I want to thank Jim Manzi for taking the time to respond to my criticisms of his recent writing on warming policies here at Gristmill. Though I disagree with much of what he says, his thoughtful work on the subject has improved the debate. I want to use one more post here to rebut a few of his assessments.

Let me begin by expressing sharp disagreement with his argument that an effective, efficient, and binding carbon tax is an unlikely outcome given the many political actors involved. As has been made abundantly clear in recent weeks, the United States is one of the principal sources of resistance to binding international agreements, due primarily to a skeptical Republican leadership with strong ties to the energy industry. Domestically, it’s also clear that the main opposition to a binding carbon regulatory scheme, either a carbon tax or cap-and-trade regime, is the Republican Party. These policies are not far-fetched — an imperfect but improvable cap-and-trade plan somehow found its way to Congress this session — but the GOP is committed to defeating such legislation, and not because of Jim’s arguments but because they doubt the science of global warming.

This is why I wondered whether an emphasis on markets might be preferable as a conservative solution — not because conservatism is good in and of itself, but because Republicans represent the primary obstacle to significant climate progress within the U.S. and globally. I can’t claim to understand what makes the GOP tick ideologically, but I do know that solving these problems will require either the winning-over of conservative leaders or their total electoral defeat.

For many of Jim’s later points, our disagreements are more matters of degree (though significant ones) than direction. Jim has clearly spent time and attention studying the impact of assessments of growth, mitigation costs, and discount rates on the desirability of different solutions. I don’t want to dispute Jim’s methodology; rather I would point out that these assessments are subject to considerable debate within the ranks of concerned academics. Just this week, economics Nobelist Kenneth Arrow wrote a column in the Taipei Times demonstrating that quite reasonable choices of growth and discount rates result in a clear conclusion in favor of substantial mitigation efforts.

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As I mentioned in my first response to Jim, however, we both agree that some current action should be taken. Jim’s opposition to a carbon tax rests upon the idea that such a tax would be insanely expensive. He presents this expense in three general ways:

  1. that it would be very difficult to undo a binding and aggressive carbon abatement regime;
  2. that it would be incredibly damaging to consumption and economic growth to adopt such a regime in the first place; and,
  3. that there are a host of economic externalities out there, so why should we spend so much time, money, and effort on this one.

I’ll take each of these in turn.

I find point No. 1 a bit odd considering the time Jim spends detailing the list of people committed to fighting a carbon control plan. If there’s so little a constituency for passing the tax in the first place, one assume it would be rather easy to rally them all behind repeal. Moreover, one needs to consider whether it will be easier to undo the tax or the warming.

At a broader level, however, this argument simply does not hold water. From the Bank of England-managed, gold-based financial system of the early 20th century to Bretton Woods II, the world has operated under a number of formal and informal financial agreements that functioned well for decades before dissipating as they became too costly, unworkable, or unnecessary. The record of international agreements in the last hundred years is mixed, but evidence indicates that functioning treaties can and are dispatched or modified when they outlive their usefulness. Within the United States, the past three decades also contain numerous examples of significant reductions in the tax burden; under President Bush alone the United States has cut taxes and abrogated international treaties multiple times. I don’t see why we couldn’t do it again in the future, particularly if the case for doing so were actually sound.

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Next, Jim assumes that any effective carbon tax would be extremely damaging to economic growth and current consumption. One aspect of this point is Jim’s contention that offsetting tax reductions will be imperfect or absent or distortionary. Personally, I believe Jim is guilty of seeing all the potential flaws in a carbon tax and none in the current tax code. Consider: he argues that a carbon tax would be regressive, requiring further tweaks to prevent damaging redistribution. Of course, those who suggest tax offsets often offer up the payroll tax as a ready candidate for compensating reductions, and the payroll tax is itself highly regressive. At worst, we’d maintain the current progressivity (or lack thereof) in the tax code.

