Knowledge Not Required

One might think one would have to know what one was talking about to write an op-ed for The Washington Post but of course if that were the case then Robert Samuelson would be unemployed:

Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down. It wouldn’t permit satisfactory economic growth. But if we’re going to try to stimulate new technologies through price, let’s do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable. If environmentalists still prefer an allowance system, let’s call it by its proper name: cap-and-tax.

We'll turn this over to Ryan Avent:

Yowza. As any economist worth his or her salt will tell you, a cap and trade plan with auctioned permits is essentially identical to a carbon tax. That also happens to be exactly what Barack Obama is proposing. So, another way for Samuelson to have written this column would have been to title it, “Barack Obama has a good plan to reduce carbon emissions."

This is, of course, also the view of Hillary Clinton, John Edwards, leading congressional Democrats, and all the main environmental groups. But of course Samuelson's the kind of guy for whom environmentalists and Democrats are always wrong, so we have to ignore the facts.

Comments

Dear American Voters,

Hon. Senator McCain and Obama, besides each having many attributes and characteristics. The critical differences in my professional, political, and personal opinion are as under:

1. Presidential "Temperament and Composer".
2. Little Washington "insider Versus outsider" connectedness.
3. Vision and mission for our nation future rather than past.
4. American policies first USA centric than other countries centric.

In my professional opinion one senator has it and the other does not. We need one for our Greatgrand Nation to address our all these challenges with a fresh, clean and new slate.

God Bless America. its diverse people, and our Greatgrand Nation.

Yours truly,

COL. [retd] A.M.Khajawall
Forensic psychiatrist, Las Vegas NV

Posted by COl.[retd] A.M.Khajawall | June 2, 2008 4:47 PM

Dear American Voters,

Hon. Senator McCain and Obama, besides each having many attributes and characteristics. The critical differences in my professional, political, and personal opinion are as under:

1. Presidential "Temperament and Composer".
2. Little Washington "insider Versus outsider" connectedness.
3. Vision and mission for our nation future rather than past.
4. American policies first USA centric than other countries centric.

In my professional opinion one senator has it and the other does not. We need one for our Greatgrand Nation to address our all these challenges with a fresh, clean and new slate.

God Bless America. its diverse people, and our Greatgrand Nation.

Yours truly,

COL. [retd] A.M.Khajawall
Forensic psychiatrist, Las Vegas NV

Posted by COl.[retd] A.M.Khajawall | June 2, 2008 4:47 PM

I really feel like those comments above should have ended with a plea to wire money to a foreign bank account or something.

Posted by Chris O. | June 2, 2008 4:54 PM

Sometimes an Ivy League education just ain't what it's cracked up to be.

Samuelson's point is that calling this anything other than a carbon tax is obfuscating the truth. If this program is so good, why would Obama want to hide that truth? I thought he is all that is honest and good and open and clean and articulate.

I presume you'll have no objection, then, to the characterization that this will be a massive tax increase on anyone who uses energy?

And you'll have no objection to calling it what it is-- Obama's Tax on Carbon?

That is why Obama wraps this up into a bureacratic rationing system -- it is a tax to manipulate (increase) the cost, thereby trying to manipulate (reduce) the demand. But for some reason the politically savvy Obama won't just call it what it is -- a carbon tax.

Why do you think that is?

Change we can believe in.

Posted by Wee Willie Keeler | June 2, 2008 4:56 PM

I think the point was to call a tax a tax instead of using euphemisms like "cap and trade".

Posted by Dave | June 2, 2008 4:57 PM

Samuelson is wrong when he says that a carbon tax would favor alternative fuels and conservation just as much as cap-and-trade--his point is that they wouldn't. But the rest of his article is right-on.

If you want to understand the difference--and I know that most here don't--it's this: how much will it cost to reduce carbon emissions by 10%? No one knows. The advantage of a carbon tax is that it allows calibration on the cost of emissions. If, as Samuelson says, a 44% reduction in carbon emissions can't be accomplished absent vast economic dislocations, then we may not wish to require reductions to that extent. A tax allows greater flexibility and transparency on the cost side.

