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I have absolutely no issue with folks arguing that we need to “do something” about climate change because they are terrified that the seas may boil over. What I do have an issue with is when such claims are made under the pretense that “doing something” necessarily follows from sound economic principles. Those sound principles usually derive from a thorough misunderstanding of the implications of Arthur Pigou’s insights on how best to deal with “externalities.”

First two clarifications, then the point of the post.

Clarification #1: The use of the term “externalities” does belong in scare quotes if not being deleted from all use forever. Why? Using the term as conventially used implies some notion of a legitimate property rights assignment. In other words, the term “externalities” is loaded. It implies that my actions impose costs on you, which means that we are assuming that you own the right in question. But of course, once you understand that the “problem of social costs” is that property rights themselves are poorly defined, you realize that it makes no sense to call something an “externality” a priori. This is not mere semantics. Right now there is a legitimate question about who owns the air in my office. My neighbor is on the phone right now and I can hear him. It would only be correct to call this an “externality” if during during the 2pm hour on a Wednesday that the courts or the college recognize my legitimate rights to my own airspace. But of course I have no such rights. Or maybe I do. Who knows? Thus we have a social cost problem. My neighbor is engaging in an action whose costs do not fall entirely on himself.

Clarification #2: The Pigouvian insight is that when we have a problem of social cost, the way to fix that is to make “the polluter pay.” The reciprocal Pigouvian insight also applies – if my actions produce positive benefits for you, then the producers should be subsidized to the tune of their external benefits. Now those of you who know Coase understand that these Pigouvian insights are merely very special and limited cases of the Coase Theorem which are not guaranteed to be correct in general cases. But let’s ignore that and jump on the Pigouvian bandwagon like so many others like to (why? again because it implies a bigger role for government, I can see no other logical reason why this would be folks’ default view).

The point of the post is this: I am not sure people think through their defense of “doing something” about climate change when they are invoking Pigou to do it. The standard argument for regulating CO2 emissions, following Pigou, would be that our actions produce costs on you that we are not paying for ourselves, and therefore we (the polluters) should pay for those costs. Such thinking is what is behind a carbon tax or other regulatory regimes (note as an aside that a Carbon Tax COULD be consistent with Coasean insights, but ignore that for now).

But what this requires then, if this is the justification for the tax, is that you take it to its logical end.

Application #1: What if CO2 turns out to be a net benefit to humanity, not just over the current range of CO2 concentrations in the atmosphere (as it seems to be) but also over any conceivable concentration that human activity could get the atmosphere up to. That concentration may be something on the order of 1,000 ppm (we are at 400ppm today, and we know that up into the 700ppm range for example that crop yields, holding precipitation and other factors constant, would increase by something around 25% to 33%). So my question to folks is, if you are justifying climate interventions today on Pigouvian grounds, and new research comes out with a consensus that CO2 is on net good, and likely to be good for a long time, would you favor subsidies to fossil fuels on Pigouvian grounds (again this is a ceteris paribus question, I understand that drilling for oil may have net negative social costs, but so too does building a windmill). Would you? If not, why not and explain how you can defend taxes and regulations on Pigouvian grounds?

Application #2: Right now, folks are wrangling at their annual United Nations climate party about the role the US should play in curbing global emissions. Never mind the fact that we are really the only country to have considerably reduced emissions over the last five years and have done so despite forces opposing such a reduction. The argument at the UN and in fashionable circles on college campuses goes something like this: the US and Europe got rich by fouling the climate. Some (lots?) of the costs of climate change are going to fall on poorer countries who did not get to participate in the party. And this is unfair. And on Pigouvian grounds the US (i.e. the polluter) should pay.


But consider the following observations, which have been made by a lot of folks, including again among the stylish folks on campus. “US R&D efforts spills over into other countries, including (especially) poor countries!” This is in fact a defense you might use when presented with research that shows the federal spending on much R&D does not produce observable benefits in the US (you see, then happen elsewhere!). Or how about the argument that the rest of the world “free-rides” on the incredible US healthcare system? Or that the rest of the world “free-rides” on the American higher education machine? Or that US economic growth opens up markets for foreign exports. Or that the US itself provides a safety valve for political and economic refugees from around the world? Or that foreign countries, especially China, “steal” our valuable intellectual property.

What is the Pigouvian “solution” to all of this free-riding? It is that poor countries should be forced to compensate the U.S. for undertaking all of those investments. Why? Because from their perspective we are not taking enough of them – if the US selfishly thinks only of how those investments benefit herself, she never considers the benefits to poor countries. And so to get the “problem” fixed, we need to make poor countries subsidize us.

But think for a minute about how Application #2 sits with the concerns and complains of folks who want the US and the West to “pay more” because of the external climate costs of all of those activities. If you want to play Pigou, then it is entirely appropriate to add up all of the external benefits and costs and establish policy based on the NET social benefits and costs of our actions. And based on my reading of the climate economics literature and from what we know about who reaps the major gains from research and innovation (i.e. not the innovators themselves, but folks downstream and in future generations from them), it seems to be a very reasonable assumption that the net impact of the US on the rest of the world is … positive. 

Viewed using this Pigovian lens, the very lens that the “do somethings” are claiming as their mantle, wouldn’t we consider the “Climate Externality” that the West and the US is imposing on the rest of the world is akin to the payment/compensation that the poor countries are making to us in order to induce an “efficient” amount of R&D and other innovation that they will benefit from?

On what grounds might you oppose such a view? Crickets I bet. Crickets.

2 Responses to “Taking Pigou Seriously … Is the U.S. on NET a Good or Evil Force in the World?”

  1. Harry says:

    Great post, WC.

    Being a Rizzo fan and a Landsburg fan, I wonder about all of the PhD crickets crawling around Harkness Hall, the ones who do no eye contact, on to a more important mission. Maybe they say hello to other strangers and smile.

    It is intellectual cowardice that prevents them from engaging their office neighbors in talking about ideas that might challenge what they have built their careers upon, even after they have achieved tenure. Tenure is supposed to encourage wild belief, including concessions about youthful stupidity.

    But tenure, in the view of my friend who was a philosophy professor and now a union boss, is all about making sure tenured professors get a ten percent raise every year for sixty years or more, and screw his father and everyone else.

    My views are mine alone, and I have not in any way intended to disparage anyone who holds the broad axe to dismember WC or perfesser Landsburg. Rochester is lucky to have them.

  2. Naoufal Z says:

    I think this is a well reasoned way to theoretically and fairly go about a Pigouvian analysis of how the (potential) climate crisis should be handled. But I honestly don’t see how point #2 adds any productive aspects to the dialogue. It is well reasoned, but we can go on forever with whether economic growth in the US on a whole benefits other countries; the worst cases of negative externalities imposed by the US present day are not environmental. I feel most economic arguments ignore the psychological, social, military, and political externalities (positive and negative) of the US and Europe. Anyone who has studied the Middle East will have a hard time with the assumption that the US has had a positive impact on that part of the world. Good in one place does not cancel out negatives in another.

    What I feel is more important to consider is who has the greatest means to lessening or worsening future events by acting right now. This is not a question of “who should” and justice, but “who can” and feasibility. From the numbers I have seen they are not asking much from the US relative to the military budget, which would still be far larger than necessary had the US taken the $100 billion or so they asked for in Doha directly from the military. Is anything wrong with this line of reasoning?

    Also in my opinion it is still important to consider who is the largest polluter, regardless if they have reduced their emissions the most because that is not necessarily a permanent trend.

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