Krugman on climate economics: uncertainty makes the case for action stronger

Lucidity in an economist is to be prized, and Nobel winner Paul Krugman writes with great clarity in a lengthy article this weekend in the New York Times Magazine headed Building a Green Economy. Is it possible, he asks, to make drastic cuts in greenhouse gases without destroying our economy? I’ll offer a summary of his reasoning here, but strongly recommend reading the whole article if you have the time. He clearly understands the import of climate science, and rightly lets that have full influence in his policy preferences. Economists who haven’t taken on board the seriousness of the prospect the science points to are hardly reliable guides.

“Negative externalities”, says Krugman, are the costs that economic activities impose on others without paying a price for their actions. The market economy does many things well, but left to its own devices it won’t face up to those externalities. The emission of greenhouse gases is a classic negative externality – the “biggest market failure the world has ever seen,” in the words of Nicholas Stern.

What should we do about it?

“Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach.”

The three approaches Krugman discusses are regulation, pollution taxes and market based emission controls (cap and trade). Each has benefits. Krugman allows that there are times when regulation is a sensible path, but it does not leave the scope for flexibility and creativity provided by the other two. The very scale and complexity of the situation requires a market-based solution, whether cap and trade or an emissions tax.

“After all, greenhouse gases are a direct or indirect byproduct of almost everything produced in a modern economy, from the houses we live in to the cars we drive. Reducing emissions of those gases will require getting people to change their behavior in many different ways, some of them impossible to identify until we have a much better grasp of green technology. So can we really make meaningful progress by telling people specifically what will or will not be permitted? Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts.

“…A market-based system would create decentralized incentives to do the right thing, and that’s the only way it can be done.”

However he is impressed enough by James Hansen’s arguments that we must stop burning coal to advocate supplementing market-based disincentives with direct controls on coal burning.

He favours cap and trade over emission taxes, pointing out how well the former worked to achieve a significant mitigation of acid rain in the US and at a much lower cost than even the optimists expected. He also considers it politically more feasible because in doling out licensing to industry it offers a way to partly compensate some of the groups whose interests will suffer if a serious climate-change policy is adopted. A tax, on the other hand, imposes costs on the private sector while generating revenue for the government. Which is not to say that there can’t be hybrid solutions.

Part way through his discussions Krugman pauses to make it clear that the science of climate change is for real. He makes three points. First, the planet is warming. Second, climate models predicted this well in advance. Third, models indicate that if we continue adding greenhouse gases to the atmosphere as we have we will eventually face drastic changes in the climate and massively disruptive events.  There is still tremendous uncertainty in long-term forecasts, but that makes the case for action stronger, not weaker.

Can we afford what needs to be done?

Economic modelers have reached a rough consensus that restricting emissions would slow economic growth – but not by much. The Congressional Budget Office, relying on a survey of models, concludes that strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise. On a global level the estimates are somewhat lower because of the efficiency gains in energy use possible to emerging economies – between 1 percent and 3 percent.

Krugman acknowledges that there are a number of ways in which the modeling could be wrong. Nobody really knows, for instance, what solar power will cost once it finally becomes a large-scale proposition. But while it’s unlikely that the models get everything right, it’s a good bet that they overstate rather than understate the economic costs of climate-change action. That was the experience with the acid rain scheme. He particularly notes that models do not and cannot take into account creativity.  Surely the private sector will come up with ways to limit emissions that are not yet in any model.

Yet conservative opponents of climate-change policy claim that any attempt to limit emissions would be economically devastating. What has happened to their belief in the dynamism of capitalism?  He thinks they are reacting against the idea of government intervention and indulging in political ploys rather than reasoned economic judgment. Hence their strong tendency to argue in bad faith, willfully misreading the figures.

“The truth is that there is no credible research suggesting that taking strong action on climate change is beyond the economy’s capacity.”

To the objection that the emerging economies won’t participate and therefore there’s no point in limiting emissions in the US, he argues for positive inducements and, if they fail, for carbon tariffs. He certainly doesn’t see the problem as intractable. If the US and Europe decide to move they almost certainly would be able to cajole and chivvy the rest of the world into joining the effort.