Posted by Thomas | June 2, 2008 4:57 PM

The only way an auctioned cap-and-trade system truly functions as a tax is if the penalty for violations is way too small.

Posted by Anonymous | June 2, 2008 5:00 PM

Avent writes: "As any economist worth his or her salt will tell you, a cap and trade plan with auctioned permits is essentially identical to a carbon tax."

Uh, this is exactly the point that Samuelson is making. That's why the final sentence of the quoted language reads "let’s call [cap and trade] by its proper name: cap-and-tax". Duh.

But Avent is completely missing Samuelson's deeper point. One does not know how much carbon reduction one gets at any particular tax level. Accordingly, one may either set the tax level and let the carbon reduction work itself out, or one can set the carbon reduction and let the tax level work itself out. Samuelson argues for the former, rather than the latter, because if we set the tax level, we know exactly what harm we are doing to the economy, whereas if we set the carbon reduction level we do not know what harm we are doing to the economy - and, if the promised changes in the economy and creation of new technologies do not pan out, the tax level will be excessive and we could do too much harm to the economy.

Avent has never struck me as an especially bright member of the blogosphere, so one can excuse his difficulty understanding even these simple points. But why is Matthew linking to him?

Posted by Al | June 2, 2008 5:00 PM

The Washington Post strives for ignorance among its commentators. That is why the Kagans have unlimited access to the Post pages. But when was the last time you got a valuable insight from the likes of Cohen, Ignatius, Hoagland, Mallaby, Broder? Old, stupid, clueless.

Posted by della Rovere | June 2, 2008 5:01 PM

I think everyone talking about cap and trade and taxes would do well to learn a little about SO2 cap and trade system from the 90s.

Posted by Anonymous | June 2, 2008 5:04 PM

This criticism is completely off-base.

Consider Avent's incredibly simplistic (and in many ways wrong) assertion:

"Yowza. As any economist worth his or her salt will tell you, a cap and trade plan with auctioned permits is essentially identical to a carbon tax."

A cap and trade plan does establish a market price for carbon emissions, and in that crucial sense it is similar to a carbon tax. But it is very different in how and when it sets that price.

Right now, we're suffering from a lack of information: we don't know how expensive it will be to make large cuts in our carbon emissions. In fact, at some sufficiently high cost, cutting emissions may not be worth it. If tight cap-and-trade limits force the cost of a ton of carbon up to a wildly inflated level (as tight supply caps are known to do), we're going to see some serious economic carnage. Will this happen? I don't know, but it's possible that we aren't going to see the improved technology that will be necessary to fight carbon emissions anytime soon, and that slashing emissions will be more expensive than we hope.

Samuelson calls for "honesty" in the form of a carbon tax because it's more efficient and predictable: given our limited knowledge about the difficulty of cutting carbon emissions, it's makes much more sense to say that we're going to do it up to a certain cost level, rather than quixotically pursue a set emissions level no matter how cheap or expensive it turns out to be.

This would be different if we knew that X amount of carbon was a certain "threshold" value for climate change, and that we desperately needed to set an emissions target below it. But we have no such knowledge, and as such a specific price level for carbon makes much more sense.

Avent is being the hack here, and a clueless, arrogant one at that. Robert Samuelson is wrong about many things, but this isn't one of them.

Posted by Matt Rognlie | June 2, 2008 5:08 PM

Three and a half months ago. The third point seems to be the one people are making around here.

Posted by agl | June 2, 2008 5:17 PM

Anonymous wrote:

"I think everyone talking about cap and trade and taxes would do well to learn a little about SO2 cap and trade system from the 90s."

You need to understand that CO2 reductions are different from every kind of emissions reduction that has thus far been attempted. With other pollutants, you can tweak the existing methods of production to make them cleaner -- with SO2, for instance, you can use flue gas desulfurization, and you can use low sulfur coal. Not so with carbon: every fuel has a certain carbon content that has to go somewhere, and will escape into the atmosphere as a consequence of combustion.