Moreover, I don’t think Jim has thought his numbers through. In his original American Scene post, he argued that an effective abatement program might cost “hundreds of billions of dollars in the U.S. alone,” which sounds awfully large and dramatic. A number of independent budget analysts, however, have pegged the annual cost of the Bush tax cuts of 2001 and 2003 at between $250 and $400 billion per year. Clearly, the economy was not crippled in the years before those cuts, so even if no offsetting tax is adopted to balance out a carbon levy, the economy should not suffer all that much, if at all, from a carbon tax.

Finally, the nice thing about a carefully targeted consumption tax is that consumers can quickly and easily optimize their personal consumption to minimize the burden they face. I explained how this might work in my first response, and Jim didn’t offer a response, but the main point is this: if you use current tax revenues (primarily generated from income) to fund research efforts, then consumers who seek to avoid the pain of taxation will undermine the primary tool you’ve chosen to fight warming — the federal research revenue stream. If you use a carbon tax, the tax avoidance itself fights warming, while also incentivizing technology investment.

Two more quick points about the growth cost of a carbon tax. First, I wonder if Jim would rather spend hundreds of billions annually on a solution that works, or a few billions annually on a solution that does not. The point, after all, of setting aside a particular percentage of GDP for a warming solution is not that the money alone solves the problem; one must use that money effectively. This becomes important when one examines past experience with pollutant abatement, such as efforts to combat sulfur dioxide emissions (PDF) in the 1960s and 1970s. Not only did the 1970 New Source Performance Standard pollutant caps slow the growth in SO2 emissions, it also led to a substantial increase in innovations patented for SO2 control technologies. Before 1970, when federal research funding was available but no caps were in place, four or fewer SO2 control patents were filed each year. Thereafter, 26 or more patents were filed annually.

What’s more, creating a market incentive for innovation delivers a competitive advantage to the most innovative firms. Government allocated research funding, by contrast, produces market winners that excel in using political influence. A carbon tax makes the marketplace fitter; research subsidies do the opposite.

Finally, Jim asks, why carbon? Why warming? What about all the other externalities out there? In making this point, Jim poses a number of criticisms that appear to apply just as strongly to his own favored solution (actually rather more strongly) than to mine. Assuming we’re going to take some action, and Jim appears to believe we should, there will not be a perfect government response to the problem. This is why I prefer a carbon pricing system; it maximizes the extent to which consumers and firms have control over where to cut back and where to invest.

But let me add another point in this regard. Why is global warming special? On the one hand, it’s not. We have addressed many externalities in the past, including a number related to energy and pollution. There’s no reason why the presence of other such problems should justify foot-dragging on greenhouse-gas reduction. To the contrary, if a carbon tax encourages efficiency and renewable resource use, then it will also reduce the negative externalities posed by a host of other ills, from smog and ozone to automobile congestion.

On the other hand, global warming is special. There is a logical reason to privilege warming gases over other externalities — because warming is a truly global externality. Previous air pollution battles have typically involved gases that affect just a small portion of the earth (like sulfur dioxide) or which involve a relatively small segment of the global economy (like chlorofluorocarbons). The externalities there were relatively easily managed because the number of negotiation participants was small and the stakes were lower.

Carbon isn’t like that. The gas produced in one part of the world affects residents everywhere else, and carbon is produced from thousands of sources involved in hundreds of industries. It’s vital that we find a solution that can efficiently and effectively reduce carbon output across all of those countries and sources — that can encourage emission improvements across an incredibly wide range of activities at an acceptable cost.

So while there is undoubtedly a role for targeted government research funding to play, it’s also vital that the costs and responsibilities of abatement are spread over as many people and as many individual consumption decisions as possible. Personally, I’m very glad that Jim is writing as he is; the first step in solving this problem is convincing influential Republican leaders that there is, in fact, a problem to solve. I trust that if that happens, there will be sufficient political consensus in Washington and in the international community to adopt binding carbon reduction measures. When that occurs, the governments that have embraced carbon pricing will find that they’ve chosen the most efficient and effective means to achieve the necessary goals.

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