Krugman On Copenhagen

Paul Krugman is optimistic that we will see real progress at the Copenhagen climate talks; no surprise there.

Krugman also offers an absurd strawman argument; again, no surprise:

The truth is that conservatives who predict economic doom if we try to fight climate change are betraying their own principles. They claim to believe that capitalism is infinitely adaptable, that the magic of the marketplace can deal with any problem. But for some reason they insist that cap and trade — a system specifically designed to bring the power of market incentives to bear on environmental problems — can’t work.

For heaven's sake - if the human contribution to the global warming phenomenon is tiny (or if warming isn't even happening) then cap and trade can't pass a cost/benefit analysis because there are no benefits, only costs.  I happen to think humans are wildly adaptable and could adjust to a law requiring us to run around wearing paper bags on our head, but I would question the wisdom and economic efficiency of such a law.

There would be one notable benefit to the Copenhagen process producing a definitive agreement (which it won't) - the resolution of uncertainty as to the state of play of energy investment might unfreeze some investments, as the Times noted last week.  Let's take some tax advice from Macbeth - if it were done when 'tis done then 'twere well it were done quickly.

Krugman does claim that the costs of cap and trade will have only a "small impact" on growth and links to a fascinating McKinsey study charting the way forward in the US (Yes, we cited that study last summer and we still find it fascinating).  Because he is an economist I know Krugman was most intrigued by their conclusion (p. 16 of 107) that "almost 40% of abatement could be achieved at 'negative' marginal cost".

McKinsey mentions weatherizing homes as an example of a market failure - homeowners don't want to pay upfront in order to save on their heating and cooling bills over time, and home builders don't want to put the insulation money into the house upfront and then try to recoup it in the sales price.

Let's suppose McKinsey is right.  Then their analysis is skewed (as they note) by the fact that the overall cost of abatement is brought down by including lots of stuff people ought to be doing right now.  But it also leaves one wondering - if the current price incentives favor weatherization and yet people don't do it for other reasons (hazy and asymmetric information, I would say), then will raising the cost of energy through cap and trade really wake people up to the money they are wasting?  Maybe! 

But why wait for cap and trade?  If Krugman and his fellow behavioral economists can identify and eliminate the market flaws observed by the McKinsey authors, they can lead us 40% of the way to the abatement promised land while saving the nation money (and perhaps pocketing some!).  Surely this is the sort of failure of market models that a Nobel Laureate in Economics might sensibly address.

Of course, in his current column Krugman says this:

Why should you believe that cutting emissions is affordable? First, because financial incentives work.

Hmm.  Per the McKinsey report he cites, financial incentives are an imperfect call to arms.  I assume that raising the price of energy will prompt a few people to act in accordance with their current financial interests, but the real kick would come from getting people to invest in order to save right now.

AS AN ASIDE: SLEIGHT OF HAND USED BY LYING LIARS:

Krugman indulges in my favorite statistical trick to emerge from this debate:

The Congressional Budget Office has estimated that by 2050 the emissions limits in recent proposed legislation would reduce real G.D.P. by between 1 percent and 3.5 percent from what it would otherwise have been. If we split the difference, that says that emissions limits would slow the economy’s annual growth over the next 40 years by around one-twentieth of a percentage point — from 2.37 percent to 2.32 percent.

That’s not much.

Krugman wants you to think (and may be thinking himself!) that 0.05% on a US economy of $14 trillion is a mere $7 billion per year.  But since we are talking about a growth rate, the effect is cumulative - $7 billion in lost output the first year sets the new baseline for the second year, which then lags by $14 billion; the third year lags by $21 billion, and so on to the year 2050, where a 2.25% gap in GDP amounts to $315 billion.  At that $315 billion output gap, which is the cost of cap and trade in the year 2050, continues to grow - better to focus on the "not so much" number of $7 billion.

Comments

[Walter]

Tom,

I'd rather not take tax advice from someone who then spends the rest of the play regretting the deed done quickly.

It's like trying to apply "just do it" to pursuits other than sports.

[clarice]

It takes from the economy and the pockets of all to further line the pockets of the grifters for no realsocial benefit and an economist thinks that's a good thing? On wht planet?
Build refinerues and nuclear power plants.
The economy will improve and there'll be enough excess capital to invest in even better energy plays.

[jimmyk]

In my admittedly limited experience, I've never found that all these fabulous energy-saving measures actually save as much energy as is claimed. That may be one reason people don't do them as much as the bean counters at McKinsey say they should.

