An open letter to the leaders of Canada’s federal political parties from economists teaching in Canadian colleges and universities

The press release and the list of signatories (more than 230 and counting) are over here. Here's the letter:

One of the few issues on which most economists agree is the need for public policy to protect the environment. Why so much agreement? Because in the absence of policy, individuals generally don’t take the environmental consequences of their actions into account, and the result is “market failure” and excessive levels of pollution. Environmental degradation diminishes the quality of life for all of us. And without a healthy environment, we can’t sustain a healthy economy. We, the undersigned, have therefore joined together to express our shared views on effective policies to address climate change.

We are non-partisan and will undoubtedly be supporting different parties in this election. Our goal is not to criticize or praise one party or another, but rather to offer our collective views, as economists, to help inform public debate on these matters at a critical time – during a federal election campaign.

What Needs to be Done
While Canada clearly cannot solve the climate change problem on its own, we need to do our part, and this requires immediate and substantive action by our federal government. We make this statement fully acknowledging the importance of other issues to Canadian voters, such as the turmoil in financial markets and our military involvement in Afghanistan. But climate scientists state that we bear the costs of our lack of action on carbon reduction on a daily basis, and within a few decades the impacts of climate change could be truly catastrophic—unless we take action now. Even those who are not quite convinced by today's scientific evidence need to consider the costs of not acting now. If they turn out to be wrong, and we wait for complete certainty, it will be too late.

All the major political parties have stated that they understand the need to act on carbon emissions. The question then becomes what action to take. Any action (including inaction) will have substantial economic consequences and , thus, economics lies at the heart of the debate on climate change.

With this letter, we hope to help put the debate on a more solid economic foundation by offering the following set of principles upon which we believe climate change policy should be founded.

