Rossi-Hansberg on the impact of carbon taxes
Esteban Rossi-Habnsberg’s wonderful speech at the Hoover Economic Policy Working Group inspired me to think about climate economics again. Link here If the above embedding does not work. Paper is here, (With Jose Luis Cruz Alvarez), slide Here. Earlier The introductory post is here.
There is a lot of content in this paper and presentation, and I will try to stick to a theme in each article.
Like most economists, my knee-jerk reaction to climate change is a “carbon tax.” Especially carbon taxes rather than extensive regulation. Given We will have a climate policy that does not encourage carbon emissions, and a uniform price for carbon emissions is the only wise and effective way. (For this purpose, it does not matter whether taxes, tradable rights, or other mechanisms.) I will add barriers to the removal of alternatives, such as nuclear power, and health expenditures for basic science of alternatives.
With this in mind, I was shocked by these charts:
This is the impact of GDP. (In this model, warming does cause considerable damage to GDP, which I will talk about in the next blog post.) Reducing carbon emissions now consumes a lot of GDP in exchange for a moderate increase later.
In terms of impact, the implementation of a uniform carbon tax reduces the use of fossil fuels, which makes energy more expensive overall, thereby reducing income and welfare…Initially, the carbon tax reduced corporate innovation because of the potential current decline in profits. Therefore, the growth rate of the economy is reduced. Of course, as time goes by, the flattening of the temperature curve has a beneficial effect on amenities and productivity, resulting in higher real income and welfare, and higher growth rates. Finally, the curves in Figure 19 intersect, which means that the implementation of the carbon tax will be beneficial on average after this period. In the long run, real GDP and welfare continue to increase due to the increase in the global population.
Since there is no long-term benefit to the climate, the only long-term benefit comes from their assumptions about the size of the population. Endogenous fertility is something we don’t know much about, so I don’t place too much emphasis on the costs and benefits of carbon policies that work by encouraging increased fertility, and I’m not sure whether climate advocates believe that population expansion is a pure benefit.
For standard cost-benefit analysis, the very low discount rate that is currently popular is used. This fact does reduce revenue.
We chose a benchmark discount factor of ? = 0.965. For this value, today’s carbon tax is not desirable… But if we increase the discount factor to ?=0.969, then a carbon tax of 200% or higher will maximize welfare and real GDP. Considering the path shown in Figure 19, this large sensitivity of the optimal carbon tax is natural and warns us not to rely too much on PDV statistics that rely on a specific value of the discount factor.
If you think that global warming is a “crisis”, “existential threat”, the prelude to earth civilization or the end of life, then such a postponement is of little value at all. “Let’s postpone climate change” doesn’t really keep young activists away from roadblocks, does it?
Unlike many black box climate models, the intuition here is straightforward and convincing, “Why didn’t I think of it?” Somehow. We are sitting on a pile of fossil fuels, and the cost of consumption is getting higher and higher.
(Actually, I think this is mainly coal.) We can use fossil energy or “clean” energy, which are good but not perfect substitutes. This is an important point. The time and weather sensitivity of “clean” energy means that we still need fossil backups. It is more difficult to completely replace fossil fuels than to use a little bit. There are also some uses that are difficult to replace with fossil fuels. For example, airplanes are more difficult to energize than cars because the batteries are heavy. Shooting a billionaire into space will hardly be exciting. Don’t forget the fossil fuels and other carbon emissions from manufacturing windmills, electric cars, and biomass.
In this mechanism, a carbon tax will only make mining more expensive. We generally use less energy, leading to a short-term decline in GDP and replacing more “clean” energy. But we still empty the pool.
You might say that this proves that stupid economists have been wrong all along. The damn carbon tax has introduced regulations. But regardless of the mechanism, this is the same. If the regulatory agency (and now the central bank) achieves the same substitution of fossil fuels through authorization, supervision, and cancellation of funds, the burn volume and GDP impact will be the same. We just hide costs and are much less efficient; we burn fossil fuels in activities that are of low economic value but are politically privileged, and replace fossil fuels with other activities that are extremely expensive. Carbon taxes still dominate regulations, by doing the same things more efficiently, burning our carbon in the most beneficial places.
So, really, this picture is a condemnation of all anti-carbon policies.
How can we revoke it? Where are the hidden assumptions? Fortunately, they are not hidden!
The first core assumption is the elasticity of substitution between carbon emissions and clean energy, which is set at 1.6 here. This is very flexible, but not unlimited.
epsilon = 1.6.
The standard vision in policy discussions assumes unlimited substitutability. Once the cost of clean energy is lower than the cost of carbon-emitting energy, everyone will completely replace the latter, leaving oil and coal underground. This is the key question. The graph clearly shows that if we want to avoid a significant temperature rise, most of the carbon must stay underground (or return there). (Similarly, I won’t dispute the climate aspect of the model here. Whether the large warming really hurts GDP is a separate issue and I will return to it in the next article.) But as long as the flexibility of substitution is limited, as here is the case. , And then carbon comes out of the ground. As you use less and less, the remaining uses become more and more valuable. Therefore, despite its smaller scale, it is worthwhile to continue to use it, both for individuals and for society.
So I learned from it that the focus of R&D is not to reduce cost Alternatives, but increase their Substitution Used in fossil fuels. Just because the cost of solar cells plummeted is not good for us. We need to increase their fungibility. This consideration once again points out that nuclear and carbon capture and storage are truly important technologies. We are actually discussing how to replace coal-fired base-load power plants in areas of the world that desperately need electricity. Nuclear energy and capture and storage, although they may not be the cheapest, seem to provide better alternatives. Both are taboo topics in the climate debate, which is sad.
This idea underscores a point that Bjorn Lomborg emphasized in many different ways in previous talks. Simply making carbon more expensive will not work.
This is the real price of oil. There is no big trend. Innovations to reduce costs can reduce the cost of fossil fuels and the cost of alternatives.
Regarding a big question, what is the GDP cost of climate change…