The Perfect Plan vs. What Will Be Enacted

There are two observations I’d like to make this morning about Paul Krugman’s column this morning in praise of a cap and trade system to reduce carbon emissions in the United States:

Action on climate, if it happens, will take the form of “cap and trade”: businesses won’t be told what to produce or how, but they will have to buy permits to cover their emissions of carbon dioxide and other greenhouse gases. So they’ll be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that.

The first observation is that I believe I’ve discerned a pattern in Dr. Krugman’s policy prescriptions and also identified why I so routinely find them irritating. I think that Dr. Krugman consistently imagines the perfectly crafted and perfectly administered plan and contrasts that with the status quo (or, worse, a distorted version of the status quo) rather than considering the implications of the plan that’s likely to make it through the Congress and how it’s likely to be administered. That is, he’s creating a perfect economic model and using it to make inferences about the imperfect political world. I think that process is inherently flawed.

Dr. Krugman points to the experience with sulfur dioxide emissions:

The acid rain controversy of the 1980s was in many respects a dress rehearsal for today’s fight over climate change. Then as now, right-wing ideologues denied the science. Then as now, industry groups claimed that any attempt to limit emissions would inflict grievous economic harm.

But in 1990 the United States went ahead anyway with a cap-and-trade system for sulfur dioxide. And guess what. It worked, delivering a sharp reduction in pollution at lower-than-predicted cost.

It might work out like that. But, on the other hand, the system introduced to control sulfur dioxide emissions only fell on a very small sliver of the economy and not on the enormous swathe that the cap-and-trade system will affect. And that brings me to the second observation.

I wonder why people so frequently tend to ignore the effects of the fear of regulation in predicting the reaction to policies? It wasn’t just cap-and-trade that influenced the coal-fired power plant owners to change their behavior. It was the conviction that if that plan failed a more direct regulatory approach would be forthcoming.

I don’t think that will be the case with respect to carbon emissions. I think that the various different players will decide they have little to fear from direct regulation (the social and political implications are simply too extreme) and concentrate their efforts on influencing the system rather than reducing emissions. IMO that’s largely what happened in Europe.

The irony of this is that Dr. Krugman himself would undoubtedly prefer a carbon tax as would I, the reasons for which are described in an op-ed also appearing in the New York Times this morning. The argument made by people like Dr. Krugman who know better is that a carbon tax is politically impossible while cap-and-trade is, apparently, politically possible.

One of the reasons a carbon tax is politically impossible is that public intellectuals like Dr. Krugman persist in laying down political covering fire for a Congress that’s disinclined to do anything that’s effective for fear of the political consequences.

If the Congress is unwilling to do anything that might be effective, what does that tell you of the likely effects of the cap-and-trade system they might implement?

9 comments… add one
  • PD Shaw Link

    Excellent point about the limited relevance of the SO2 market system, which generally fell upon electric utilities with well-understood smokestack emissions and limited ability to move operations out of the country. A better program to consider is Illinois’ emissions markets for VOM (volatile organic materials), which involve a wide variety of sources.

    The Illinois VOM market has been deemed a success because VOM emissions have dropped, but most of this came from plant closures. This was sold as a dynamic process, in which industry competed on technological advances to make a profit. In the process, the state would sell allowances at high cost which would help fund the regulators. Neither happened.

    I don’t believe the VOM market is the cause of plant closures, as opposed to general downward trends in industry and numerous other environmental regulations. However, for this to have worked in the way it was intended, I believe a more dynamic economy was required as a backdrop with new market entrants and expanding lines being integrated with technological improvements. And frankly if you want to do that, you might as well not build in Chicago.

  • The first observation is that I believe I’ve discerned a pattern in Dr. Krugman’s policy prescriptions and also identified why I so routinely find them irritating. I think that Dr. Krugman consistently imagines the perfectly crafted and perfectly administered plan and contrasts that with the status quo (or, worse, a distorted version of the status quo) rather than considering the implications of the plan that’s likely to make it through the Congress and how it’s likely to be administered. That is, he’s creating a perfect economic model and using it to make inferences about the imperfect political world. I think that process is inherently flawed.

    Signed. And…he is a theorist after all–i.e. not known for his stellar empirical research.

    In theory cap and trade looks great. You incorporate into each firm’s cost structure the external costs imposed by GHG emissions. Thus you get an optimal outcome and you don’t have to try and figure out all the details for each firm, for each industry, for each state, country, and so on and so forth. Let the market handle the massive information requirements…that is what markets often do well.

    Now…reality. In Europe the cap and trade prgrams were basically ginormous corporate welfare programs. There was an over-supply of permits making the whole process a joke. Instead of getting the correct costs imbedded into the system you got costs that were too low. Add on incomplete coverage in terms of cap and trade and you have a program that just isn’t going to work a neatly as the theory predicts.

    A carbon tax is much more simpler to implement, also brings costs into the polluters cost structure (although there is the issue of what exactly is the right tax, but you had a similar issue with the right amount of credits/permits/allowances whatever you want to call them).

  • Drew Link

    “But, on the other hand, the system introduced to control sulfur dioxide emissions only fell on a very small sliver of the economy and not on the enormous swathe that the cap-and-trade system will affect.”

    That’s the correct and crucial point, although, since coal provides 50% of electricity, I wouldn’t minimize the case. (But there’s alot more than electricity going on.)