Admittedly, it's possible that cheap carbon sequestration will let us all off the hook. But this is a highly unproven, untested technology, and if it doesn't succeed we will be forced to change our energy sources in unprecedented ways.

Please don't pretend that once we implement tight carbon caps, everything will magically resolve itself with acceptable cost. It may, but depending on the technology it also may not.

Posted by Matt Rognlie | June 2, 2008 5:23 PM

Anonymous wrote:

"I think everyone talking about cap and trade and taxes would do well to learn a little about SO2 cap and trade system from the 90s."

You need to understand that CO2 reductions are different from every kind of emissions reduction that has thus far been attempted. With other pollutants, you can tweak the existing methods of production to make them cleaner -- with SO2, for instance, you can use flue gas desulfurization, and you can use low sulfur coal. Not so with carbon: every fuel has a certain carbon content that has to go somewhere, and will escape into the atmosphere as a consequence of combustion.

Admittedly, it's possible that cheap carbon sequestration will let us all off the hook. But this is a highly unproven, untested technology, and if it doesn't succeed we will be forced to change our energy sources in unprecedented ways.

Please don't pretend that once we implement tight carbon caps, everything will magically resolve itself with acceptable cost. It may, but depending on the technology it also may not.

Posted by Matt Rognlie | June 2, 2008 5:26 PM

The "Cap and Trade" system would restrict the available supply of energy and introduce rationing. Why? Well, the left opposes nuclear power, which is the only viable non-fossil electricity generation source - wind and solar are, and will remain, small players (also worth noting: any sizeable wind system gets shot down by the left anyway - see Ted Kennedy, Gov. O'Malley of MD).

All this is, is a scheme to generate huge wads if tax dollars for the federal government, which it will then proceed to waste.

Posted by James Robertson | June 2, 2008 5:29 PM

WaPo has been doing its damnedest to shovel out anti-regulation agitprop on climate over the last few days. Krauthammer followed by Will followed by Samuelson. Bleh.

The Post and the New York Times have become sad, pathetic shells of their former selves.

Posted by Jon | June 2, 2008 5:46 PM

Hate to be such an incessant presence on this comment thread, but when James Robertson...

"Well, the left opposes nuclear power, which is the only viable non-fossil electricity generation source"

An interdisciplinary group at MIT did an extensive study on the future of nuclear power in 2003. They did recommend that we expand our capacity for nuclear generation, but their results strongly contradicted the right-wing trope that nuclear electricity can solve all our energy needs.

First, it's simply unrealistic to assume that nuclear energy can expand to cover most of the new demand that emerges in the next few decades. There is a binding uranium supply constraint, and the most reasonable scenario examined by the MIT group projected that nuclear energy would remain relatively constant fraction of our total energy output. (Since energy consumption is bound to increase significantly, such a scenario involves a tripling of production). Nuclear power plainly cannot substitute for the development of a broader range of alternative energy sources.

Second, talk about the possibility of closed fuel cycles to resolve uranium supply constraints (in addition to our growing waste problem) is wildly overblown. Such technology has never been implemented at a reasonable price, or on a wide scale. Meanwhile, it creates potentially disastrous safety and proliferation issues. As the MIT group states:

"We have not found, and based on current knowledge do not believe it is realistic to expect, that there are new reactor and fuel cycle technologies that simultaneously overcome the problems of cost, safety, waste, and proliferation."

It's most likely that fifty years from now, nuclear power will look roughly like it does today: an important carbon-free part of energy generation, producing about 20% our electricity. It will not solve our energy and environmental problems.

Posted by Matt Rognlie | June 2, 2008 6:00 PM

@Matt Rognlie is exactly right. The fundamental difference is that a carbon tax establishes a cost NOW for using this resource - cap and trade requires multiple bartering sessions to establish a cost and will tend towards a lower cost (as it is now in the free market and potentially profitable). The carbon tax is felt as a penalty and those affected wish to reduce the penalty.

Also, a carbon tax requires some form of standardized measurement and many (current) systems of cap-and-trade rely on non-standardized measures of carbon reduction and are therefore subject to…manipulation (again, at the behest of profit).

