Breakthrough Institute Misses the Beat on Climate Economics (Again)

Why do those at the Breakthrough Institute insist that everyone else besides them who cares about the environment is wrong, wrong, wrong? Their latest, called “The Creative Destruction of Climate Economics,” is a swipe at those misguided souls who think putting a price on carbon emissions would help combat climate change.

Breakthrough, according to its website, aims “to modernize liberal-progressive-green politics” and to accelerate the transition to an “ecologically vibrant” future. It “broke through” into well-funded fame in 2003 with its attack on environmentalists for failing to emphasize the economic concerns of ordinary Americans, such as jobs — thereby alienating the major environmental groups, who had been talking about jobs and the environment for years.

What’s wrong with pricing carbon emissions? This particular breakthrough rests on a mistaken reading of an academic paper in the American Economic Review, the most prestigious outlet for mainstream economics. That paper develops a simplified, abstract model of an economy that generates carbon emissions. Unlike some climate economics models, it assumes that public policy can affect the pace of innovation. Its conclusion, in the authors’ own words, seems quite balanced:

A simple but important implication of our analysis is that optimal environmental regulation should always use both an input tax (“carbon tax”) to control current emissions, and research subsidies or profit taxes to influence the direction of research.

Compared to exclusive reliance on carbon taxes, they continue, “optimal policy relies less on a carbon tax and instead involves direct encouragement to the development of clean technologies.”

Nothing has been creatively destroyed here, except for a lopsided position that calls for carbon taxes to do the whole job alone. And note that we’re talking about a very simple model, not a study of the U.S. economy. Yet the Breakthrough crowd is ready to run with the claim that another shibboleth of environmentalism has been laid low. After dismissive comments about many advocates of carbon pricing — imagine the chutzpah of Paul Krugman, using his reputation as an economist to support price incentives! — they zoom in on Environmental Defense Fund economist Gernot Wagner.

Wagner has, in fact, made some lopsided statements about the possibility of reaching environmental goals through price incentives alone. Ted Nordhaus and Michael Shellenberger, the Breakthrough authors, are right about a couple of specifics in their response to Wagner: Most of the phaseout of leaded gasoline in the 1970s happened before the introduction of a lead emissions trading system; the same was true for the decrease in the price of sulfur dioxide emissions from coal plants in the 1990s, ahead of the introduction of sulfur emissions trading.

Nordhaus and Shellenberger are wrong to conclude from this, however, that price incentives can be ignored. The European Union’s emissions trading system has no effect because the emissions cap is so high and the resulting price is so low — a common defect of recent emissions trading schemes, as it turns out. The early phaseout of lead emissions from gasoline, and of sulfur emissions from power plants, both were driven by old-fashioned “command and control” regulations, a euphemism for “telling polluters to stop polluting.”

What should be done to reduce carbon emissions? Climate change actually is a crisis that demands massive, immediate response. Putting a price on carbon emissions, funding research on clean energy, and adopting traditional controls on the dirtiest technologies all seem entirely compatible. We’ll need all of the above and more, right away, to stand a chance.

What should be said to those, like Gernot Wagner, who may be overly committed to a single policy choice? As long as it’s a desirable policy, as Wagner’s is, let’s congratulate them on advocating it, and urge them to take an even broader view.

It is so important to work together on this, that the help of Nordhaus and Shellenberger should be welcomed — as soon as they achieve one of those breakthroughs that’s normally required in kindergarten, namely learning to “play well with others.”