastrophic scenarios; I think he is far too concerned with the potential cost of rent-seeking behavior; I think he overestimates growth sans pricing and underestimates growth with pricing; and I think that if we agree that our emissions are creating climate change, then it’s absurd to not even attempt to at least slow the growth of those emissions.
As fun as it is to be contrary, the overwhelming consensus of environmentalists and economists on these points should at least suggest that maybe Manzi is overplaying his hand. And if Reihan really thinks that offering a prize for the invention of a method to de-carbon the atmosphere is the best way to approach climate change, it still seems reasonable to think that a small carbon tax could both help fund the prize and make the ultimate job of de-carbon-ing easier.
But Reihan basically says that carbon pricing is insane, extremely costly, and regressive, which tells me that he’s probably not spent much time exploring the relevant arguments.
The political dymanics
But all of this is particularly bothersome to me because the natural place for a conservative on the climate change issue should be to favor pricing, with no industry handouts, and maybe a modest transition assistance refund, carefully structured so as not to generate long-term dependency. It would be marvelous if the GOP would embrace that, from a legislative standpoint.
If the default conservative position is that nothing should be done, then the Democratic response will be to target vulnerable Republican legislators and offer them pork until the bill has enough votes. This has the effect of inflating some of the right’s key concerns about climate legislation (among non-denialists, is the general assumption I’m making here).
If instead, the right embraced an efficiency argument and stood strong against wasteful subsidies, then their opposition would improve the bill, from their perspective, and from the perspective of most economists.
It seems to me that conservatives have learned nothing politically from the climate change debate to date. Facts on the ground are forcing them to abandon the denialist position, and facts on the ground will ultimately force them to abandon the do-nothing position. Rather than get ahead of the curve and offer a reasonable critique of the liberal approach, they’ve opted to stick their fingers in their ears and hope for the best. That’s bad policy, and it’s bad politics.