1. Canada needs to act on climate change now.

2. Any substantive action will involve economic costs. Any effective carbon-reduction policy will necessarily entail changing the way we live and do business. All forms of regulation, taxes, or markets for the exchange of emission permits that have a significant impact on greenhouse gas emissions will affect the prices of carbon-intensive goods.
3. These economic impacts cannot be an excuse for inaction. Climate scientists are clear on the costs of inaction, and that these costs will accumulate well beyond the current business cycle, possibly at an accelerating rate. Active and effective climate change policy should be seen as an investment that will yield pay-offs for ourselves, our children and our grandchildren. Given the need to act, the question then becomes which policies would obtain the carbon reduction goals we establish with the lowest cost and greatest level of fairness.
4. Pricing carbon is the best approach from an economic perspective. Approaches to reaching any particular climate change goal that involve pricing carbon, such as carbon taxes and cap and trade systems, involve less economic damage to businesses and families than the alternatives. Carbon pricing is good for several reasons:
   1. Pricing allows each business and family to choose the response that is best and most efficient for them. Firms and families will differ greatly in the options they have for reducing their use of carbon, as well as in the value they place on carbon-generating activities. Price mechanisms give everyone the incentive to reduce their carbon use, but to do so to the degree and in the way that is best for them. This is the main reason that pricing policies are the lowest-cost way to meet our climate change goals.
   2. Pricing induces innovation. As the price of carbon increases, users of carbon intensive goods will demand alternatives. This will induce innovations in the goods and services that are produced, how those goods and services are produced, and the way people live. By moving relatively early in terms of climate policy, Canada has an opportunity to innovate and sell new technologies to the rest of the world.
   3. Carbon is almost certainly under-priced right now. In a fully efficient price system, the price we pay for a product would reflect the full costs of producing and using it, including the costs to the environment. Prices do not currently reflect those environmental costs. When carbon is under-priced, consumers and businesses tend to use too much of it. Policies that increase the price of carbon provide the proper incentives for consumers and businesses when they are making their investment and consumption decisions.
5. Regulation tends to be the most expensive way to meet a given climate change goal. Under regulation, businesses and consumers are mandated to take particular actions related to carbon use (e.g., use a particular technology or stay under mandated levels with no option to trade carbon emission rights). As a result, they are not given the choice of adjusting in the way that is best for them. Regulation therefore increases the costs of achieving carbon reduction compared to when pricing mechanisms such as a carbon tax or a cap and trade system are used. Furthermore, while regulations imposed on firms may appear to be so far removed from the typical consumer that they might think they will not bear these costs, this is not true. Those increased costs will be passed on to consumers due to normal market forces. There may be circumstances when regulation is the appropriate policy tool, but in most cases it is the most economically damaging.
6. A carbon tax has the advantage of providing certainty in the price of carbon. Under a carbon tax, a charge is added to the sale of all fuels according to the carbon emitted when they are used. With a well-designed carbon tax strategy, the tax will be introduced gradually and increased in pre-announced increments until the environmental target is reached . This provides investors with a degree of certainty that is good for business, and allows consumers to make adjustments knowing what is coming. The exact impact of the price increase on the quantity of carbon emitted can be predicted, although with some margin of error. A carbon tax thus involves choosing price certainty but accepting some uncertainty in total carbon emissions.
7. A cap and trade system provides certainty on the quantity of carbon emitted, but not on the price of carbon and can be a highly complex policy to implement. In a cap and trade system, an upper limit (cap) is set on carbon emissions, usually for a particular industry. The government must then make a decision about whether to auction the permits (known as allowances), requiring each firm to buy enough allowances to cover its total emissions. Normal market forces then determine the price of these allowances such that supply equals demand. A cap and trade system with auctioned allowances then acts much like a carbon tax. The price cannot, however, be predicted in advance. Alternatively, the government can issue allowances to firms without charge, then open up the market for trading. In this situation, there is both the uncertainty about the price and potential for significant problems to emerge in the market based on how the allowances are initially allocated. The Emission Trading System in the European Union began by distributing too many allowances and as a result the price fell to close to zero, rendering the policy ineffective. Thus, while a cap and trade system can in principle be equivalent to a carbon tax in terms of its ultimate impacts on the price and quantity of carbon, and will generally give more certainty in meeting environmental targets if the allowances are properly chosen, the price uncertainty in the cap and trade system generally implies a worse environment for long-range decision-making on the part of businesses and consumers.
8. Policies that impose costs on producers (big or small) affect consumers. Some voters seem to think that policies like cap and trade, which apply directly to producers, have less impact on the prices they face than carbon taxes, where the impact can be seen immediately. In fact, voters would do better to assume that all such policies would, ultimately, affect the prices they pay. Indeed, since the goal of these policies is to change what we buy, policies applied to producers must affect the prices faced by consumers if they are to meet environmental goals. The argument that a policy capable of reducing carbon emissions will only affect producers is without economic merit.
9. Price mechanisms can be regressive and our policy should address this. Like most taxes on goods and services that are widely consumed, carbon pricing will have a larger negative effect on lower income Canadian families than others. As we have stated, the same is true of regulation since regulation also raises costs of production and those increased costs will ultimately show up in higher prices. Thus, whatever policy is used, a complete policy should include some element of redistribution to address the impacts it will have on the least well off in our society. Not only will the costs to consumers ultimately be lower under a carbon tax or auctioned emission permits, these latter policies also have the potential to bring revenue into the government that can be used to help offset any inordinate hardship experienced among the least well-off. This is not true of regulatory approaches, or of a cap and trade system in which the allowances are allocated without charge to emitters.
10. A pricing mechanism can allow other taxes to be reduced and provide an opportunity to improve the tax system. With the revenue brought in from a carbon tax or from auctioning the allowances in a cap and trade system, governments can provide general cuts in income and/or corporate taxes. Such systems can be “tax neutral”, meaning the increased burden of the carbon taxes is exactly offset by tax reductions elsewhere, but this result will depend on the details of the particular policy adopted. Under such a plan, lighter carbon users will tend to pay lower taxes overall, while heavier polluters will pay more, corresponding to their greater negative effects on the environment. At the same time, all individuals will continue to have an incentive to reduce their carbon emissions when prices include the cost of their carbon usage. If the tax redesign is done thoughtfully, Canada could move toward an overall tax system, which imposes fewer burdens on the economy and, as a result, leads to a more productive economy for all Canadians.