The costs of inaction are difficult to estimate. Krugman has a lively sense of the drastic changes which could accompany higher temperatures. We’re reaching levels of carbon dioxide in the atmosphere not seen in millions of years. Nobody really knows how much damage would result from the level of temperatures now considered likely. This uncertainty strengthens the case for action. He agrees with Martin Weitzman that if there is a chance of utter catastrophe, that chance should dominate cost-benefit calculations. Utter catastrophe does look like a realistic possibility. It would be irresponsible not to turn back from what may be the edge of a cliff.

There has been debate as to whether we act with some decisiveness now or build gradually over the century, the big bang or the ramp. Krugman leans toward the big-bang view, represented most notably by Nicholas Stern. Again, it’s the nonnegligible probability of utter disaster that argues for aggressive moves to curb emissions, soon.

On the US political front he’s not sanguine, but thinks there’s some chance that political support for action on climate change will revive.  If it does the economic analysis will be ready.

“We know how to limit greenhouse-gas emissions. We have a good sense of the costs – and they’re manageable. All we need now is the political will.”

47 thoughts on “Krugman on climate economics: uncertainty makes the case for action stronger”

  1. "If it does, the economic analysis will be ready. We know how to limit greenhouse-gas emissions. We have a good sense of the costs — and they’re manageable. All we need now is the political will…"

    Exactly, this is the key to it all really. And this is what the denial machine is working overtime to compromise.

  2. Paul Krugman is always good for a read, so well done Bryan for picking this one up!

    Neatly summed is PK’s 3-way approach — regulation, pollution taxation, and market-based emission controls — and very well-stated for its omission in supposedly modern economic planning (aka market-centered) the externality issue. For what it is worth I’d sooner state this in this context as pollution in order to effect greater acceptance of what we are dealing to.

    Since Reagan and various proxies of which the Douglas indoctrinations of NZ in the 1980s (“Better Way etc) the promotion of market ahead of all else and yes, including the downsides of fossil-fueled energy and atmospheric methane productions, has inducted an ego-driven class of wealth seekers.

    In that regard PK mentions (per your quote above) — “…A market-based system would create decentralized incentives to do the right thing, and that’s the only way it can be done.” — which I would suggest amounts to an oxymoron.

    For rather than being the “only way” it would appear to capitalists imbued with their objectivity of inevitable convergence that being central — never decentral(ized) — can be the only way.

    Hoping this aids definition/s for a supposed political will solution.

  3. I keep harping on about the SA coal deal,but if you follow the reasoning in the Guardian article linked to below, you will see that there is absolutely no political will to reduce greenhouse gas emissions globally.

    Regardless of what you might think of ACT, they are right on one thing:

    The ETS will have no effect on the environment whatsoever, and it WILL reduce wealth in NZ.

    I am sure the voters of this country might take a LOT more interest in climate change when it starts hitting their pockets.

  4. "If the solutions to the problems of Climate change are so easy and straightforward as implied by some"

    Who is implying this? Most people who know anything about it realise that this problem is not straightforward or easy to solve at all, requiring as it does major changes in the organisation of the global economy. The opposition from the deniers is a (if not the) major complicating factor in that the confusion their disinformation campaign has created seriously weakens the political resolve of our leaders. Other complicating factors include the reluctance of any nation to be the first to act, pressures from industries with vested interests in maintaining their 'right' to pollute and many others.

    This said there are several people articulating solutions very well, including Krugman as above.

    1. Krugman hasn't advocated anything radical in that above piece. He certainly isn't pushing for 'major changes in the organisation of the global economy' like you think is the only solution. The fact that he doesn't advocate what you put forward as a solution suggests quite strongly that many people don't actually agree with your analysis on this subject.

      1. It depends whether you consider reduction of emissions to entail 'major changes in the organisation of the global economy', since the global economy currently depends on the ability to burn cheap fossil fuels with no limits to emissions. Not many people agree that this can continue without disastrous effects on the climate system.