Posted by Ethan | June 2, 2008 6:17 PM

I feel really silly arguing with people who say that I'm right, but:

"The fundamental difference is that a carbon tax establishes a cost NOW for using this resource - cap and trade requires multiple bartering sessions to establish a cost and will tend towards a lower cost (as it is now in the free market and potentially profitable)."

This isn't really true. There is no question that cap-and-trade will produce an efficient market price for emissions permits, given a set emissions cap. Once the government has specified that it will allow X tons of carbon emissions in a given year, I have no doubt that the market will reach the most efficient allocation of those emissions. The permit-trading market will be large and fluid, and there won't be "bartering" in any recognizable way.

The problem is that by fixing a certain level of emissions in stone, a cap-and-trade policy leaves us at the mercy of uncertain technological forces. This works in both directions: what if it becomes cheap to reduce carbon emissions to near zero? The price of permits will then be too low -- once the cap isn't binding, there will be very little incentive to go further below the cap. In this case, permits will be too cheap, and a simple fixed price on carbon would serve us much better.

Alternatively, if it turns out that sharp cuts in emissions are prohibitively expensive, a fixed cap may prove disastrous. Now, at this point, the government would probably step in and raise the cap, but this belies the supposed motivation of a cap-and-trade system -- if the government raises the cap when permit prices become too high, then it's implicitly using a price target (rather than a quantity target) anyway.

Posted by Matt Rognlie | June 2, 2008 6:31 PM

It isn't often I say this, but Matt is totally wrong here.

Samuelson makes entirely valid points about the problems with cap&trade, and why a tax is preferrable. I think the first is a disaster in the making, and the second is the only one that might have a potential of bringing about any real positive improvement in the situation.

Avert's point is pretty vacuous: on paper, yes, a tax and cap&trade are identical; but we don't live on paper. The institutional, transactional and other costs, benefits and uncertainties associated with both make the actual implementation of either on the real world be very different.

I can't really be bothered to explain why now, especially as I'm jetlagged and am also writing my PhD dissertation partly on this very question, but this article by the Economist will give some insight into why what Samuelson is saying is kinda ok:
http://www.economist.com/finance/displaystory.cfm?story_id=9337630

Posted by saifedean | June 2, 2008 7:51 PM

"But of course Samuelson's the kind of guy for whom environmentalists and Democrats are always wrong, so we have to ignore the facts."

Samuelson's advocacy of a carbon tax is hardly GOP orthodoxy. It just doesn't happen to be Obama's either. I guess in Matt's world thinking outside the phony GOP vs. Dems box is not allowed.

Posted by kafka | June 2, 2008 8:36 PM

How about we all read:

Prices vs. Quantities
Martin L. Weitzman
The Review of Economic Studies, Vol. 41, No. 4 (Oct., 1974), pp. 477-491

and then we can reconvene and discuss as a class.

It's odd, even though I agree with Samuelson that a carbon tax is far preferable to carbon cap-and-trade, something about the douchey way he writes just makes me want to argue with him.

(Good luck with the PhD dissertation, saifedean. And even more luck with formatting and filing it :) )

Posted by TheF79 | June 2, 2008 8:50 PM

It isn't often I say this, but Matt is totally wrong here.

Samuelson makes entirely valid points about the problems with cap&trade, and why a tax is preferrable. I think the first is a disaster in the making, and the second is the only one that might have a potential of bringing about any real positive improvement in the situation.

Avert's point is pretty vacuous: on paper, yes, a tax and cap&trade are identical; but we don't live on paper. The institutional, transactional and other costs, benefits and uncertainties associated with both make the actual implementation of either on the real world be very different.

I can't really be bothered to explain why now, especially as I'm jetlagged and am also writing my PhD dissertation partly on this very question, but this article by the Economist will give some insight into why what Samuelson is saying is kinda ok:
http://www.economist.com/finance/displaystory.cfm?story_id=9337630

Posted by saifedean | June 2, 2008 9:28 PM

It isn't often I say this, but Matt is totally wrong here.

