Cap and Trade

It seems to me that cap and trade, as it is currently formulated, is probably a bad idea. Here are some of my concerns:

1) The benefit, as measured by the extent of the decrease in global warming, seems to be negli­gible. According to a recent analysis by Chip Knappenberger, reduction of U.S. CO2 emissions to 83% below 2005 levels by 2050 — which is the goal of the Waxman-Markey bill — would only reduce global temperature by 0.05° C. Even in the highly unlikely event that the entire world were to follow suit and reduce CO2 emissions by the same amount, the resulting reduction in global temper­ature by 2050 would still be less than 0.5° C. — see here. This analysis assumes the IPCC mid-range or high-range emis­sions scenarios; for low-range scenarios the temper­ature change would be even less. Knappenberger uses the so-called MAGICC simulator (the Model for the Assess­ment of Green­house-gas Induced Climate Change) which you can down­load in order to run the calculations for yourself.

2) The cost of cap and trade would probably be significant.  The 2007 IPCC AR4 Synthesis Report estimates that stabilization of CO2 at 445-535 ppm would require a reduction in economic growth of < 0.12% per year, resulting in a decrease in the 2050 world-wide GDP of < 5.5% [see SPM.7].  This is roughly in line with the recent MIT study, The Cost of Climate Policy in the United States, which estimates that current cap and trade proposals would reduce U.S. GDP by 3.7% in 2050. These projections can be made more concrete by figuring actual dollar amounts: Using the IPCC estimate and figuring 2050 world GDP to be roughly 150 trillion dollars (based on the current GDP of 54 trillion and growth of 2.5%), we would get a world-wide cost in 2050 of < 8 trillion dollars. Using the MIT estimate, with its projec­tion that the U.S. GDP in 2050 will be 37 trillion dollars, we would get a U.S. cost in 2050 of roughly 1.3 trillion dollars. These are not accumulated costs but a snapshot of continuing annual costs, slightly less for 2049, slightly more for 2051, etc.  We are talking about a significant sum of money — money that could be used, alternatively, for re­search, adaptation, or the alleviation of more pressing social needs.

3) The science itself is uncertain. Estimates of climate sensitivity — the expec­ted increase in global temperature from a doubling of CO2 — diverge widely.   In the 2007 AR4 Summary for Policy-Makers, the IPCC suggests a range for climate sensitivity from 2° to 4.5° C., with a best estimate of 3° C.  But it is generally agreed that the green­house effect, by itself, yields a sensi­tivity of only about 1.1° C., and the higher IPCC range depends crucially on anticipated feed­back mech­anisms — mainly increased cloud cover and water vapor in the atmos­phere — for which the IPCC concedes that there is a low level of scientific under­standing [Ch. 2, p. 131-132, Ch. 8, p. 593]. Accordingly, there are many scientists who disagree with the IPCC figures.  Most signi­ficant are probably those who peg sensitivity at under 2° C., or think that feed­backs will be minor or even negative [e.g., Nir Shaviv, Richard Lindzen, Stephen Schwartz]. But there are also estimates that are higher than the IPCC projections — like this new MIT study. Recent discus­sions of water vapor and cloud cover feedbacks at ClimateAudit are fascinating, and illustrate both the political urgency surrounding these issues and the sketchiness of our under­standing of them. Since mitigation only makes strategic sense for a limited range of pos­sible sensiti­vities, the question is whether we under­stand these feed­backs well enough to be confi­dent that a mitigation policy is reasonable.  I suspect that we do not.  

4) The empirical evidence currently deviates from the model projections. There has been an apparent pause in warming over the past decade, suggesting that this might not be the most auspicious time to set into motion a large mitigation effort. Perhaps it would be wiser to wait for a while.  

Discussions of the costs and benefits of mitigation, in climate circles, often invoke the allegory of the tragedy of the commons, the problem of finding communal solutions for the allocation of shared resources.  The RealClimate response to Knappenberger takes this approach. The second half of Knappenberger’s analysis, though, shows that even with world-wide cooperation the benefits of cap and trade would remain margi­nal. In fact, temperature reduction would apparently be less than the error in measurement. It is hard to get enthused about such a prospect.

In calculating costs, it is also important to realize that there is an essentially normative issue regarding the appropriate discount rate — the extent to which we should dis­count future costs.  This philosophical issue would need to be taken into consideration in any com­pre­hen­sive discussion.

Finally, there are many technical problems with cap and trade:  It is regressive; it seems to favor certain geographic constituencies; it is not transparent to the consumer; and it invites corruption. If I had to choose, I would probably prefer a straight carbon tax — as being the more transparent of these two alternatives. The suggestion that I find most attractive, though, is Ross McKitrick’s proposal for a carbon tax that is tied to the temper­ature of the tropical troposphere. But this idea is probably too reasonable to ever become policy.

–Paul