Advice for Obama: Spend Green Today, Tax Green in the Future

Politicians are often tempted to think that a policy to help one goal, say air quality, must also help lots of other goals, say economic growth. Economists are more likely to presume tradeoffs, and to use the principle of targets and instruments. That principle says that you cannot expect to hit more than one bird with one stone, except by coincidence.

At the American Economic Association meetings in San Francisco on January 3, I was on a panel titled “Energy and the Environment: Policy Advice for the New Administration” (along with some real energy experts; I am a relative latecomer to the area). Within the framework of targets and instruments, I proposed a matrix such as the one that appears below.

There are examples that go either way.

• My favorite example of hitting several birds with a single stone is a gas tax. This one instrument hits seven targets! (See page 4 of my slides. Too bad the gas tax has always been considered political suicide for whoever proposes it.) More often, independent policy instruments have independent effects; a measure that helps one goal might hurt another.
• An example of an initiative that successfully addressed one important environmental goal with the side effect of making another worse was the Montreal Protocol. It successfully addressed stratospheric ozone depletion, but banning CFCs led to substitution of HFCs and (worse) PFCs, which are Greenhouse Gases (GhGs) and thus worsen Global Climate Change.
• Another example, which arouses greater passion, is the question of whether to start building nuclear power plans again. Environmentalists should like that nuclear power is an energy source that does not create GhGs, but worry that nobody wants to store the nuclear waste in their own state. National security buffs should like that it helps reduce dependence on imported oil, but nuclear plants in other countries increase risk of proliferation of nuclear weapons.

Government in practice makes decisions in largely independent policy processes (“stovepipes”). We need an overarching conceptual framework. Consider the matrix below. Across the top are the labels of columns, each of which represents a different objective; down the side are the labels of rows, each of which represents a different policy instrument.

To illustrate: the energy tax measures (gas tax, BTU tax, oil tax, carbon tax) all tend to work in the same positive directions: helping local reduce local air pollution and traffic congestion, improving national security, and providing revenue that the government can use to cut distortionary taxes or fund social security; thus energy taxes receive “pluses” in all these columns. But CAFÉ standards, as other performance standards or “command and control” policies are an inefficient way to attain a given environmental goal, and so receive a “minus” in the Economic Efficiency column. Indeed, the decision to grant more lenient standards to light trucks probably allowed the SUV craze to start, thereby perversely increasing traffic congestion and serious accidents (especially relative the alternative of a gas tax).

In two places in the table, I have distinguished between long run effects of a policy and shorter run effect. One place concerns the Cheney-McCain policy of “drill, baby, drill” on federal lands and offshore. The other concerns the Strategic Petroleum Reserve. For details see the last two pages of my slides.

Computing the optimal combination of policy measures to hit the desired set of policy targets is straightforward in theory (so long as there at least as many instruments as targets). Needless to say, it is more difficult in practice.

Moving to the situation that Barack Obama will step into on January 20, priority number 1 is, and should be, a fiscal stimulus package. It can be a “green stimulus” package. From a macroeconomic viewpoint, the goals should be stimulus in 2009, without abandoning all hope of fiscal discipline in future years. From an environmental policy, the goals should be getting started quickly on those energy investments that meet a cost-benefit test, and also sending the signal that prices of energy, especially carbon, will be higher in the future. All four goals can be met by the general principle: Spend green today; tax green in the future.

Comments

[John Polomny:]

"Moving to the situation that Barack Obama will step into on January 20, priority number 1 is, and should be, a fiscal stimulus package. It can be a “green stimulus” package. From a macroeconomic viewpoint, the goals should be stimulus in 2009, without abandoning all hope of fiscal discipline in future years."

More statist Kenseyan claptrap. How about shrinking government at all levels, lowering taxes, and letting all of the malinvestment get cleared out. I noticed you refer to the situation with the environment as 'climate change" and not "global warming". That is very sly as it now appears that the warming is turning into cooling. This article is complete nonsense.

