By Chris | August 18, 2008
Jim Manzi at Cato makes some great insights into the global warming debate in this post (HT econlog). I particularly enjoyed his criticism on using a zero-discount rate to calculate the present value of the costs of global warming. He notes that 50% of the world’s 2008 GDP is equal to .1% of the world’s projected GDP in 2200 . No one is willing to cut the modern world’s standard of living in half to make a much richer future world nominally richer. I was also intrigued by his argument that the aim of carbon taxes is innovation not conservation:
[Beginning of Quote]
“To evaluate this, start with the observation that the primary purpose of such a tax or rationing system is not to encourage conservation per se, but rather to induce the development of new technologies that can de-link economic growth from damaging accumulations of atmospheric carbon dioxide. Increasing the price or scarcity of carbon would cause some direct reduction in fossil-fuel consumption (e.g., biking to work instead of driving), and get more people to use some pre-existing technologies (e.g., efficient light bulbs), but these effects would be limited. Hairshirts are not enough. We would have to develop new technologies that use energy more efficiently, emit less carbon per unit of energy, remove carbon from the atmosphere, and/or reduce the harm done by carbon dioxide. The real costs of a program to address global warming are crucially dependent on how much time and money it would take to develop and diffuse these technologies, plus the incremental costs per unit of energy (if any) they would impose once deployed.
This explains why carbon tax or rationing advocates pay lip service to the naïve idea that the developing world will impose large carbon taxes if we just “lead by example.” Of course, under the reasonable assumption that the relevant technologies will be developed primarily in the United States, Europe, Japan, Canada, and Australia, it doesn’t really matter that much whether the developing world puts a price on carbon or not. The global crusade is a smokescreen. The goal is to create an artificial scarcity of carbon in the developed world.”
[End of Quote]
Manzi argues that the developing world will never agree to a carbon tax, therefore its main appeal is that it will drive innovation in developed countries. However, I suspect that most innovations will be self-defeating. Let’s assume that a carbon tax in the developed world stimulates innovators to develop cheaper and cleaner forms of energy. These technologies will certainly be cheaper than carbon-based technologies plus the artificial taxes. However, unless they are cheaper than carbon-based technologies alone, the developing world will continue to consume carbon-based energy sources. Indeed, as developed countries switch to new technologies, demand for carbon-based energy sources like oil will fall in the developed world driving down the price of oil for everyone else. The gains from clean technology will be offset by an increase in the quantity of carbon-based energy consumed by the rest of the world.
In the near to mid-future, I don’t believe that technology alone will be able to reduce global carbon emissions. Oil is just too cheap and most of the world is too poor to find conservation even remotely attractive. No matter how much you tax carbon-based energy, scientists aren’t going to develop the uber-cheap, totally-clean energy sources of science fiction novels: at least not anytime soon. There are already hundreds of billions of dollars on the table for such a discovery. It’s not like the current prize isn’t attractive enough.
Nevertheless, the picture isn’t as gloomy as it might seem. When we develop a relatively cheap, significantly-cleaner, energy source, we can just pay poor countries to use it. As thing stand, countries have the defacto right to release carbon into the air. Rich countries value a world without global warming more in monetary terms than poor countries do. So, why not pay them to use our cleaner energy technology? I think Coase would agree.