        Personally I think that any action that has the requisite effect in changing our behaviours wrt carbon emissions will result in major economic changes (both positive and negative), especially if they're brought about more quickly.

  5. "There is still tremendous uncertainty in long-term forecasts, but that makes the case for action stronger, not weaker."

    Huh ? Uncertainty ? I certainly agree with him there, but that means 2 things that contradict the rest of the item:

    1) We don't really know how the climate works despite the claims that the 'science is settled'.

    2) If we don't know for sure how it works, how can we be certain that reducing CO2 levels will be of benefit – we'll definitely be doing financial damage if we reduce CO2 output and we may well also be doing environmental damage.

      1. 1. Deniosaurs ? The science would indeed have to be settled for sceptics to be labelled as 'deniers'. Your own words betray your 'settled science' attitude.

        2. I checked your links. The first is some light-weight pretty climate cycle pictures from Niwa. The second is a link to a graph showing in the past CO2 density trailing temperature. It's yet further evidence that we really don't understand climate.

        1. We understand enough to act. You seem to think we should bet the future of the planet against the overwhelming balance of evidence.

          My father used to say that "you'll never see a bookie on a bicycle".

          No bookmaker, are you…?

            1. Nope. The overwhelming balance of evidence of the need to act to reduce emissions. Evidence of temperature increase is only a part of that. And if you can't find it, you ain't looking in the right places.

            2. So – what is the "evidence of temperature increase" that is so overwhelming that there's a need to act to reduce emissions ?

            3. Just spoke to a mate you is working on carbon capture and storage technology for the N Sea – seems to think it is a goer.

              So you can burn your fossil fuels and store the CO2.


        2. "The first is some light-weight pretty climate cycle pictures from Niwa." – Cadae.

          So they were too advanced for you?. Never mind. Not one deniosaur ever, has managed to come up with a convincing argument to supplant the enhanced Greenhouse Effect, and that includes deniosaur scientists such as Dick Lindzen, Roy Spencer etc. Ever wonder why?.

          "The second is a link to a graph showing in the past CO2 density trailing temperature. It's yet further evidence that we really don't understand climate." – Cadae.

          Yup, certainly evidence that YOU don't understand climate science. The ice core record shows the connection between global temperatures and atmospheric CO2:

          "When the Earth comes out of an ice age, the warming is not initiated by CO2 but by changes in the Earth's orbit. The warming causes the oceans to give up CO2. The CO2 amplifies the warming and mixes through the atmosphere, spreading warming throughout the planet. So CO2 causes warming AND rising temperature causes CO2 rise."

          The pertinent lesson – more CO2 = more global warming. C'mon these are the basics, have you been listening to the cookie monster?.

          1. "The pertinent lesson – more CO2 = more global warming"

            Then why does your cited graph show the earth's temperature declining when CO2 was rising ? Your formula is clearly incorrect.

            1. "Then why does your cited graph show the earth's temperature declining when CO2 was rising ?" – Cadae

              Simple, it doesn't. Cookie monster logic won't work here. Read the accompanying page it's not difficult to comprehend.

            2. "When the Earth comes out of an ice age, the warming is not initiated by CO2 but by changes in the Earth's orbit. The warming causes the oceans to give up CO2. The CO2 amplifies the warming and mixes through the atmosphere, spreading warming throughout the planet. So CO2 causes warming AND rising temperature causes CO2 rise."

              What part of that don't you understand?.

            3. Your formula "more CO2 = more global warming" is plainly wrong. You graph showed more CO2, but there wasn't more global warming.

              Temperature does not have a simple dependency on CO2 density, the sea and earth's orbit, there are far more variables, both earth-internal and earth external that have an impact.

            4. I am not following you Cadae. Increase GHG will give you a warming, but noone is saying that is the only forcing at work in net temperature. I'd say our current understanding of climate making a pretty good job of matching the epica data. eg

              As to overwhelming evidence for temperature increase. Lets see. why in your opinion then is the sea level rising? Why does satellite LT MSU show same trend as the surface record? And why then is the global glacier volume decreasing. (, fig 5.9).

