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Paul Krugman, New York Times, April 11th, 2010

 

The Testament of Paul Krugman  

Kwang Joo - Thursday, April 15, 2010

Welcome to Enerhope
 

The New York Times Magazine, April 11, 2010, contains a long article (written on April 5th) by Paul Krugman, the Nobel Prize-winning economist. The article is entitled, “Green Economics – How we can afford to tackle Climate Change.” The URL of the entire article is:

 

http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html?th=&emc=th&pagewanted=print

 

In the article, Krugman makes the following points:

 

(1)

We can tackle climate change without damaging our economy.

(2)

The best economic instrument for tackling climate change in the USA would be a cap-and-trade system.

(3)

Cap-and-trade would be more effective than a carbon tax in reducing greenhouse gas emissions.

 

Do we agree with Krugman?   Yes,…..and no…..

 


Yes

 

Krugman is to be commended for his support of cap-and-trade as a program to reduce the USA’s greenhouse gas emissions, at a time when Republican and conservative critics are attacking the proposed cap-and-trade system.

 

He is correct in maintaining that a cap-and-trade system would be more effective and efficient than a carbon tax in reducing the emissions of capped facilities.

 


No

 

Krugman appears to be following a serious error in the current plan to impose cap-and-trade on almost all of the US economy.

 

Cap-and-trade has proven to be effective in reducing the direct emissions of large, direct emitters, e.g. coal-fired generating stations, cement kilns, petroleum refineries. These large, direct emitters represent 40% - 50% of total USA emissions.

 

The other emitters are not suitable candidates for cap-and-trade.

Imposing cap-and-trade on thousands of small and medium-size emitters would create a chaotic regulatory situation. Small and medium-size enterprises, with no knowledge of emissions reporting, trading or reductions, would be required to report their emissions and surrender allowances or offsets at the end of the year. Supervising this massive number of capped facilities would place a huge administrative burden on the US Government.

 

Imposing cap-and-trade on fuel distributors for their indirect emissions, i.e. for emissions by their customers, would be a serious mistake. Motorists who buy and consume gasoline from service stations would not be under any regulatory obligation to reduce their greenhouse gas emissions. Instead, the motorists would see a price increase of about 5% in the price of gasoline, varying with the week-by-week price of allowances. The motorists would resent this price increase but would not reduce their emissions. If the government made allowances so scarce that the price of gasoline increased by a large percentage, e.g. 70%, motorists would begin to reduce their fuel consumption, but many vulnerable people would be hurt.

 

Krugman appears to have fallen into the argument that a massive cap-and-trade system would be better than a carbon tax, a tax on fossil fuel based on the mass of greenhouse gas emitted per unit of fuel burned.

 

This argument assumes that there are no other alternatives.

 

Wrong!

 

Governments can and should use other policy instruments to promote emission reductions in non cap-and-trade sectors. These other policy instruments include:

  • Regulations
  • Policies
  • Taxes
  • Information
  • Promotion
  • Subsidies
  • Government Purchase
  • Technology Development
  • Infrastructure
  • Training
  • Community Planning
  • Setting a Good Example
  • Changing Cultural Values

 

And remember: In a cap-and-trade system, uncapped facilities that have reduced their emissions can apply for offsets.

 

 

Does anyone else agree with Enerhope’s comments on Krugman’s article?

 


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