[clarice]

IIRC in communities where people did save a lot of energy the power companies than raised the rates to recapture lost income. How's tht for incentive?

[PD]

IIRC in communities where people did save a lot of energy the power companies than raised the rates to recapture lost income. How's tht for incentive?

Perfectly predictable. Like the government raising taxes on cigarettes, then being surprised that the expected increase in revenue doesn't materialize when people don't smoke as much. Or the government being surprised that gax tax revenue declines when people move to more fuel-efficient cars as the government suggests.

[Terry Gain]

1. Is it warming at all?
2. Are we causing it?
3. To what extent?
4. What harm are we causing?
5. What is the cost of preventing the harm we are causing?
6. Is the cure worse than the disease?

I have no answers and I don't trust the solutions of anyone who can't answer these questions.

[glasater]

We're about to find out what the EPA thinks regarding CO2......

[Rick Ballard]

"1. Is it warming at all?"

I'll take a crack at this one - the answer is a resounding YES!! and it's happening at various places all over the world, right this very second. The first sign is a faint glow in the east - the temperature may feel as if it had dropped when the glow is first observed but that's just a feint. Then (unless it's cloudy) a brilliant ball of fire appears on the horizon and the temperature begins its inexorable climb....

Honest - check it out.

[Frau Nebenan]

I know why my American forebears moved to the wilderness where the dangers were beasts and *natural* disasters.

[Pofarmer]

I don't by the GDP numbers, or, at least I don't trust them. Regulation, cap and tax, whatever, is going to increase energy prices. I'd expect a doubling of both electricity and fuel prices, plus spot shortages of electricity. GDP may or may not fall, but your chunk of it is going to get a lot slimmer.

[Tom Bowler]

Honest - check it out.

Rick, I did! I did! I checked it out and you're right. In fact I ran a study, right here in Nashua, from January until July of last year. In my study I found not only did it get warmer as the ball of fire rose, each day it just kept getting warmer. Every day, almost! It proves that CO2 was trapping the heat!

I'm having a hard time explaining why it's been getting cooler since July. In fact it's pretty cold today. Very disheartening. I think I can rework the numbers though! I'll keep at it.

[Rocco]

They claim to believe that capitalism is infinitely adaptable, that the magic of the marketplace can deal with any problem. But for some reason they insist that cap and trade — a system specifically designed to bring the power of market incentives to bear on environmental problems — can’t work.

Does he really believe that a system designed to transfer wealth is capitalism?

[clarice]

If energy prices double the rush to move overseas--to places like India and China which are major polluters will be enormous. So there will be fewer jobs, less tax revenue and greater welfare needs and less personal income to pay increased energy costs. Could enemies have devised anything more diabolical?

[Rick Ballard]

"Very disheartening."

I know what you mean, Tom. I've noticed the same thin, year after year after year. I'm begining to suspect that there is some sort of cycle involved.

[Sue]

OT but every poll in December has Obama below 50%. Gallup has him 47/46. CNN has Palin at 46/46. This is what CNN has to say about Palin's numbers: "The survey indicates that Americans are split on Palin, with 46 percent saying they have a favorable opinion of her and an equal amount saying they have an unfavorable view of last year's Republican vice presidential nominee." I wonder if they also think Americans are split on Obama? ::grin::

[centralcal]

Good point, Sue. However, CNN can't quite come to grips that they are in last place in the cable news business and have had to find "creative" ways to claim they are No. 1. So, it doesn't surprise me they are creative when reporting on polls.

[clarice]

Great--A report that the scientists are losing hope in Copenhagen:
"As world leaders gear up for what is being billed as an historic climate meeting in Copenhagen, scientists offer a grimmer outlook on the outcome that is supposed to replace the last major global climate deal, drawn up in 1997.

"I don't have high hopes," said Josefino Comiso, a senior scientist at NASA Goddard Space Flight Center in Greenbelt, Md. "But I hope that the participants could get to a good plan on how to minimize greenhouse gas emissions."

Comiso told LiveScience that more research is needed to convince the public and "climate skeptics" that greenhouse gas emissions are causing global warming. Other scientists say the United States needs to take more of a leadership role.

In addition, the climate-change problem is complex and deeply rooted in multiple sectors, including the economy and its push for consumption along with population growth, according to one climate scientist, who also thinks human nature and our love of material goods could need a fix.