In closing, we ask you, the leaders of Canada’s major political parties, to immediately begin a substantive public debate, grounded in the generally accepted economic principles outlined above, on the best ways to address climate change. Our collective future is truly in your hands.

Comments

[commonsense]

Wow. 230 Leading Canadian Economists jumped onto a bandwagon without checking their facts. How embarrassing will it be for you when it becomes common knowledge that anthropogenic global warming is a pernicious lie...

Just as an example, go read Mann, et al. (Proc. Nat. Acad. Sci. 105(36):13252-13257). You will find a graph of global temperature over the last two thousand years, which exhibits an alarming hockey-stick uptrend since about 1900 or so.

Then go to

http://noconsensus.wordpress.com/2008/09/18/the-all-important-blade-of-the-stick-uses-less-than-5-of-the-data/

for a detailed analysis of how Mann et al. COOKED THE DATA TO FABRICATE THE UPTREND.

And just in case you're inclined to dispense with the due diligence, let me quote the relevant conclusion for you:

"This clearly demonstrates a strong hockey stick modification to the complete data set. It was accomplished using a RegEM method which has been used by others to interpolate between series, extrapolating (projecting the future) is another use entirely! But how many of these were accepted into the 484 series of the final paper?

After some number crunching I found that 391 of the 484 used data sets included extrapolated data."

Translation: Mann et al. PASTED A FAKE UPTREND ONTO THE DATA SERIES.

Come on, now. You are economists. If anyone can be expected to appreciate the mechanics of statistical data analysis and non-linear time series prediction, it is you. So don’t be so gullible. Go check your facts. Go do your due diligence. And then write a retraction of your chicken-little sky-is-falling letter... that way you will be much less embarrassed than if you let it stand until everyone becomes fully aware of the extent of the politically motivated fraud of global warming alarmism.

[Pitt]

You will find a graph of global temperature over the last two thousand years, which exhibits an alarming hockey-stick uptrend since about 1900 or so.

Indeed you will, but you will also find that (a) this is far from the only evidence for climate change, (b) this isn't even the only evidence for the "hockey-stick" uptrend, and (c) your criticisms have already been addressed (by, for example, RealClimate).

The problem isn't that you're questioning scientific consensus; questioning what you're told is great. The problem is that you're putting utter certainty in one position on a complex issue based on one opinion on one piece of evidence for one facet of that issue. That's not a rational approach.

[commonsense]

1. The “utter certainty” you speak of exists only in the sense that religious fanatics feel “utter certainty” that everyone who doesn’t submit to their dogma is going to hell.

2. The fraudulent methods used by Mann et al. are typical of the methods used in the global warming literature in general. In particular, the use of “proxy” data as a stand-in for actual temperature data, and the conventions for manipulating those data to produce the desired outcome, are the precisely the kind of pseudo-scientific mumbo-jumbo that gave rise to the description “lies, damn lies, and statistics.” None of it is scientifically sound. All of it is political activism disguised as science.

3. The fact that Mann et al were able to publish such a pseudo-scientific fraud in a publication as prestigious as the Proceedings of the National Academy of Science shows the extent to which the peer review process has been subverted when it comes to global warming. The IPCC is the Enron of science: the auditors are part of the scam.

4. What the global warming alarmists are doing is not only morally repugnant, it is downright criminal. It is the equivalent of shouting “FIRE!” in a crowded theatre.

[sustain_ability]

There's no question that the post WWII crowd strove mightily to rebuild following the true end of the Great Depression. This struggle made tremendous use of cheap and irreplaceable oil, so when the low lying fruit exhausted itself, the tar sands (promised long ago) became the last refuge. Trouble is, the external costs (pollution, development and treatment/refining) as well as the opportunity costs (going 'green') are now too imposing to ignore either financially or politically/philosophically. We see the event horizon - we experienced a bit of it when oil prices spiked at $150.

