Halfway through reading Paul Krugman’s New York Times piece on green economics, I had my snarky retort all ready to go. Then in the second half he went and got all reasonable on me. I still don’t buy his conclusions, but (sadly for readers who like fireworks), he’s not (at least in this instance) nuts.
There have been exactly two great ideas in environmental economics, one from Arthur Cecil Pigou and the other from Ronald Coase. Krugman starts off with a good account of the first. Sometimes market transactions impose spillover costs (economists call them externalities) on innocent bystanders; carbon emissions are a good example. Pigou proposed to tax externalities at a rate commensurate with the costs they impose. If your smokestack causes $50 worth of damage, you pay a $50 tax. We call such taxes Pigovian. Krugman does a good job of explaining how they work, and why they’re usually preferable to direct mandates.
Here, though, is where I briefly thought Krugman had gone completely off the rails. He touts the merits of Pigovian taxes—the first great idea in environmental economics—while appearing completely to ignore the second great idea, namely Coase’s insight into how Pigovian taxes can backfire. Here’s the problem: Pigovian taxes will lead to fewer carbon emissions, and with fewer carbon emissions, less effort will go into seeking alternative solutions, like new technologies to cool the planet or new technologies to make life tolerable in a much warmer world. Nothing in pure theory can tell you whether such technologies are likely to be feasible or efficient, so nothing in pure theory can tell you whether a Pigovian tax is a good idea.
When it comes to macroeconomics, Krugman loves nothing more than to skewer writers who depart from the Keynesian gospel—writing, he says, as if Keynes had never lived. How delicious, then, to find Krugman writing as if Ronald Coase had never lived. Bloggers love this kind of irony.
So if Krugman had stopped there, my own retort would have been shorter, snappier and more quotable than the post you’re reading now. Alas for readers who enjoy that kind of thing, Krugman’s piece took a turn for the better. True, after all his paeans to Pigou, Krugman never mentions Coase’s name, and true, he never gives Coase’s ideas the same careful airing he gives Pigou’s. But his economics training wins out and eventually leads him into essentially Coasian reasoning:
It seems almost certain that … [a temperature rise of 9 degrees Fahrenheit] … would make the United States, and the world as a whole, poorer than it would be otherwise…But we have an advanced economy, the kind hat has historically shown great ability to adapt to changed circumstances….[This] should help us cope with a somewhat higher average temperature.
He then proceeds, just as Professor Coase would have us do, to think about just how well we might cope, to acknowledge that both action and inaction can be costly, and to inquire into the particulars of the situation. I think he gets several of those particulars wrong, but at least from this point on he asks most of the right questions. (I’ll elaborate on this later in the week.)
To recap: Krugman starts out with the right answer (“impose a Pigovian tax”) to the wrong question (“How can we best reduce carbon emissions?”). The right question is not how best to reduce emissions, but how best to cope with the fact that carbon-based technology can have a substantial downside. We might want to deal with that by reducing emissions; we might want to deal with it by finding other ways to cool the earth; we might want to deal with it by moving all our cities northward and inland; we might want to deal with it through some combination of those strategies; we might want to deal with it in some way that nobody has yet imagined. A Pigovian tax does a good job of reducing emissions, but at the same time it causes people to work less hard at the alternatives. Therefore, depending on particulars, a Pigovian tax could be an excellent idea or a disastrous one. Again, Krugman gets that right. Where he goes a bit wrong, I think, is in his assessments of the particulars.
This post is getting long, so I’ll save my quibbles for later in the week.