Green Economics

Economics Nobelist Paul Krugman makes the case for climate policy in the New York Times magazine

2 min read

If you're still on the fence as to whether carbon-reduction policies are called for, or whether direct regulation, a carbon tax or cap-and-trade is the best approach, then you won't want to miss Krugman's article in this week's Sunday Times magazine. Krugman explains the basic principles of environmental economics in easy-to-understand language, and forcefully states the case for climate action: "We're not talking about a few more hot days in the summer and bit less snow in the winter; we're talking about massively disruptive events, like the transformation of the Southwestern United States into a permanent dust bowl over the next few decades."

Citing a Congressional Budget Office analysis of the climate bill that the U.S. House passed last year, Krugman estimates that it would merely trim U.S. economic growth from 2.4 percent to 2.31 percent per year during the four decades from 2010 to 2050. The estimated global growth penalty would be even smaller, because countries like China produce energy inefficiently and can more easily improve performance and cleanliness.

Krugman might have made the case even more forcefully if he had observed that the world's major breadbaskets could end up getting much too much or much too little water as the century wears on, if global warming goes unchecked. (What we're REALLY talking about is the ability of the world to feed its 7, 8 or 9 billion people.) And he might have been a little more critical of the U.S. acid rain program: Its cap-and-trade system resulted in much more coal stripping in Montana's Powder River basin and West Virginia mountaintops, as detailed in my book, Kicking the Carbon Habit. (A drawback to cap-and-trade unmentioned by Krugman is that it can produced undesirable secondary consequences.)

The particularly acute concluding section of Krugman's article deals with the pitfalls and drawbacks of cost-benefit analysis as a guide to long-term climate policy. He notes, for example, that standard estimates of gains may be overstated because a lot of warming is already "baked in," as he puts it. Conversely, if we don't take action a lot of bad things will continue to happen well beyond 2100--the usual end-point in C/B calculations--and so, "if you place a significant weight on the really, really distant future, the case for action is stronger."

But there's the rub, as he goes on to argue. Technical economists and economic philosophers are deeply divided on the question of what the thinkers call "time preference" and the technicians "discounting." If too much or too little weight is put on the welfare of future people, absurd conclusions result. So, says Krugman, it may be better to rely on an insurance model: rather than take cost-benefit analyses too seriously, policy might better be based on insurance principles--we should take actions now to reduce the possibility of catastrophic events occurring in the future.

That's the better way to go, I'd agree, but it too begs some questions. When we insure our houses against total loss, as we're required to do when we get a mortgage, the amount we buy is based on the estimated replacement cost of the house, which in turn is based on objective market values. But we can't insure ourselves against total loss of Earth, and even if we could, we wouldn't know how to value its (inestimable) worth. So how much insurance should we buy? One possible answer is that we should buy as much as we can afford. But what happens when we start discussing how much we can afford? We find ourselves getting sucked right back into cost-benefit analysis--which is what happens to Krugman too!

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