Must-read: Nobel laureate on climate economics

The Nobel economics laureate and New York Times columnist Paul Krugman has written a lengthy essay for this weekend’s NYT Magazine which explores climate economics and different options available for limiting emissions including variations on carbon trading and green taxes. His essential conclusion:

“We know how to limit greenhouse gas emissions. We have a good sense of the costs – and they’re manageable. All we need now is the political will.”

While recommending you read the whole thing, here are some of the most interesting bits:

“The truth is that there is no credible research suggesting that taking strong action on climate change is beyond the economy’s capacity. Even if you do not fully trust the models – and you shouldn’t – history and logic both suggest that the models are overestimating, not underestimating, the costs of climate action. We can afford to do something about climate change.”

Most of his focus is naturally about the US situation but some of his points apply equally to the UK. For example on coal, he writes:

“James Hansen, the renowned climate scientist who deserves much of the credit for making global warming an issue in the first place, has argued forcefully that most of the climate-change problem comes down to just one thing, burning coal, and that whatever else we do, we have to shut down coal burning over the next couple of decades. My economist’s reaction is that a stuff license fee would strongly discourage coal use anyway. But a market-based system might turn out to have loopholes – and their consequences could be dire. So I would advocate supplementing market-based disincentives with direct controls on coal burning.”

This is particularly relevant here because direct controls on coal burning – via an emissions performance standard – are exactly what were proposed in last month’s Energy Bill but stopped by just eight votes when it came through Parliament.

Interestingly Krugman also uses his piece to throw his backing behind new carbon tariffs on imported goods from countries failing to do enough on climate change. He writes:

“What happens if the Chinese (or the Indians or the Brazilians, etc.) do not want to participate in such a system? Then you need sticks as well as carrots. In particular, you need carbon tariffs. A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods.”

Such tariffs have been proposed in international talks including by President Sarkozy.