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A delayed response

August 13, 2011

My carbon tax article in “the drum” in June sparked a lot of debate, with many people angry at my article and a few people saying some nice things. Most of the negative responses were quite dumb and don’t deserve a response, and it seemed that many didn’t read (or at least, didn’t understand) the article before they declared it wrong. But there was a response by “James512” (20 June 2011, 12:39pm) which deserve a response. I’m going to go back to an old-style blogging technique and “fisk” his comment:

JAMES: There’s a reason why Garnaut added in extra benefits but not extra costs. Only measurable market costs can be modeled, and the costs of a carbon price are all market costs, but most of the costs of climate change are not. Climate change will also undoubtedly have unexpected costs.

I agree that climate change will have unexpected costs. It will also have unexpected benefits. And the policy response will also have unexpected costs. Indeed, given the track record of public policy and unexpected consequences, that is the most likely outcome. It is appropriate to add in non-market climate impacts, but that should be done explicitly and not with an “other” category. Explicitly adding those impacts helps to avoid implicit double-counting (eg you shouldn’t include a revealed preference for environmental amenity *and* a stated preference for environmental amenity). Finally, there are “dynamic” costs of any tax that are often not counted because they are difficult to measure. After saying all of this — you need to remember that I used your preferred number in my benefit-cost analysis, and it still failed.

JAMES: With a high discount rate you could discount the extinction of humanity in 2060.

I doubt it. People today care about future generations and you need to count that (non-discounted) concern. But even if a discount rate gives you uncomfortable conclusions, that is no reason to not use the correct discount rate. After saying that — you need to remember that I used your preferred discount rate in my benefit-cost analysis, and it still failed.

JAMES: We are tracking the IPCC’s highest emissions scenario, which leads to 5 degrees warming. The uncertainty about climate sensitivity is on the high side, and slow feedbacks amplify warming, so it could be more than 5 degrees by 2100, and will certainly be even more beyond that time.

I know the reason for using a high temperature number, but it is possible to come up with reasons to use lots of different numbers. We still have a lot to learn about climate sensitivity and feedback, and when doing economic analysis I think it best to not get involved in the science debate. The safest approach is to use IPCC numbers, and not second-guess what the next report will say. After saying that — you need to remember that I used your preferred temperature change in my benefit-cost analysis, and it still failed.

JAMES: We can certainly stop most of the costs of 5 degrees warming by limiting warming to 1 or 2 degrees.

Perhaps. Though to limit warming to 1 or 2 degrees, then you are certainly talking about a strong binding international agreement, and so it is fundamental to factor in the probability of such an agreement. Simply assuming the agreement is like the proverbial economist on a desert island with canned food deciding to “assume a can opener”.

JAMES: Of course Australia cannot control the world. But if every country made the argument that it was only part of the world, no country would ever do anything. Imagine if we chose not to fight wars on the basis that we “can’t control the world”.

I would be quite happy for there to be fewer wars. 🙂 You seem to want to avoid the need to make an estimate about our impact on the world. But it is absolutely necessary, because to do otherwise is to include an implicit assumption of 100% world control. Which is wrong. First, there is a non-zero chance that the world will never reach a strong binding agreement, in which case the benefit of Australia’s carbon tax goes to zero. Second, there is a non-zero chance that the world will reach an agreement without Australia’s carbon tax, which means we could simply introduce the carbon tax after the world agreement. To argue (as Garnaut does) that we need to act *before* the world requires that our early action will increase the probability of a binding international agreement. Garnaut is right to say that we do influence the world… but the question is how much? This is the vital question that carbon tax proponents refuse to answer, because they know that to give an honest answer will undermine their preferred policy. After saying that — even if you assume 100% world control in a benefit-cost analysis, the policy still fails.

JAMES: The bottom line is we have to do everything we can to prevent climate catastrophe, even if we are not certain of success.

I’m not worried about certainty of success. I’m worried that we will introduce a policy that has more costs than benefits. I understand the urge to act, but good public policy is about only acting when those actions create a net benefit. If your actions create a net cost, then you’ve just made the world a worse place.

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