"We need to change our mind frame - our values," said Rasmus Benestad of the Norwegian Meteorological Institute. "Perhaps quality time, love, family values, friendship and respect are preferable to material goods and status? Or maybe we humans are too vain. In this problem, I think we are seeing the worst of ourselves in the mirror. We see power struggle and corruption."

http://news.yahoo.com/s/livescience/20091207/sc_livescience/scientistsdimoutlookforclimatesummit>Better luck next time ,thieves

Roger Simon thinks O may have changed his trip to the last day of the conference because it's busted.

[Spiny Norman]

For heaven's sake - if the human contribution to the global warming phenomenon is tiny (or if warming isn't even happening) then cap and trade can't pass a cost/benefit analysis because there are no benefits, only costs.

There's your problem right there: die-hard Keynesian statists like Krugman believe ALL wealth comes from Government, that Government is the engine that drives the ecomony, not the private sector.

Does he really believe that a system designed to transfer wealth is capitalism?

Why, yes!

[clarice]

he essential role for govt in a capitalist nation is to maintain the infrastructure necessary for trade--transportation, courts, etc--and to establish a rule of law, a stable framework under which everyone knows the rules of the game. By mucking about with all these ill-conceived major efforts to substantially change the rules of the game as this Administration has is to throw a monkey wrench into the system so it cannot work as it should.

[narciso]

From the KTUU, they have approved three wells for Shell to drill in the Chukchi sea, 'told ys do' seem in order

[Jim Miller]

Krugman is certain that financial incentives will work for climate change. But at the same time he is strongly for ObamaCare, which reduces the use of financial incentives. (Which are too low already, as I think most economists would agree.)

Not being a NYT columnist, much less a Nobel-prize-winning economist, I am unable to explain how he reconciles these two positions. (As a political observer, I can explain them by saying that Krugman favors whatever he thinks will help his party, or faction within his party.)

[Old Lurker]

"I am unable to explain how he reconciles these two positions"

Progs don't have to, Jim. Didn't you know that?

[Les Nessman]

"IIRC in communities where people did save a lot of energy the power companies than raised the rates to recapture lost income. How's tht for incentive?"

That's a hot topic now in Ohio. First Energy is sending 2 curly fluorescent bulbs to all their customers - WHETHER WE WANT THEM OR NOT.
And, they are also going to charge us ~70 cents a month extra- TO MAKE UP FOR THE ENERGY WE WILL NOT BE USING!!

It works out to about $22.
For bulbs that I don't want, must take and could buy on my own for $2.

grrr.
A pox upon First Energy and the PUCO.

[daddy]

"From the KTUU, they have approved three wells for Shell to drill in the Chukchi sea"

That's great news Narciso! I'll have the headsets on today to hopefully get the particulars. Can't believe though that there's not some EPA or enviro-eco-challenge just waiting to spring into action the moment this gets going.

[glasater]

Here is a screaming headline:)

Webb warns Obama on taking action in Copenhagen

From a D no less...

[daddy]

Narciso,

The Chukchi drilling guy from Shell is on Fagan's show right now. He say's the EPA is still dicking with them today. He say's the EPA has had the permit in hand since last December and dithered and dithered etc. It keeps making Shell jump thru hoops. Now today's ruling, as far as I can tell so far, is that EPA has said Shell has to get some more public hearing stuff done and then return the Permit thing back to the EPA for their final permission. Seems that that is not a done deal. I am being hasty on this as I've missed some of the interview. It started I think about 30 minutes into hour 1 today. Will keep you up to date.

[daddy]

The Shell guy is Pete Slatey or Slavey (SP) If they don't get the permitting entirely done within the month they won't be able to do it this year, and the lease ends after 10 years and they're well into that 10 years.

They think they're 27 billion barrels of oil in the Chuckchi.

He's explaining the economic benefits now for the state and jobs etc if the project goes through--he's talking of the positive side IF it goes through. This would cause a second pipeline half of the current one. Very big and very promising IF it goes through.

But it's the Courts and the Obama Admin in charge---the state and Shell are willing to go ASAP, but it's DC making the yes or no decision on this project and it's not yet a yes decision.

Interview ended. I will try to get the full story.

[Whitehall]

As to why householders don't spent more money on energy-saving devices, the reason is their discount rate.

DoE research shows that normal people discount energy savings cash flow at 100%. In otherwords, they'll spent IF they can recoup the initial cost within a year.

One of the reasons have been mentioned above - they distrust the projected savings. If puffery is "asymmetric information" I'd just prefer the term "lies."

The other reason is that consumers have a LOT of other uses for their cash flow, as in "baby needs a new pair of shoes."

