Friday, September 25, 2009

Global Warming, Doing Nothing?

Sometimes it is better to do nothing, and as the scientific opinions regarding global warming vary so widely, the costs to address it so exorbitant, and the unwillingness of the major polluting countries like China and India to do much of anything, perhaps that is the best policy.

Few accept the overblown projections of the deep ecology inspired environmentalists that the world as we know it will end tomorrow, and government’s record in efficiently managing the economic ramifications of their policy initiatives, do not lead one to a level of confidence in whatever response they might settle on regarding global warming, so perhaps the best response is to do very little, as this article from the Wall Street Journal suggests.

An excerpt.

“Will government solutions to global warming be worse than global warming itself? Remember that man-made global warming is a negative externality that occurs when burning fossil fuels release carbon dioxide into the atmosphere. Economists define negative externality as a spillover from an economic transaction that harms parties not directly involved in the transaction. In this case, the carbon dioxide released into the atmosphere is thought to be boosting temperatures, raising sea levels, and having other effects on the climate that people must involuntarily pay to adapt to (more air conditioning, switching crops, and so forth). Thus, goes the argument, the price of fossil fuels does not reflect the full cost of consuming them.

“Ideally, once the full costs of man-made global warming are calculated, consumers, businesses, governments, and international agencies can adopt policies to take such costs into account. The two policy options generally discussed in this light are cap-and-trade carbon markets and carbon taxes. The idea behind carbon markets is that governments ration how much carbon dioxide and other greenhouse gases may be emitted by setting an overall limit on emissions. Emitters are then required to have a government-issued permit for each ton of carbon dioxide they release into the air. The total amount of permits cannot exceed the cap. Emitters that need to increase their emission allowance must buy permits from those who emit less, creating a market for carbon dioxide emissions permits. The goal of such a rationing scheme is to create a market that sets a price on the negative externalities imposed by burning fossil fuels.

“Similarly, imposing a tax on emissions aims to correct the negative climate externalities produced by burning fossil fuels. A carbon tax is a Pigouvian tax (after the economist Arthur Pigou) levied on a market activity to take into account the negative externalities of that activity. In Pigou's formulation, negative externalities occur when the social cost of a market activity exceeds the private cost of the activity, which is another way of saying that the activities of some people are imposing uncompensated harms on other people. The result is that markets over-supply a good—in this case, the energy produced from fossil fuels. The goal is to set a tax equal to the cost of the negative externality, thus nudging markets to produce efficient amounts of a good.

“The laudable goal of both carbon markets and carbon taxes is basically the same: make polluters pay for the costs they involuntarily impose on others. So all that remains is to calculate the costs and let policy makers impose either the appropriate markets or taxes. The problem is that in the real world things are never as simple as economic theory would have it. Estimates of the potential damage caused by global warming range widely, depending on estimates of how the climate is likely to react to extra carbon dioxide, future economic growth, and, most crucially, the discount rate.”