    1. Cadae you overlook the fact that Krugman takes the science seriously. The uncertainty relates to the long-term predictions, not to what the science has already revealed. Uncertainty as to just how bad it will be in the coming decades of this century. That partly depends on whether we will act to cut emissions or not. I don't know how in the face of this you can urge that we not cut emissions.

      1. Agreed – Krugman claims to take the science seriously.

        As long as we have uncertainty both about the climate mechanisms and the actual global temperatures in the long-term, we cannot decide that spending truckloads of cash now is going to be a good return on investment – especially given that peoples' lives really will be impacted negatively by that spend.

        Indeed, we may actually be spending our way into climate problems. What can and MUST be done is to remove the climate alarmism, re-introduce healthy scientific scepticism to the entire climate industry and start concentrating on getting the science of climatology cleaned up and separated from its funding source (PR FUD). Then and only then will sensible rational decisions be made.

        1. Krugman doesn't just claim to take the science seriously, he actually does. I realise you find this difficult to understand because you don't comprehend the science yourself. You are persuaded that it lacks the rigour of scepticism. That's simply untrue. It's genuine, tested science. As such it acknowledges uncertainties where they exist, and of course in the matter of prediction there are bound to be many uncertainties. But none of the uncertainty comes anywhere near undermining the fact that there is real cause for alarm.

          You use the words rational and sensible, but insistent denialism has become profoundly anti-intellectual and, when it tries to stop necessary precautions, dangerous to the human future.

        2. …start concentrating on getting the science of climatology cleaned up and separated from its funding source (PR FUD)

          And what about the PR funding for scepticism? Let's get rid of Koch, Scaife and Exxon money and see what's left,. Not a whole lot…

          Frankly Cadae, this is such a gross perversion of the risk argument that you should be ashamed.

          1. PR funding for scepticism – I wish 🙂

            Indeed if you take away the $20 million Exxon spent 10 years ago, there's not much left. Especially in comparison to the multi-billion dollar industry and interests that now rest on climatology PR FUD.

            1. You need to read up on the Koch brothers and Richard Mellon Scaife and their various "foundations". They've been funding climate denial and the bodies that promote it for 20 years. Plenty of links and info here, if you look.

              Find me a credible scientist who is sceptical of the need for action on climate change who does not have links to those groups.

            2. The Koch brothers support political ( Libertarian ) groups such as the Cato Institute while Richard Mellon Scaife funds an organisation that sponsors the blog "Climate Depot".

              On the other end of the spectrum we have individuals such as Soros, large environmental organisations such as Greenpeace, the marketing departments of significant businesses and the treasuries of governments.

              I see an imbalance, but it's not in favour of scepticism – there are large financial gains to be had by governments, industries, researchers and investors by pushing the AGW message. It is that financial distortion that needs to be balanced with a large dollop of scepticism.

              To answer your question about sceptical credible scientists: why should credible scientists want "action on climate change" ? Scientists' field of expertise is the study of nature – not "action on climate change". "Action on climate change" is the field of geographers, politicians and economists. It's irrelevant what scientists' opinions are about climate change actions.

            3. "there are large financial gains to be had by governments, industries, researchers and investors by pushing the AGW message"

              so you disagree mith your denialist friends who claim that cutting emissions will bankrupt the world?

              "It's irrelevant what scientists' opinions are about climate change actions."

              their opinions are quite substantially more relevant than yours, my friend, given that they demonstrate at least some understanding of the issues. you seem to think your own gross lack of understanding is evidence that no one understands the workings of the climate but this is not the case. just because a system is complex does not make it incomprehensible.

              "It is that financial distortion that needs to be balanced with a large dollop of scepticism."

              yes science needs to be balanced with distortions and mistruths in the same way good needs to be balanced with evil ie. in the comic book world you inhabit.

            4. Cadae: your reply is literally unbelievable. You minimise the well-established role of the Koch/Scaife etc in setting up a carefully constructed PR campaign to delay action (see reviews here of Climate Cover Up, and the discussion under my recent talk to Skeptics in the Pub).