The First Energy story is funny. The reason they were told to take that course is because of the earlier experience in California. Here, the PUC order the utilities to take money from the ratepayers and give it to GE and Philips to subsidize the sale of twistee bulbs within the state.

What happened was arbitrage. Some Californians went out to Home Depot and bought cases at the subsidized price then sold them nationally on eBay.

[clarice]

Whitehall, it's heartening to me to learn that the folks can still outsmart the govt.

[JM Hanes]

TM:

I'd just note that before your critique even kicks in, you have to assume that the cap & trade "system" Krugman is talking about actually bears some resemblance to the cap and trade legislation our erstwhile Congress has produced.

Clarice:

On Obama's decision to make more than a token early bird appearance in Copenhagen, it's my impression that he and Sarkozy and someone else I can't remember offhand, have cooked up a scheme to commit $10 billion (apiece?) to a fund intended to assist the victims taking the brunt of our callous AGW disregard for their well-being. Now that's a made for Obama moment (which Sarko has doubtless figured out). Prepare for a flashy photo-op, and subsequent pressers in which Obama will tout his global leadership, and take credit for this unprecedented accomplishment -- as we finally begin to live up to our responsibilities, pay for our sins, and start making the world a better place.

[clarice]

If he does that,jmh, he'll have to get Congressional approval for it..and I expect he would never.

[JM Hanes]

clarice:

I doubt that would stop him from touting the achievement at any/every opportune moment. All he's ever needed is a will o' the wisp to hang his rhetorical hat own.

[clarice]

Yes--but it will be as solid as the unicorn he rode in on.. Just as it was when Clinton suckec up to the tranzis by signing Kyoto and then stuck the treaty in a drawer because he knew Congress would never go along.

Still enough dumbell reporters say Bush refused to sign the treay ort somesuch rather than admit Clinton pulled yet another hokey pokey move.

The majority of Americans now believe that global warming is a hoax and they are already suffering mightily in this economy as O runs it into the ground. My sharpened picket operation here in DC looks better by the minute.

[Jane]

I was at my Rotary meeting tonite and as is often the case we talked politics. The guy sitting next to me - a business owner, multi-millionaire, life long republican, 70 years old said to me: "I've never gone out and protested before. I'm beginning to think I have to."

People are really really really really freaked out.

[Pofarmer]

People are really really really really freaked out.

Good, we've become far too complacent.

This latest deal by the EPA really cements that fact.

[Jane]

BTW the primary for replacing Kennedy is tomorrow in MA. At this point it looks like Martha Coakley and Scott Brown are the favorites.

[Dave (in MA)]

Jane, I usually pull a Donk ballot in the primary and vote against the presumed front-runner, but these 4 clowns are pretty interchangeable, so what's the use? I started out wanting Coakley to lose, but Pag has been so obnoxious on the radio I really don't give a crap anymore.

[clarice]

Jane, it's really why people aren't hiring or buying. I'm already cashing out as much as I can. Next year will be worse at this rate..

[Dave (in MA)]

Lawmakers consider gasoline tax hike A hearing is scheduled at the State House today as Massachusetts lawmakers weigh a series of bills that would increase the state’s gasoline tax. The gas tax, currently 23.5 cents per gallon, would increase by 50 cents under one proposal to help cover the Massachusetts Turnpike’s Big Dig-related debts.

I'd like to thank the morons who vote for these people and inflict them on the rest of us.

[pagar]

If you think 50 cents a gallon is bad:

"Despite industry opposition, Prime Minister Gordon Brown introduced a 112 per cent rise in a passenger duty, slugging a family of four wanting to fly to Australia with up to $700 in fees and charges."

LUN

[Melinda Romanoff]

clarice-

between 1929 and 1939, the Dow made five 93% gain moves after the "crash" (which meant it dropped that much too).

Deflation is not an easy snake to get a hold of...

[Dave (in MA)]

Pagar, I guess one response to that would be that it's a lot more crucial to the economy that people are able to get to+from work than it is for Brits to visit Oz.

[clarice]

The elites hate it that ordinary people got to travel in the last few decades.It was bad enough that they had cars and didn't have to ride public transport. Seriously. A good deal of this is the desire to return to some greater socail distance between the elites and everyone else.

[Dave (in MA)]

If they had their druthers we'd all be stacked in government tenements taking the government choo-choo to our government jobs.

[pagar]

Dave (in MA) My intent in posting the UK tax story was to show another wild tax increase, and the effect it created. IMO, no one who proposes these tax increases ever thinks about what they do to human beings nor the economy.