Jan 21 11:34 AM

[John Lounsbury:]

1 world currency - - -

Please read the author's biography and you will find out who he is. If you have a biography, maybe you could supply it so readers could compare.

I regularly read Jeffrey Fraenkel's articles and when I feel the need to post a comment in disagreement I try to do it in a civil manner.

Jan 21 03:08 PM

[John Lounsbury:]

John Polomny - - -

I expect your brief remark "it now appears that the warming is turning into cooling." was not intended to get a discourse on the current understanding of "climate change" or "global warming". After reading what I have to say, (if you even want to read it) you may want to post an explaination of why you made the statement quoted.

As a scientific person with good training (Ph.D. in chemistry), I have to add some facts to your statement.

A list of facts (admittedly not complete) and examples of scientific reasoning:

1. Increased carbon dioxide in the atmosphere increases average earth temperature.

2. Over geologic time, carbon dioxide has varied from less than we have today to as much as 20 times current amounts. Earth temperature has risen or fallen with carbon dioxide changes. There have been times in earth's history when there was no winter ice (snow) throughout the year anywhere because of elevated temperatures.

3. Carbon dioxide production is generally considered to be divide between two sources: geologic and biologic (including all human activities). Although, over geologic time there have been periods where massive volcanic eruptions have affected the earth's atmosphere, over the past several thousand years (at least), geologic variation has been small compared to human impacts of the past 100-200 years.

4. Climate variations from year to year can mask longer term climate trends. More snow and colder temperatures in one year does not disprove global warming, just as less snow and warmer temperatures in the previous year does not prove it.

5. Climate trends are measured over decades and centuries and can, but not always persist for many millenia.

6. Carbon dioxide in the atmosphere has increased by 30-35% over the past 100-150 years. This is a more rapid change than for similar periods of time over the time of human existence.

7. There are very few scientific publications that provide any experimental evidence contradicting the volume of experimental results regarding increases in carbon dioxide (and other greenhouse gases) and changes in global climate. All these scientific publications are public knowledge and subject to the examination of scientists around the world. The highest form of achievement for a scientist is to discover something that is new, and especially when the discovery disproves a conclusion drawn from previous data. This is a powerful force that has driven scientific progress. I am unaware of any scientific publication refuting carbon dioxide measurements and climate change measurements that has withstood this critical scrutiny.

8. Global warming does not impose insurmountable difficulties for human existence. If it persists, such things as habits, location of human habitat, food sources, etc will probably change significantly, but I know of no credible research that projects human extinction from this source.

9. Various climate change models have projected average sea levels to rise by a few feet over the next century. If sea level were to rise 2 feet over 100 years, would you notice the average annual change of less than 1/4 inch?

10. There is no debate that I know of about the relevant data collected for what has happened up to now. The debate is forward looking. Most responsible scientists use models (which can be criticized) to project possible outcomes for established data trends. The projections these scientists make are than usually expressed as a range of outcomes with various probabilities of occurrence. One problem the non-scientist has with this is difficulty in conceptualizing the significance of probabilities. A news reporter may write and article on a paper (or talk) by Dr. X, who made a statement like: "Based on data trends over the past 159 years, and estimated carbon dioxide production if fossil fuel combustion continues at its current rate, we estimate the average temperature of the earth will increase between 1.2 and 5.4 degrees celsius (one standard deviation limits) over the next 100 years." The news article may state "Dr. X predicts temperature rise as much as 5.4 degrees over the next century."

By the way, the numbers are not real. I made them up for the purpose of this discussion.

The news reporter would be wrong if he inferred in his article that the temperature was "sure to rise by at least 1.2 degrees over the next century". The scientist actually said (by inference, not directly) that there was approximately one chance in six that temperature rise would be less than 1.2 degrees. There is nothing in the statement the scientist made to indicate whether or not his model shows some probability that temperature could even fall over 100 years.

