Krugman, Paul - Building a Green Economy

07/09/2010

The New York Times Magazine, April 6 2010

This popular article discusses the basics of environmental economics and the major approaches to legislation for the environment. Author focuses on the threat of global warming, coal burning and carbon emissions in examples of how legislation might work. Author first reviews the core of environmental economics, which is another factor in the basics of economics. The basics of economics involves the mutual benefit from transactions between agents. The problem is when the byproducts of those transactions create costs that aren't factored in, called "negative externalities".

One solution is a restriction on that kind of transaction, or a very high price assessed to the agents for it. This is considered like a ban or strict limit, like for instance emissions standards on cars; those intended for sale in the US cannot go above a certain level of emissions. A major problem with outright bans or high standards is with having to retrofit, or in general the levels of compliance that the status quo (doesn't) enjoy. Author turns to Arthur Pigou's 1920s book The Economics of Welfare (Pigovian tax). The analysis here was that a 'market based' approach that limited production of a certain negative effect, perhaps carbon emissions or sulfur from coal burning on the whole, would allow the polluters to "buy" pollution from the non-polluters, all staying below the legislated cap. This kind of cap & trade system worked for sulfur dioxide into the air from coal producers in the 1990s, author claims.

A number of times, author discusses the state of the debate on climate change and tries to clarify it. While there is uncertainty with how the climate change will take place, and at what level, the vast consensus is that our current levels of carbon production will change the planet over the next 100 years. However, for author, the justification for action is that there is a non-negligible chance that there will be a calamitous result. Thus most uncertainty about the numbers isn't as much of a concern as the real possibility (non-negligible) of 'apocalyptic' conditions.

Author lays out how the cap and trade system might work, and what the (likely) overestimated constraints on economic growth would be, roughly 0.03-0.09 of GDP per annum, and perhaps at a cost of 1-3% of the world's gross product. Author also criticizes the critics of a cap and trade plan as disingenuous, simultaneously arguing that the magic of private innovation can do wonders for efficiency, but that private enterprise would be unable to cope with a cap and trade system. (Author also favors some outright bans or limits on coal burning, acknowledging that much of our pollution comes from that source.)

Author reviews two ways-- carrots and sticks-- of coaxing developing nations (read: China) into a similar system. The carrot is by incorporating them into the global emissions-rights-sales system that would allow China to sell the US (and other developed world) permits to pollute, effectively taking advantage of the fact they are still developing. The stick could be a tariff on imports that takes into account the carbon emissions used to produce it.

Author discusses two possible ways to enact this kind of legislation: the ramp up, or the 'big-bang'. The ramp up suggests that the costs of emissions rise slowly over the next century, the 'big-bang' is much more aggressive about legislating caps upfront. Author is more partial to the 'big-bang', since the ramp-up method seems to place bets that large limits late in the game will have the same effect that good limits now would. What if the game is already lost by the third quarter?

The last discussion is the possible way legislation like this could wind its way through Congress. Good luck.