A couple of weeks ago, James Hansen had an op-ed in the New York Times against a cap-and-trade system. After reading it, my hope was that it would get people’s attention and begin to shift the public discourse against cap-and-trade. I was disappointed when I saw that Paul Krugman denounced him as “unhelpful Hansen” that same morning, arguing, that between a cap-and-trade versus fee-and-dividend system,
The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.
It’s just destructive to denounce the program we can actually get — a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time — in favor of something that can’t possibly happen in time to avoid disaster.
He also pulls the economist trump card:
Things like this often happen when economists deal with physical scientists; the hard-science guys tend to assume that we’re witch doctors with nothing to tell them, so they can’t be bothered to listen at all to what the economists have to say, and the result is that they end up reinventing old errors in the belief that they’re deep insights.
Well, Hansen was obviously miffed about this post as well, because like me, he generally agrees with Krugman’s insights. Today, Hansen responds on the SolveClimate blog. He starts out with a key fact:
As long as fossil fuels are the cheapest form of energy their use will continue and even increase.
Then he takes on Krugman’s arguments one-by-one:
Krugman Argument #1: Cap‐and‐trade is the only way to get an effective agreement rapidly.
That is a myth. In fact, every cap‐and‐trade regime has taken many years to hammer out. Kyoto negotiations dragged on a decade and were not completed. Individual countries had to be bribed to participate, yet some still would not. And the result was not successful, as we have seen.
Proposed cap‐and‐trade within the United States would be even more complex than “Kyoto.” […]
Fee‐and‐dividend, in contrast, is defined by a single number: the fee (tax) rate that the fossil fuel companies must hand over at the first sale of oil, gas or coal…
International agreement requires principally that the United States and China agree to apply such internal fees across the board on fossil fuels at the mine or port of entry. Agreement on such action is in the best interests of both nations, making it far easier to reach than agreements on caps…
Next, and this rebuttal is the key one,
Krugman Argument #2: Cap‐and‐trade and fee‐and‐dividend are really equivalent.
Krugman says that the fee‐and‐dividend I propose is “essentially equivalent” to cap‐and‐trade. Here I may not have been clear. I do not dispute the economic theory that a cap and a fee are, in principle, equivalent. But cap‐and‐trade’s complexity allows special interests to take over, killing its effectiveness.
The devil is in the implementations…
One can appreciate the difference in transparency by comparing the 2,000‐page Waxman‐Markey cap‐and‐trade bill with the simplicity of a single fee (tax) rate on fossil fuels. With fee‐and‐dividend we know who gets the money – equal amounts to all legal residents…
Finally, he disagrees with Krugman’s lack of concern over Wall St’s involvement in these markets. Although he only gets to it in the conclusion, my core concern with the market’s involvement in carbon is, as Hansen says,
Caps inherently cause prices to fluctuate wildly. Even if legislators attempt to outsmart the market by building in limits on the fluctuations, there is still uncertainty in the impact on energy prices. Business people need to have confidence about how prices will change in the future. Ditto, the public.
I think Hansen wins on the technical points about which is better. I wonder if fee-and-dividend can pass, primarily because it gives less to special interests. However, W-M might be DOA in the Senate anyways, and I think the idea of a public dividend can make the bill more palatable to the fossil fuel-dependent constituencies (read: voters, not dollars).