              And then you dodge the intent of my question, and ask why credible scientists should want action on climate change. The answer's simple enough: they see a big problem coming our way, and that we need to work out a way of minimising the damage. Scientists in many fields have important roles to play in finding any solution.

              The simple fact is that it is impossible to name any prominent "sceptical" scientist who has not got well-documented associations with organisations funded by Koch/Scaife etc. Without that money, there would be a lot less distracting us from getting on with a solution.

            5. Also note that most of the "multi-billion dollar" funding that skeptics like counting is money spent on satellites. Satellite instruments dont have a political bias.

        3. "getting the science of climatology cleaned up and separated from its funding source"

          so we're going to be better informed about climate change by decreasing the amount of funding designated to studying it?

          now that we know what passes for sensible and rational in your world we can pretty much disregard all the other gems of logic you wish to shower us with…

          "Indeed, we may actually be spending our way into climate problems"

          we are. we're spending billions on extracting and burning fossil fuels. this is creating problems.

  6. If the solutions to the problems of Climate change are so easy and straightforward as implied by some why are we having so much difficulty in both articulating what they are and also in getting them implemented?

    I would prefer an answer a little more detailed than the simplistic excuse that it is all down to opposition from 'Deniers'.

    1. Gosman,

      It seems you want something reasonably concise, but with the important steps in the chain of reasoning all left in. I'll try to provide one. I don't want to write a tutorial in politics, or rehearse the science and engineering, so I'll base my answer on economic history. Of necessity it will be greatly simplified and high-level; I encourage you to do your own research.

      Before we can say why there is so much difficulty with the solutions to the problems of climate change, we need to know what the solutions are.

      The solutions are straightforward in one sense, but not in another: they are easy to say, but hard to do. In general terms, the solutions are the same as for any deteriorating situation. First, stop the problem getting worse. Second, fix up the damage already caused. The second action is at present relatively easy and uncontroversial, but unless we stop the problem getting worse, it will get harder and harder. Right now, the difficulty lies almost entirely with the first action.

      So, what do we have to do to stop the problem getting worse? Climate change is caused by an imbalance in the earth's heat flows due to an increasing concentration of carbon dioxide in the air which acts as an insulating layer. If you apply heat to something and don't let it cool down, it will get hotter. Accordingly, the earth's surface is warming. To stop this problem getting worse, we need to drastically cut emissions of carbon dioxide from burning fossil fuels — cut them by 95% or more. I'll skip the science, but if we don't do this within thirty years, it may be too late. Natural processes will take over, and the earth will remain hot for tens of thousands of years, whatever we do.

      To stop the problem getting worse, we have to cut emissions of carbon dioxide from fossil fuels to almost nothing, and we have to cut them fast.

      The problem isn't that we don't know how to cut emissions. We can shut down coal-fired power stations and stop using petrol and diesel-powered vehicles. We have reasonably good substitutes for coal-fired power stations and for oil-powered vehicles, so, overall, we can continue living as we do now, with only minor changes. No problem from the engineer's point of view.

      The core of the difficulty lies in the scale of the changes, and in having to make these changes quickly. Fossil fuels provide eighty percent of the world's energy. How quickly can we change to something else? Change is easy for consumer goods like LPs and videotapes to CDs and DVDs. It's much slower for the technologies used to power all of our industry.

      History is a guide to the process of change. There have been three transitions from one primary source of industrial energy to another in the recent past. The first was the transition from human and animal muscle power to water power for machinery. The second was the transition from water power (for machines) and wood (for heat) to steam and coal. The third was the transition from direct steam power to electricity (for factories) and oil (for vehicles). The first transition took over eighty years, the second about seventy, and the third about fifty.

      History is guide, but it's not a very good one. In each of the earlier transitions, the new source of energy was clearly better than the old. It provided more power, more reliably, more cheaply, and more conveniently than the old technology. In each case, there were niches where the old technology was competitive and is still used. That's not the case this time. Alternative energy sources are just okay, not overwhelmingly superior. They're very expensive. And we can't go on using fossil fuels (except, perhaps, for sea transport).