Samuelson makes entirely valid points about the problems with cap&trade, and why a tax is preferrable. I think the first is a disaster in the making, and the second is the only one that might have a potential of bringing about any real positive improvement in the situation.

Avert's point is pretty vacuous: on paper, yes, a tax and cap&trade are identical; but we don't live on paper. The institutional, transactional and other costs, benefits and uncertainties associated with both make the actual implementation of either on the real world be very different.

I can't really be bothered to explain why now, especially as I'm jetlagged and am also writing my PhD dissertation partly on this very question, but this article by the Economist will give some insight into why what Samuelson is saying is kinda ok:
http://www.economist.com/finance/displaystory.cfm?story_id=9337630

Posted by saifedean | June 2, 2008 9:31 PM

If "a cap and trade plan with auctioned permits is essentially identical to a carbon tax." then you shouldn't really care which one you get.

It seems to me that a carbon tax would be somewhat easier to administer.

In a cap and trade you would need some penalty for people who don't have the proper permits. So you would need to measure everyone emissions. If you are measuring something then it wouldn't be too difficult to tax it.

If one company thought they would need an extra permit and went out and bought a permit that was never used then the cap and trade system added needless friction to the system and you ended up with a sub-optimal result.

This wouldn't happen with a tax.

If I realized too late that I needed a permit and ended up paying a penalty then it would be another sub-optimal result.

I want carbon reduced as efficiently as possible. To put it another way, I want carbon USED as efficiently as possible. Having a simple tax would be the best way.

Don't forget that Enron and Ken Lay were in favor of cap and trade because they wanted to make money from the system. They wanted to game the system and take advantage of people due to the complexity.

Why let future Enron's take money from the economy when there is ZERO benefit to society as a whole?

Posted by neil wilson | June 2, 2008 9:58 PM

Setting aside the question of whether cap and trade is better than a carbon tax, Avent's criticism is silly at a more basic level. After all, his claim is that Samuelsson is a fool for not seeing that they are just the same. But cap and trade is better. But, not surprisingly, Avent's reason for thinking that one of the identical things is better is precisely Samuelsson's reason for thinking that that one of the identical things is worse.

Samuelsson does stupidly begin by attacking the idea that cap and trade is a free market mechanism, because it is not a pure free market system. But nobody ever claims that it is. But his real point is that the cap and trade system sets fixed allowances. Avent gives that as the advantage of the system. (Although Avent thinks that the targets will be soft, while Samuelsson thinks they will be fixed).

Obviously, there is a serious debate to be had as to whether the caps are a plus or a minus. But Samuelsson actually does a better job of advancing the debate than Avent does.

Posted by Lon | June 2, 2008 10:50 PM

As Rognlie and others have pointed out here, both Avent and Matt are dead wrong here, factually wrong. He should correct the post.

Cap and trade with auctioned permits: quantity certainty, price uncertainty.

Carbon tax: price certainty, quantity uncertainty.

Samuelson's point, and it's a good one, is that we have no idea what the marginal cost curve of carbon reductions is, but the marginal benefit curve of carbon reductions is probably pretty flat. As any decent econ textbook will tell you, this situation calls for a carbon tax, not auctionable permits.

Samuelson understands the economics correctly here.

You *can* transform a cap and trade system into a carbon tax by having a "safety valve" price, but that's not included in the Obama plan as I understand it.

Posted by mq | June 2, 2008 10:56 PM

MattY - while your post is wrong, at least there are no egregious spelling or grammaratical errors in it.

Seriously, was it really early or something? This was a goofy post.

Posted by notchris | June 3, 2008 10:11 AM

notchris, mq, Lon, saifedean, etc:

Uh, no. Avent and Yglesias do have it right. It's true there's a nuanced debate about permits vs. taxes, but Samuelson isn't having it. He's just being either frightfully wrong, frightfully disingenuous, or both.

If you still can't see why, DeLong's explanation is pretty good.

Posted by jack lecou | June 4, 2008 2:23 PM