    But if I might augment. That policy worked because there is Eastern and Western coal, one high sulfur, one low sulfur. So it changed the dynamics of what coal was mined and used. The market (yes, that terrible free market) adjusted. There was an alternative.

    Krugman, dishonestly (my words) trying to say that the dire projections had no effect conveniently forgets that this policy completely transformed the coal mining industry. He gets away with it because most people are ignorant of the issues.

    I’m trying to be the new, modulated Drew. (its like being drugged) But look, these a-holes like Krugman are theoretical idiots. They have no practical scientific or commercial experience or instincts. They should be characterized for what they are: know-nothing ivory tower morons plying weird theoretical notions that have no commercial application. They are dangerous.

    Where’s the opiate push…….

  • steve Link

    Drew-Are you saying they would have stopped SO2 emissions without government interference? Why would they do that?

    Steve

  • steve,

    I don’t see that. What Drew is saying is that by regulating the sulfur output via cap-and-trade coal burning electricity generators were able to switch to a low sulfur coal that allowed them to avoid increasing costs and keeping electricity prices lower than they otherwise would have been.

    We really don’t have a viable alternative to oil/gasoline right now for a significant segment of our economy. Say what you will, biodiesel, electric cars, and so forth the options are quite limited so the two cases are not entirely analogous.

  • Drew Link

    Steve –

    No, I’m simply pointing out that Krugman is being bald-faced dishonest when he argues there “was no grevious economic harm,” or that the policy was innocuous as a defense to his current proposition. It wasn’t. And further, as Steve V points out, switching to the current debate, there are no real alternatives.

    Back whence, because there was the option of low sulfur western coal to go to, the companies developed that resource, putting the eastern coal mining operations and their employees flat on their back. You can’t imagine how many mines have been abandoned. Ask those people if Krugman is right.

    And it had the unintended consequence of introducing strip mining (because of the way western vs eastern coal is in the distributed in the ground). People don’t like that.

    And Steve V’s observation stands on its own.

    So Krugman is counting on the proposition that many bright, educated and informed people like you have no clue about the narrow issues of the history of coal mining, the issues of relative sulfur, ash and mercury content, mining extraction techniques, relative BTU content etc……..all of the technical and economic tradeoff considerations. And why would you? I’m formerly a metallurgical engineer who would naturally have some background. (Many people don’t know what that is. Its the same as a chemical engineer, which people tend to understand better. And I worked in the steel industry, where coal is an important raw material.) As an investor I’ve come across companies where these issues are at the fore. But the majority of people? C’mon. Coal dynamics? What about this week’s football game, or what about the latest Senate proposal?

    So Krugman knows that no sane person, or at least only a small minority of people, are steeped in these issues, and abuses his position as an “economic authority” to make false claims. He really is a scumbag. This is only one of many of his distortions.

  • PD Shaw Link

    Drew, you don’t no fancy degrees, you just have to stop in flyover country once and awhile.

    I would simply add a point, the 1990 law that Krugman is championing is still described by the coal industry as something like the Natural Gas Subsidy Act. It wasn’t just western coal that was advantaged, a lot of electric utilities switched or introduced natural gas and King Coal believed Bush I signed it as a plum to his Texas friends. It really doesn’t take away from the point about subsititutes, but is something I think about when people talk about whether natural gas should be used to power motor vehicles.

    Krugman also doesn’t appear to know that SO2 was regulated beginning in 1970 under the Clean Air. The emissions system authorized in 1990 was built on a base of knowledge and experience that simply does not yet exist for CO2. Next year will be the first year that facilities will be required to monitor and report for it. We won’t know the results until 2011, and that’s just one year’s results.

  • PD Shaw Link

    emissions system = emissions trading system

  • Drew Link

    “Drew, you don’t no fancy degrees, you just have to stop in flyover country once and awhile.”

    Say what? BTW – I live in flyover country – Illinois.

    “…. the law that Krugman is championing is still described by the coal industry as something like the Natural Gas Subsidy Act. It wasn’t just western coal that was advantaged, a lot of electric utilities switched or introduced natural gas….”

    That is absolutely correct, PD. Of course, that became a mess, as Hurricane Katrina proved. We once were looking at a company/deal where EBITDA quadrupled because natural gas prices skyrocketed after Katrina and this company’s coal assets benefitted accordingly. Scary.

    “The (SO2) emissions system authorized in 1990 was built on a base of knowledge and experience that simply does not yet exist for CO2.”

    Damned straight. I’ve been flogging this point that as a kid I worked on a potential technology to capture SO2 in coal boilers. I long ago lost track of the science, but I have little doubt that this gambit failed economically as the utilities just moved over time to western coal and installed baghouses as needed. But as for CO2 I have no clue. When I was fiddling around we had iron to dissolve SO2. But physics is physics. I don’t know what we do with CO2………….construct the mother of all Coca-Cola factories?

    You know, the Krugman’s and Obamas of the world can hold their pud’s in their left hand while academically pontificating all they want. But they appear to have little commercial sense. Too much time community organizing and Ivory Towering it, I guess. Unfortunately, there is a real world out there. But hey; the President told us this morning that he would halve the deficit. So I’m going to do my best Keith Olberman routine and Lewinsky Obama for such absurd claims.

    I better stop. Old Drew is starting to come out.

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