Thursday, June 25, 2009

Cap and Trade: Bargain Insurance

The Congressional Budget Office (CBO) has estimated the cost of the Waxman-Markey "cap and trade" bill, and found that it is modest - about $22 billion ($175 per capita) in 2020. That is an estimate of gross costs, and does not take into account the benefits of reducing global warming.

The benefits may be quite large. Separately, the CBO has analyzed the likely effects of global warming. Though they do not put a dollar value on it, $175 per year seems like a small price to (partly) avoid this: While there is some imprecision in estimating the exact implications of carbon emissions for the climate and the consequent economic costs, it is rational to pay small costs to reduce the probability of really, really, really bad outcomes. That is, in essence, why we buy insurance. Though I haven't (yet) managed to crash a car, it makes sense for me to write a check to a lovable, British-accented Gecko who will protect me from some the consequences if I ever do. In this case, the potential consequences are far worse than a car accident, and the costs of insurance are considerably less.

Moreover, as Ezra Klein notes, the cost estimates are likely overstated. Along those lines, Paul Krugman reminds us that market economies can adapt to relative price changes; he writes:
The point is that we need to be clear about who are the realists and who are the fantasists here. The realists are actually the climate activists, who understand that if you give people in a market economy the right incentives they will make big changes in their energy use and environmental impact. The fantasists are the burn-baby-burn crowd who hate the idea of using government for good, and therefore insist that doing the right thing is economically impossible.


Steve Offutt said...

I think the Gecko has an Australian accent. You are right. Thinking about risk management is a smart way to look at the issue of climate change. Check out this video:

Bill C said...

Thanks. That's pretty good. The pepto bismol in the background is a nice touch.

I think one important thing economists need to do is to make the point that the "economic harm" from taking action is tiny, at most.

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