Climate Change Really Shouldn't be a Big Deal

For all the media attention and research focus on climate change, and the potentially dramatic implications of warming currently predicted, it is kind of amazing how small a deal this really should be.

Why a small deal?  No, I'm not a denialist.   It's a small deal because the costs of curbing greenhouse gas emissions are probably very small if done in an intelligent way.  And Waxman-Markey, while probably far from ideal policy, does seem to get a lot of the basics right.  In fact, all anyone talks about these days are market-based approaches to solving the problem (carbon taxes or cap-and-trade), so I'm optimistic that if policy is implemented, it will at least get first-order efficiencies right.  That is a huge victory for economics.  But the longer we wait to do something the more expensive it gets.

Krugman, as usual, is able to clearly and concisely cover a lot of key issues.  I think he's right on almost all accounts here.  The science and the economics back up his assertions.

I trust the low-cost estimates because I know where they are coming from: MIT, Resources for the Future, and CBO.  These are not institutions known for cooking the books to serve environmental causes.  In contrast, the Heritage Foundation has a well-known (extreme?) agenda and always cooks the books to serve the interests that funds it.

Furthermore, as Krugman points out, model-based estimates almost always exaggerate costs rather than underestimate them.  Costs are always exaggerated because every innovation or adaptation that the researchers cannot anticipate lowers the cost relative to the estimate.

So, like all policy issues, the question about climate change mitigation comes down to both costs and benefits.  The benefits, while highly uncertain, could be high if current climate forecasts are correct (not something I would stake my life on).  Furthermore, uncertainty is not our friend and a bad excuse for inaction.  Think of climate change mitigation as an insurance policy, one with a very low premium.

If climate change mitigation is so cheap, then why the conflict?  Ideology probably plays a role.  But I imagine the larger reason is that oil and coal would lose, big time.  In fact, the cheaper CO2 mitigation is, the more these interests lose.  Why is that?  Basic economics: If we can't cheaply reduce CO2-emissions, we'll have to do it by consuming less energy, which means much higher prices.   If prices go up a lot then Big Coal and Big Oil get very rich.  A cap-and-trade system would be almost like a government-enforced monopoly for BC and BO.

So, my hypothesis is that Big Oil and Big Coal (a.k.a, the climate skeptics, Pew, and Heritage) are fighting hard against climate change policy because they know or strongly suspect alternative energy sources are or will be cheap. And that will hurt their pocket books, because with a little time and innovation on the renewable energy front, all their oil and coal reserves will be worthless.  So they have good reason to fight hard and fight dirty against climate policy.  Not because it's bad policy.  But because it's good policy.


  1. Mostly agree, but not with your last point about cheaper greenhouse gas mitigation being bad for Big Coal and Big Oil. The more expensive the price of CO2, the more the energy mix will shift away from those two to lower-emitting sources. I think if you ran the math this would outweigh the benefit to them of a higher "market price" for energy.

  2. Another way to think about it is the simplistic model that climate change policy means a government-imposed price per ton of CO2e emitted... doesn't make sense that a coal company would think, "I prefer $20/t to $10/t, so I'll lobby for $0/t." Unless you believe a small non-zero price would have a catalytic effect on technology development, but that seems to me like a hard case to make.

  3. R:

    I may be wrong about Big Oil and Big Coal. Some of these are backing Waxman Markey. And they do gain in many of the models, particulalry because they will be given a significant share of the permits.

    But I do think the broader point is correct. If demand is really inelastic (and it is, especially in W-M), and low-carbon alternatives are not cheaply available, then the carbon cap is equivalent to a an energy cap, but the effective "tax burden" is mostly offset in the form of higher prices.

    And when the permits are given to BO and BC, they basically get to keep a lot of effective tax revenue, too--that's just the value of the permits.

    What is crystal clear to me is that the more low or carbon-free energy we can be produced once an incentive in place, the worse the policy will be for owners of coal and oil reserves.

    I don't say natural gas because I think natural gas is a good first step toward lower carbon emissions--about half, as I recall.

  4. I would say it slightly differently: at higher effective carbon prices imposed by climate change policy, more low or carbon-free energy sources will be economically competitive with oil and coal, which is bad for them. So they want the effective carbon price to be as low as possible (So best case is zero - no policy - but they prefer $10/t to $20/t).

    Permit allocations blunt this somewhat for power generation (but not completely, and only at first), and the amount of permits allocated to oil is tiny.

    I don't understand why demand for all greenhouse gas-emitting products would be inelastic... didn't we see car miles driven fall when oil prices spiked, for example?

  5. R:

    I think demand is pretty inelastic. It will be especially inelastic on the electricity (coal) front due to the way W-M effectively subsidizes retail electricity prices.

    It's a tricky balancing act. If you give coal or oil just enough permits, and alternative non-carbon based energy sources are NOT easily available, then they MAY prefer a lower cap.

    But like the monopolist's problem, there is going to be a non-linear relationship. There will be some optimal cap that is less than infinite but not arbitrarily high either.

    Hmmmm. If I can find the time I might write out the math.

  6. Would love to see your version of the math - not sure I understand what you're getting at with the monopoly analogy.

    Here's my stab (feel free to poke holes). Assume as a base case that the current energy mix is economically efficient for a carbon price of zero, and there are fewer permits allocated to coal and oil than current emissions from each of those sectors (true for oil immediately, and true for coal once the cap gets ratcheted down). I think you can then prove by induction that as carbon price increases, total revenue (net of permit costs and benefits) is monotonically non-increasing for both coal and oil.

    (in fact, that both components of revenue - average unit revenue and volume sold - are monotonically non-increasing as carbon price increases)

    From this I'd infer that a lower carbon price is always better than a higher carbon price from the point of view of the coal and oil sectors as a whole.


  7. OK, I'm wrong about strictly non-increasing average unit revenue - total permit allocation stays fixed while total permit cost goes down with volume, so average unit revenue doesn't necessarily decrease.


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