Willem Buiter on Climate Change
Over at Martin Wolf's Economics Forum, Willem Buiter writes that we are in both bigger trouble and less-big trouble than Larry Summers thinks:
Economists' forum: Willem Buiter: Larry wants to bring down to earth a climate idealism that, unfortunately, is already below-ground. Unlike him I believe that, with the right kind of leadership... the world can be encouraged to launch a much more ambitious attack on environmental problems in general and climate change in particular, than he can currently envisage.... There are just three ways of reducing carbon dioxide and other greenhouse emissions... command and control... end all subsidies to energy use and to tax all carbon or greenhouse gas emissions... cap and trade....
Like taxation, cap and trade requires the authority (here the CEA) to be able to monitor actual emissions.... It is absolutely essential that the sound and sensible idea of cap and trade be uncoupled from the notion of offsets.... [F]or offsets to work the authority needs to know not just the carbon emissions that will actually occur because of the project. That is the same information required for carbon taxes or cap and trade. The authority in addition needs to know the carbon emissions that would have occurred had the proposed project not taken place because of the absence of the offsets.... It is, in practice, virtually impossible for any outsider to determine the ‘additionality’ of a project.... The predictable result has been a proliferation of bogus schemes - an orgy of phoney carbon emission reduction claims....
Cap and trade or the taxation of greenhouse gas emissions can produce equivalent desirable environmental results by reducing carbon emissions. Provided greenhouse gas licenses are auctioned off, both cap and trade and taxation will produce revenues.... To make greenhouse gas emission reductions palatable to developing countries, the bulk of these revenues should be transferred to the developing countries, to use as they see fit. Only through such resource transfers will the rich nations of the world be able to convince much poorer countries to contribute to the cost of internalising the global externalities of greenhouse gas emissions.
Martin Wolf: This is a fascinating discussion. Let me start by noting two fundamental points of agreement. First, I am entirely persuaded by Willem's argument that so-called "offsets" are an absurdity, ripe for fraud and entirely meaningless in practice.... Second, I agree with Larry that the collective action problems are hugely difficult to resolve.... [T]here is no disagreement, I presume, that any cap and trade system should be based on the auctioning of permits. The allocation of quota rent to existing polluters is unconscionable...