I would just say one thing in conclusion: the past is fixed and the future is variable.

Please take no offense, John Polomny. Post a reply if you like.

Jan 21 03:28 PM

[Glen L.:]

I'll take a crack at this, because I detest "argument from authority". And we all know what PhD really stands for.

Now, I claim no special expertise beyond extensive reading on AGW theory, and I will state unequivocally that there is powerful evidence in refutation. I'm not going to engage in a running debate, lacking both the time and the patience, but others may wish to jump in with comments to support me.

Point 2: there is very credible evidence that, in many cases, CO2 levels increase *after* global warming, not before, with an average lag time of 8 decades. The reason is postulated to be that warming induces the oceans to release vast quantities of CO2 into the atmosphere.

Point 6: human contribution to atmospheric CO2 is trivial now, and was excedingly trivial prior to the mid-20th century. Furthermore, increases of 30-35% (if true) could easily be explained by the earth warming first (see point 2). The "little ice age" (caused by volcanic eruptions) ended around 1815, if i remember correctly... add 80 years and that tracks much better with the CO2 increases than the slight increases due to industrialization in the 19th Century.

Point 7: there is a large and growing volume of excellent scientific research in refutation of AGW. The most recent example is the evidence presented that global warming (and cooling) trends are much better explained by sunspot cycles. No one who understands the power of the sun to affect earth's climate could possibly be surprised by this, of course.

The fact that you don't know about it speaks volumes about the largely successful attempts by the AGW theorists to stifle information contra their alarmist nonsense. Every publication that questions the theory in the slightest is immediately ridiculed by the AGW establishment, and the authors are invariably tarred as tools of the energy companies (complete nonsense). Scientific debate is stifled by this pseudo-academic intimidation.

The reason they do this? Because the vast majority of climate researchers are university and government-agency based, and therefore have a vested interest in alarmist predictions. Big problems warrant big funding, no problems warrant no funding. They are also aided in getting this funding by agenda-driven "green" organizations that spend far more on lobbying this issue than the energy companies. As always, follow the money.

Green is the new Red. The author is either a fellow traveler or a dupe. Raising taxes on the citizens during this time of extreme economic stress is one of the most irresponsible policy recommendations imaginable. One would think that the "greens" would be satisfied for the moment, because all human-generated greenhouse gases are diminishing worldwide due to the economic crisis, as factories shut down, shipping activity declines drastically, auto sales plunge, and everyone cuts back on traveling.

My policy recommendation for the President: Leave us alone. Reduce government spending now, and tax rates later. Shelve the green dream until such time as AGW is proven unequivocally to be both true and a greater threat to humanity than this coming worldwide depression. Until then, trust human ingenuity and let the markets function.

Jan 22 10:57 AM

[sleepless_o...:]

Glen W. - - -

You limit your horizons if you 'detest "argument from authority" '.

You make some valid points, but their value is greatly diminished by your stated intention of ignoring any counter points from "authorities".

As I understand it, your contention that CO2 is increased by warmer temperatures causing outgassing is correct. If CO2 increases from all sources produce temperature rises and increased temperatures produce more CO2 emission, isn't this a self-reinforcing mechanism? Doesn't increase of CO2 from any source add to climate warming? Isn't this a spiral?

Glen, please try to put it all together and not cherry pick facts. If John Lounsbury didn't include every factor in the debate at least he started his discussion with "A list of facts (admittedly not complete) and examples of scientific reasoning:" Lounsbury showed some openmindedness in his discussion. If you disagree (he invited disagreement at the end of his comment), please do so in the same spirit.

Jan 22 12:18 PM

[Tedspick:]

Glen L: You are not "extensively reading" the right sources. All of your points are easily explained and refuted by research scientists as described on the excellent site: realclimate.org

I suggest studying what the real scientists say and not religious-style beliefs of the propagandists. You will find there not "argument-by authority" but instead argument from measurements and scientific fact.

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