      We have to replace fossil fuels more or less completely, without there being a clearly superior new technology ready and waiting to be used. There is, as yet, no economic incentive to make any change, let alone a complete change. At bottom, this is the difficulty.

      All the talk of regulation, carbon taxes, and emissions trading schemes is about trying to create artificial incentives for the transition. But unless and until there are powerful natural reasons to change, it will be a struggle. Making the change more quickly than ever before, in these circumstances, is going to be a huge struggle.

      As for deniers: any proposed change will be fiercely resisted by those who think they have something to lose — that's human nature. These days, resistance takes the form of a war of words, with the real actors using mercenary mouthpieces. The willingness of people to listen to deniers shows that the real problem is the lack of incentives to change.

        1. While I thought iy was far too generalised it did make some interesting points especially on the incentives to transition. I do think Greg has missed the point about what the real problem is though. It is the heating of the atmosphere which is the problem not the use of fossil fuels. If we can mitigate the impact that fiossil fuels have on the heating of the atmosphere then there is no reason we should stop using them.

          What I think many people fail to understand is that any rapid change is likely going to increase carbon generating activities in the short term. This is because you have to put in place the infrastructure for the new method while maintaining and decomissioning the old.

          This is why it is crazy to talk about imposing immediate caps and curbs on carbon emissions without first thinking through the approach to move to this alternative low carbon based economy.

      1. "We have reasonably good substitutes for coal-fired power stations and for oil-powered vehicles"

        Oil-powered vehicles?

        Well, we have bicycles and donkey carts. Not sure if there is much else around that doesn't use oil directly or indirectly. Even our roads are based on oil (asphalt)

        If you want to "dramatically reduce fossil fuel usage", there are two possibilities:

        (1) A massive worldwide recession (quite likely)
        (2) A global nuclear war

        Otherwise, it's all pipe dreams

        1. Try Electric vehicles. Even if you got the electricity from power stations, even with transmissions and battery losses, they would still reduce greenhouse gases because of the much higher efficiency. Get the power from non-CO2 sources and you are away. Asphalt is no problem. You dont get the CO2 till you burn it.

          For things that really need diesel, use biofuel – even better, use CO2 from steel-making for enriched bio-algae. Better use of land than ice-cream and breast-milk replacement.

          The problem really is that you are looking for tech that wont be common place for 25 years. If you have to bring CO2 down hard (and in NZ without touching agricultural emissions), then I dont think you have any options except a 1M hectare or so of new land committed to forestry. And what would be the inducement for farmers to convert land to forestry?

          Is 25 year too risky and/or expensive? I doubt I will be around – something for the under 50s to decide perhaps?

          1. There has actually been a recent study which suggests that, outside nations where the majority of electricity is generated using carbon neutral methods (e.g. NZ), Electric cars are actually less carbon neutral than standard petrol and Diesal driven vehicles.

            What you also fail to take into account is the huge initial Carbon cost of replacing the existing stock of cars with the Electric alternative and setting up the relevant infrastructure to deal with them.

            1. I'm still looking for the study I read but here is a link to an engineering discussion on the relative merits between Electric and Fossil fuel powered vehicles if the energy for the Electric car is coming from Coal fired power stations.

              Interesting to note though that there is an energy cost in refining Oil which might not be included in the equation.

            2. Well I am pretty interested to see this, because if I crunch the numbers, I cant see how if you are comparing oil burnt at power station versus oil burnt in car. Coal providing the electricity is a different option.

              Infrastructure change – well changing everything overnight isnt going happen, especially with electric cars as tech only just getting usable. However, repeating the argument from article, if you replace existing vehicles at end of life time with new electric, then given cars are mostly replaced anyway withn 15-20 years, you have a monetary and carbon neutral change of technology. Probably a good idea anyway, as I suspect you would be paying a lot for oil in 25 years.

              Again, the problem is doing things fast.

  7. Attention good sirs. It has come to my attention that the Lord of Oxburgh hath completeth the mighty second coat of whitewash of the tall towers of CRU.

    It is time for the peasants to stand up and rejoice in the streets once more.

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