Finance
Why the status quo matters
In an earlier afterI have listed some questions that interventionists should consider before advocating their interventions. This is part of my ongoing crusade to get interventionists to think about things as they really are as opposed to a blank slate. I call these two ways of thinking ‘status quo reasoning’ (seeing the world as it is) versus ‘state of nature reasoning’ (seeing the world as a blank slate).
Recent research shows the importance of status quo reasoning. In a new National Bureau of Economic Research working paper titled “The market and climate implications of US LNG exportsJames Stock of Harvard University and Matthew Zaragoza-Watkins of UC Davis examine how America’s evolution from a net importer of natural gas to a net exporter has affected greenhouse gas emissions. After fracking began in the US, natural gas prices became disconnected from other energy prices for a while as the US market was flooded with natural gas and export opportunities didn’t really exist. However, during 2012-2016, approvals were granted and LNG export terminals were built, allowing US energy companies to export LNG around the world. By tapping into the global market, U.S. natural gas prices “reconnected” with global energy market prices: Natural gas prices rose and began to move along with oil and coal, as has been the historical trend.
What is interesting is their discussion of climate impacts. In their summary they write:
“We estimate that the domestic gas price effect of this recoupling is large comparable to a carbon tax of $30/ton. This effect is the case for coal prices, which are linked to gas due to competition in the energy sector comparable to a carbon tax of $20/ton. Using the NREL ReEDS model, we estimate that this recoupling will reduce U.S. energy sector CO2 emissions by approximately 145 million metric tons by 2030” (emphasis added)
Many proponents of a carbon tax wrongly claim that there is no price on carbon. That’s the fallacious “state of nature” reasoning I discuss above. In the state of nature, there is no price for carbon. But in the real world, carbon comes at a price. There may not be any monetary price, but there is always some form of price. When natural gas (a significantly cleaner energy producer than oil and coal) came onto the market, carbon use dropped. Furthermore, as the price of natural gas matched other energy prices, people cut back on the use of natural gas (which, while cleaner than other energy sources, still releases CO2), as well as oil and coal. All in all, the effect of this was a reduction in CO2 emissions as if a carbon tax was applied! The market has, quite unintentionally, helped solve the problems appearance by imposing a price on carbon.
Moreover, this market alternative to carbon taxes is likely to be net more efficient than a comparable carbon tax. That is, even if this link had the same effect as a $30 per ton carbon tax, probably with less waste. When we talk about public policy, we need to discuss the political process and how the sausage is made. Politics is a messy business, and imposing a carbon tax is no different. Even if we assume that the tax is levied free of charge and without any political fuss surrounding it, there are still the administrative costs of the tax (i.e. all the costs incurred in administering the tax: hiring people to administer the tax collection and calculation, audits, etc.), thus reducing its effectiveness. But with this market process, those potential costs don’t exist.
In a state of nature, the interventionist might propose a carbon tax that is too high (or too low). But when we take into account the status quo, we look at the total effects and not just the marginal effects (such as Ronald Coase stressed so long ago The problem of social costs), we have a much clearer picture of which interventions may be necessary and which may not.
