Writing in the New York Review of Books, economist Paul Krugman reviews William Nordquist's The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, which discusses the economics of climate change. In discussing carbon tax/cap and trade vs direct action, Krugman writes:
Why is putting a price on carbon better than direct regulation of emissions? Every economist knows the arguments: efforts to reduce emissions can take place along many “margins,” and we should give people an incentive to exploit all of those margins. Should consumers try to use less energy themselves? Should they shift their consumption toward products that use relatively less energy to produce? Should we try to produce energy from low-emission sources (e.g., natural gas) or non-emission sources (e.g., wind)? Should we try to remove CO2 after the carbon is burned, e.g., by capture and sequestration at power plants? The answer is, all of the above. And putting a price on carbon does, in fact, give people an incentive to do all of the above.Krugman also makes reference to something that sometimes leads me to be somewhat pessimistic about our chances of addressing the problem of climate change:
By contrast, it would be very hard to set rules to accomplish all these goals; in fact, even figuring out the comparative emissions from a simple choice, like whether to drive or fly to a city a few hundred miles away, is by no means a simple problem. So carbon pricing, says Nordhaus, is the way to go. And I, of course, agree—they’d probably revoke my economist card if I didn’t.
And yet there is a slightly odd dissonance in this book’s emphasis on carbon pricing. As I’ve just suggested, the standard economic argument for emissions pricing comes from the observation that there are many margins on which we should operate. Yet as Nordhaus himself points out, studies attempting to analyze how we might most efficiently reduce carbon emissions strongly suggest that just one of these margins should account for the bulk of any improvement—namely, we have to sharply reduce emissions from coal-fired electricity generation. Certainly it would be good to operate on other margins, especially because these studies might be wrong—maybe, for example, it would be easier than we think for consumers to shift to a radically lower-energy lifestyle, or there might be radical new ideas for scrubbing carbon from the atmosphere. Nonetheless, the message I took from this book was that direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing—not as good, but not bad.
I enjoyed The Climate Casino, and felt that I learned a lot from it. Yet as I read it, I couldn’t help wondering whom, exactly, the book was written for. It is, after all, a calm, reasoned tract, marshaling the best available scientific and economic evidence on behalf of a pragmatic policy approach. And here’s the thing: just about everyone responsive to that kind of argument already favors strong climate action. It’s the other guys who constitute the problem.Unfortunately we Australians recently elected the other guys.
Read Krugman's full review over at the New York Review of Books.