Carbon taxes vs emissions trading

John Quiggin98 Comments

Now that nearly everyone is agreed on the need for a market-based policy instrument to reduce CO2 emissions, the biggest unresolved question is whether to implement carbon taxes, tradeable emissions permits or some hybrid of the two.

I support tradeable permits, but I’ve never really spelt out my reasons for doing so. It’s important before doing this to observe that the differences between the two approaches are more limited than most of the discussion suggests. Both ensure the existence of a price for CO2 emissions and both can be set up to distribute the costs of emissions in a lot of different ways.

That said, tradeable permits have some significant advantages in my view.
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Sheridan on 1972

John Quiggin15 Comments

Greg Sheridan’s panegyric to Alexander Downer includes the following aside,

Australian foreign policy history, and Australian history generally, is written overwhelmingly by people who are institutionally sympathetic to the Labor Party. In fact they are generally quite a fair bit to the Left of the Labor Party. And one of Labor’s great virtues is its creation and nurturing of its own legends. Thus, at the end of 1972, the Whitlam government extended official diplomatic recognition to China.

Several Western countries had done this already and by the end of 1973 the whole world, more or less, had recognised China. Thus Australian recognition was as near inevitable as anything could possibly be in history. No matter who was in power in Canberra in 1973, it would have happened. Yet the Labor school of history has elevated this to an act of mythical heroism and far-sighted statesmanship by Gough Whitlam.

Sheridan is either playing on his readers’ ignorance or displaying his own here. He asserts that the inevitability of recognising China was obvious to anyone at the time. In fact, when Whitlam (then Opposition leader) visited China in 1972, he was vigorously attacked by the conservative press (a group the Oz was to join a couple of years later) and the conservative parties. Then PM McMahon said of Whitlam “And, of course, Zhou Enlai played Mr Whitlam like a fisherman plays a trout.” It was typical of the McMahon era that it came out shortly afterward that Kissinger had been secretly visiting China at the same time, laying the groundwork for Nixon’s famous trip. Even so, the McMahon government didn’t recognise China, leaving this to Whitlam.

To set the record straight for Sheridan, Whitlam’s willingess to visit China in 1972 was indeed a piece of far-sighted statesmanship, and took some political courage. By the time Whitlam won office at the end of the year, it was indeed obvious that recognition was inevitable, but even so, there were plenty of people, then as now, who ignored the obvious.

The political economy of networks

John Quiggin11 Comments

I’ve had this post in mind for quite a while, and never got in finished to my satisfaction, but it’s been stimulated to a significant extent by reading Clay Shirky, so I thought I’d pop it up now, somewhat half-baked, since Clay is currently visiting Crooked Timber, where I’ve crossposted this.

The biggest single question in political economy is whether and to what extent we can achieve social equality without sacrificing other goods like liberty and prosperity. Neoclassical economics (a project in which I’m a participant) begins with models which imply that, with competitive markets, all factors of production will earn their marginal product. This in turn implies that any intervention that shifts wages or returns to capital away from their marginal product must imply a loss in aggregate income (there are some complex technical issues here which I’ll skip over)

There are all sorts of problems with simple-minded applications of this result. Still, in an economy that fits the standard model of lots of competing firms, all operating in a region where constant returns to scale apply, the standard neoclassical analysis has considerable force. But the growing part of the economy centred on the Internet doesn’t fit this model at all. The Internet is a network and the economies of networks are different, in critical ways, from those of the standard neoclassical model.
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Garnaut draft report released

John Quiggin68 Comments

The Garnaut Review draft report has just come out. The site is clogged, but I’ve managed to get a copy of the report and press release (I’ve attached the latter here.

There’s a lot of discussion of the Murray Darling Basin where the worst-case projections are about as grim as they can possibly be. My UQ research group (Risk and Sustainable Management Group) did the economic modelling that translated the climatic projections into predicted changes in land and water use. There are big adverse impacts under most of the ‘business as usual’ scenarios. On the other hand, in the projections where CO2 concentrations are held to 450 ppm things aren’t bad, and even 550 ppm would still allow irrigation to continue.

More soon on the policy recommendations. Whether or not the government ultimately follows Garnaut’s proposed model, there’s no doubt that the Review has shifted the terms of debate substantially. Those (like the Federal Opposition) who are tempted to play the issue for short-term political gain will pay a big price in the end if they succumb to that temptation.

Radical scepticism

John Quiggin80 Comments

For a long time, I’ve used the term “delusionist” rather than “sceptic” to describe those who reject mainstream science on global warming. In general, the term “sceptic” is inappropriate for the vast majority of this group, since their position is hardly ever based on a willingness to look sceptically at evidence without reliance on a preconceived views. The gullibility with which so many delusionists parrot the latest talking points (“Hockey stick broken!”, “Global warming on Mars”, Warming stopped in 1998″ and so on) is clearly incompatible with any kind of scepticism. And, given the volume of evidence that has accumulated on the issue, only an adherent of some very strong form of scepticism could reasonably remain undecided. Such a sceptic has now appeared in the form of Adam Shand, a Channel 9 journalist who said, in a recent Sunday program on global warming “it’s only an assumption” that summer is warmer than winter. I imagine he gets great prices on ski holidays, by going in January!

Of course, once you’ve gone this far in scepticism, why not go the whole hog? Radical scepticism provides the perfect argument for rejecting action to mitigate global warming – if we have no reason to believe in the existence of the external world, then trashing it can’t be a problem, can it?
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The unsustainable has run its course

John Quiggin30 Comments

Unlike national central banks, the Bank for International Settlements doesn’t have to worry too much about the effect of its statements on business and consumer confidence or on the possibility of political flak. Hence, it has usually tended to give a less rosy view of the economic outlook than other official and quasi-official institutions. The latest assessment is particularly gloomy .

The full annual report has the cheery title “The unsustainable has run its course and policymakers face the difficult task of damage control” (Overview here).

The money quote:

Perhaps the principal conclusion to be drawn from today’s policy challenges is that it would have been better to avoid the build-up of credit excesses in the first place. In future, this could be done through the establishment of a new macrofinancial stability framework, which would call for both monetary and macroprudential policies to “lean against the wind” of the credit cycle

It’s hard to disagree with this, but equally hard to imagine such a framework (reminiscent of the “new global financial architecture” proposed in the late 90s) being introduced without the stimulus of a truly dire financial crisis.

Cromulent

John Quiggin9 Comments
.!.

Working in a Faculty of Business and Economics, I get exposed to lots of business magazines I wouldn’t read otherwise. I saw one today with a cover which urged me to “empassion my sales!”.

Being a prosaic economist, I would have thought that, as long as a business can embiggen its sales and profit margins, empassionment is beside the point.