Ronald Coase on global warming

Railroads used to spark

Global warming is an issue that resurrects that old debate between Ronald Coase and A. C. Pigou.

Let me accept that carbon use induces global warming. I’m not so sure about this, but for discussion let’s take this as given.

Warming as externality

One way to look at the issue is to consider that warming, like pollution, is an externality.  Ronald Coase’s solution is to give property rights to the use of carbon (either to the one who likes it cold, or to the one who likes it hot).  Coase demonstrated that the efficient solution is the same regardless of who gets the property right, but of course the distribution of wealth differs.  If you give the right to the one who likes it hot, the one who wants it cold has to pay; and vice versa.

The global warming debate is at present dominated by those who like it cold.  But de facto, the right to raise the temperature defaults to those who produce or use carbon fuels.  In the debate, those who like it cold are (or claim to be) willing to pay a Pigovian tax on carbon use.   They want to impose this tax on everyone to make sure that the earth stays cool.  They then condemn the rest who like it hot on the theory that the latter don’t want to contribute to the “cost” of keeping the earth cool.  Somehow I think it’s that simple.

Coase however has demonstrated that the so-called Pigovian tax was wrong.  The tax/subsidy scheme doesn’t work.  In the case of pollution, the correct solution is to move the polluter away from the polluted, or for one or the other to pay for what he wants.  Coase would therefore say that those who like it cold should go closer to the North and South Poles, and the rest of us who like it hot can stay put in the tropics.  The debate boils down to who will bear the adjustment costs as the earth warms (or cools, if it goes the other way).

A sober review of the net benefits and costs suggests that the economic cost of preventing global warming is so much larger than its benefit, by a ratio of 10 to 1.  Here’s what economist Thomas Moore said in 2009:   “Thus, it would cost several times Kyoto, more than 10 percent of our GDP, to stop the buildup of CO2 while, at the outside, climate change would cost only about 1 percent of U.S. income and could be beneficial.”  In other words, doing nothing (derisively called “business as usual” by those who like it cold) would mean harm amounting on balance to 1% of annual incomes, while preventing CO2 buildup will require 10% of incomes.  In general, coldly calculating economists wouldn’t support Al Gore’s convenient untruth.  (But based on Moore’s work, we should give Al Gore some credit:  He has been championing a cause that actually goes against American preferences, given that Americans generally prefer warm to cold, and that warming is adverse to non-Americans.)

(By the way, Coase used the externality story on railroad trains that emitted sparks that damaged agricultural crops beside the railroad.  The question then was how to limit the damage to crops, as well as how to keep people riding a train happy.  The farmers wanted the railroads or their customers to pay, and Coase said that that wasn’t always the correct solution.  Obviously, if the gains of railroad users outweigh the crop damage, the correct solution is to allow the railroad.  In this case, if the farmers owned the right to their crops, they could charge the railroad a price for passing by; if the farmers charged too high a price, the railroad tracks could be moved and/or the railroad would install “spark arrestors.”)

Warming as a public bad

A different way to frame the issue is to assume that warming is a public “bad.”  The solution, from institutional economics, is to have a collective mechanism to reduce that bad (since by assumption, the public good is to induce global cooling).  In this model, it pays to use taxation because individuals will not usually reveal their willingness to pay for cooling.  This view supports those who want a carbon tax.  In extremis, this model also supports a ban on carbon use, just as a ban on fluorocarbons is accepted as a means of dealing with ozone depletion.

But if the world is divided between those who think the world is “too hot” or “too cold,” then both groups have their public-good free-rider problem:  Those who want it cold have to band together to collect funds so they can persuade the other group to stop carbon use, while those who like it hot also have to band together to pay for the right to heat up the planet.  There is no clear economic solution here since presumably the two groups would face each other in a bilateral monopoly setting.  This is why global warming is really global politics.

Resolving the issue

Which of the two alternative models is right?  I believe the pollution/externality story is more correct.  We cannot simply impose our tastes on temperature on one another, and if it’s really that hot, there’s always air conditioning.  Or dual temperature controls, the kind you see in high-end cars.

But my main problem with the global warming debate is that the proponents of a carbon tax assume no further technological progress even as they use calculations with a 100-year horizon (if perhaps also to make our hearts bleed for the future unborn).  If technology (the discovery of fossil fuels) brings on global warming, then it is likely that technology can also find solutions to the adverse effects of global warming.  This makes the pricing of the property right to a certain band of temperature a matter of (market) discovery, something that cannot be solved by bureaucrats or self-appointed “experts.”

Libertarians (and some conservatives), in the spirit of Coase’s analysis, would support the so-called cap and trade proposals because it would recognize the reciprocal nature of the issue, though it would still be a matter of global negotiation which groups  (those who prefer it hot, like the Americans, and the others who prefer it cold) would “own” the right to carbon use.  A simple strategy is to simply give that right to the poor, i.e., the least developed countries, and let the Americans pay them to not use carbon.  If Moore’s calculations are correct, trading in carbon-use rights will not be much, since the most wealthy, e.g. the Americans would gladly allow the other countries to use carbon.  In short, there will be little or no market for the “trade” part of cap and trade.  This is a likely outcome regardless of how high or low the “cap” is set.  In sum, the global warming debate may well be much ado about not much.

Unfortunately, the global warming debate has often become an ugly form of blogodiatribe.  An example is Paul Krugman’s characterization of those who disagree with him as “traitors to the planet.”  Enough said, I hope.

Photo credit: www.freefoto.com

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19 thoughts on “Ronald Coase on global warming

  1. It is true, and I agree that the Pigovian tax scheme is not an ideal solution to combating global warming as it does obstruct the practice of “free market”, however I am not in agreement of the argument you gave that global warming is just a matter of preference whether people like it “hot” or “cold” and casually dismissing it with the solution of just moving to a hotter or colder place to live in. First of all not all people are privileged enough to automatically move from one place to another. Consider the farmers for instance if their crops fail because of the increasing heat they would have a hard time moving to a “cooler place” to live in considering that there farm lands are there source of income and that there is an issue of scarcity of land to move into due to the increasing population. Second, “seriously???” no disrespect but do you really think that global warming will only split the planet into warmer and cooler sides and you’ll simply say ill just turn on the ac, and BOOM global warming problem… solved!!! The fact that the effects global warming is not limited only to heating up the planet but it can also tamper with the planets weather, leading to extreme and abnormal weather. Imagine moving into a “cooler” place then suddenly hail the size of tennis balls start dropping from the sky!!! XD. Anyway what I’m trying to say is that there is no comfort zone you can run too when global warming takes full effect. And as of the notion that we can just simply adapt and adjust to the weather ok I get that, that is if were given a millennia to adapt like how our ancestors did in the last ice-age but that is not the case, we are only given 3 to 5 decades to adapt to the changing climate. Yes global warming is a serious problem and if we are truly a supporter of the “free market” (which would be rendered useless when a major calamity strikes) then we should let the “free market” solve this problem not dismiss it, a good option would be using the carbon cap and trade system that you mentioned (which you were so sure that’s gonna fail anyway) or better yet create another system that would best achieve greenhouse gas emissions reductions with maximum economic benefit. I rest my case…..
    Oh… and also legalize medical marijuana!! XP peace!!!!

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    1. I thought the adjustment period was a century. Now it’s down to 30 years? Where did all this quantification come from? And what kind of discount rate are you using to come up with the argument that the apocalypse is at hand?

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