Krugman takes on Climate Change Economics

Paul Krugman takes on climate change economics, just read the whole damn thing, but I will summarize so you don’t have to wade through 8 pages.

In what follows, I will offer a brief survey of the economics of climate change or, more precisely, the economics of lessening climate change. I’ll try to lay out the areas of broad agreement as well as those that remain in major dispute. First, though, a primer in the basic economics of environmental protection.

Magazine Preview – Climate Change – Building a Green Economy –

First off, it is well written, aimed at simplifying the economics of pollution so most people can understand, what you’d expect from him!

  1. Basic Economics and how externalities work, and why free markets alone will never solve moral problems of reducing pollution, or providing health care
  2. How the work of Pigou, a 1920s economist is the basis of all all environmental economics, with a small sidetrack on rabbits! This is well written, it captures the essence of what needs to be done with pollution – Simple prohibition is not enough, imposing a fair cost on the pollution works much better
  3. What are command and control, cap and trade, carbon taxes, and what they do. Krugman prefers cap and trade approaches where there is certainty on the pollution. But he stresses (and this is very important) that it is essential to put additional control elements in place, for example, fuel efficiency requirements for cars in addition to just carbon costs, or severe limits on coal fired power plants
  4. He talks about developed, and developing countries, and how to handle increasing emissions in China, India, etc. He postulates a combined carrot and stick policy, where China and India can trade emission permits with the rich countries. His contention is that since the Chinese economy is less efficient, the costs of cutting pollution in China are likely to be a lot lower. The stick involves the imposition of carbon tariffs on imported goods to Europe and the US if China does not play ball. So, the rich countries pass money to the poorer countries to reduce emissions, but impose taxes if they don’t
  5. He thinks that carbon costs should increase quickly rather than slowly
  6. He compares the costs of action to the costs of inaction, no surprise that the costs of inaction are orders of magnitude larger than the costs of action.

Of course, he ends with the caveat that the political will to do this is going to be sorely lacking.

What do I think? While it pretty much encapsulates what I think of as the big picture approach, Krugman hand waves around the many personal changes in consumption, land use, urbanization, localization that all have to occur. All of that is included in “additional command control based changes”. I don’t necessarily believe in Homo Economicus, the rational human who responds to economic incentives. So we will have to, as citizens, agitate forcefully for local actions that set us in the western world up for reduced consumption and increased efficiency. In addition, we have to simultaneously support national level politicians that are serious about climate change and punish the ones that are not, so they can help enact the right national and trans-national policies.

Anyway, all in all, an excellent read.

1 comment for “Krugman takes on Climate Change Economics

  1. soumya
    April 7, 2010 at 6:07 pm

    Thanks for summing it up.. All in all, your blog post was an excellent read.