Consulting by RPM || Free Advice Blog

Murphy Quadruple Play

==> I will be writing a weekly-ish article for Mises.org now, here is my first one on Judy Shelton.

==> At IER, I point out a pretty astonishing remark from a PhD physicist who wrote a NYT article on climate change modeling. Here is her quotation: “In this situation, the best we can do is improve computer models to obtain more accurate, approximate solutions. It is knowledge we urgently need: As Earth continues to warm, we face a future of drought, rising seas and extreme weather events. But for all we currently know, this situation could be anywhere between a mere annoyance and an existential threat.”

==> Yikes I just realized I am way behind on IER posts for you folks. So here I talk about planting trees and how a new study disrupts the standard social cost of carbon calculation, and then in this one I talk about Canada’s proposed ban on single-use plastics. For the tree one, here is an analogy I thought was pretty good:

Citing a figure that planting a new tree costs roughly 30 cents, Prof. Crowther remarked that we could plant the target of 1 trillion trees by spending about $300 billion. Sure, that’s a big number, but it’s nowhere close to the economic cost of imposing a worldwide carbon tax, the “solution” that many economists have been promoting for years as a no-brainer. (William Nordhaus’ model in its 2007 calibration estimated that even his modest carbon tax would cause several trillion dollars [in today’s dollars] in economic compliance costs, while the more aggressive proposals would cause more than $20 trillion in economic costs.)

This episode is a specific example of the type of problem Ronald Coase warned about [and that I explained earlier in the article–rpm]. Specifically, the carbon tax logic assumed that the problem was, “People are emitting too much carbon dioxide and we need to coerce them into scaling back.” But what if instead the problem was, “People aren’t planting enough trees, and we need to coax them into planting more”?

To give some quick numbers: By some estimates, a single healthy tree can sequester up to a ton of carbon dioxide by the time it reaches 40 years old, and we also read that a silver maple tree will absorb 400 pounds of carbon dioxide by the time it reaches 25 years old.

So consider a coal-fired power plant that is going to emit a ton of carbon dioxide in order to produce some additional electricity. If the pro-tax economists had gotten their way, there would be a $42 tax levied on the power plant, since the Obama EPA estimated that that was the “social cost of carbon” for the year 2020.

Yet if there is room on Earth for more trees—given the plans of everybody else—that Obama-era estimate greatly overstates the harm of the emission. Rather than imposing $42 in damages as the EPA calculations suggested, the power plant owner could spend a mere $3 to plant 10 trees, meaning that over the next two decades the trees would have absorbed more than the additional emissions, and would in fact continue reducing CO₂ in the atmosphere for decades beyond.

As this simple example illustrates, a carbon tax of $42 would have been a gross overkill. It would have led power plants and other firms to scale back their emissions in very costly ways that stifled economic growth, when—apparently—there was a much cheaper solution available. And notice throughout all of this discussion, I am stipulating the basic externality framework for the sake of argument, and am merely showing the problems that Ronald Coase demonstrated with this one-size-fits-all way of thinking.

A Theater Analogy

Consider a movie theater. It’s a problem that people sometimes drop popcorn and other litter on the floor. Now there are two ways the theater could respond: (1) It could install cameras and personnel to monitor the customers and heavily fine anybody caught dropping stuff on the floor. This would be a huge inconvenience and make movie-going far less pleasant. Or (2) the theater could hire personnel to clean up the floor after a show. And notice that even if some combination were used—maybe the theater calls the police on somebody who just runs up and down the aisles dumping soda on the floor—there is no reason that the “fine” imposed on litterers should be used to pay the salary of the employees who pick up popcorn with a broom. Those are two totally different considerations.

When it comes to carbon taxes, the conventional logic has simply assumed that penalizing emissions is the appropriate solution to the ostensible problem of harmful climate change. But maybe that is totally wrong. Perhaps it would make far more sense to pay people to plant trees.