Monday, October 17, 2011

Against Government Energy Goals

A while back, I briefly stated that I object to a climate policy in which the government set quotas and goals - for example, that by 2025 a quarter of our energy will be low carbon, or that we are going to reduce greenhouse gas emissions by 40% from its levels in 1990.

Today, I will defend that position.

Recall that my proposed climate policy would involve nothing more than a tax on man-made greenhouse gas emissions that would be used to compensate those harmed through climate change for the harms done (as best as we can). The goal is to build the cost of greenhouse gas emissions into the price, so that those who engage in greenhouse gas emitting activity are not permitted to profit from killing, maiming, and sickening others and destroying their property.

I would also add some amount to the tax to provide energy assistance to the poor, but that is a separate issue. That issue should not clutter this discussion.

Once those costs are internalized, I have no idea what course people generally will take. I do not know the full value that the different options have for people - and neither does anybody else. People may decide to go ahead and produce just as much greenhouse gas regardless of the costs - but at least those harmed will be compensated. They may go for conservation, cutting back on energy-using activities. They could go for some form of alternative energy. I simply do not know, and I would not try to predict.

The best way for this information to come out is through market transactions where the individual preferences of billions of people can be aggregated far more efficiently than any bureaucratic plan can hope to provide.

Not only are politicians substantially ignorant of current aggregate demand, they are even more ignorant both of future demand and future supply. Perhaps future breakthroughs will come mostly in conservation technology - making all forms of energy production uneconomical. Maybe carbon sequestering will allow us to open the coal fields. Maybe cold fusion is just around the corner. Maybe solar power satellites will become the least expensive way to build massive pollution-free orbiting power stations. I do not know the best direction to go, and neither does anybody else in government.

Compounding this problem of bureaucratic ignorance - where governments dictate winners and losers, every potential competitor needs to invest in lobbying, "public relations" (which often involve massive public disinformation campaigns), and the buying and selling of legislatures and regulators becomes an essential part of business.

If any company should decide to take the high road and not play these political games - focusing instead on giving their customers the best product at the lowest price - then it is on that company's carcass that the politically involved companies will feed.

We are talking here not only of lost billions of dollars in politicking that produce no viable economic goods, but of policy distortions that spring from these activities that generally make people worse off than they would have been. Not only are these programs built on a platform of massive ignorance distorted by the misinformation of political lobbying and "public relations", bureaucratic solutions lock ignorance and politics firmly in place.

Markets, on the other hand, are extremely flexible. They not only respond almost instantly to new information, and provides incentives that cause people to have the right sorts of reactions to that news.

If a massive freeze damages some food crop, the market instantly responds. The price goes up, telling people to immediately get to work to find ways to conserve whatever will soon be in short supply. It drives them to give up the least valuable uses of that resource, or to switch to substitutes where the most economical substitutes are available. It also gives people an incentive to find more of the good that is now in short supply.

Where markets respond quickly and accurately to new information, it takes the government months or years to respond to change direction - and its incentives are corrupted by the political process.

For these reasons, I would argue for a carbon tax to internalize the externalities of greenhouse gas emissions - and that is it.

I would end all government subsidies – oil subsidies and “green energy” subsidies alike.

I would end all subsidies being paid for alternative energy - ethanol, solar, wind, tide, carbon sequestering, nuclear, and the like. Let alternative energy industries - ethanol, solar, wind, tide, carbon sequestering, nuclear, and the like - compete against the new (higher) price of traditional fuels as best they can, and let the better industry win.

I would use these savings to help balance the budget.

(The carbon tax revenue is not general revenue and can’t be used to balance the budget. It is supposed to go to compensate those harmed by climate change. Adding it to the general revenue means balancing the budget on the backs of those harmed by climate change and not compensated.)

This is a plan that not only gives us a sound energy policy and helps to balance the budget, it deals with the issue of greenhouse gas emissions in a rational way, and it is one that no ideologically sound conservative could reject.