The argument/rational for peeling away from the 'old but true' ways is made even more compelling if one sees the current financial crisis through the prism of "Freedom 55" or any other quick fix based on "irrational exuberance", incl. "put a tiger in your tank" or similar "modern life" attribute. It's the resources, stupid! is my contribution, as well as an ongoing research blog for alternative energy and infrastructure rebuilding.

Standing still and hoping that things will blow over is the wrong approach in that the time to diversify away from oil is now (actually yesterday). If we use oil subsidies for peeling away instead, we can at least hope to redeem some of the wasted time.

[langmann]

I noticed you signed this thing.

With all due respect, did you stop to think about the actual effects of a plan like the Green Shift: I have calculated using the elasticities of price and income that it will actually increase CO2 emissions due to the income effect. Click here.

While I do agree with a shift from income to consumption taxes, and that they are likely to lower the distortionary effect of income taxes, I am not sure if they will result in a CO2 reduction (providing that is even necessary).

So linking the price increase to CO2 reduction is foolish, especially when you are intending to lead to public to thinking it could result in GHG emissions when there is little evidence to show it does. Ironically many European businesses have managed to weasel their way out of paying the carbon taxes.

[Manny]

Funny how economists all agree on this scientific issue, yet climate scientists are busy contradicting each others.

Next, 230 biologists will sign a petition on how to fix the financial markets. They will, no doubt, all agree.

[crf]

Only in the minds of uninformed sceptics are climate scientists very busy substantively contradicting each other. There is much agreement that raising carbon dioxide in the atmosphere will lead to warming, and that continuing to raise the rate of increase in carbon dioxide emissions is very dangerous.

Canada's position on Climate change is stupid and uninformed, and it the fault of Canada's media. It is really incredible that all two of our national newspapers think we should elect a majority conservative government, which will then help (hinder?) in negotiating a binding treaty in 2009 that cannot fail without dire consequences. The Globe thinks Harper will learn about it on the job. He doesn't have long to learn, and he's never shown that he can incorporate the advice of others into his decisions on any subject. His substantive analysis of Kyoto was that it was "a socialist plot": that tells you alot about the quality of his thinking. The Globe has failed to even mention to Canadians that the next government will be responsible for negotiating one of the most important treaties in its history, Canada's position is right now a big secret. Pravda could not do a better job in covering this issue than the Globe.

Get ready for a massive brain drain from Canada again if Harper is elected. What scientist would want to live in a country where science is disappeared from the conduits of public discussion if it isn't compatible with Conservative doctrine?

[commonsense]

crf, you have everything almost exactly backwards.

Man-made global warming is certainly not proven!

It is the global warming alarmists who stifle honest scientific debate!

And if Harper called global warming alarmism a socialist plot, that does indeed tell me a lot about the quality of his thinking. It tells me he is smarter than I thought!

But don’t take my word for it. Let me quote Dr. Richard S. Lindzen, the Alfred P. Sloan Professor of Meteorology at MIT and one of the lead authors of the 2001 IPCC Report.

"The public, press and policy makers have been repeatedly told that three claims have widespread scientific support: Global temperature has risen about a degree since the late 19th century; levels of CO2 in the atmosphere have increased by about 30% over the same period; and CO2 should contribute to future warming. These claims are true. However, what the public fails to grasp is that the claims neither constitute support for alarm nor establish man's responsibility for the small amount of warming that has occurred. In fact, those who make the most outlandish claims of alarm are actually demonstrating scepticism of the very science they say supports them. It isn't just that the alarmists are trumpeting model results that we know must be wrong. It is that they are trumpeting catastrophes that couldn't happen even if the models were right as justifying costly policies to try to prevent global warming."

"But there is a more sinister side to this feeding frenzy. Scientists who dissent from the alarmism have seen their grant funds disappear, their work derided, and themselves libelled as industry stooges, scientific hacks or worse. Consequently, lies about climate change gain credence even when they fly in the face of the science that supposedly is their basis."

source:
Climate of Fear: Global-warming alarmists intimidate dissenting scientists into silence. [italics mine]