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October 28, 2013

Paul Krugman: Environmentalist First, Economist Second

October 28, 2013
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Paul Krugman’s lengthy review of William Nordhaus’ new book, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World , shows that Krugman is an environmentalist first, an economist second. To be sure, Krugman can talk a good game about “market-based solutions,” being mindful of efficiency, setting the “optimal” carbon tax, and so on. But as his review makes crystal clear, he’s willing to throw all those “market-based solutions” aside and impose complete government control by simply banning coal. After all, to do otherwise risks civilization and even the planet itself. I’m not exaggerating; this is literally the rhetoric Krugman uses in the piece.

Krugman’s over-the-top hyperbole stands in sharp contrast to the sober analysis (and much more modest policy recommendations) of his mentor, Nordhaus. As a Nobel laureate and one of the most widely read economics bloggers on the planet, Krugman’s willingness to downplay proper economic analysis and instead embrace top-down government planning sets a very bad example in the policy debate.

Krugman: Markets Are Great, But Banning Coal Is OK Too

At first Krugman pays the obligatory homage to “pricing emissions,” which makes carbon taxation sound like a very wise, sensible, and oh so efficient policy:

Why is putting a price on carbon better than direct regulation of emissions? Every economist knows the arguments: efforts to reduce emissions can take place along many “margins,” and we should give people an incentive to exploit all of those margins. Should consumers try to use less energy themselves? Should they shift their consumption toward products that use relatively less energy to produce? […etc…] The answer is, all of the above. And putting a price on carbon does, in fact, give people an incentive to do all of the above.

By contrast, it would be very hard to set rules to accomplish all these goals… So carbon pricing, says Nordhaus, is the way to go. And I, of course, agree—they’d probably revoke my economist card if I didn’t. [Bold added.]

Yet after Krugman gives the above genuflection to the virtues of a carbon tax, he immediately reveals how much weight he puts on all of those arguments about the value of markets versus command-and-control government regulations. The answer: None at all. Krugman has no problem if the EPA just flat out bans coal-fired power plants:

And yet there is a slightly odd dissonance in this book’s emphasis on carbon pricing. As I’ve just suggested, the standard economic argument for emissions pricing comes from the observation that there are many margins on which we should operate.…Nonetheless, the message I took from this book was that direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing—not as good, but not bad.

And this conclusion becomes especially interesting given the current legal and political situation in the United States, where nothing like a carbon-pricing scheme has a chance of getting through Congress at least until or unless Democrats regain control of both houses, whereas the Environmental Protection Agency has asserted its right and duty to regulate power plant emissions, and has already introduced rules that will probably prevent the construction of any new coal-fired plants. Taking on the existing plants is going to be much tougher and more controversial, but looks for the moment like a more feasible path than carbon pricing. [Bold added.]

The above quotation from Krugman is very revealing. It shows that the lip service he pays to the wonders of decentralized markets, and the acknowledgement that bureaucrats lack the information to impose top-down solutions, is just that—lip service. Krugman says sure, a carbon tax would be better than a flat out ban on coal from the EPA, since it leaves decisions about how much and where to cutback emissions up to the market. But Krugman gives this endorsement of a “market solution” because he has to say that as a professional economist—as his own joke about revoking his card admits. As his quotation above shows, when it comes down to it, Krugman is so sure that eliminating coal is the right outcome, that he is fine if the EPA just does it by mandate.

This isn’t an isolated example. Elsewhere Krugman—who won the Nobel Memorial Prize in Economics for his work on international trade theory, mind you—shows what he’s prepared to do, to force China and other recalcitrant countries to get on board with carbon restrictions:

On one side, “carbon tariffs” on imported goods from nonparticipating countries would provide a powerful inducement to join in. My reading of international trade law is that such tariffs would probably be ruled legal by the World Trade Organization—and if not, so much for the WTO. Saving the planet trumps free trade. [Bold added.]

With rhetoric like this—Krugman actually ends his piece by saying our climate policies are a “dangerous bet” that threatens civilization itself, and that “if the bet goes bad, we won’t get another chance to play”—Krugman shows that he is not at all the sober scientist that he likes to portray to his readers in blog posts like this. In fact, Krugman at times in his review almost audibly sighs at Nordhaus’ correction of hyperbole on the pro-carbon tax side.

For example, Krugman grudgingly agrees with Nordhaus that the popular environmentalist goal of limiting global temperature increases to 2 degrees Celsius is utterly arbitrary and doesn’t reflect a scientific (Nordhaus’ actual term) approach to the issue. Yet Krugman shrugs and says it’s close enough, implying that he (Krugman) isn’t going to spend his time telling environmental activists that they are being unscientific. This is even though Krugman a few sentences later admits that the correct cost/benefit approach could make the actual policy target closer to 4 degrees Celsius, meaning that Krugman is implicitly endorsing a horrendously inefficient target (namely limiting temperature increases to 2 degrees Celsius) that would make humanity much poorer compared to a more relaxed target.

Conclusion

The present post is not an endorsement of William Nordhaus. Indeed, I have written an entire journal article criticizing Nordhaus’ DICE model. However, Nordhaus is at least an economist, who is always careful to place his arguments for a carbon tax in the context of standard marginal cost/benefit analysis. Yes, I disagree very strongly with Nordhaus’ conclusions, but in the context of one economist disagreeing with another.

In contrast, when it comes to climate change policy, Krugman chafes at the restrictions imposed by economic science. His review of Nordhaus’ new book repeatedly notes strategic disagreement whenever Nordhaus concedes points to the opponents of carbon taxes. Indeed, Krugman ends his review by suggesting that we risk destroying civilization itself if we adopt the wrong policies—a completely outlandish claim that is nowhere to be found in economic studies of climate change—and we have already seen his rhetoric about “saving the planet.” The only way to even entertain such doomsday language is to throw out the standard economic approach to uncertainty. (Krugman unwittingly admits as much when he acknowledges in the book review that Nordhaus has criticized the efforts of Martin Weitzman and others to invent a new framework for dealing with uncertainty when it comes to climate change.)

In conclusion, though I disagree with his policy recommendations, I will gladly admit that William Nordhaus is an economist first, an environmentalist second. His protégé, Paul Krugman, has chosen the opposite set of priorities in his own work on climate change. Even though Nordhaus is quite clearly the superior authority on climate change analysis—as even Krugman would admit without hesitation—unfortunately Krugman has a much bigger platform in the public policy discussion. His over-the-top rhetoric will make it harder for reasonable economists such as Nordhaus to engage in a rational discussion of the issues.


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