Jesse Reeve said...

Instead of "substantially ignorant" politicians deciding on quotas and goals, you would have those same politicians create a carbon tax to "compensate those harmed" and "build the cost of greenhouse gas emissions into the price." But now these same politicians who can't set quotas and goals have the greater responsibility of setting the total costs and how to compensate those harmed.

Take hurricanes as an example. Scientific evidence links global climate change to hurricane intensity. But the intensity of a hurricane is only one factor in its destructiveness. Hurricane Katrina's damage was attributed to poverty, FEMA's ill-managed response, poor infrastructure maintenance, local government corruption, and the poor urban planning inherent in building a city below sea level-- just off the top of my head. How could "substantially ignorant" politicians establish what fraction was due to global climate change?

Say that the question is answered, somehow, and carbon taxes are raised accordingly. How should that money be used to compensate for harms? Should cash be paid out to the residents of New Orleans, or the city? Should it be used to rebuild infrastructure, and by which agency of federal or local government? Furthermore, global climate change is, well, a global phenomenon. For your policy to fully internalize emissions costs, politicians would have to calculate the worldwide harms done by American greenhouse gas emissions, and tax and distribute accordingly.

To be fair, solutions based on quotas and goals will face similar problems. So the question becomes, which can politicians (or, hopefully, the scientists, economists, etc. that advise politicians) estimate more accurately: the total worldwide harm of global warming and the best way to compensate those harms; or the greenhouse gas emissions levels that minimize harms, and the consequences of goal-and-quota policies (like market based 'cap and trade') that would reduce emissions to those levels? It seems to me the latter is easier to answer.

Kristopher said...

at the end of you're post did you mean that you would not** use these savings to balance the budget?

usually i dont care about typos but missing a "not" changes the meaning and made me a little confused.

@jesse i wonder if this plan is as ideal but impractical as you suggest. insurance companies are pretty good at calculating what harms they have to pay and how much they are attributed to this or that cuase. exact number are difficult to come by but estimates and "close enough" could work just as well.

i think the insurance companies would lobby for this law since it should free them up from having to pay for the health costs and property loss that they would otherwise have to pay for... which might lead to them over calculating how much the government owes from the energy tax pool instead of themselves in ambigous circumstances.

however i think this is basicallky moot because if we were paying the real price in for energy alternative would find itself to be much cheaper once the infrastructure was in place. so then we mught not have to worry much about spending the taxed money of a defunt industry....

i think gas needs to be stabley over 5$ or 6$ a gallon to make alternatives marketable. so if gas companies are smart they wont let it get that high (at least not stabley) but if the real costs of gasoline are above 6$ a gallon than the markets will create the solution. without the need for micromanagement.

Alonzo Fyfe said...

Jesse Reeve

The science of calculating harms done is one we can't get rid of. It is an essential issue for the civil courts.

And, you are right, it leaves a great deal of room for politicing - defendants who underestimate the harms they do, plaintiffs who assert harms that do not exist, and both motivated to some degree to twist the truth to get the verdict they want.

But the solution is not to say, "This is hard, so it ought not to be done."

"Minimizing harm" has its problems because there may be circumstances in which some harm produces an overall greater good. We do not want to outlaw the greater good. At the same time, those who were harmed deserve to be compensated for the production of that good.

There are both moral and economic arguments to seek to compensate those harmed. Without this principle, people may be easily sacrificed - used as a "means only" - whenever somebody thinks that there is a good to be achieved.

And people are annoyingly disposed to be underconcerned when others are sacrificed for their benefit.

Alonzo Fyfe said...


That was not a typo.

I would use the savings from cancelling all government subsidies for oil and renewable energy to balance the budget.

But not the money from the carbon tax - that money would go to compensate those harmed or potentially harmed by climate change.

(Note: I would also defend adding to the carbon tax another amount of money to provide energy assistance for the poor, but that is a separate subject.)

Kristopher said...

oh, i understand now thanks.

my bad i mis-read